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MKT306
Marketing Strategy
Version 2.0
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Contents
Introduction
Unit 1
What is Strategic Marketing?
Introduction 1
Defining marketing 2
Customers 3
Profit 5
Marketing mix 6
Marketing orientation 9
A definition of strategy 12
Linking corporate strategy to marketing strategy 13
Missions, visions and corporate objectives 17
From purpose to strategy 18
Marketing orientation revisited 19
Tactics 21
The traditional marketing concept versus the relationship marketing concept 22
The structure of a marketing strategy 23
References 29
Unit 2
Assessing the Internal Environment
Introduction 31
The value chain based view (VBV) 37
Working with customers to create value 39
Understanding the value chain 40
Developing the firm’s competitive advantage 43
Competition analysis in an industry using Porter’s 5-forces 47
Development of a dynamic benchmarking model, Hollensen (2003) 57
References 60
Unit 3
Assessing the External Environment
Introduction 61
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Consumer Behaviour 63
Influences on consumer decision making 73
Environmental influences 78
Environmental forces 80
Organisational forces 81
Measuring Customer Satisfaction 84
Competitor analysis and intelligence 88
Learning about our competitors 89
Identification of competitors’ chosen markets 91
Understanding relationships in the marketplace 93
Relationships with suppliers 95
PESTLE, PLESTIE, SLEPT or PEST Factors 97
References 102
Unit 4
Developing Marketing Strategies
Introduction 103
Corporate objectives 108
Managing a portfolio of products 111
Market segmentation and positioning 120
Segmenting the B2B market 125
References 133
Unit 5
Developing Marketing Programmes
Introduction 135
Service strategies 137
Product life cycle 141
Pricing 142
The economist’s view of pricing 144
Distribution 148
Criteria for choosing distribution channels 149
Controlling distribution channels 152
Marketing Communications 159
How to improve levels of response in marketing communications 162
Branding 166
Sponsorship 173
References 176
Unit 6
Organising, Implementing and Controlling the Marketing Effort
Organisational structures 179
Marketing audit 183
Setting sales targets 188
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Marketing strategies and programmes 190
Customer lifetime value 192
References 203
Unit 7
Focus on Direct Marketing and Customer
Relationship Management
Introduction 205
Defining direct marketing 206
Relationship marketing 208
The strategic role of direct marketing 213
Loyalty 216
What Creates Loyalty? 218
Loyalty schemes 221
Understanding lifetime value 227
Direct marketing strategy 231
Acquisition 233
Allowable marketing cost 237
Retention 249
References 258
Unit 8
Marketing, Technology and E-commerce
Introduction 259
Innovation and change 260
How innovation happens 263
Direct marketing and technology 269
Reasons for the growth of direct and relationship marketing approaches 270
The importance of the database 271
E-commerce and loyalty 275
The Internet and the marketing concept 277
The World Wide Web and web ‘presence’ 281
Buyer behaviour online 282
E-commerce marketing strategy 284
References 289
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How to use this workbook
This workbook has been designed to provide you with the course
material necessary to complete Marketing Strategy by distance
learning. At various stages throughout the module you will encounter
icons as outlined below which indicate what you are required to do to
help you learn.
This Activity icon refers to an activity where you are required to undertake a
specific task. These could include reading, questioning, writing, research,
analysing, evaluating, etc.
This Activity Feedback icon is used to provide you with the information
required to confirm and reinforce the learning outcomes of the activity.
This icon shows where the Virtual Campus could be useful as a medium for
discussion on the relevant topic.
It is important that you utilise these icons as together they will provide
you with the underpinning knowledge required to understand
concepts and theories and apply them to the business and management
environment. Try to use your own background knowledge when
completing the activities and draw the best ideas and solutions you can
from your work experience. If possible, discuss your ideas with other
students or your colleagues; this will make learning much more
stimulating. Remember, if in doubt, or you need answers to any
questions about this workbook or how to study, ask your tutor.
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Marketing Strategy
Introduction
LEARNING OUTCOMES
On successful completion of this module, students should be able to:
· Explain the nature of marketing strategy and its significance for the
organisation.
Skills
· Research skills.
Content synopsis
The module aims to review the nature and scope of marketing strategy
and evaluate how strategies are developed, given different
organisational contexts. The module considers that strategy is a
fundamental pattern of present and planned objectives, resource
deployments and interactions of an organisation with markets,
competitors and other environmental factors. The module lays the
foundation by appraising the mechanics of marketing strategy,
considering the evolving models and practices that are essential to the
development and implementation of strategy. The module examines
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Marketing Strategy – Introduction Marketing Strategy
Amplified content
Portfolio Analysis – the management of groups of brands, product
lines and services. The analysis focusing on the interrelationship of
products and services within a product / service mix. The performance
of the mix will be emphasized in the module.
New Product Development – new and improved products hold the key
to business survival. Many organisations develop new products based
on orderly procedures, employing comprehensive and relevant data,
and intelligent decision making.
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Marketing Strategy Marketing Strategy – Introduction
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Unit 1
This module combines theory with practice so that you can see how, by
definition, strategic decisions made at each stage have material
consequences on the long term health of a company or organisation.
Introduction
In this first unit we will consider what marketing is and what marketing
organisations do. It is important to consider the definitions of marketing
and the marketing function since it varies from person to person and
from company to company. On the one hand marketing may be
considered to be a set of tools and techniques but on the other it can be a
philosophy that inspires the entire company and informs its corporate
strategy.
This unit summarises a number of ideas that are looked at in more depth
in later units to give you an overview of strategic marketing and how it
is planned.
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Unit 1 – What is Strategic Marketing? Marketing Strategy
LEARNING OUTCOMES
After studying this unit you should be able to
Defining marketing
In this section we think about the position and role of marketing within
an organisation.
It is, perhaps, useful at this stage to review what you understand by the
term ‘marketing’.
ACTIVITY
From memory, write as full and complete a definition as you can of marketing.
ACTIVITY FEEDBACK
It is highly likely that you wrote something like the following:
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This definition comes from the Chartered Institute of Marketing (CIM) in the
UK, the largest professional marketing body in the world. It contains many of
the key terms central to the marketing function.
Kotler (1999)
We will now consider some of the key terms used in these definitions.
Customers
Above all else, and more than any other functional department in an
organisation, marketing is concerned with customers.
So, even where we can identify that there are many customers already
active in the market, that is buying similar products to meet similar
needs, we still need to understand the nature of these needs as fully as
possible.
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Unit 1 – What is Strategic Marketing? Marketing Strategy
Customer needs
Customer needs, or more properly their needs and wants, can only be
fully met by understanding how and why these needs arise. We also
need to understand how different customers seek to meet these needs
and wants in different ways.
Again these are issues dealt with at greater length in Units 2 and 3.
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Profit
The CIM definition above refers to the need to deal profitably with
customers and there is no doubt that lack of profitable customers is a
major cause of company collapse. Companies with very high levels of
turnover and very many customers inevitably fail if they make
insufficient profit. In the last ten years this has been graphically
demonstrated by the number of internetbased companies which have
grown rapidly handling millions of customer transactions but which
have failed to develop a business model that yielded profit. Even
Amazon, the online bookseller and arguably one of the most famous
‘dotcoms’, has only recently begun to break even. (The use of
technology and its impact on marketing is the subject of much of Unit 8).
At first, the desirability of profit may seem uncontroversial yet there are
many instances when transactions with customers do not result in a
profit for the company.
Internal marketing
Given the above spread of responsibilities it is clear that marketing
functions have a considerable influence on other parts of the company.
Quite apart from the organisational impact, such changes have financial
consequences. It has often been said that every marketing decision
(with one exception) results in expenditure.
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Unit 1 – What is Strategic Marketing? Marketing Strategy
Marketing mix
The key elements of marketing decision making are often summarised
with reference to the 4Ps – product, price, place and promotion. These
are dealt with in greater depth in Unit 5.
ACTIVITY
List the four Ps and summarise what you understand them to be. Then list a
further three or four that apply to services.
ACTIVITY FEEDBACK
The marketing mix is, conventionally, –
· Product.
· Price.
· Place.
· Promotion.
In addition –
· People.
· Process.
· Physical evidence.
· Philosophy.
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ACTIVITY
Read the case study below and then answer the questions at the end.
Tyrrells Potato Chips have just as much sodium and oil as its more downmarket
neighbours on the supermarket shelf, but made from potatoes grown on the
farm, hand-fried and packed immediately for maximum freshness, they look
like a ‘piece of the sunlit Herefordshire fields in a bag’.
Potato farmer William Chase had grown tired of growing for the supermarkets.
After travelling in the US, he came back with the concept of a premium,
hand-fried chip that was thicker and with more flavour than a crisp…and which
might shift the balance of power away from the retailer.
In 2002, Chase invested £1.2m to convert his potato sheds into a factory. He
sent samples to Fortnum & Mason, Harrods and a host of upmarket
delicatessens and cafes and began a designer snack boom. “People don’t just
want any old bag of crisps – they want a bag of the best,” said Chase, who
points out that the premium snacks market in the UK is growing at some 10% a
year.
Tyrells now has 25 staff and 3,000 independent customers with net margins of
23% on sales of £2m for the year ending March 2004. Current figures suggest
turnover of £6m for the year.
But the question for Tyrrell’s is ‘what next?’ There are now some 14 producers
of premium hand-fried potato crisps in the UK. Chase has kept ahead of them
by launching new products, including root vegetable crisps made from celeriac
and beetroot or parsnips, bags of salted broad beans and garlic grissini. A range
of dips, including caramelised red onion and red pepper are being made for
Tyrrell’s by a small external supplier.
Kettle, the UK’s number one player in premium potato crisps, has already
launched its own parsnip product and, more worryingly, Walkers, the market
leader in crisps, has successfully launched its ‘Sensations’ brand; thicker cut and
with exotic flavours.
Chase could expand his range, but he may not be able to manufacture them all
down on the farm. “The question is whether we would dilute that message by
moving into products made elsewhere.”
He could go after export markets – currently one third of sales. So far, export
sales have followed a personal visit to a very upmarket store in the target
country.
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for us” says Chase “is not whether there is a market; we know there is. The
problem is that I can’t be in two places at once. We can’t build a factory until we
have someone to run it.” Even now, Chase and his operations director can
sometimes be found frying and bagging up chips on the factory floor. “I’d rather
have a small well-paid well-motivated team doing double the work.”
However, Chase is ambitious. At the age of 40, he believes he can double the
size of the business each year for several years. The production capacity in
Herefordshire can take him to £30m sales. But to do this, over the next 18
months he will have to start hiring purchasing officers, quality officers,
production managers and others.
Perhaps the reason Chase is so driven is that ten years ago the farm he inherited
from his parents went bust and it took him some years of punishing work –
growing potatoes – to regain ownership.
www.tyrrellspotatochips.co.uk
ACTIVITY FEEDBACK
1. Tyrrells certainly started with the identification of a market
opportunity. William Chase saw a growing consumer demand for
premium snacks and allied this to his own ability to produce the key
product ingredient – potatoes.
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Marketing orientation
Marketing orientation is the “underlying marketing corporate
philosophy” (Sutherland and Canwell 2004) and is concerned with the
centrality of customer needs and wants to the corporate strategy.
Strategic level Unit of analysis Examples of major issues Examples of new organisational
forms
other functions.
‘make-or-buy’ choices.
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ACTIVITY
The following is adapted from McDonald (1999, pp18-19):
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ACTIVITY FEEDBACK
The numbers below equate to the above statements. Tick how many of your
selected statements appear in each row –
Group A 1 2 4 7 10 12 15 17 18 19
Group B 3 5 6 8 9 11 13 14 16 20
The more group B definitions you selected, the higher your personal marketing
orientation.
A definition of strategy
At this point it is worth defining, more precisely, what we mean by
‘strategy’ or ‘strategic’. It has been said that strategic issues are those
which are longterm and important. According to Michael Baker (Baker
2000), Igor Ansoff offered a more precise definition when he described a
‘policy’ as a contingent decision (a statement of what must to be done in
given circumstances) and a strategy as a ‘rule for making decisions’
(ibid, p53) – especially when the decisionmaker’s knowledge was less
than complete.
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P ar t 1: P ar t 2:
The internal situation The external situation
SW OT
P ar t 3:
SWOT analysis
Feedback S t r at egy:
Corporate strategy
Business strategy
Marketing management
strategy
P ar t 4:
Marketing programme
P ar t 5:
Action planning
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Unit 1 – What is Strategic Marketing? Marketing Strategy
Here we see that an audit of the internal and external situation is carried
out leading to an analysis of strengths, weaknesses, opportunities and
threats (SWOT). This forms the starting point for most business
planning processes. We look at this in more depth in Units 2, 3 and 4.
Objectives
A simple mnemonic helps focus objectives. A statement of an objectives
should be:
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ACTIVITY
Evaluate the following example objectives against the SMART checklist.
Objectives S M A R T
tick as appropriate
1 “To be the best ice cream manufacturer in the world” q q q q q
ACTIVITY FEEDBACK
You will notice that in all cases it is impossible to judge if the objectives are
realistic. Clearly one would have to have carried out some considerable
analysis, both internal and external, before being able to judge!(See Units 2, 3
and 4).
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Unit 1 – What is Strategic Marketing? Marketing Strategy
Objectives S M A R T
tick as appropriate
1 “To be the best ice cream manufacturer in the world” ý ý þ q ý
Comment: Whilst this is undoubtedly inspirational it may be difficult
to judge if or when this might be achieved.
3 “To be rated best by customers on safety and value for money by the q þ þ q þ
year-end”
Comment: Given that such a rating was already in place this could be
a marketing objective. It combined two measurable outcomes,
however. Pursuing the ‘safety’ objective may add costs that impact on
customers’ perception of value for money.
Of course, any of the objectives above can be questioned, and should be,
especially in the context of the corporate objectives. The debate around
objective-setting during the planning process is almost as useful as the
objectives themselves.
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ACTIVITY
Consider these, generic (but often used) aims or objectives. Can you think of
others?
Can you now think of a company that might NOT want to achieve some or all of
these?
ACTIVITY FEEDBACK
You might also have added to the above something concerned with making
profit, but you should have found it difficult to add anything new. Campbell and
Alexander’s point was that such objectives point towards what all companies
should be aiming at – developing sustainable competitive advantage.
Rather than stating these as objectives, such statements could also be described
as constraints. A company must make profit in order to survive and so such
objectives do little to inform a strategy.
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Unit 1 – What is Strategic Marketing? Marketing Strategy
For example, the Body Shop has a clear set of values originated by Anita
Roddick, the founder, that inspires most, if not all, of its strategic
decisions. ‘Making cosmetics without harming animals or the
environment’ imposes some limits on strategies that may be selected,
even before any objectives are determined.
Campbell and Alexander suggest that insight can come from anywhere
– from a production process, from relationships with suppliers or with
other stakeholders but, in the end, they must lead to superior value for
customers who are willing and able to purchase the product.
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This ‘reframing’ of the whole organisation in terms of what it does for its
customers is closely related to the concept of ‘purpose’ discussed
already. However, the extent to which this purpose comes from
closeness to customers or from some wideranging research aimed at
predicting the future is a subject for debate.
ACTIVITY
Re-read the case of Tyrells potato chips. William Chase has asked you to
analyse the company’s strategic marketing orientation. Do you think they are
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Unit 1 – What is Strategic Marketing? Marketing Strategy
ACTIVITY FEEDBACK
You have already examined this case and, at the time, we suggested that the
driving force seems to be William Chase’s own desire to grow the company and
to build personal security.
This is further complicated by the point previously made about the distinction
between customers (the retailers) and the consumers (the retailers’
customers). The Tyrell brand may perform a particular function for the retailer
by fitting into their image of sourcing high quality, handmade foods for example.
For the person who eats the chips, the product may be seen as a treat or as
being more healthy than conventional snacks.
Of course, these issues would have to be explored more fully in order to make
important strategic decisions, but the key is that they must be explored and
debated.
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READING ACTIVITY
Read Hollensen, exhibit 16.2, page 660-661. Examine figure 16.7 on page 661.
ACTIVITY FEEDBACK
Effects of changes such as those undergone by Ciba Speciality Chemicals may
include –
All these possible pitfalls point to the need for change to be managed. If the
change is led by marketers and marketing departments, it is still necessary to
win the hearts and minds of as many people as possible within an organisation. If
the whole organisation shares a marketing orientation, then this should be
easier.
Tactics
Although this unit is module is about strategic marketing we feel it is
worth mentioning a further distinction that is often the source of
confusion. That between strategy and tactics.
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Unit 1 – What is Strategic Marketing? Marketing Strategy
way. So whilst the planned route will remain broadly the same (unless
the destination is changed), the tactics will be picked up and set down at
different times and in different stages of the journey.
On the other hand the strategy may be right, but progress is insufficient
or, possibly, too rapid. In this case, tactics (what we do to actors in the
marketplace) can be changed.
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· Title page.
· Table of contents.
· Executive summary.
· Introduction.
· Situational analysis.
· Marketing objectives and goals.
· Marketing strategies and programmes.
· Budgets.
· Implementation and control.
· Conclusion.
READING ACTIVITY
Hollensen goes into some detail about the content of each section of such a plan
in section 16.3, pages 651-655. Read the description of each section and bear
these in mind as you work through the remaining units in this module.
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Unit 1 – What is Strategic Marketing? Marketing Strategy
REVIEW ACTIVITY
Review questions
1. From memory, write a definition of marketing.
6. Read the following simplified case study and answer the questions that
follow.
Case study: S&J Printers.
S & J Printers have one printing press in their small workshop. Currently they
print anything and everything that comes their way – although the press only
prints two colours at a time they have printed very complex four-colour work
for large companies. They didn’t make much money on those jobs because they
had to buy in finishing services such as folding and stitching; so-called ‘outwork’.
The two-man company has worked out that the press can run for a maximum
of 8 hours in a day and needs a minimum of around 2 hours ‘make-ready’
between jobs, although for complex jobs this can be longer.
Apart from dealing with finishing suppliers (outwork such as folding and
binding, etc) John Jones gets all the work in for the company by visiting local
businesses. Ted Smith runs the press, but also deals with suppliers of ‘repro’
services, more outwork, such as plate-makers and sometimes typesetters.
Early on they decided not to charge on a cost basis, rather they wanted to
charge what a job was worth. They pride themselves on printing a very clean
job and always delivering at the agreed time.
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There are many competitors in the area – some with better facilities, some with
the same or similar equipment to Smith & Jones. Their main aim is to be able to
pay themselves a little more and to pay off the debts incurred in setting up.
a. Describe their current marketing mix. How do they use the ‘Four Ps’?
b. How would you suggest the company adapt its marketing mix and why?
ACTIVITY FEEDBACK
1. From memory write a definition of marketing.
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Purpose defines the core beliefs and aims of a company, and acts as a
‘filter’ for future strategic decisions. Insight into the source of value,
both now and in the future, from business processes and from
customers, generate possible strategic directions. Once evaluated and
chosen, these can be expressed as objectives and strategies.
S Specific
M Measurable
A Aspirational
R Realistic
T Time-based
The following is an outline which you can follow to compare with your own
answer and to organise further thoughts you have.
In common with the owners of many small companies it is likely that John and
Ted don’t really consider what they do as marketing. It clearly is, since they are
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attempting to identify and meet customers’ needs, but there is little evidence in
the case as to their current marketing plan.
Internally...
They must examine their own motives, their ‘purpose’ – whilst they wish to be
able to generate more profit, they also take pride in the work they do and they
deliver on time.
They must look at their own competencies and skills – their skills in marketing
to the different kinds of customer and the ease with which they can meet
certain customers’ needs. There may be a source of insight that suggests
opportunities.
S&J must look at the resources they have available for marketing (principally
time, but they may also see the need for some investment in the marketing mix
– see below).
Externally...
Who are the customers? They need to be examined closely in terms of their
characteristics and buying behaviour. Business cards for large local companies
seem to offer a good combination of profitable and regular work. With little in
the way of outwork and simple set-ups, John will be free to pursue more clients
– and may also be in a better position to gain the larger jobs that they can do
profitably.
How big is the market and what is happening? In other words, is the chosen
target market sufficient, sustainable, growing or declining? This will demand
research. The printers may choose to look at the trends in the industry they are
serving; for example, what is happening to financial organisations? It may pay
them to look more closely at why financial organisations have been good
customers in the past. Is it because they have a large salesforce and/or a high
turnover of staff? Is this likely to continue?
The competition must also be monitored. Not only might the target market be
already well served but there may be competition from in-house print facilities.
Again what is their competitive advantage?
Finally, S&J must also look at the wider environment. For example.
technologically, are they likely to be left behind? What economic factors may
present threats or opportunities?
They must strike a balance between serving the customers they know and
looking more widely at the market.
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Marketing strategy
Having looked at the broad picture, some strategic choices will emerge.
Crucially the company needs to set out some marketing objectives which must
be SMART.
S&J currently have a muddled marketing mix. They do not offer a distinctive
product (printing anything that comes along), their promotion relies solely on
personal selling and word of mouth. However, their pricing policy seems to be
based on their understanding of what the customer will pay (indicative of a
customer focus rather than a production focus), and their approach to delivery
(which reflects on the product) seems to offer some potential competitive
advantage.
Having been through a strategic review, S&J need to orientate their marketing
mix towards their chosen marketing objectives. The company must not
standardise their marketing mix, but must have a strategy. Their advantage is
that they know each of their customers; each is different, each can be
developed in a relationship approach.
Product.
They may choose to redefine their product as a quality on-call print facility.
Effectively offering their clients the advantages of in-house printing without the
overheads. They may augment the product by taking away the difficulties their
corporate clients have with ordering small items, by offering a stock call-off
system and telephone ordering. They should be continually improving the
product quality for the customer – perhaps recommending new stock (paper)
upon which to print. This is essentially about adding value through service or
augmenting the product; giving a tailored product. It is the continual
improvement that is the key, not just the quality of paper or ink.
Place.
With guaranteed delivery built into the product and telephone ordering, place
ceases to be an issue.
Price.
Pricing is already flexible but this may encourage customers to pressure for
discounts. Hence, prices need to be defended by increasing the perceived
quality in the other elements of the mix). The company may try structuring the
price so that they agree to invoice on delivery but print stock to call off when
the need arises. Hence, the customer is paying for the ready availability of new
stock and deals with a lower unit of price (per invoice) – it also helps cash flow.
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Promotion.
In their marketing plan S&J should be seeking to build barriers around their
customers, making it difficult for them to go to competitors. At the same time
they should be continuously seeking to improve the level of satisfaction
amongst their customers so that they want to stay with them.
References
Baker, M. (2000). Marketing Strategy and Management. Basingstoke,
Macmillan.
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Unit 2
LEARNING OUTCOMES
After studying this unit you should be able:
Introduction
In order to assess a firm’s competitiveness it is essential to consider its
current situation. The purpose of carrying out an internal audit is to
establish which resources it possesses in terms of its people, its finances
and its products or services. For many this is similar to carrying out
stock control, but instead of just looking at products or services, we
must also consider the capabilities of the staff who work for us, how we
manage our finances and how we are developing our products or
services in order to satisfy our customers now, and in the future.
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Unit 2 – Assessing the Internal Environment Marketing Strategy
CASE STUDY ACTIVITY
Read the Microsoft and Lego case study in Hollensen, page 27, and answer the
following questions:
1. Which of the two partners will benefit most from the alliance?
CASE STUDY FEEDBACK
1. This is an alliance of two very powerful global brands. Without doubt
Lego is the most established of the two brands, in terms of age, and on
a global basis enjoys widespread recognition and is known for its
excellent product quality. It holds a unique position in terms of its
appeal to children as well as parents who grew up with the brand.
However, in terms of turnover and overall brand value, Microsoft is the
more powerful of the two.
2. There are significant benefits for both parties from this alliance. There
are a number of joint marketing exercises which they might wish to
undertake:
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Imitation Test This looks at the potential competitor and considers how difficult it would be to
recreate our resources in such areas as its physical difference or any economic
barriers to imitating our resources.
Duration Test Measures to what extent our resources will be produced in the future. This will
include such factors as recruitment and training in relation to competitors.
Appropriateness Considers whether the company is able to take advantage of the resource in the
Test market. Is this a new market for the company or do they have existing networks of
suppliers?
Substitutability To what extent can a competitor introduce a produce or service with an alternative
Test but with similar advantages. The company’s success in introducing new products or
services can be taken into consideration.
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CASE STUDY ACTIVITY
Read the Honda case study on page 33, Hollensen (2003), and briefly say what
you think Honda’s core competencies are:
CASE STUDY FEEDBACK
Honda’s core competence, and an area where they enjoyed competitive
advantage, was in the area of small engine production. While the company was
associated predominantly with motorcycle engine manufacture, they had a key
competitive advantage in perhaps a less glamorous market, such as small
engines, but ultimately one which enabled them to develop a key competitive
advantage and which was more profitable.
Core Competence
A core competence is considered by Hollensen (2003), in reviewing the
work of Prahalad and Hamel (1990), to have three main traits: it makes a
contribution to perceived customer benefits: it is difficult for
competitors to imitate: and it can be leveraged to a wide variety of
markets. There have been numerous examples of companies who,
having identified their core competencies as being marketing and
distribution, have contracted out the manufacture of their products to
other companies.
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Technical Resources
These include areas such as Research and Development capabilities,
process engineering and worldwide patents. Companies who enjoy
such resources are Microsoft, Hewlett Packard and IBM.
Financial Resources
These cover areas such as having a reputation for paying and being
creditworthy as well as being able to put their plans into operation.
Consider the many millions of dollars that companies such as Gillette
put into the production of their new razors.
Human Resources
We need to cover areas such as managerial skill, the capabilities of
employees and the companies focus on group or individual learning.
This latter point relates to corporate culture and the way in which the
organisation approaches staff training and development.
Marketing Resources
We need to be able to evaluate our relationships with customers, how
loyal our customers are, and the value of our brand or brand equity.
Information Systems
This covers the area of decision support within the organisation and the
importance it places in managing information within the organisation
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New 3. Renew and nurture the resource base 4. Further business developments
Current 1. Exploit resources in existing business 2. Stretch resource base to new customer
groups
Establishing relationships
(example: Dassault/Falcon)
with suppliers (case: Siemens, Boeing)
Upstream
Downstream Establishing
relationships
with customers
(case: Lockheed
Martin)
Current New
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purchase. Again if they ran out of these products then it would disrupt
the smooth running of the kitchen.
CASE STUDY ACTIVITY
Let us reflect upon the value chain and the way in which we can add value to our
products and services.
Read the short case study on the value chain of Acme Axles, Inc, page 41 in
Hollensen (2003), and state how you think Acme’s internal value chain can be
broken down.
CASE STUDY FEEDBACK
You will see that Acme’s internal value chain can be broken down into six
components of which only two, manufacturing and custom axle design, are
directly related to the production of their core product, the axle. They
differentiate their product from those of their competitors through the
customisation of axles for a range of clients.
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READING ACTIVITY
Read the article about information management at Caterpillar on page 42 in
Hollensen’s book, and consider how they try to create competitive advantage
by adding value to their customers.
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READING ACTIVITY FEEDBACK
The example of Caterpillar’s use of an information management system shows
that they are approaching this from their customer’s point of view and
ultimately adds some value to their brand. This is similar to the Winterhalter
dishwasher example that we looked at earlier in this unit. Caterpillar has a very
strong reputation in the manufacture of machines used in the construction
industry. Their reputation has developed over a number of years and their
investment in new products means that they continue to lead the market. In
order to defend this position they have looked at the problems that their
customers might face. Many firms in the construction industry use this
equipment on multi-million dollar projects. If you visit building sites around the
world you will see Caterpillar equipment. Many of these companies work to
very strict deadlines and often have fines imposed for missing deadlines. Their
biggest problem arises when a machine stops working and the subsequent time
taken to diagnose and resolve the problem. For every day that a machine is out
of action it costs their customers in terms of lost time. By introducing sensors to
identify failing parts and giving their suppliers and distributors access to the
system, means that they are in a much stronger position to reduce the impact of
machine breakdown.
Primary Activities
1. Inbound logistics
Here we need to consider all of the activities linked to the
handling of distribution of the product or service, to include
transportation, stock control and materials handling.
2. Operations
These include the activities that result in the final product or
service such as packaging, manufacture, assembly and testing.
3. Outbound logistics
This involves the collection, storage and distribution of our
products to customers. For services, this might include taking the
customers to a sports event. Hollensen (2003)
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Support Activities
1. Procurement
This is linked to obtaining the resources necessary to service the
primary activities.
2. Technology development
This refers to any value activity that is linked to research and
development, product design, technical knowhow or an
improvement in raw materials.
3. Human resource management
This refers to the activities concerned with the training,
development and reward of staff involved in the company.
4. Infrastructure
This covers all of the planning activities of the firm, such as
finance and quality control, as well as any of the structures
within the company that help to maintain its culture.
CASE STUDY ACTIVITY
Read the Amazon and Toys ‘R’ Us case study on pages 53 to 54 of the Hollensen
book and attempt the following questions:
1. Identify the core competences of Amazon.com and Toys ‘R’ Us. How
are these competences in harmony with each other?
3. What are the chances that the partnership will turn out to be a financial
success?
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CASE STUDY FEEDBACK
1. The core competences of Amazon are:
2. The alliance between the two companies shows consideration for both
the resource based view (RBV) and the market orientation view
(MOV). However, concentrating on each other’s core competences
has its starting point in a resource based view (RBV). Trying to get as
many internet users to see the offers of Toys ‘R’ Us on Amazon’s
website, is based more on MOV.
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1. Economies of scale
In order to understand the concept of economies of scale we need to
consider the manufacture of a fast moving consumer good. One of the
latest razor blades developed by Wilkinson or Gillette, is made in highly
efficient, uptodate production plants, which produce this high quality
product twenty fours a day in very large quantities. When developing
this new product, speed and ease of production is a major factor to be
taken into consideration, and will contribute towards a relatively low
cost of production. This cost of production might be so low that firms
will be reluctant to release the actual cost. This low cost will bear no
relation to the final price to the consumer. Firms have to take into
consideration the high research and development costs which have to
be covered in the sale price of the product. It is estimated that the new
Gillette razors absorbed research and development costs of around one
billion dollars.
Firms who enjoy considerable economies of scale are also very efficient
in using up their production capacity. If we refer back to the
Amazon.com case study, we saw that Amazon has excess capacity
which it needs fill. By filling this excess then it will be able to spread
more of its fixed costs. Those firms who have the lowest production
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costs may use this as a way of deterring new entrants into the
marketplace.
2. Economies of Scope
Economies of scope are enjoyed by key players in international markets.
Hollensen (2003) includes the transfer of resources, transfer of
experience and the transfer of ideas and successful concepts across
products and markets. Firms who enjoy economies of scope are able to
gain much quicker entry to new overseas markets, taking advantage of
the skills and knowhow developed by the company in other markets.
For major players such as Colgate and Unilever, they are able to transfer
key personnel to developing markets, and regularly share ideas and
good practice with colleagues in other markets. Linked to this is also the
power of the brand, which we will discuss in more detail in Unit 5,
which makes it much easier to penetrate new markets or introduce new
products or services.
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Factor conditions
In our analysis we should look at the factors of production which might
give a nation a competitive advantage. This might be natural resources,
skilled workforces or a specialisation in certain industries. We must also
consider service industries and the factors which impact service. We
might consider the southern coasts of Spain which not only favour
tourism but also have developed into regions for sporting and corporate
events. We must also take into consideration the availability of capital,
which is a feature of the most developed economies. Hollensen (2003)
cites the example of Japanese firms who were forced to consider the
automation of their production process as a result of a shortage of
skilled labour and production space.
Demand conditions
We need to understand the demand conditions in the market place and
how this impacts on competitiveness. Consider factors such as dense
populations, a feature of Spanish and Japanese cities or less dense
populations in countries such as Finland or Sweden. Germany has
become a major producer of manufacturing systems as a result of their
heavy emphasis on the technical capabilities of their products. Saab
produced cars in the seventies and eighties for the harsh winter climate
of Sweden, and rapidly developed a reputation for more robust vehicles
which easily stood up to the demands of less harsh winters in other
parts of Europe. Fuji in Japan developed the reputation for producing
high quality products for photographers as a result of the demands of
their own discerning Japanese consumers.
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Chance
When we consider the history of particular industries, they may be
based in one particular country simply because the inventor of the
product came from that country and decided to set up business there.
Government
The support of governments can be a key factor in the development of
major industries. They can achieve this through developing the
necessary infrastructure, such as transport or education. In addition, tax
incentives and assistance with the building of production facilities can
also encourage companies to locate in a particular area.
Pot ent i al
ent r ant s
Threat of
new entrants
I ndust r y
Bargaining power Bargaining power
compet it or s
of suppliers of buyers
S uppli er s B uyer s
Rivalry among
existing firms
Threat of
substitute products
or services
S ubst it ut es
Source: Reprinted with the permission of the Free Press, a division of Simon & Schuster, from Competitive Strategy:
Techniques for Analysing Industries and Competitors by Michael E Porter. Copyright 1980 by Michael E Porter
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If we look at Figure 2.3 we see that Porter considers the factors which he
considers to be important when assessing a firm’s competitiveness in
the market. The players within an industry are those that produce the
same products or those that might be considered a substitute product.
As you will see in Figure 2.3, the market is made up of new entrants to
the market, suppliers, buyers, substitutes and market competitors.
Hollensen (2003), page 7475, uses the Porters’ 5forces model to analyse
the metal container industry. The suppliers to the industry are potential
future competitors as are their buyers, and there is a considerable threat
of substitute products and the entry barriers to the market are low.
Overall the profit potential of this market is also considered to be low.
Market Competitors
Hollensen (2003) discusses the degree of rivalry between existing
competitors in the market. The level of rivalry will depend on the
following factors:
Structure of costs
In industries where there are high fixed costs, there is a tendency to cut
prices in order to use up excess capacity.
Degree of differentiation
In analysing our product or service offering we need to establish
whether our offering is differentiated from those of our competitors. If
they are similar then we can expect much greater competitive activity.
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Switching costs
When we enjoy a good relationship with our customers and have
attempted to tie them in to our product or service, it becomes very
difficult for them to switch to one of our competitors. Early distributors
of ice cream gave their customers free refrigerators in return for
distribution rights, effectively putting a barrier in place for competitors.
Exit barriers
When markets become saturated and competition is fierce, the strategic
alternative for some companies will be to look at new markets.
However, if they are tied in to a market due to high cost of exiting, or
where there are a lack of opportunities in other markets, then firms will
find it difficult to leave the market and be forced to continue competing.
Suppliers
In markets where suppliers face little competition, they are in a strong
bargaining position to fix process. Hollensen (2003) cites the example of
Microsoft as suppliers to the computing industry. As their products are
in effect the industry standard they are in a strong position to negotiate
prices with their customers.
Buyers
Buyers have more power over their suppliers when they are the major
customer. When your leading customer accounts for more than 60% of
your total business then this gives them considerable purchasing
power. In order to reduce the dependency on a buyer then firms must
look to increase their total number of customers and produce highly
differentiated products.
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Substitutes
When analysing our market we need to be aware of substitute products
or services which might replace out existing products or their
components. In order to counter this threat we should build up barriers
which, should our customers wish to change supplier, would incur
considerable switching costs.
New entrants
New entrants to a market will have a significant impact on competition.
In order to reduce the possibility of new entrants we need to consider
our brand identity, and the impact of our brand in the market place. A
highly differentiated product with strong brand identity will make it
harder for new products to join the market. Other barriers to entry are
businesses that require a significant investment or where expenditure
on research and development are high. We discussed the men’s razor
market earlier in the unit. Wilkinsons and Gillette both produce highly
differentiated products as a result of their investment in manufacturing
facilities and high expenditure on research and development. They both
also enjoy very strong brand identities, a reputation for quality and
excellent relationships with their distributors. While this is an attractive
market for other companies to enter, Wilkinsons and Gillette have made
it difficult for new companies to join.
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Market competitors
Here companies collaborate with competitors who make similar
products, which has become a feature of the international car
components market.
Suppliers
Here companies work with their suppliers, integrating vertically, which
is particularly noticeable in the Japanese market for electronics and cars.
Buyers
Here companies form alliances with specific customers which
guarantee them a certain level of distribution.
Substitutes
Companies choose to work with companies who sell or produce
substitute products. Hollensen cites the example of mobile telephone
companies merging with traditional telephone providers, which has
enable them to increase the size of their network.
New entrants
Here companies diversify into new areas, some with a technological
link. The merging of media companies with internet providers is an
example of this strategy.
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People
Here we must consider not only our customers but also the people who
work for us. It is important that our staff receive sufficient training to
understand how important their role is in delivering quality of service,
and how this adds value to our business.
Physical aspects
Here we consider the location of our experience and the factors which
we introduce to make our service more tangible. This involves our
premises or, in the case of a hotel, the physical environment.
Process
Firms are investing heavily in new technologies in order to make the
business process more effective for customers. This includes using new
technology to improve booking systems and to reduce the time
involved in purchasing good or services. Low cost airlines have
invested in efficient online booking systems which are easy to navigate,
which has given them a competitive advantage over traditional airlines.
Their competitive response has also been to develop similar booking
systems.
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Capacity utilisation
This is better expressed in terms of percentage of capacity used. A
restaurant with 100 covers (seats) which uses on average 60 per night,
assuming that they only have one sitting, is working to 60 per cent
capacity. If a firm does not use its capacity to the maximum then it
incurs costs.
Linkages
If we invest in improving the quality of our service, then this might lead
to a reduction in the cost of aftersales service.
Interrelationships
Companies who belong to a group or conglomerate can work together
on research and development or sharing other business activities as a
way of reducing costs.
Integration
Companies are increasingly looking to outsource some of their
operations in order to reduce costs.
Timing
Companies who are to first to reach the market with a new product or
service can achieve significant cost savings particularly as they don’t
face any direct competition.
Policy decisions
Companies who introduce policies on customer service, their choice of
distribution channels or on their product ranges, can achieve significant
costs. A number of companies who have extensive brand portfolios
might sell off less profitable brands or even look to kill off brands which
they don’t believe will be successful in the future.
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Location
In an industry where the transportation or warehousing of goods
accounts for a high percentage of the cost of a product or service,
relocating production might offer significant cost savings. Gillette
introduced centralised production of their shaving products in Europe
in an attempt to increase specialisation or reduce costs.
Institutional factors
Uncontrollable factors such as local taxes or changes in government
regulations will have an impact on costs.
Competitive benchmarking
Benchmarking is essentially about being able to compare your product
or service with those of your competitors. While this might be from a
technical point of view, whereby you obtain samples of your
competitors’ products and break them down (a practice which is often
associated with the automobile industry), we need also to benchmark
customer perception of our company and our competitors. The most
effective way of measuring these competitive differences is through
market research and indepth interviews with customers. Hollensen
(2003), page 90, suggests a framework for competitive benchmarking.
(See Figure 2.4)
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importance importance
5 4 3 2 1 5 4 3 2 1 5 4 3 2 1
Low price
Delivery on schedule
Specified invoices
Gives guarantees
Environment conscious
When we carry out our benchmarking exercise we use the value chain
functions and ask customers to rank our company against our
competitors in order to give us a more accurate measure. The results of
the interviews should reveal our key competitive strengths as well as
opportunities for improvement.
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ACTIVITY
Outsourcing
What are the advantages and disadvantages that outsourcing presents for
organisations?
ACTIVITY FEEDBACK
Outsourcing
There are many examples of how outsourcing has been used in business. In the
past five years this has even involved some service industries being outsourced
to overseas countries. The impact of new technologies has made this more
feasible. Nor are we presenting this as a new idea. Historically companies have
used outsourcing to prevent the need for moving to new premises. Some of
you might work for training organisations, which in the past may well have been
outsourced by a large company.
Advantages Disadvantages
Allows companies to make cost savings in a wide You need to be able to convince companies that it
range of areas is in their interests.
Can make companies more competitive which Can have the same impact as introducing new
ultimately can improve their performance in the staff, but can be even more unsettling for existing
market staff
Allows specialists to take control of important Can create problems with staff and unions
areas such as production or distribution
Allows companies to improve quality standards Can be a problem where it leads to the
and become more efficient outsourcers having direct contact with customers
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Our next stage is to set out our future strategy and implementation
plans. We will develop this further in Unit 5.
CASE STUDY ACTIVITY
Read the BBC Worldwide case study in Hollensen, pages 100-101, and answer
the following questions:
2. Define the differences in the business system of the BBC’s TOTP and
the Pepsi Chart Shows. Which of the two chart shows would have the
biggest chance of being successful in the international market?
CASE STUDY FEEDBACK
1. The principal core competence of the BBC is product development in
the upstream part of the value chain. The series ‘Walking with
Dinosaurs’ was recognised as a highly innovative development in TV
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REVIEW ACTIVITY
Procter and Gamble to buy Gillette for $ 60 billion?
When rumours emerged at the end of 2004 that Procter and Gamble were to
buy Gillette for $ 60 billion dollars, several business commentators started to
predict the global impact that this might have on their respective businesses.
Procter and Gamble claimed that this was part of their future plans to remain
competitive and ahead of its major competitors. The following facts were
released to the press:
Procter and Gamble has 16 brands in its portfolio with sales of more than
$1 billion per annum.
Gillette has five brands with sales of more than $ 1 billion per annum.
Gillette has an estimated 74% share of the $ 7 billion global wet shave market.
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More than 2 billion people a day use a Procter and Gamble product, while the
same figure for Gillette is 1 billion people per day.
The combined annual advertising budget of Gillette and Procter and Gamble
(P&G) would be around $ 3 billion, with P&G accounting for around
$2.1 billion.
Questions
1. To what extent do you think companies like P&G can increase the
distribution of the products which it acquires when it takes over a
company such as Gillette, which already has a main presence on
retailers’ shelves?
2. What sort of cost savings do you think will be possible as a result of this
merger?
4. Read the Teepack case study in Hollensen, page 57, and answer the
following questions:
REVIEW ACTIVITY FEEDBACK
1. Historically Procter and Gamble have increased the distribution of the
brands they have acquired, due in no small part to their strong working
relationship with retailers. They managed to increase the shelf facings
of the ‘Iams’ range of pet foods. Having presence on retail shelves is a
difficult task in highly competitive markets, and retailers look to work
with companies who can supply products which generate substantial
turnover in their stores.
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References
Hollensen, S, (2003), Marketing Management: a relationship approach.
Pearson Education, Essex, England, ISBN 0273643789
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Unit 3
LEARNING OUTCOMES
After studying this unit you should be able to:
· Identify the way in which the decision making unit (DMU) works.
Introduction
If we consider the definition of marketing that was used in Unit 1, and
the underlying principles of marketing, we must focus our efforts on
customers. The term we will use for business to consumer is B2C. We
need to recognise also that while many of our customers are individuals
and purchase a range or products from the most basic such as bread and
milk, to more involved and expensive purchases such as cars or houses,
some customers may also be businesses. The term business to business
(B2B) is used to cover the role of businesses which sell industrial
products or products which are used in the production process such as
machinery. In some texts you may also see reference to Industrial
Marketing. Hollensen (2003) categorises B2B customers as original
equipment manufacturers (OEMs), intermediaries and governmental
buyers. As marketing managers it is our job to try and understand the
process which our customers go through when deciding to purchase
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CASE STUDY ACTIVITY
Read the BASF case study on page 107 in Hollensen (2003) and answer the
following questions:
CASE STUDY FEEDBACK
1. We can identify the following companies as potential customers:
L’Oreal (France), Unilever (UK), Estee Lauder (USA), Procter &
Gamble (USA), Benckiser Group (Germany), Revlon (USA), Body Shop
(UK), Wella (Germany), Boots the Chemist (UK). Indeed, working as a
supplier to any one of these giants can generate high levels of business.
How well does BASF and the customer’s organisation fit together?
What is the physical distance and the psychic distance to the customer?
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Based on these criteria, BASF could possibly start with the German
cosmetic manufacturers Benckiser and Wella.
2. The decision making process would need to take the following into
consideration:
You will now consider some of the other ways of looking at decision making
processes.
Consumer Behaviour
According to Solomon et al (1999) consumer behaviour is the study of
the processes involved when individuals or groups select, purchase, use
or dispose of products, services, ideas or experiences to satisfy needs
and desires.
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Culture
S Social influence
S t imulus Reference group
Marketing mix
P Psychological factors
P r ocess Physiological factors
( or ganism)
Perceptions and feelings
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Hollensen (2003) suggests that there are three main areas in which we
need to focus our attention. If we look at Figure 3.1, the SPR model, we
can see these three broad areas. These are the stimuli that make us
consider a product, the process we go through in deciding to purchase
this product and the response that we make having evaluated the
alternatives.
The next stage we go through is the process. Here we are evaluating our
responses to the stimuli which might be psychological factors,
physiological factors or our feelings towards or perceptions of a
product. If this is a new category of product for us then we might take
longer to choose the product.
Through all of these decisions we must take into account the fact that
some products are low involvement purchases and therefore require
less consideration. If we are buying an everyday product such as a
newspaper then while we might be attracted to another newspaper as a
result of a promotional campaign or after comments from our peers in
the workplace, we will probably purchase our usual newspaper. If we
are considering a more involved purchase such as an item of clothing,
then we are likely to be affected by various stimuli and may take longer
in choosing to purchase the item.
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Problem recognition
Information search
Evaluation of alternatives
Product choice
Outcomes
Problem recognition
We need to understand at what stage our customers or potential
customers consider themselves to have a problem which can be satisfied
by purchasing a product. In the case of a car tyre that needs replacing,
we have little option but to consider a purchase. If we are starting to
worry about our image then we will start to consider the actions
necessary to remedy our problem. We might also be influenced by a
new product which makes us consider a solution to a new need. A
kitchen gadget to make liquidised fruit drinks might not be a product
which we considered before, but could be the solution to our need to
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Remember also that these problems may have existed for a considerable
amount of time. Investment in researching this area, may bring
rewards. Consider the history of the suitcase. We have used this form of
product for more than two hundred years. However, it is only in the last
ten years or so that manufacturers decided to put wheels on cases. This
has now become the standard for the industry.
Information search
If we consider the case of the tyre which needs replacing, then we might
refer to our stored information. We are aware that Kwikfit offer a rapid
tyre change service, and we are aware of their location. The fact that
Kwikfit have invested in communicating information to their customers
has paid off in this instance. We might also go back to memory search
and remember the garage which we used before. If we haven’t
encountered this problem before then we must carry out an external
search; check in the phone book, look on websites or even contact
people who we know might be able to offer some guidance. For some
consumers their search for information is ongoing.
Take the example of purchasing a holiday. In many cases the search for
information for holidays begins immediately after the last holiday. We
need to try and understand the impact that a holiday might have on a
family or group of friends. This is a considerable investment, and may
account for 15% of a person’s annual income. Why would somebody
spend so much on an activity that only accounts for 4% of the whole
year? There are several reasons. The holiday represents relaxation, time
away from the pressures of work and home life, it might be an
opportunity to try out new activities and it is a chance to make
memories. We now see that this is therefore a very important purchase.
At what stage then do we need to send out information to our
customers? In some cases straight after the last holiday, or in other cases
at times when families are likely to be gathered together. The annual
Christmas holiday in the UK is a time when television adverts are
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Evaluation of alternatives
We now pass to an evaluation phase having stored the information that
we need, and in many cases having several brands to choose from. As
marketing managers we are still interested in researching this phase as
this can give us some indication about how our consumers arrive at
their final decision. Solomon et al (1999) looks at ways of identifying
these alternatives.
In Figure 3.3 we see that our alternatives can be broken down into three
sets. The evoked set includes those alternatives that are already in the
memory or our retrieval set, as well as those which are readily available
and on display in a retail setting. Research tells us that in certain
product categories we may have 5 or 6 brands in our evoked set. This
will vary across product categories. If we are aware of products, but
have no intention of buying, then these are in our inept set. If there are
products of which we are not aware and, therefore, unlikely to
purchase, then these are in the inert set.
All alternatives
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If you are working with a company that sells to consumers, can you
categorise your consumers in terms of loyalty to your brand? What
percentage of your customers might consider switching brands? If you
can’t answer these questions then you need to address this through
market research.
Product choice
When consumers are making their final choice they are looking for
factors which differentiate products. When products have similar
attributes then consumers may have to look for other reasons to
purchase. Solomon et al (1999) suggest that in order for companies to
address this issue they should look to convey three specific types of
information in their marketing communications. It should point out the
differences between attributes of brands. It should supply the customer
with a decision making rule, and finally that it convey a message that
shows how the customer used the product when he or she last
purchased it.
Cost attributes
Here we need to consider not only the cost of purchase, but also the
costs associated with operating, repairing or with selling on the product
when we want to replace it.
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Performance attributes
These include the quality of the materials used, how reliable the product
is and how generally it performs. This includes such attributes such as
taste, safety or efficiency.
Social attributes
These include some intangible benefits such as its reputation, image and
popularity with friends and peers, style or fashion.
Availability attributes
We need to consider how easy the product is to purchase, such as a
snack bar or soft drink, if there are credit terms for more involved
purchases such as a car, or other factors such as delivery time and
quality of service.
Try to think of the attributes of the products that you buy on a regular
basis. Are these attributes important when you decide to go and eat out
or go out to meet friends? What are the alternatives?
Outcomes
Once the consumer has made the final decision to purchase, he or she
will either be satisfied with the purchase or dissatisfied with the
purchase. If the purchase represented a level of risk to the consumer,
then it is still likely that there are doubts. Consumers will very often
question their own purchase, which we refer to as cognitive dissonance.
Car manufacturers target recent buyers with communications to allay
their fears and to convince them that they have indeed made the right
decision. Once the purchase has been completed, the consumer then
returns to the problem identification and is open to information about
this or new products. Car manufacturers have to monitor this period
quite closely. A car buyer who replaces their car every year will be open
to receiving information about new cars on a regular basis.
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Try to think of a purchase that you or your friends have made recently
where you are considering whether or not you have made the right
choice. Have you had to contact the supplier about the product? Many
companies now see aftersales service as important as the purchase in
helping to maintain their client base. The buying of computers is such a
purchase. Consumers in developing countries are starting to invest
heavily in personal computers. What happens when the computer isn’t
working as well as you expected. How easy is it to contact the
manufacturer? Do they resolve the problem quickly or are you made to
feel guilty by the people you deal with on the phone. If you are able to
deal with these issues quickly, then you will almost certainly add value
to the brand in the eyes of your consumer.
ACTIVITY
Ford car dealers
One of the problems that Ford faces in a number of its markets around the
world, is the reputation and service of the dealers who sell Ford cars. In many
cases these are private companies who represent Ford, and usually work
exclusively with Ford. Perhaps understandably one of the problems is the sales
person’s understanding of customers. They are given sales targets, and in many
cases their basic salary is low, with the incentive to make money by taking a
commission on every car that they sell. The average sales price of a new car is
usually around $ 16,000. One of the frequent complaints of the sales people
themselves is that too many people visit their showrooms just to look at the
cars, and seem to have little intention of buying. The sales people refer to these
as ‘tyre kickers’ and refer to people who leave without a buy as a ‘walkout’.
One of the problems with sales people is that they can be seen to be too keen
to get the sale, a factor confirmed by ‘mystery shoppers’, who are people sent
by market research agencies undercover to test customer service in
dealerships. Female customers also complain that male sales people tend to be
patronising, and in a case where they take a male companion to the showroom
with them to help them buy a car, find that the sales people usually always
direct their sales pitch to the male, even thought it is the female who has the
budget to buy the car.
Using the knowledge that you have gained from studying the decision making
process, give some advice to the dealerships to suggest how they might change
their approach to the people who visit their showrooms.
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ACTIVITY FEEDBACK
There are several areas to address and you will have listed some of the
following:
3. Showroom – remember that for most customers this might be the only
opportunity to see a car close up, hence the title showroom. Many car
dealers encourage people to visit their showrooms and offer advice
and information in a no pressure environment.
5. Repeat purchase – many car buyers have a purchase cycle for cars. A
‘car interested’ person needs to visit showrooms so that they can make
informed decisions at a later date. The showroom should be an inviting
place with refreshments and information to help this type of potential
customer.
6. ‘Die hards’ – these are your brand evangelists. They help to sell your
cars to their friends. They should always be welcomed and offered
information so that they go out and spread the word.
You may have made more specific points and these should generally be in the
area of improving customer service and presentation of the showrooms.
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Needs
Maslow’s classification is often used as a framework for understanding
the needs of customers. These are considered to be the five basic needs
of humans:
Perception
According to Solomon (2002), perception is the process by which our
sensations, such as how we respond to light, colour, sound or odours,
are selected, organised and interpreted. Hollensen (2003) suggests that
consumers tend to avoid information that contradicts our current
beliefs and attitudes. The current legislation whereby manufacturers
print stark warnings on their packaging is likely not to be noticed by
smokers.
Memory
Hollensen (2003) discusses the idea of short term and long term
memory. Information is processed in the short term memory and if
stored will pass to the long term memory. As consumers we are
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Attitudes
Attitude surveys are used to measure our attitudes. We must aim to
understand consumer attitude towards our product or service, and if
necessary we may need to try and change attitudes.
Our attitudes are likely to affect the purchases that we make, and it is
therefore an important part of consumer behaviour. We can form
attitudes towards a product simply because of the way that it is
advertised. The main objective of the advert may simply be to change
consumer attitudes. Solomon (2002) suggests that some adverts are
aimed at our emotions and attempt to evoke positive feelings towards
the product. We must also consider tracking consumer attitudes over a
period of time in order to try and identify changing attitudes.
Socio-demographic variables
Age/social class/demographics
These variables help us to try and categorise our customers and can
form the basis of early attempts to segment the market. Age usually has
some impact on the products we consume. In particular we need to be
aware of products or services which make us feel better about ourselves
and which perhaps are more associated with younger age groups.
Think of the products which we consume in order to make us feel or
look younger. Social class differences are more noticeable in some
countries than in others.
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demand new types of products, and look for specialist holidays and
social activities.
Lifestyles
The way in which we live our lives is reflected in the products or
services that we purchase. There are currently regular television
bulletins about lifestyle and diet. There is a strong association between
fast foods, considered to be healthy and nutritious, with obesity and
lack of fitness. Such is the problem that the UK and USA governments
are putting pressure on the food industry to promote healthier eating.
Culture/subculture
Culture has many definitions. It is shared beliefs, attitudes and
behaviour patterns which are passed on from one generation to the
next. A subculture is a group within a culture who might share similar
ideas.
Reference groups/family
We need to understand to what extent our family of reference groups
have an impact on the goods or services which we produce. These can
also include family and colleagues and their attitudes to products may
influence us more than we realise.
The family
It is difficult to measure the impact of families across different borders.
Consider the Chinese policy of one child per family. This means that
there will be a whole generation of consumers who do not have aunts,
uncles or cousins, and who are increasingly spoiled by parents and
grandparents who invest huge sums in their ‘little king’ or ‘little queen’.
Consumption of personal computers for young people in China has
escalated as a result of this phenomenon.
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Buying situations
The three different buying situations in B2B markets are new task
buying, modified rebuy and straight rebuy. Each situation suggests
how much work the seller has to undertake in order to gain business.
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Straight rebuy
In a situation where companies are making routine purchases of our
product or service, we need to ensure that our booking systems and
operations are set up to make this process as simple as possible, and we
should invest time in maintaining and developing this relationship. We
should be aware of potential competition and look to set up barriers to
competition.
Modified rebuy
This is relatively straightforward in terms of decision making, however
as a supplier we must be aware that this might open the door slightly for
a competitor. We should try to turn this situation in to a straight rebuy
situation as soon as possible. We might also be the initiator for a new
product or service, particularly if we have a good working relationship
with our customers. Good companies are constantly looking for new
solutions to problems and work closely with suppliers who help them
to develop these new solutions.
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Environmental influences
We have already considered the PEST figures in this unit, and the
PLESTI + C is another way of looking at the influences exerted upon us
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Organisational influences
We must try to understand the climate within the organisation as this
will affect their buying decisions. We understand that if we work with
supermarket buyers that they are under pressure to deliver innovative
solutions within stores, and to consider ways of improving distribution.
We must also try to consider their structure, lines of communication and
the reward structure within the organisation. The closer we can be to
their expectations of a supplier then the more we are likely to be chosen
as a supplier.
Evaluating suppliers
If we look at Hollensen, page 137, we can see an example of a supplier
evaluation form for the Chrysler Corporation. If we look at this form
then we can see how our potential customers consider their suppliers,
and against which criteria they are being evaluated. This is an important
checklist for potential suppliers and we can feasibly use this form as
selfevaluation, and as the basis for researching our competitors.
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1. Recognition of a problem/need
Environmental forces
Economic influences
While our primary concern as a B2B supplier is our customer, we
mustn’t forget that ultimately their products are likely to be destined for
the enduser market. As a result, a supplier of car components should
take an interest in trends in the car market. We therefore need to
monitor economic changes and consider the likely impact on our
particular market.
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Technological influences
Current developments in technology and the use of webbased
technologies have revolutionised business, in particular the B2B sector.
Manufacturing processes are increasingly computerised and for many
companies the solutions for their needs lie in technological
developments. This will have significant cost implications and our
ability to finance future developments is very important.
Organisational forces
Strategic solutions
Our relationship with key customers is critical to our survival. Our
understanding of the strategic decisions which our customers need to
take may be important to help us develop our future business. The
supermarket business changed dramatically once distributors formed
strategic alliances with their customers. There was a recognition that
distribution was a not a core strength of the supermarket and, by
passing on distribution to strategic partners, they were able to divert
more resources to their core business of retailing and customer service.
Group forces
The people within an organisation who take part in the decision making
process are sometimes referred to as the decision making unit (DMU).
We need to understand exactly how the DMU works within an
organisation. We might need to target each group with a different
communication message. If we are selling industrial grass cutters then
we must consider the operatives as well as the engineers, the finance
directors and the purchasing department.
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Users
These are the people who use our products or services. Not only are
they important in the decision making process, but they are also key
when we are developing new products which they will use. Their
expertise will be important in the new product development process.
Influencers
These are people who can influence a decision to purchase as they may
be involved in the development of a project. They might be people with
technical knowledge who can influence other members of the DMU.
Buyers
These are usually people within the purchasing department who, while
their main role may be to authorise the decision of the DMU, may also
have some input in the final decision.
Deciders
These people might have the final decision when choosing between
suppliers. It is up to our sales and marketing people to identify who the
deciders are and to make sure that we have satisfied their main criteria.
Gatekeepers
These are people who can control the flow of information within the
organisation. If we send details of our new product to a purchase
manager only, then we are reliant upon this person to share the
information with other people within the organisation. We may,
therefore, decide to target more than one person within the company.
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Individual forces
We need to understand the power of individuals within the decision
making process. There are individuals who have a much greater stake
and perhaps have more say in the final decision.
ACTIVITY
Ford Motor Company used its research data in order to make key members of
staff aware of the importance of loyalty and satisfaction. There is often
confusion between loyalty and customer satisfaction and an assumption that
satisfied customers will remain loyal and that loyal customers are satisfied.
or enthustiasts
High
30% 20%
Low
40% 10%
Low High
Satisfaction
Consider the information, where you are faced with the fact that research
indicates that 30% of your current customers are ‘vulnerables’, 20% are ‘true
loyalists’, 10% are ‘switchers’ and 40% are probable ‘lost customers’.
What are the options available to you as Ford’s marketing director? What
specifically would you recommend that they do to address the issues raised by
this research?
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ACTIVITY FEEDBACK
Ford customer loyalty
1. Low loyalty and low satisfaction – one of the problems facing Ford, and
all companies in the car industry, is the fact that the length of time
between purchases in a customer’s life may be several years. This
accounts for about 40% of all customers. We know that the cost of
recruiting new customers will be high, so we will need to divert some
resources to addressing these issues. The problem with the customers
in this section is that at present they seem the most unlikely to buy a
Ford car again. However, there are still some in the group who could,
with some targeting, be moved more towards the high satisfaction
segment.
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S peci fi c S ummar y
at t r i but es char act er i st i cs
Durability
Appearance
P r oduct
Reliability qual i t y
Shipment timeliness
Shipment damage
T r anspor t at i on
Driver courtesy and del iver y
Representative’s accessibility
Representative’s knowledge S ales
Reliability, follow-up Cust omer
loyal t y F i nanci al per for mance
Structural designs Over al l Sales
Sample timeliness D esign cust omer Commit ment Market share
Technical quality sat i sfact i on Lifetime customer value
B ondi ng/ Customer profitability
Complaint resolution r epeat buyi ng Total profit
Telephone response
Cust omer
ser vi ce Cust omer
Information accuracy r et ent ion
Invoice accuracy
Invoice timeliness
I nvoice and
Inquiry responsiveness admi ni st r at i on
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CASE STUDY ACTIVITY
Read the Manchester United case study in Hollensen, page 160, and answer the
following questions. Remember that even if you don’t like football you should
approach this case study as if you were a consultant. Many of the commercial
activities of a sports club have very little to do with one’s knowledge of the
sport itself.
a) B2C market?
b) B2B market?
2. What are the short-term and long-term benefits and pitfalls of the
Manchester United-New York Yankees alliance for both partners?
4. Is the Manchester United-New York Yankees alliance the right way for
realising a global brand strategy?
CASE STUDY FEEDBACK
1. The customers on the B2C market for Manchester United are:
Television viewers.
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Benefits:
The fact is that the average American doesn’t follow soccer, and much
prefers established American sports such as baseball, basketball,
American football and ice hockey.
The men’s soccer game attracts very little media attention in the USA
and, in fact, the game for women in the USA is more established and
they have also won the World Cup.
Pitfalls:
4. One of the possibilities lies in targeting areas of the world where they
love both soccer and baseball.
Given the US sporting links with other countries, as a result of its high
Hispanic population, might open up some Latin American markets to
Manchester United.
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ACTIVITY
Consider the following list of products in the first column. In the second column
write down a list of their likely competitors.
Product Competition
A package holiday to a
Greek island
A Harley Davidson
motorbike
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ACTIVITY FEEDBACK
Product Competition
A swimming pool
You will notice that in certain situations we face direct competition from similar
products. You might ask why a swimming pool is in competition with a motor
bike? The answer is because the Harley for many consumers is a purchase made
once their children have left home and the house loan has been paid. Many
consumers are men in their mid-fifties. The swimming pool is another product
that perhaps their wives or partners would rather purchase with their money.
It might seem obscure but research has shown that this is often the case. The
example of the Parker Pen is much easier to understand. A high percentage are
bought as gifts and they therefore compete with gifts within a specific price
range.
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Hollensen (2003) suggests that the three main areas that we need to
consider when assessing the current strategies of our competitors are:
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Prices
When considering our competitors’ pricing strategy we need to
consider what their current approach to pricing is. We should have a
good idea of their costs, and certainly be able to estimate them. When
we can estimate their costs we can then see how aggressive their pricing
strategy is. While we accept that price competition can ultimately
destroy our profits, we need to be in a position to respond to changes in
price.
Product features
We should monitor the development of our competitors’ extended
product. By this we mean such things as levels of service or innovation
in developing existing products or services.
CASE STUDY ACTIVITY
Please read the Virgin Case study in Hollensen page 191 and answer the
following questions:
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1. What have been the main reasons for the disappointing performance of
Virgin Cola (Virgin Drinks division) ?
CASE STUDY FEEDBACK
1. The main reason has been the dominance of the two giants Coca-Cola
and Pepsi Cola, who are well entrenched in the market and enjoy
considerable customer loyalty.
Virgin’s product line of standard cola and a diet cola is too narrow.
The company overestimated the impact of the Virgin brand in the USA.
There is a much stronger association between the brand and Richard
Branson in the United Kingdom and the brand has a very strong
identity. Richard Branson is not as well known in the USA as he is in the
United Kingdom.
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Actors
Actors operate at different levels in the network. Actors are constantly
trying to take more control of the network in the marketplace.
Resource ties
In developing a relationship, companies will combine their resources in
order to improve their effectiveness in the market.
Activities
These refer to any shared activities that are aimed at making companies
more effective. Companies who work together on production schedules
or in improving service to endusers are setting up activity links. These
can present a barrier to other competitors.
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Customer behaviour
Hollensen (2003) uses the marketing relationship continuum developed
by Jackson (1985) to classify the types of relationships that we might
enjoy without customers. The continuum looks at the ‘alwaysashare’
customers who focus mainly on transactions which share their business
across a number of different suppliers. At the other end of the
continuum are the lostforgood customers, who work closely with their
suppliers to create barriers to entry for their competitors.
Perhaps the biggest test for both partners would be the bringing
together of two very different management and work cultures.
However the benefits of achieving a smooth integration are clear for
both parties.
CASE STUDY ACTIVITY
Philips and Jordan
Read the Philips and Jordan case study in Hollensen, page 197 and answer the
following questions
1. What would be the benefits for Philips of the Optiva acquisition? How
would Optiva benefit from the acquisition?
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CASE STUDY FEEDBACK
1. Philips’ acquisition of Optiva gave them access to a 35-40% market
share in the USA market for electrical toothbrushes. They also gained
access to Optiva’s revolutionary technology which had created such an
impact in the market place.
2. You might consider that Philips’ purchase signals their intent to remain
a major player in the marketplace, which might have an impact on the
relationship with Jordans.
Buyer-supplier relationships
In order to understand the relationship between buyer and supplier, we
need to consider the bargaining power of each party. Hollensen (2003)
has developed a matrix (see Figure 3.7) to be able to plot the relationship
between buyers and suppliers.
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SUPPLIER
BUYER
1. Cooperative system
Where there are few buyers or few suppliers in a market then the
balance of power between the supplier and the buyer is similar. In some
cases this might suit a buyer who doesn’t want to rely on just one
supplier. Suppliers who take on more than one buyer will be confident
of their ability to satisfy both current demands and future demands.
3. Adversarial system
In this situation where there are many suppliers and buyers, then the
buyer tends to be in a much stronger position. The emphasis in the
working relationship with suppliers will be based mainly on price, due
to competition, with buyers able to switch suppliers easily.
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Political factors
What are the key political factors which might affect our business?
These are factors such as the government currently in power, the
political climate in a country and the amount of support that a
government gives to business. In some volatile international markets
political factors are likely to be more important than in stable markets.
We will find that some political factors might also appear in legal
factors. This isn’t a problem, as the most important function of the
PESTLE is to identify key factors which are relevant to our business.
Economic factors
We must take into account economic factors which have a direct
influence on our business or on our customers. The key indicators are
inflation, both current and predicted as this will have a bearing on
costing and pricing. Other factors include interest rates, Gross Domestic
Product (GDP), exchange rates and unemployment. While we might
know the GDP per person in the market, we also need to be able to
interpret its impact on our business. While interest rates are low an
economy tends to function more effectively, but this won’t have a direct
impact on all business.
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Social factors
Here we are concerned with the social factors which might impact on
our consumers or on the endusers of products. We can identify some of
these factors in this unit where we look at consumer decision making.
Research will enable us to identify those social factors which have an
impact on our business. We can predict future impact, simply by
studying current growth rates. A fall in the birth rate will have a definite
impact in the future on markets which sell products to parents, and an
increase in divorce rates might also have an impact on housing. It is
those companies which are able to predict future trends which are likely
to have the most impact in the marketplace in the future. Economists are
making many predictions about the impact of the aging population in
developed countries, and the future demand for products.
Technological factors
We need to understand the technological environment in the markets in
which we operate. We mentioned the software market and how this is
linked to the development of the hardware market. Given the rapid
increase in technological development, it has become even more
important to understand the technological environment.
Legal factors
Legal factors are linked closely to political factors. Legislation can have
a direct impact on our business. In the UK market, when the
government changed the tax levels on company cars, in an effort to
encourage companies to purchase more fuel efficient cars, Ford
introduced the new 1.4 litre engine car, as this fell within the new
legislation on company car tax.
Environmental factors
Under environmental factors we can introduce the areas that we
covered in this unit and Unit 2. Here we must consider the competitive
environment in which we operate. This will also include competitor
analysis and how we see our competitive position in the market.
Remember that the PESTLE must only include those factors which are
relevant to our business and our markets, and for that reason it is a
useful tool for marketing planning.
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CASE STUDY ACTIVITY
Dandy Chewing Gum
Read the Dandy case study in Hollensen, page 245, and answer the following
questions:
1. How are Dandy’s competences in the value chain used in the alliances
to create value for the Dandy-Joyco and Dandy-KGFF partnerships?
2. What should Dandy’s future product market strategy be? You can draw
up a SWOT analysis to help you answer the question. Should they
develop their own brands (Stimorol, Dirol and V6) or should they
function more as a sub-supplier to large multinational confectionery or
healthcare/pharmaceutical companies?
CASE STUDY ACTIVITY FEEDBACK
1. In the Russian market, Dandy’s distribution competencies are used in
the Dando-Joyco alliance. In the alliance between Dandy-KGFF,
Dandy’s competence in dragee production technology is used.
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marketed under the existing brands of Stimorol, Dirol and V6. Dandy
might also consider acting as a consultant and sell its knowledge about
dragee products to companies who are looking to outsource their
production and/or product development of dragee products. Dandy
has already produced dragee products for other manufacturers or
retail chains under their own private label.
REVIEW ACTIVITY
Read the Viagra case study in Hollensen (2003), page 165, and answer the
following questions:
1. How do you see the future market development for drugs against ED?
REVIEW ACTIVITY FEEDBACK
1. Possible the biggest factor which might impede the market
development of such a drug is the refusal of potential customers to
own up to the problem of ED. In certain cultures such a condition
might impact on virility and a man’s self-esteem. If this is a product
targeted at over 50 year old males, then as the average life of males
increases across the globe, this might reflect on the sales of Viagra.
There will almost certainly be increased competition in the
marketplace. However, Viagra is the name that is strongly identified
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with this category of drugs. There will also need to be continued efforts
to educate potential customers.
2. There will still be growth in sales to males for ED. However, there are
opportunities to introduce a similar drug for women and a version of
Viagra for diabetes sufferers.
We should establish what we think their objectives are, and what their
likely strategies will be.
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about their products. Does this mean obtaining a competitor’s car and
checking it in our research and development workshops? The answer
is almost certainly yes, as well as collecting any published information
about our competitors.
References
Hollensen, S, (2003), Marketing Management: a relationship approach.
Pearson Education, Essex, England, ISBN 0273643789
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Unit 4
LEARNING OUTCOMES
After studying this unit you should be able to:
Introduction
In Units 2 and 3 we have considered the internal and external factors
which we need to understand. We now look at exactly how we will use
this information in order to develop our marketing strategies. Without a
clear understanding of exactly how we stand in the market in relation to
our competitors, we will find it difficult to guide our business in the
right direction. We must carry out an honest appraisal of our internal
strengths and weaknesses, while considering the external threats and
opportunities.
Mission statement
We need to offer some direction to our company and in particular our
staff. We should have a mission statement which clearly indicates the
direction of the company. It is easy to suggest that the mission statement
should be as short as possible and communicated effectively, but that is
what we should aim to do. When a well established United States
distribution company introduced its mission statement which was ‘to
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SWOT analysis
This is a simple technique of analysing the strengths and weaknesses of
our organisation (SW), or internal factors, and the opportunities and
threats in our external environment (OT). It is also down to all
departments within the organisation to contribute to the SWOT
analysis.
We must also produce a SWOT analysis at all levels of the company and
not fall in to the trap of producing just one SWOT analysis for the whole
company. Hollensen (2003) suggests that we conduct SWOT analyses at
corporate level, at a Strategic Business Unit (SBU) level, at product level
and at market level.
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ACTIVITY
Read the following mini case study and produce an outline SWOT analysis. You
may need to make some assumptions about the company, particularly as you
will see that it is based on a small to medium sized business.
Stewart Wilde had always wanted to own his own bar and brewery, having
worked in the award winning Fat Cat public house in Sheffield, England, while
he studied at Sheffield University. The bar belonged to his economics lecturer,
who had also introduced the concept to the USA. Stewart’s dream was to
become a reality some fifteen years later when he opened the Man in the Moon
bar in Northern Spain, as well as the Vitoria Brewery Company. He had
travelled from Spain to England to research brewing and bar design. In order to
position his bar as an authentic British pub, he needed to recreate the look and
feel of a British bar in a city where the vast majority of bars were much smaller,
and unmistakably Spanish in style. He knew that he would have to recreate
traditional British beers to sell in a market where lighter and much gassier beers
dominated.
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He knew that he would also need to develop his own brands, and was able to
design brands for his new beers, which on the face of it looked as though they
could have been introduced a year ago. He launched Albert’s Ale and Dark
Moon with his business partner, having brewed and tested several recipes. He
was surprisingly good at brewing, and the beer was accepted by a handful of
discerning expatriates, and the many local people who had been drawn to the
bar by its distinctive design.
Stewart was able to take out a loan through the local chamber of commerce
and produced his beer at a small purpose built brewery about 40 kilometres
from the bar. His calculations had been correct. He was able to produce a pint
(approx half a litre) very cheaply, and on the advice of a relative, was able to sell
the beer at a premium price, and therefore position it as a quality product,
while at the same time differentiate his beer from his competitors. While he
was making a healthy profit on the beer, he was still only working to 60%
capacity, and the balance of the sales were made up by traditional Spanish
beers, coffees and spirits.
Stewart set about imposing his mark on the Man in the Moon and it soon
developed into one of the most popular bars in town. He was able to combine
his love of music with being a bar landlord and was soon offering an outlet to
local musicians and bands. He also introduced quizzes which were very popular
with students at the local university who were keen to practice their spoken
English. The bar was unmistakably Stewart’s bar, and on days when he wasn’t
working in the bar, there always seemed to be less people in. Spanish bar
customers were notorious ‘bar hoppers’ and would soon move on to the next
pub if they didn’t like the atmosphere in a bar. His early attempts at advertising
and promotion were hampered by cash flow and the dismissal of advertising as
it didn’t generate the expected level of sales increase. However, running a bar
and a brewery was starting to take its toll on Stewart’s family and social life and
he wasn’t able to develop the business in the way that he had first planned. He
experienced some difficulties with staff and his plans to sell food were not as
successful as he had hoped. At times it seemed a long way from his days in the
Fat Cat in Sheffield.
When you produce your SWOT analysis you will cover areas such as marketing,
production and operations, people, management and resources. For the
external analysis, consider the key political, social, economic and technological
factors, as well as competition and relationships with suppliers. You may need
to make some assumptions.
List the main points in order of importance. Only show the main points
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Strengths Weaknesses
Opportunities Threats
What are the main considerations for the company based on your findings? List
the most important points.
ACTIVITY FEEDBACK
Strengths Weaknesses
1 Branding – the bar and beers were cleverly 3 Lacked financial resources to develop the
positioned in their respective markets business further
Opportunities Threats
8 To sell spare capacity of unique product to 10 Intense rivalry in bar sector and possible
other bars, using new brands reduction in sales
9 To ‘franchise’ the concept in other towns and 11 Threat of entry of ‘me-too’ products
cities
12 Hands-on approach to running the bar
prevented future planning
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What are the main considerations for the company based on your
findings?
You may not have identified exactly the same points but in a case like this you
should have identified that the threats to the business were considerable and
that there are some weaknesses to overcome.
The most noticeable feature of this analysis is that there are more weaknesses
than strengths, which will need to be addressed in order to move the business
forward.
Unfortunately, this case study is all too familiar. Underlying this, there is a lack
of market information gathered by the owner. In many cases people invest in
new business ventures, confident that they will be successful, when the
available secondary market research data suggests otherwise. The fact is that
the bar market in Spain is saturated with small bars, and the only significant
development is through chains of bars and larger corporations buying into the
market with themed bars. People setting up individual bars do so at their peril.
Corporate objectives
Consider the objectives that a company might wish to set itself. Where do
we start? Companies who are embarking on the planning process for the
first time will find that a shortage of information about the current
position of the company, will make setting objectives very difficult. Of
course, we can assume that one of our principal objectives will be to make
a profit of some kind, and perhaps as a new starter we will set ourselves a
breakeven target. We can use past performance as an indicator, however
it isn’t the most accurate way of predicting the future.
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Contribution margin
Price/earnings ratio
Profit
Brand awareness
Brand preference
Product quality
Customer satisfaction
Customer retention
Customer loyalty
institutions
Growth in employment
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We will need to monitor our plans to ensure that we do not fall short of
our targets. If we do fall short then we might need to review our
planning.
Growth Strategies
Let us consider the options that are open to us as a company if we want
to grow. Using Ansoff’s well established matrix there are four options
available to us. We can concentrate on our existing products or markets
or consider new markets and new products.
If we consider each of the four categories in Figure 4.2 then there are
clear examples of how companies have used these strategies to develop.
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Diversification
As a strategic option this should be carefully considered as this involves
moving into entirely new markets with new products. Companies who
have enjoyed success using diversification usually enjoy the reputation
of a very powerful brand and have an existing network of important
customers. We must also consider the option of vertical or horizontal
integration. By integrating vertically we might take over one of our
suppliers or a retail outlet, and by integrating horizontally we might
take over another manufacturer in a different field of expertise.
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High
Mar k et
gr ow t h
Cash cow D og
Low
If we look at Figure 4.3 we can see that there are four main categories
within the BCG matrix, measured against the rate of growth within their
market and their market share relative to their largest competitor.
Market growth rate is an important indicator of future market potential.
When the market grows we may be investing in the development of one
of our new products and so extra cash is needed. In terms of our relative
market share, the higher our market share is in relation to our
competitors then the higher should be our profitability.
Stars
As the title suggests, they are the main income generating products in
the portfolio, although they still require investment to maintain their
dominant position in the market. It is when the market slows down and
they maintain their position that they become cash cows.
Cash cows
These well established products enjoy a high relative market share in a
low growth market. As such they tend to require less investment and
can be ‘milked’ to provide investment for question marks in the
portfolio.
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Dogs
These are the least attractive members of the portfolio as they offer very
little profit in a low growth market. These may ultimately be sold or
kept going but with very little investment.
CASE STUDY ACTIVITY
Microsoft’s X-Box
Read the case study in Hollensen, page 263, and answer the following questions:
2. Do you think that Microsoft should carry out market testing for online
gaming in Japan?
CASE STUDY FEEDBACK
1. The Windows product is a cash cow product in that it enjoys a high
market share in a market where the growth rate has slowed down.
2. Since online gaming is one of the product advantages which X-Box has
compared to Sony Playstation II, it is one of the ways that X-Box can
gain a competitive advantage over Sony Playstation II. Although
‘broadband’ is not widespread, it is certainly going to be the next
development in the market.
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B usiness st r engt h
Low
Figure 4.4: General Electric Matrix – strategic implications. Source: Doole and Lowe (2003)
If we look at Figure 4.4 we can see that there are nine areas where our
business units can be placed, and that each shows us the options available
when deciding our future strategy. Within the grid the shaded segments
are the most attractive to a company. The nonshaded areas imply a
company should consider a change in its strategic direction. Hollensen
(2003) considers the factors that might contribute to the attractiveness of a
market and our competitive position within that market.
Market growth (total and segments) Marketing ability and capacity (country
specific know-how)
Psychic distance (from home base to foreign market) Access to distribution channels
Figure 4.5: Factors of market/country attractiveness and competitive strength. Source: Hollensen (2003).
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If we look at Figure 4.5 we can see the factors that we need to take into
consideration when estimating the market or country attractiveness
and our competitive strength. Hollensen (2003) suggests also the use of
a questionnaire in order to be able to position our company on the grid.
Low
1 10
If we consider Figure 4.6 we can plot each of our suppliers on the grid.
We might represent this value in terms of the total amount of business
with a supplier against the total amount of business with all of our
suppliers.
CASE STUDY ACTIVITY
Read the Ford Motor Company case study in Hollensen, page 300, and answer
the following questions:
1. What are the main differences in buying behaviour of golf cars for:
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b) Golf courses?
2. Prepare a SWOT analysis for Ford’s entry into the golf car market.
CASE STUDY FEEDBACK
1. When targeting the closed community for elder people, a growth
market in developed countries where the population is aging, the
elderly person or elderly couple is the decision maker. (B2C market)
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3. Ford has already set up a wholly owned company to market their new
line of battery-powered vehicles.
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ACTIVITY
Using the segmentation activity data listed, answer the following questions:
2. What will be the final outcome if only 30% of this age group are in
higher education?
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ACTIVITY FEEDBACK
1. We can consider the strengths followed by the weaknesses.
Strengths
Weaknesses
The system is only as good as the accuracy of the data. If the figures are
20% out in the beginning then this will have a significant impact on the
outcome.
2. If only 30% of the age group are in higher education, then this equates
to:
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This equals 6,654 multiplied by 2 units per week = 13,308 units per
week
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Sociodemographic variables
These tend to be the most often cited and are usually the easiest to
measure. While we can use age, gender, family life cycles, geographical
locations, income, occupation and education, we might also want to
consider race and ethnic origin, social class and events such as holidays,
sports or birthdays
Behaviouristic variables
Here we are attempting to segment based on a consumer’s behaviour
towards a particular product, using past behaviour as a guide to future
behaviour or consumption. We might also segment by a consumer’s
readiness to purchase a product. We might also segment based on a
consumer’s media and buying habits. To what extent has our segment
changed its shopping behaviour with easier access to the Internet? We
might consider our consumers’ experience and ability to use a product.
Consider the computing market, or is it the IT solutions market? We
might also consider consumer loyalty towards our products. Are there
groups of people who are intensely loyal to our brand or do they switch
from brand to brand? We might consider the case of the newspaper
where there has been intense loyalty towards individual brands. We can
also segment by usage frequency. Are our consumers heavy users or
light users? Can we convert our light users to become more frequent
users? We can also look at our consumers’ attitudes to wards innovation
and their choice of products. Some groups of people are avid consumers
of new products, whereas others lag far behind.
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Psychographic variables
Segmenting by psychographic variables perhaps gives us a much better
idea of how people consume, but it can be more difficult to identify and
access them. Here we consider segmenting by lifestyle and personality,
segments that might not be easy to measure using sociodemographic
variables. The explosion of ready meals in developed markets suggests
that consumption is due mainly to busy lifestyles. Is this also the group
that consumes recipe books for quick meals, but still doesn’t find time to
cook? It is likely that we might be able to create sub segments by age and
occupation.
You will see that the criteria, in line with those that we have already
considered in this unit, act as a way of categorising actual and potential
customers. Your first reaction might be to look at this numerically and
start to calculate the various combinations. This isn’t necessary, as we
are looking for specific segments that are most likely to buy our cars.
Remember that we have our existing data and we will understand that
there are already natural segments.
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Sex
Education
Occupation
Family
Income
Ownership of durables
Socio-economic grouping
Area type
Area density
Neighbourhood type
House type
Use frequency
Brand/Dealer loyalty
Attitudes to fashion
ACTIVITY
Using the categories in Figure 4.7:
2. Suggest where they can obtain the data necessary to make use of these
segmentation variables.
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ACTIVITY FEEDBACK
1. By encouraging dealers to segment the market for cars in their area,
this will help them to identify and compare different marketing
opportunities. In many cases, income will not be the main variable, but
the personal values and attitudes of some customers. This might be the
case in some developed countries. In the UK, a high percentage of the
population will borrow money in order to purchase a car, which they
will justify as their car is seen as a necessary purchase. In many cases
they will incur unnecessary debts in order to run a car. This decision is
more a result of personal values, rather than for economic reasons.
The dealers will also be able to value a particular segment and adjust
their marketing expenditure in line with the value of the segment.
Their internal sources were their sales, orders and service records, as
well as any information they held about enquiries or responses to their
marketing activities. External sources included lifestyle data provided
by Ford’s market research agency and general research data such as
Mintel and Euromonitor.
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Macro segmentation
Here we consider variables such as the type of industry, the size of
companies within the market, their relationship with the enduser
market and the way in which the products are used.
Micro segmentation
Here we focus on the internal characteristics of customers and consider
the personal characteristics of the buyers within companies. This can
also focus on the personalities of buyers and the relationship that they
enjoy with sellers.
In order to locate within the matrix we must measure the buyer’s degree
of loyalty against the value to the seller. Where there is a high buyer
loyalty and high value to the seller then we have a partnership.
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B uyer loyal t y
Low High
Low
V alue t o
seller
( per cept ion)
High
Targeting
We need to be able to divide our potential market into those segments
which are most likely to respond to our product or service while
discounting those who are least likely to respond. If we are players in
international markets then we will carry out the same process across
overseas markets.
Positioning
In order to understand positioning we must consider the competitive
nature of the markets in which we operate. If we are competing in the
soft drinks market, then we are likely to face strong competition, and in
many cases we are marketing quite similar products. We can use
positioning, therefore, to differentiate our product from those of our
competitors. In order to position we must first understand the way that
our customers see our product. We are in effect trying to give our
products their own personality that might make them stand out. In
most cases our products have many attributes but we use them to
position the product. In the Polish beer market the leading brands have
used positioning in order to stake a claim in the market and prevent
their competitors from making the same claim. One brand has claimed
the traditional position while another has claimed the sporting position
by associating itself more with sports. Consider the car market in your
country and how companies have positioned their products.
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CASE STUDY ACTIVITY
Read the Ballygowan case study in Hollensen, page 304, and answer the
following questions:
b) water coolers.
2. Using the information contained in the case study, where do you think
that Ballygowan should target its marketing resources?
CASE STUDY FEEDBACK
Ballygowan
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ACTIVITY
Using the table below construct a perceptual map for the following breakfast
foods. You will need to plot toast or bread, cold cereal, hot cereal, a cooked
breakfast and new Nutrigrain nutritional breakfast bars.
You can also use the map to show how typical breakfast products in your own
country are positioned.
ex pensive
t ime
quick
consuming
inex pensive
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ACTIVITY FEEDBACK
ex pensive Young
USA professionals
breakfast who are time
poor but
Cooked Nutrigrain concerned
breakfast bars about health
pancakes
and
syrup
t ime
quick
consuming
Hot
cereal Cold Popular
cereal with children
You will see that based on a European perspective that cold cereals, toast or
bread and Nutrigrain bars are all relatively quick, whereas a cooked breakfast
and hot cereal are more time consuming.
How did you get on plotting the typical breakfast from your own country? You
might have a range of breakfast options to choose from, a feature of many
cultures. It is likely that the time you have to prepare and consume your
breakfast will determine your choice. Travelling to different countries, one
usually finds that breakfast can present a huge culture shock. Consumers from
those countries who are used to eating a bread based product with coffee are
horrified by the sight of a cooked British breakfast.
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Competitive strategies
In order to consider the strategic options available to us, we use Michael
Porter’s matrix. Porter developed a matrix which considered a
company’s position in the market based on its ability to differentiate its
product or service from those of its competitors, and also its costs,
relative to those of its competitors.
D et er minant s of supplier power R ivalr y among ex ist i ng fir ms D et er minant s of buyer power
Supplier concentration Number of competitors (concentration) Number of buyers relative to sellers
Availability of substitute inputs Relative size of competitors (balance) Product differentiation
Importance of suppliers’ input to buyer Industry growth rate Switching costs to use other product
Suppliers’ product differentiation Fixed cost vs. variable costs Buyers’ profit margins
Importance of industry to suppliers Product differentiation Buyers’ use of multiple sources
Buyers’ switching cost to other input Capacity augmented in large in increments Buyers’ threat of backward integration
Suppliers’ threat of forward integration Buyers’ switching costs Importance of product to the buyer
Buyers’ threat of backward integration Diversity of competitors Buyers’ volume
Exit barriers
Strategic stakes
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CASE STUDY ACTIVITY
BMW’s Mini
Read the case study in Hollensen (2003), page 344, and answer the following
question:
Consider the personal car market and suggest some segmentation categories.
List the main segmentation criteria which you think are the most relevant.
CASE STUDY FEEDBACK
Developed car markets are usually highly segmented, and marketing training
for the dealers who sell cars focuses heavily on how to target specific segments.
If we segment by social group then that would be lower, middle and upper
middle.
Vehicle usage such as local journeys only, transporting children, utility vehicle
or family vehicle might also be considered.
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REVIEW ACTIVITY
1. Why do companies use product portfolio analysis to help them
construct their marketing plan?
REVIEW ACTIVITY FEEDBACK
1. The product portfolio approach forces companies to assess the
performance of all of its products or services over time. By categorising
these products, it enables them to divert resources into supporting
products with market potential, while also helping them to sell off or
lose products that lose money. The portfolio approach, therefore will
help a company to develop strategic alternatives for its products: a key
consideration in marketing planning, and also identifying new
opportunities.
2. The main advantages of portfolio analysis are that they are easy to use
and give clear strategic direction. The simplicity of the models means
that it is easier to use it as a training tool in companies. Their strategic
value is in the fact that they can show strategic activity in the market,
and also be used to track the developments of leading competitors, and
so give a clearer indication
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References
Doole and Lowe (2004). International Marketing Strategy. Fourth Edition,
Thomson, England, ISBN 1844800253
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Unit 5
Developing Marketing
Programmes
LEARNING OUTCOMES
After studying this unit you should be able to:
Introduction
Having considered the internal and external environment in previous
units and looked at the various segmentation options open to us, we
now move into the compilation of our marketing programme. We
should now have a much clearer understanding of the competitive
environment in which we operate, and through an assessment of our
current position and those of our competitors we are now in a position
to set out our marketing activities. This has traditionally been referred
to as developing our marketing mix, in which we make decisions about
the product, place, price and promotion. We will also set objectives for
each of the activities which we undertake.
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Product attributes
At the next level of product we consider factors such as design,
packaging, quality of production and, in the case of cars, colour variants
and design specifications. Where customer service is an important
component of the product, then we can also evaluate staff behaviour.
Support services
At the third level of the product we look to find components which will
help us to differentiate our product. By including delivery, installation
or aftersales service, then we are adding value to our product. At all
levels of the product, our research will concentrate on understanding
these levels of product as well as those of our competitors.
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ACTIVITY
Gym manager
Imagine that you are the marketing manager of a new multi-purpose gym in a
country where a high percentage of the population are overweight or in need of
more frequent exercise. Being a member of a gym is an obvious solution to help
people improve their fitness. Why is it that the biggest problem facing us as the
marketing manager is not just recruiting members, but also trying to stop new
recruits from terminating their membership after only 3-4 months?
ACTIVITY FEEDBACK
Let us think about this from the customer’s point of view. Perhaps what the
customer is buying is the expectation of improving their health, losing weight
and with it an improvement in their appearance, or is it what we might call
experiencing the ‘feel-good’ factor?
You might argue that the cost of the monthly membership of around £40 might
cause people to eventually leave. This may well be the case, but the
membership fees are discussed at the beginning and we can assume that the
customer found them to be affordable.
What about lifestyle? We may have customers who belong to the ‘cash-rich,
time-poor’ segment who, while they enjoy their visits, can’t then fit them in.
Service strategies
You may have more experience of services than you do of physical
products and we need to understand the key aspects of service. You
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Intangibility
A key characteristic of a service is intangibility, meaning that it can’t be
touched as it doesn’t exist in a physical state. If we consider the
experience of watching a film, going to the theatre or attending a major
sporting event, then what is it that we can take away from the
experience? This is an issue which the growing area of sports marketing
deals with. In the case of the marketing manager of a sports team, the
performance of the team or the outcome of the event are often
unpredictable and uncontrollable. However, research by Tomlinson et
al (1995) showed that sports fans attend sporting events not just for the
event itself but also for prematch refreshments and other factors that
contribute towards the atmosphere.
Perishability
A key characteristic of a service is the fact that it might only have a
limited life. If we consider the case of a visit to the theatre or a oneoff
event, then an empty seat represents lost revenue for the theatre owner.
New lowcost airlines have introduced a more flexible approach to
pricing in order to try and ensure that they make the most effective use
of their capacity.
Heterogeneity
In service situations the experiences of customers vary and may depend
upon the levels of customer service. In this case people are very
important in helping to deliver the best experience for customers. In a
restaurant we have chosen to eat a particular style of cuisine but our
enjoyment of this might be affected by the poor service of the staff in the
restaurant.
Inseparability
If we refer back to our experience of the sporting event we can’t separate
the event from the consumption of the event. In order for our service to
be successful then we must be able to reach potential customers in a
specific time frame.
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Types of service
Hollensen (2003) refers to three broad categories of services.
People processing
In this situation customers become part of the production process, in the
case of students at a university or diners in a restaurant.
Possession processing
Here the service is being performed to the possessions of the customer
in the case of repairs to a customer’s products.
Information-based services
These include services such as telecommunications or information
services where the customer isn’t involved in the production of the
service. Recent improvements in technology have meant that this is one
of the fasting growth areas in business.
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CASE STUDY ACTIVITY
Joyco India
Read the case study in Hollensen, page 481, and answer the following
questions:
1. What are the criteria for successful marketing in the Indian bubblegum
market?
2. What are the main reasons for Joyco’s success over Perfetti in the
bubblegum market?
CASE STUDY FEEDBACK
1. In such a large country it takes time to achieve widespread distribution.
The fact that Joyco have been able to reach 400,000 outlets using 1650
distributors has contributed to the success of Joyco.
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Profits
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Pricing
Pricing is possibly one of the hardest components of the marketing mix
to get right, and can cause the most discussion within the company and
also with distributors and intermediaries. How many consumers are
concerned with paying low prices yet buy products which have high
value added? Is it in our interests to steer consumers away from price
discussions towards looking at the extra value our products or services
offer? The answer to these questions is that there are many examples of
where we pay relatively high prices for products which have a low cost
of production and it is definitely in the interests of companies to add
value for their customers. The impact of a price war is considerable. It is
not in our interests to take part in a price war unless we know that we
can win!
The sign of a highly developed market is very often the amount of value
which companies have added. Consider the allinclusive holiday
packages which are increasingly popular where the price includes all
food, drink, entertainment and extra activities with the hotel complex.
What is the main attraction for the buyer? Is it not the fact that they don’t
have to worry about working out how much spending money to take or
that they don’t need to worry about carrying money around?
The price of a product will influence the demand for that product in the
market. The economist’s view of pricing is that the demand for a
product is based on the price set. This is referred to as the price elasticity
of demand. In this case higher prices will cause demand to fall and
lower prices will make demand increase.
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ACTIVITY
Consider the all inclusive price of a two week holiday in Cuba, where all food,
drink, evening entertainment, horse-riding, tennis, dance lessons, excursions,
Spanish lessons, flights, child care and transport to and from the airport are
included.
2. What, if any, are the benefits for the tour company or hotel selling the
offer? You will need to focus on cost, profit and adding value.
ACTIVITY FEEDBACK
1. The benefits for the customer are:
The piece of mind of knowing that you don’t have to pay for expensive
extras while on holiday such as horse-riding or local excursions.
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While there are benefits to both parties the main aim is to deliver
customer satisfaction and experience.
Pricing rules
Let us examine the importance of pricing to the company once again
and why it is important to fix the right price.
1. The price that we charge for our product or service will help to
position the product in the marketplace.
2. The value that we add to our product or service will help us to
hide the true price of the product.
3. The price that we set determines our profit margin and will
ultimately provide us with some of the funds that we need to
develop our new products or services. This will also include an
allocation of funds to cover marketing costs such as advertising.
Pricing developments
We are currently witnessing significant changes in pricing in certain
B2C global markets. This is due in part to rapid technological
innovation which delivers superior new products at lower costs. We
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might consider the personal computer (PC) market where price levels
have fallen rapidly and in a very short period of time. Each new version
of a PC has more functions, more memory and at a relatively lower
price. A digital camera which cost US $ 500 two years ago can easily be
purchased for US $ 200 now. It is only because firms are competing in
global markets that they are able to spread the development costs of the
product, and sell much larger volumes for very low profit margins, but
who ultimately are producing an adequate rate of return on their
investment. We need to consider, therefore, the factors which we need
to take into consideration when fixing prices.
If we aim to position our product at the premium end of the market then
we will use premium pricing in order to position. Remember the
example of perfume and how this price will be based on the levels
necessary to position and not necessarily based on the costs of
producing and marketing the product.
Product factors
In Units 2 and 3 we looked at internal and external factors which might
contribute to our success or failure in the marketplace. Our
understanding of our product features, in relation to our competitors’
products or services will help us to set the most appropriate prices.
Hollensen (2003) considers price escalation, where goods are sold to
overseas intermediaries, whose additional costs may cause the price to
the end consumer to rise dramatically. It is essential for us to be aware of
this concept and to encourage intermediaries to maintain cost control.
Environmental factors
We need to be aware of factors in the marketplace which might impact
on prices. In overseas markets we should understand tariffs and
government regulations or taxes which will raise the final price. We are
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also aware that a change in exchange rates can either increase the costs
of goods to overseas customers or might bring down the price.
Market factors
In setting prices we need to understand the dynamics of the market in
which our goods or services are going to compete. Strong competition is
likely to put pressure on pricing and we have already established the
need to understand our competitors. Faced with strong competition we
must consider the positioning of our product and look to add value. We
have discussed ways in which we can erect competitive barriers for our
products, and one of these is to include extra services which tie the
customer in to our business.
Pricing strategies
Consider the pricing strategies that are open to us. Before we can apply
the appropriate pricing strategy we need to understand our competitive
position in the market. There are two broad approaches, namely
penetration pricing and skimming.
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Price bundling
In order to place more emphasis on product value, we should consider
the issue of price bundling. Here we attempt to bundle extra service to
our product offering. While this adds value to the customer, it also
enables us to spread costs across a number of different services.
CASE STUDY ACTIVITY
Harley Davidson
Read the Harley Davidson case study in Hollensen (2003), page 514, and
answer the following questions:
1. What are the main reasons for Harley Davidson’s success in the last 15
years?
4. Should Harley Davidson alter its price, given that there are strong price
pressures from rivals?
CASE STUDY FEEDBACK
1. The company has realised the value of the Harley brand and the
relationship it enjoys with its existing and its potential customers.
The bike has ‘symbolic’ meaning, and according to its followers stands
for freedom, adventure and individualism. Its customers also expect to
pay a premium in order to own this product.
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2. The Harley pricing strategy is clearly premium price, which Harley will
try to maintain by adding value and protecting the image of its brand.
4. This is a question that the marketing team of Harley ask themselves all
of the time. It is unlikely that a competitor will develop a product which
will attract the main Harley customer and so a premium pricing
strategy would be followed. Harley may choose to use a new brand to
compete in other sectors of the market.
Distribution
The basic function of distribution is to link the manufacturer of goods
and services with final consumers. The decision we face is then to
decide how many intermediaries are needed to link us, as the producer,
with the marketplace. The technological revolution in consumer
retailing continues to change the marketplace. Current estimates for
goods purchased via the Internet in the UK during the Christmas
holiday period, suggest that around 5% of all purchases will be made
online. The expertise which we gain in distributing goods or services in
our domestic market may not be transferable to overseas markets,
where distribution systems vary. We must also take into consideration
the fact that the cost of distributing goods may account for about 25% of
the final sales price, which means it is important to find the most
appropriate channels. Perhaps with this in mind we should reconsider
technological innovations and their ability to deliver customer
satisfaction. Reports from consumer groups in the UK suggested that as
many as 1% of all goods ordered online, failed to turn up in time for
Christmas, in spite of delivery guarantees made by suppliers.
Channel length
We must consider the number of intermediaries involved in the
channel. At the first level we start with the manufacturer. In some
markets the manufacturer then sells to the retailer. The retailer then sells
to the consumer. In this case there are two intermediaries, in what is a
traditional distribution channel. A key consideration in channel
structure is that each member of the channel needs to make a profit from
their business, and therefore each adds extra costs in the channel.
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Customers
An understanding of our customer groups will determine the choice of
channel. Our research is likely to show us their geographical
concentration, or where they are based, their preferred distribution
outlets, and their usage of the product or services. The key
consideration is to identify trends in distribution and to offer the
channels which best serve the identified customer base.
Product characteristics
It is perhaps obvious to state that the size and frequency of purchase of a
product should determine how it is distributed. Large business to
business products, which are likely to incur large distribution costs,
should be situated as near as possible to the final consumer. Fast
moving consumer goods, which are produced and distributed
frequently, are likely to have widespread distribution.
Competition
In specialist markets we may have little choice but to use the same
distribution outlets as our competitors. Stores which sell products for
the home and garden are usually situated in outoftown locations and
we would have little choice but to distribute through these outlets.
Legal factors
This is particularly relevant in a number of overseas markets.
Government control over the distribution of alcohol or cigarettes may
be in place in some markets
Market coverage
Hollensen (2003) talks about the three broad categories of distribution
namely intensive (a wide number of channels), selective (which might
favour some geographic areas over others) and exclusive (which might
involve only one distributor).
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Channel length
Here we need to consider the number of parties involved in the
distribution chain. In more traditional distribution channels there may
be a wholesaler and retailer, and in some markets there may even be
more that one wholesaler. The main feature of a multilayered channel
is the extra cost involved. As each party needs to earn money for their
work, this might impact upon the final price to the consumer.
Control
When choosing the most appropriate distribution channel, companies
face a trade off between the amount of marketing control they can
exercise over the channel and the cost of maintaining the channel.
Generally, the more intermediaries that we use in our distribution, the
less we can control distribution. The most effective control is to have our
own distribution channels, but in many markets the cost of doing this is
prohibitive.
CASE STUDY ACTIVITY
Read the Denka Holding case study in Hollensen (2003), page 518, and answer
the following questions:
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CASE STUDY FEEDBACK
1. The main advantages for Denka are:
Denka retains more control over marketing effort as this is part of the
franchise package.
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management
Score 111 94 85
Weighting: 5 – Critical success factor, 4 – Prerequisite success factor, 3 – Important success factor, 2 – Of
some importance, 1 – Standard
Figure 5.2: Criteria for selecting channel members. Source: Hollensen (2004).
As the table shows, it is not only important to identify the key success
criteria, but also to rank them in terms of their overall importance. We
must concentrate on those factors that are relevant in helping us to
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We must set specific and realistic agreed targets for our distributors,
which will enable us to have more control over the relationship. We
must also use these agreements as a way of monitoring performance,
with a view to terminating the contracts of those which perform poorly
in the market.
Retailing
The main feature of the retailing market on a global basis is the
increasing presence of global retailers. Established retailers such as
WalMart from the USA and Carrefour from France continue to
dominate traditional markets, and along with Tesco from the UK are
constantly expanding into new forms of retail outlets. The strength of a
retail brand may enable certain retailers to attack new markets both
within their own country and overseas.
Retail marketing
The criteria used in Figure 5.3 are based on work carried out by Cook, G
(1997) which referred to Lindquist (1974) to identify the key
components which retailers needed to address, in order to be
customerfocused. This research, now more than thirty years old, still
acts as a checklist for retailers to follow, when trying to deliver customer
satisfaction
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1. Merchandise Quality
Assortment
Fashion
Guarantee
Pricing
2. Service General
Staff service
Telephone handling
Delivery
Self-image
Store personnel
4. Physical Facilities
Layout
Shopping ease
Architecture
5. Convenience Location
Parking
Opening hours
Displays
Advertising (local)
Advertising (brand)
Events
7. Atmosphere Congeniality
Class
Reputation
Reliability
Loyalty
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ACTIVITY
Using the criteria identified in Figure 5.3, give examples of how retail outlets
with which you are familiar use the “toolbox” to deliver customer satisfaction.
Try to identify a store which you feel addresses most of these components in
their retail marketing mix.
ACTIVITY FEEDBACK
There are obviously several stores you could use to attempt this exercise.
Of course, your country of origin will also impact upon your expectations of
retailers. Shop opening times in China and Hong Kong are geared towards the
satisfaction of consumers, whereas more conservative opening hours in the UK
or France would simply not be acceptable in other countries.
Institutional factors are very often the hardest attributes to change, and usually
areas for improvement for many retailers. Mystery shoppers are used to look at
such areas and to look at levels of service. Very often it is in the area of levels of
service where we, as customers, are not aware of how the retailer deals with
some of these attributes, until we feel that we have reason to complain. As
marketers, remember that we are in the business of building up long term
relationships with customers, which in many instances can be undone by staff,
when dealing with customers who want to return goods or make a complaint.
This is an area for staff training in order to deal with returns or complaints.
Atmosphere and environment are critical success factors for stores such as
Tesco. Like many multiple retailers they are aware of the need to consider
visual aspects, aural (such as background noise), olfactory (such as scent and
freshness), and tactile components (such as softness, smoothness and
temperature). Many supermarkets have introduced in-store bakeries in order
to create a more appealing atmosphere for their shops.
The retail marketing toolkit is a useful checklist for any marketer working in the
retail sector, and can de adapted to a variety of different retail outlets. There
are no set guidelines for particular sectors, only examples of good or poor
practice. Good practice in retail marketing can very often be transferred across
to other sectors, and forces organisations to focus on their customers. IKEA
have carefully researched their business and have provided out of town stores,
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which cater for a wide range of consumers, but which has engendered a high
degree of loyalty.
Spare a thought for WH Smith, a retailer in the UK which would appear to have
a confused positioning. Faced with recently reported falling sales, researchers
have discovered that some of its potential customers use the store to check out
their CDs, books, DVDs and gifts, and often leave the store with nothing more
than a daily newspaper, returning home to buy the other products online.
ACTIVITY
Imagine that you are the marketing director for a major retailer such as Tesco
which traditionally has sold groceries, and any new products have also been
sold in a supermarket environment. You might want to visit the Tesco website
at www.tesco.com, but this is not essential. You can also assume that Tesco are
planning to expand their business. Consider the following questions:
1. How might you express your corporate objectives? These do not have
to be accurate projections but show your understanding of how
companies are managed.
2. Taking into account your corporate objectives how might you express
your distribution or place objectives?
ACTIVITY FEEDBACK
1. You are likely to have expressed you objectives in terms of turnover
taking into consideration your current situation and the actual and
projected market trends in your key sectors.
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our relationships with suppliers and any reduction in costs that might
come with this.
We can further break this down into the types of retailer. We might be
looking to open more of the Tesco convenience stores or in terms of
the new clothes outlets they are currently investigating. Remember
that this can also be expressed in terms of weekly or monthly targets. A
supermarket that is looking to finance the development of 24 new
stores may easily express this in terms of 2 new stores per month.
You will no doubt have realised that there are a range of possible
objectives in the areas we have discussed, which can be confusing. You
must note, however, that these options are reduced if the corporate
objectives are to simply maintain their current status in their markets
or if indeed they need to downsize their business.
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CASE STUDY ACTIVITY
Red Bull
Read the Red Bull case study in Hollensen, page 552, and answer the following
questions:
2. What are the threats and opportunities which Red Bull face by planning
to increase its market share in the USA?
CASE STUDY FEEDBACK
1. Red Bull GMBH had clearly identified segments across a number of
international markets and were able to deliver a consistent message to
consumers.
The biggest threat to Red Bull is the fact that it might be a fashionable
brand and as such the growth might not continue to grow.
Other drinks manufacturers will have been attracted to this new sector
and will certainly be researching new drinks to compete with Red Bull.
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Marketing Communications
The range of tools available to the marketing communications manager
comprise the following:
· Advertising.
· Sales promotion.
· Publicity (Public relations).
· Personal selling.
· Sponsorship.
Theories of communication
There are several theories of communication, including Schramm’s
theory, and it is important to understand the broad principles of these
theories. Essentially, research tells us that if we use a television advert,
which reaches a potential audience of 12 million viewers, a percentage
of this audience will switch over as the advert is shown, and some
people will be distracted and not notice the advert. Of those that do
watch the advert some will not form part of the target audience, while
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some will watch the advert and will possibly have forgotten it after a
short while. Some may take an interest in the advert, and possibly the
smallest percentage of all will be stimulated by the advert to take any
further action. This is often referred to wastage, and something we need
to take into account when communicating with potential customers.
However, even though our final audience may be much smaller than
the total potential audience, advertising can have a very high impact
and can lead to increased sales or move people closer to the decision to
purchase.
Gross rating points (GRPs) – This is the way in which the media sell
their advertising space. Here we multiply the reach of the advert by the
frequency it appears in the media. Here, for example an advert which
has a reach of 50 per cent, which has a frequency of 3, has a GRP of 150.
If we look at the calculation of those who are exposed to the advert, the
people then are aware of the product, those who understand what the
product is and could do for them, those who have expressed an interest
in purchasing and then those who actually do purchase the product, we
can see that this equates to 9.8% of the original group who could
potentially have seen the advert when it was shown.
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The CRI is also a useful tool for forecasting the impact of future adverts,
and for looking for areas of improvement in the effectiveness of the
advert.
Purchase CR I
Intend to (85%)
purchase 9.8%
(62%)
Understand
(72%) No action (15%)
Awareness 2%
Exposure (48%)
to adverts
(54%) No intention (38%)
7.1%
Unaware (52%)
28%
No exposure (46%)
46%
100%
Calcul at ion
Those who will purchase the product:
CRI = % exposed X % aware X % understand X % intending X % purchase
= 0.54 X 0.48 X 0.72 X 0.62 X 0.85
= 0.098 or 9.8%
ACTIVITY
Using the figures in Figure 5.4, calculate the following:
a) The total number of people who were not exposed to the advert.
b) The total number of people who are likely to purchase the product.
c) The total number of people who are likely to purchase the product if
we are able to increase the percentage of people exposed to the advert
from 54% to 68%
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ACTIVITY FEEDBACK
a) If the total reach of the advert is 10 million then the total number who
are not exposed is:
= 4.6 million.
b) The total number of people who are likely to purchase the product is:
= 983,507 purchases.
= 1,238,491 purchases.
Of course, the CRI is a useful tool for forecasting and can only be used
accurately when we collect accurate data about the response of customers to
our adverts. We will be able to use these figures as a benchmark for future
campaigns, and it also helps us to set targets for those responsible for
communicating with customers.
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ACTIVITY
Look at the table and against each poor response factor and communications
problem, suggest ways in which we might look to improve consumer response.
You might want to give some examples of advertising campaigns with which
you are familiar.
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ACTIVITY FEEDBACK
2 Low levels of Possibly due to the · Do we need to review our target group’s
awareness of poor content of the media habits?
advertising campaign adverts and lack of
· What is the cost of achieving higher
frequency necessary to
awareness levels? We might consider
create awareness
increasing advertising expenditure, but
would this achieve further awareness?
4 Low levels of Possibly due to the · Possible look at reinforcing the message
consumers showing lack of frequency of by changing the exposure periods of the
any intention to buy the advert and advert. A ‘long short’ burst could be
the product or service advert’s proposition replaced by intermittent bursts over a
failing to encourage slightly longer period.
consumers sufficiently
5 Low levels of the Possibly due to the · Are there other ways of encouraging
desired final outcome, lack of frequency of purchase, perhaps through a campaign of
or the main objective the adverts and the sampling? This proves to be popular for
of the advertising desired outcome not new products.
expressed sufficiently
Additional feedback
2. A good example of how a product fits into the life of a consumer is the
example of Jello, a jelly dessert sold in the USA. Sales were high, but
repeat sales were low. Research identified a group of consumers who
had ‘stock’ of products in their cupboards, and Jello was one of these
products. However, in order to be able to consume Jello it had to be
made at least 3-4 hours before it was consumed. After dinner, when
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the choice of dessert was made by this particular segment, Jello was
never an option as it would take so long to make. The solution to
getting more sales therefore was to encourage their consumers to
make Jello in the morning while they boiled water for their morning
drink, so that it would be ready to be consumed in the evening. Jello
changed the message in their adverts and there was an instant increase
in sales of Jello.
In research carried out by Percy (2001) and Dibb et al (1997), the role of
key people who might influence the buying process was considered
Figure 5.5: Promotional techniques and consumer buying decisions. Source: Adapted from Percy, L (2001) and Dibb et al
(1997).
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Branding
It is important at this stage to distinguish between a product and a
brand. Throughout this course, the term ‘product’ could be replaced
with ‘brand’ without fundamentally changing the meaning or effect of
much of what you learn.
ACTIVITY
Read exhibit 11.5 in Hollensen, p 468.
Having entered the biscuit market, where else could they take their brands?
ACTIVITY FEEDBACK
Confectionery brand owners have been capitalising on the value of their brands
by extending them into other, closely related, markets. In fact, Mars had
experienced mixed fortunes with the Twix Top perhaps because it was
changing both the category and the product at the same time. It is likely that this
test was studied closely for the future.
The risk of launching new variants and brand extensions was reduced by the
strong brand awareness and image of the countlines.
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Further extensions included branded ice cream bars and miniature wrapped
chocolate bars in gift packs such as Cadbury’s ‘Miniature Heroes’. In both these
markets these well-liked and trusted brands could have a great impact against
relatively under-promoted brands and enabled Mars, Nestlé and Cadbury to
command premium prices.
The key to branding is in the concept of adding value to the product and
thereby building competitive advantage. This may be done through
associating the brand with product performance but many add
nonfunctional, emotional differences.
The trust and loyalty consumers put in some brands can be very deep
rooted and may be dependent on personal experience but need not be at
all rational. Indeed, in the UK, Saatchi and Saatchi refer to these emotive
and involving brands as ‘Love Marks’ (www.saatchi.co.uk).
One of the most famous branding mistakes took place when Coke in the
US responded to their archrival’s ‘Pepsi Challenge’. Relaunching their
product with a sweeter formulation, as their research told them, Coke
nevertheless found they had misunderstood the relationship between
the brand and the consumer. Legend has it that even people who did not
drink Coke contacted the company to protest against the change. Coke’s
rapid change back to ‘The Real Thing’ proved that the brand was as
much the property of its customers as the CocaCola Company.
According to Ira Herbert, former chief marketing officer of the
company, “We’d have been massacred had we not brought it back.”
(Ohmann 1996)
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Brand equity
There is no industry or product sector in which branding is impossible.
However, the significance of branding varies from industry to industry.
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The same research, from Brand Finance, also showed that, all things
being equal, strongly branded companies performed better than market
averages, a finding supported by long term research on the profit
impact of marketing strategy (PIMS).
Brands do best when they are strong and well supported; that is to say,
when they have a good market share. But Bain & Co’s detailed research
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High
T he T he H i gh-R oad
H it chhik er B r and
ROS 15-20% ROS > 20%
P r emium
degr ee
of
cat egor y
T he D ead-E nd T he L ow -R oad
B r and B r and
ROS < 5% ROS 5-10%
Low
Low High
The key to strong brands in competitive market was innovation and this
was a feature of the socalled highroad brand (more than 20% return on
sales or ROS).
Brands with ROS between 15% and 20% should, the research
recommended, focus on innovation and niche marketing. However,
‘deadend’ brands demanded tough decisions from their owners –
invest heavily or cease their support. Unilever, during the last five
years, delisted several hundred brands that were both in overcrowded
categories and had weak brands.
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ACTIVITY
Gillette is a strong brand that has been leading its sector for over 80 years.
When Bic and others introduced disposable razors their first reaction was to
launch their own in the knowledge that, given the same price and performance,
consumers would choose the trusted brand.
Was this the right decision? How would you characterise the Gillette brand in
the Bain & Co matrix?
ACTIVITY FEEDBACK
In fact, the first reaction of the Gillette management was misguided. A
dominant share of the low-end market, where customer bought on
value-for-money, would only give them a ROS of 5-10%. Gillette was, in fact, a
high-road brand and the company subsequently poured $200 million into
developing an even more sophisticated product, the Sensor, that became the
highest price ‘shaving system’ on the market by 25%. Some 15% of the
customers in fact traded up from disposables and Gillette has continued to
trade up customers by introducing new innovations.
Vishwanath and Mark (1997) point out that markets can drift towards
low price, so called ‘low road’ competition. But this then opens up the
opportunity for a premium brand to take the high road.
Perhaps the most troublesome aspect of branding is knowing how far its
value can be exploited. Brand extensions attempt to use the values of an
established brand and transfer them to products and services in new
(but related) market sectors.
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Mar k et P r oduct
Present penet r at ion development
(lowest risk) (lower risk)
D emand
|
Mar k et
|
Cust omer s Mar k et D iver sifi cat i on
New development (highest risk)
(higher risk)
The principle source of risk is moving away from known customers and
their needs. So taking this strategic move with a brand that already has
high recognition and levels of trust may ameliorate this.
ACTIVITY
Kingfisher lager is a premium beer from India that has gained significant
penetration in the UK market by securing distribution through many of the
country’s independent Indian restaurants and then expanding to the take-home
sector through supermarkets. Now, from May 2005, the Kingfisher name will
be on new Airbus A320s, flying between the UK and various destinations in
India as a new low-cost airline takes off.
Do you think this is an appropriate brand extension? How would you evaluate
the contribution of the brand to the new venture?
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ACTIVITY FEEDBACK
Low-cost airlines seem to be frequent targets for entrepreneurs with strong
brands – EasyJet is one such, whilst Virgin has taken a ‘higher road’ approach
concentrating on longer haul routes.
The question is really whether the brand is strong enough to make its presence
felt and the market for low-cost air travel is likely to be profitable. Bain and Co’s
research referred to above might suggest that a low cost position is unlikely to
yield great profits. But air travel is increasingly seen as a commodity business
and the industry is highly regulated allowing customers to make easy
comparisons between the few competitors for specific destinations.
At first glance, Dr Mallya seems to be extending the brand into new products
and technologies as well as into new markets and customers. Crucially,
however, the UB Group already has experience of the charter flight business
and is expanding principally in India where there is little competition and
growing demand. Kingfisher could be another Virgin and expand into a range of
services such as banking, mobile phones and other markets where a reliable
brand may be at an advantage.
Sponsorship
Sponsorship, as an academic research area, continues to attract
increasing attention. While sports sponsorship is estimated to account
for around 70 per cent of all sponsorship (about one 2 billion dollars per
annum in the UK alone (Duffy, 2004)) there are signs of increased
activity in broadcast, arts and causerelated marketing. There is no
doubt that sponsorship is high profile and therefore attracts a lot of
attention and, as Duffy (2004) states, it enables marketers to connect
with consumers in a passionate environment.
What are the benefits of sponsorship to sponsors and why are so many
sponsorship deals considered to be poor value for money? The main
reasons cited by Chadwick (2004) and Duffy (2004) are:
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ACTIVITY
Foster’s ten year deal for the British Formula 1 Grand Prix
Foster’s beer has a ten year deal to sponsor the high profile British Grand Prix.
Briefly list and describe the benefits to Foster’s of such a sponsorship.
ACTIVITY FEEDBACK
Benefits to Foster’s:
1. Global media coverage – the fact that the British Grand Prix is shown in
140 countries and with an estimated 600 million audience will enable
Foster’s to increase exposure to its brand.
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5. Venue sales – the deal enables Foster’s to sole distribution rights at the
event, not only generating revenue but also exposing the brand to new
consumers.
REVIEW ACTIVITY
1. How does the product life cycle theory impact on product
development strategy?
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REVIEW ACTIVITY FEEDBACK
1. The Product Life Cycle theory tells us that in many cases, existing
products will start to decline in the market. In order to stay in touch
with the consumer, we need to keep introducing new products or
services. Once a product has reached its saturation stage then we
should consider developing it, or introducing a new product to
eventually replace it.
References
Baker, M. and S. Hart (1999). Product Strategy and Management. Hemel
Hempstead, Prentice Hall.
Cook, G, (1997) Retail Marketing for Ford. Part of the marketing series
publications.
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Unit 6
LEARNING OUTCOMES
After studying this unit you should be able to:
Organisational structures
Much has been written about organisational structures and their
importance in achieving customer focus within the organisation. It is
important to understand that there are very often changes in
organisational structures as a firm grows or takes on new products and
markets. We will look at the five broad categories of organisational
structure as suggested by Fifield and Gilligan (1999) and McDonald (1999).
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the business grows, and they take on more customers, there will be a
need to adopt a more formal structure.
2. Formal structure
Managing Director
3. Matrix structure
Schools
Market
structure Hospitals
Restaurants
Product/service structure
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4. Centralised structure
Marketing function
at centre
5. Decentralised structure
Marketing
decentralised
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CASE STUDY ACTIVITY
Adidas-Salomon
Read the case study in Hollensen (2003), pages 647 to 649, and answer the
following questions:
1. What are the main motives for the new Adidas-Salomon organisation?
CASE STUDY FEEDBACK
1. The main motive for Adidas-Salomon’s organisation is to set up their
divisions based on their positioning in the market. The organisation
should, therefore, reflect the differences in consumer needs. The three
divisions operate along the same lines as strategic business units (SBU).
In setting up their three divisions the organisation are demonstrating
that they are customer focused. The development of these three
divisions also reflects the changes that have taken place in the
leisure/sports markets globally over the past few years.
2. As the divisions are based on three different market sectors, then each
should produce its own marketing plan. Each of these plans will link in
to the overall corporate plan, and there may be some marketing
activities which are shared across divisions. However, it is important to
emphasise that as their customer bases are likely to be very different,
then this should be reflected in their plan. There might be some
difficulty in separating the customers of the three footwear divisions.
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Marketing audit
In Units 2 and 3 we looked at both the internal environment and the
external environment of the firm. A marketing audit is carried out to
identify the main external and internal factors which are most likely to
have an impact on the marketing plan. We will use a SWOT analysis to
bring both internal and external factors together and help us to identify
our key strengths or weaknesses and the main opportunities and threats
which face us in the market. For most companies the data required to
carry out this audit will have been collected during the course of the
year, and many of the research activities undertaken will provide us
with the necessary information upon which we can base our marketing
plan.
· Title page.
· Table of contents.
· Executive summary.
· Introduction.
· Situational analysis.
· Marketing objectives and goals.
· Marketing strategies and programmes.
· Budgets.
· Implementation and control.
· Conclusion.
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Title page
This quite simply specifies the name of the business units covered,
authors and the time scale of the plan.
Table of contents
This indicates the key sections in the plan and is important in guiding
individuals to their key areas of responsibility.
Executive summary
As with all summaries, the executive summary gives a brief overview of
all of the sections in the plan, and will state which products or services
are included, the amounts to be invested and a summary of the expected
outcomes of the plan. It will also identify the key objectives of the plan.
Introduction
The introduction will deal with the product or service to be included in
the plan and its current situation in the market. The introduction will
also state what the main purpose of the plan is.
Situational analysis
The situational analysis covers the current external and internal
situation that the product or service now faces. The SWOT analysis is
used to present this data, with strengths and weaknesses (SW), the
internal factors, and opportunities and threats (OT), the external factors.
They will cover some of the following points:
Internal assessment
These are also sometimes referred to as controllable variables, as the
firm can have direct control over its staff, resources, products and the
manufacturing process.
Here we will identify the main personnel who are going to drive this
plan forward. We will need to concentrate on their experience, training
and skills from which the plan will benefit. It might also look at the
future personnel needs of the organisation, when dealing with the later
stages of the plan. This section will also deal with the main lines of
communication between key personnel, as well as saying something
about the culture within the organisation.
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External assessment
This part of the plan should consider the main opportunities and threats
facing the organisation. This will include details about the key
segments, the main target markets and their patterns of consumption,
and the share of this market in both value and volume terms. There will
be a separate section detailing current market trends, future forecasts,
and a section to deal with competitive activity and the main players in
the market. This was covered in Unit 3.
The external assessment will also consider the PEST factors, or the main
political, economic, social and technological factors, which will affect
the future performance of our organisation and products or services.
We will need to look at any legal considerations which are likely to
affect our product or service. Consider the current movement towards
reducing the impact of cars. This is an issue that might have a
considerable impact on car sales in the future, but an issue which car
companies are monitoring, and including in some of their
communications with key stakeholders. Established companies in the
market will be monitoring competitive activity and will be paying
attention to new entrants in the market.
ACTIVITY
Setting marketing objectives
Wood (2004) breaks marketing objectives down into external and internal
objectives. Again when you consider the process of setting objectives, you will
see the importance of having accurate market data. We will concentrate on the
external objectives only.
Using the grid for marketing objectives, fill in the gaps with some of your own
suggestions. The first column looks at the marketing objectives which a
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company might set, the second column considers how to measure them, and
the third column is for examples of these objectives. This is meant to serve as a
checklist for key objectives, which does not mean that all companies should set
the same type of objectives.
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ACTIVITY FEEDBACK
2. To retain existing By setting up and monitoring To retain the 20% ‘most loyal’ customers (from
customers sales plan for existing Ford example) and to maintain current sales
customers levels
3. To encourage Sales promotion and To reach 20 test drives per showroom per
product trial sampling with the use of month (Ford example) over the next six
coupons, telephone numbers months, and to achieve a conversion rate of
and point-of-sale samples 20%
4. To acquire new Sales plan with key customers To target the ‘luxury’ segments of the
customers targeted European package tour holiday market, and
Marcomms plan with a acquire twenty new customers per month, for
product
5. To acquire/defend Monitoring sales targets and To maintain current market value share of
market share responses to communications 25% through a programme of staff training
7. To build brand Market research survey, To increase current awareness levels of brand
awareness before, during and after from 5% to 15% in 12 months, through an
marketing activities integrated campaign of advertising,
sponsorship and sales promotion
8. To enhance brand Market research survey to test To establish the position of being seen as the
image customer perception of the most innovative and reputable company in the
company against key industry, through public relations activities
variables.
There are, of course, several examples you could have listed, and there are, as
we have established before, no right answers. If we aren’t able to set specific
targets then we do not have sufficient understanding of the market, nor how
consumers behave within the market.
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You will probably want to know how you can set, for example, a target for
improving awareness of the brand in the market place. The simple answer is
that we need to understand what is possible and use current examples as
benchmarks. It is well documented that high profile sponsorship might only
improve awareness levels in the first year by about 10-15%, so we can bear this
in mind when setting our own objectives. We also know that short term
sponsorship might deliver an increase in awareness, sometimes as high as 20%,
but that this then falls once the sponsorship ends.
In order to set sales targets for our client we can follow this sequence:
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ACTIVITY
Sales targets
The sales people have a conversion rate of 20%, that is to say they that if they
are given five leads then they will usually convert one of them.
They want to find 50 new customers in the coming year and they currently have
two sales people. They split the country up between them by north and south.
Each sales person can only visit a maximum of two potential clients per week as
a result of the travelling time involved, and the time needed to demonstrate the
product. Once a prospect is converted then this involves extra administration
time to finalise the sale.
If they send out 1000 mail shots then they usually get a return of about 20 new
prospects.
1. Calculate the number of people they will need to visit in order to reach
their sales targets, establish how they will identify their sales prospects,
and work out how long it will take the sales team to visit the prospects
you have identified.
ACTIVITY FEEDBACK
We can work out the following.
They each have a capacity of about 8 per month, or 192 per annum
between them.
This means that in the first year they will be able to visit 192 prospects,
and the remaining 58 will take 3-4 months more.
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shots, then we get a figure of 12,500. This means that they would need
to send out a mailshot of 12,500 to get a figure of 250 prospects.
Budgets
We will look at budgeting in more detail, later on in this unit. Our
budgets will take into account the cost of undertaking our product,
communications and distribution activities. This will include our
expenditure on advertising, our product development costs and the
costs of increased distribution. This will be presented to include targets
and will identify some of the key areas and those responsible for
monitoring them.
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Conclusion
Here we will include details of how our marketing strategy worked,
highlighting the advantages that our product or service has over our
main competitors.
Budgeting
In order to control our marketing plan we should aim to stick closely to
our budget. This means that we have an amount of money to spend on
our marketing activities and, as effective planners, we should also have
expectations of what our actions will achieve. We should express our
intended outcomes as objectives, which we should then express in
measurable terms. By expressing our objectives in measurable terms
means that we can monitor them to see if they have been achieved. At
the lowest level we should be able to set sales objectives and profit
expectations, and also look to express the outcomes of our other
marketing activities. We need to consider how we monitor customer
awareness, brand perceptions or even our overall image. What about
developing new products? We know that they involve high levels of
research and development funding, but how can we reduce the risk of
them failing, and within a specified budget? It is at this level that we
look to differentiate ourselves from competitors and concentrate on
building up value in our business.
CASE STUDY ACTIVITY
Teekanne
Read the case study in Hollensen (2003), page 669, and answer the following
questions:
2. Teekanne wants to expand its tea sales outside Germany. Are there
any countries that you would recommend?
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the US market. How might Teekanne use these contacts to plan the
market penetration?
CASE STUDY FEEDBACK
1. The main advantage is vertical-integration, as they are both a supplier
and a manufacturer. This allows the company to have a much closer
feel for the market, and also for the end-user. Through Teepack they
can test machines and through Teekanne they are able to supply the
market with newly developed tea bags, with a more efficient
production time.
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When we look at the Thornton’s example later in the unit, we will see
that in order to carry out effective marketing plans, marketing training
will be necessary for all of those involved in implementing the plan. Far
too many plans do not take into account the prevailing organisational
culture. UK banks, in particular, found it very difficult to implement
some of their marketing activities due to the attitude of some of its staff.
They are very often neglected during implementation, even though
they are in the front line dealing with customers. It is unrealistic to
design a customerfocused marketing strategy without considering the
organisation’s ability to deliver on its promise. Some organisations will
have an existing structure which is simply not designed to be able to
deliver the proposed marketing strategy as is intended.
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Marketing Control
In order to establish if we have achieved our objectives, or that we are on
our way to achieving them, we need to establish control mechanisms as
part of our plan. It is well documented that this is the most neglected
area of planning, (McDonald (1999) and Hollensen (2003)) and,
therefore, merits more attention. The problems encountered in control
are usually as a result of an inadequate monitoring system, or the
reluctance of some of the designers of the plan to face up to early
problems, choosing to continue in the hope that the plan will be
successful.
Having laid out our plans for implementation, we must then set our
specific performance standards in the areas of product, distribution,
communications and pricing, in which we specify exactly what is
expected at each level. This may be in terms of numbers of sales visits
and conversion rates.
We must then locate the people who are responsible for delivering the
expected results of our plan. This may be down to our brand manager or
possibly shared with the manager responsible for sales. The control
mechanism should be set up in such a way that the managers
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At this stage there are three tasks that those responsible for monitoring
the plan will need to execute. The first stage is to deal with individuals
and their contribution to the plan. It may be necessary to praise, offer
advice or even reward them through salary increases, bonuses or even
promotion. If the deviation is as a result of inappropriately set objectives
or unrealistic marketing performance standards, then corrective action
will need to be taken.
L ocat e
r esponsibilit y
Reward,
E valuat e per for mance promote,
against st andar ds advise,
punish
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ACTIVITY
Thorntons Confectionery
1. Look at the sales figures, profit before tax and operating cash flows in
Figure 6.6 and briefly comment upon them.
ACTIVITY FEEDBACK
1. We need to be careful when commenting upon incomplete figures as
the true pattern may be hidden. We can see that Thorntons have
increased their sales by 2 %. If we look at their interim sales for the
following year we see that they have increased by 4.4%. There would
appear to be a year-on-year increase.
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Both profits and operating cash flows show a decrease. Upon further
investigation we will see that this is due mainly to a significant
investment in plant and technology. What we can see is that where a
company makes investments then it will reflect in key indicators such as
profit or cash flow.
ACTIVITY
More from Thornton’s confectionery
( % )
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What might your sales objectives be, in light of the additional information?
ACTIVITY FEEDBACK
The breakdown of figures suggests that our core business, that is turnover
generated through our own shops, has fallen slightly but against a background
of a rising market. This may also be due in part to the fact that we have
increased our franchise business, but it should not have had such an impact.
This makes a total revenue increase of about £ 5.75 million or 4.3% increase
overall.
These targets can be broken down into regional targets and ultimately can be
measured at shop level. These will be some of the ‘early performance
indicators’ which we considered earlier in this unit. The increase in sales
through franchise outlets will depend also on Thornton’s plans to increase the
number of franchises.
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ACTIVITY
Thornton’s international plans: opportunity or threat
What do you think of Thornton’s international plans? Do you think that they are
right to put off their franchise plans for overseas markets?
ACTIVITY FEEDBACK
At first hand it would appear that Thornton’s appear reluctant to step outside
their domestic market. While they do not see that there are opportunities to be
gained by operating overseas, they have perhaps underestimated potential
threats, and given the developments in China, they have also underestimated
the opportunities. They seem to have an old-fashioned view of marketing
goods overseas. They have a well established product, a wide range of product
lines and considerable expertise in marketing their products. China is a rapidly
developing market, and simply by operating in one major city might give them a
bigger target market than half of the total UK population of 56 million. While
the market potential is huge, the opportunity to work within China would also
open up the Far Eastern markets, as well as present them with a chance to
reduce some manufacturing costs considerably. China has a rapidly expanding
middle class with a passion for western style goods. Past experience of
international marketing also tells us that companies who become entrenched in
their own market run the risk of new overseas competition in their domestic
market.
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REVIEW ACTIVITY
1. Read the SCA case study in Hollensen (2003), page 701, and answer
the following questions:
2. What are the main factors which we need to take into consideration
when setting marketing objectives?
REVIEW ACTIVITY FEEDBACK
1. a) In the consumer/retail market the consumer buys tissues in order
to improve the quality of life, to make daily life easier and in some
instances a useful standby product.
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the time needed to achieve them, and at all times make them
achievable and understood in key areas of the business.
The term control may also be viewed negatively by people within the
organisation, and may impact on the performance of individuals. A
control system should not be perceived to be a way of punishing
performance in the company, but as an early detection option to help
put the plan back on course.
We have already established that one of the key problems with control
systems is that they can become too rigid, and fail to identify the
deviations from the plan, for which they were set up.
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References
Dibb, S, Simkin, L, and Bradley J, (1997), The Marketing Planning
Workbook. Thomson Business Press, London, England. ISBN 1861523491
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Unit 7
LEARNING OUTCOMES
After studying this unit you should be able to:
Introduction
In this unit, we will be focusing almost exclusively on direct marketing.
Direct marketing is often represented as a subset of marketing
communications but, we argue, many of the techniques of direct
marketing are essential to the proper strategic applications of the
currently ‘fashionable’ concepts of relationship marketing and
ecommerce.
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These elements all interlink with one another and it is impossible to say
that one is more important than the other. Nevertheless the key,
according to Tapp (1998), is that a direct marketing company captures
individual customer details as soon as there is contact between them –
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ACTIVITY
Look again at the definitions of direct marketing (and review the definitions of
marketing in earlier units). What do you think are the key strengths of each with
regard to developing competitive advantage?
ACTIVITY FEEDBACK
Here we have taken just the main direct marketing definitions –
Definition Strengths
“ Marketing is the management process The conventional, transactional definition from Unit 1. It
which defines, anticipates and satisfies speaks of customers and their needs. Arguably it does
customer requirements efficiently and not refer to the strategic importance of keeping
profitably” (CIM) customers in the longer term.
“Any activity which creates and exploits a This pithy definition focuses on the value of the
direct relationship between you and your individual customer relationship. It suggests that this
customer as an individual” (Bird 1989) relationship is, itself, an asset. However, the
‘exploitation’ of the relationship may raise ethical issues
for some, and there is no suggestion that the relationship
should be maintained for longer term gains.
“The planned recording, analysis and At first difficult to understand, this definition emphasises
tracking of consumer and business direct the ‘technocratic’ nature of direct marketing. It is about
response behaviour to develop marketing planning and about detailed recording of customer
strategies for current and future behaviour. Crucially that behaviour is in response to
customers” (www.theidm.co.uk) direct activity. The purpose is made clear; to continually
inform strategy.
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Relationship marketing
Since the early 1980s, a new strand of (direct) marketing has emerged.
Relationship marketing (RM), discussed briefly in Unit 1, builds on the
strengths of direct marketing and translates them into strategies for the
whole business.
The first three points resonate closely with a direct marketing approach
and, like direct marketing, can be supported by the intelligent use of
technology, particularly in sharing information between customers and
the company – and within a company. We will look at this in Unit 8.
The last two points above move beyond direct marketing in staking a
claim for marketers, and marketing expertise, to have influence
throughout the network of relationships that sustain a company. This
latter point is a concept very close to the value chain or value network
explained in Hollensen (2003).
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Beyond the key features above, Payne (2000) also summarises the key
strategic contributions of Cranfield’s RM as being –
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I nt er nal mar k et s
Internal marketing:
every employee is an
internal customer or an
internal supplier
R efer r al mar k et s
S upplier mar k et s Creation of advocates
Collaboration (besides customers):
with key suppliers intermediaries,
Cust omer mar k et s agencies, etc.
(Customer retention,
customer lifetime value)
Figure 7.2: Relationship marketing’s ‘Six markets model’. Source: Hollensen (2003:10).
ACTIVITY
Think of a small business with which you are familiar, it may be a local retail
store or a supplier of services such as cleaning or catering services.
Try and list the different companies and organisations with which the company
has a relationship. Are these equally important? Which could be managed using
marketing techniques?
Now, for a charity or voluntary organisation, repeat the exercise. Are the
relationships different?
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ACTIVITY FEEDBACK
You may have listed suppliers, staff, others in the value-chain such as agents or
distributors as well as customers. For a charity or voluntary organisation, the
relationships are inevitably different. For example, you might separate out
donors and clients (the recipients of the charity’s help), governmental
departments, volunteers and others.
· Internal Markets
· Recruitment Markets
· Referral markets
· Influencer Markets
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ACTIVITY
Read Hollensen sections 1.3 to 1.7, pages 9-20. Develop your answers to the
discussion questions on page 22.
ACTIVITY FEEDBACK
What are the similarities between relationship marketing (RM) and
transactional marketing (TM)?
The two approaches have the same starting point: focus on customer
satisfaction.
In the ‘pure’ versions of TM and RM, Table 1.3 (pp12-13in the Hollensen
textbook) gives an overview of the differences between the two approaches.
The two parties have conflicting interests. The starting point is that the
customer does not want to buy; he or she has to be persuaded to do so.
Although Peter Drucker said that the aim of marketing is to make selling
superfluous.
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that the customer is looking for. Of course, this does not mean that conflicts
could not exist; however, cooperation is the driving force, not conflict.
You could refer back to the discussion on direct marketing and loyalty and to
the earlier discussion of the use of technology.
Tapp (1998) suggests that there are three levels of direct marketing in
which –
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ACTIVITY
Try and find examples from your own experience or from your reading of
companies that fit into each of these categories. Can you think of reasons why
they might have chosen to follow one or other of these approaches?
ACTIVITY FEEDBACK
It is highly likely that you found it easy to identify companies who use direct
marketing techniques amongst many others (the third category above). Most
global brands such as McDonalds and major brand owners such as Unilever and
Proctor and Gamble have experimented with direct techniques. They continue
to spend heavily on mass advertising primarily to maintain brand awareness in
markets where there are many substitutes and competition is intense. In the
UK, Heinz experimented with a direct marketing strategy but soon found that
the costs outweighed the benefits of selling additional cans of soup and beans.
In the end, companies supplying fast-moving goods have to deliver the product
efficiently and cheaply to the customer. For many this inevitably means using
the major supermarkets, and opportunities to ‘go direct’ are few.
Companies such as BA and other major airlines use direct marketing intensively
in certain markets where there are high value customers they would like to
keep. These (identified as the second level of direct marketing) use direct mail,
e-mail and specially tailored offers to build barriers around their best
customers. Often these are called loyalty, privilege or ‘gold’ schemes.
You may also have found it easy to think of companies that are entirely ‘direct’.
In the UK and Europe, financial services have been revolutionised by the
emergence of telephone and internet based providers of insurance and
banking. Many of the success stories of e-commerce, such as Amazon, are
retailers that have no ‘offline’ presence and deal with customers entirely
directly, but at a distance.
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ACTIVITY
As Daewoo UK re-brands as Chevrolet, it is looking to attract younger
customers to its small car range. They know, however, that they will have to
use big incentives to get young adults to shift allegiance from Ford, Vauxhall and
others. The question is how big? The profit margins on new cars are slim – at
most 10% on a new car of £4,500 (€6,500), but much of that can disappear in
conventional marketing costs.
They know that once they have a customer the chances of a repeat purchase
within three years is high (as much as 50%) so how might the idea of lifetime
value help them make their decision?
ACTIVITY FEEDBACK
It is clear that re-branding for Daewoo/Chevrolet is going to be expensive.
Apart from the cars themselves, the dealership network has to change and they
will be advertising heavily to educate the public. If they consider only the
current financial year then it is difficult to justify reducing profitability now by
adding marketing costs.
However, if they look over the next three years and predict that half of their
customers will return, then they can also predict future revenue and profits. If
half of those re-purchasing a Chevrolet in three years time return yet again,
then those customers are even more valuable.
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Loyalty
The main protagonist of the concept of loyalty in marketing is Frederik
Reicheld (1996) who researched the impact of loyal customers noting
that many companies lost 10 to 30% of their customers each year. The
result was complete renewal of their customer base within 5 years. He
also pointed out the oft quoted statistic that it cost between 3 and 30
times more to recruit a new customer than to keep an existing one.
ACTIVITY
In the 1970s Telecom was a subsidiary of the UK’s Post Office. It had a
monopoly on the provision of domestic telephones in the UK. Nevertheless,
managers were keen to adopt up-to-date techniques and regularly surveyed
their millions of customers. This was particularly important when, in the 1980s
the business transferred into the private sector and telecommunications was
opened up to competition.
If you had been advising Telecom as it prepared to fight its competitors for the
first time, how would you have interpreted the figures? On which customers
would you have advised they spent their ‘retention’ budget?
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ACTIVITY FEEDBACK
Probably your initial reaction was to point out that the company was in danger
of losing 35% of its customers; the ‘totally dissatisfied’ and the ‘dissatisfied’.
Indeed a SWOT analysis such we discussed in Units 4 and 6, might raise this as a
weakness.
In fact, Jones and Sasser (1995) reported that this was the concern of many
companies as they examined their customer satisfaction survey. However,
their investigations came up with some surprising results, replicated across a
number of different sectors.
Firstly, they discovered that even ‘satisfied’ customers in many industries were
prone to defect. In some cases the only thing preventing them was a near
monopoly situation. Utility companies (such as Telecom) were an example of
this.
Secondly, they discovered that the ‘totally satisfied’ customers were up to five
times more valuable that the merely ‘satisfied’ because they would stay longer
and buy more.
Tapp (1998) cites research by the agency Rapp & Collins that illustrates
why companies lose their customers –
Reasons Percentage
Moved away/dies 4
Competitive activity 10
Product dissatisfaction 14
Figure 7.4: Reasons why customers were lost. Source Tapp, 1998
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ACTIVITY
Read section 15.5 in Hollensen, pp617-620. Given the figures above in Figure
7.4, do you think the four categories of loyalty developed by Dick and Basu help
address the problem of customer defection?
ACTIVITY FEEDBACK
Figure 7.4 shows that nearly 80% of customer leave because they are
dissatisfied with the product and or the service they have received. Research
such as this must be treated with caution since so-called ‘exit interviews’ tend
to focus on the ‘completely dissatisfied’ category of customer who would be
difficult to retain in any circumstances. A further 4% of customers move away
or die.
Whilst the classifications from Dick and Basu are useful for conceptualising
loyalty they are weak as a management tool. It would be necessary to factor in
satisfaction and the sources of that satisfaction in order to develop appropriate
strategies.
By now you should also have considered the possibility of reflecting on the LTV
of such customers. This would assist in allocating budgets to customers
segmented by loyalty.
Above all, satisfaction and service help to create loyalty. In some cases
this may be rational when the customer knows that the product
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represents the best value in the marketplace. In the UK this is often the
case with mortgages when lenders compete on interest rates and offer
‘feefree’ switching.
But commitment can be emotional too. In this respect, brands are ideally
placed to build bonds of loyalty but continually meeting the
psychological needs of their customers.
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D eveloping r el at i onshi ps
P ar t ner
A dvocat e
S uppor t er
Cl ient
P ur chaser
P r opect
Ambassadors are not only fiercely loyal to the company, they also
recommend the company to others, hence their name.
ACTIVITY
Now might be a good time to take a break from studying! Go shopping for a
new experience.
Perhaps you could have a haircut or go out for a meal or visit a car showroom or
an expensive clothes store just to look (you don’t have to buy anything). The
important thing is, it should be a store or restaurant you have not visited before.
As you go in search of a new service ‘encounter’ note down all the places you
consider. Note how you learn about alternatives, perhaps from friends or
family or from advertising, directories or just by browsing. Try to keep a record
of how you made a decision to become a customer of the chosen company. As
you spend time in the store or restaurant, note how many times you were
approached by service personnel (the manager, waiters, sales people, etc).
How many times were you unsure about what to do or say; how many times
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did you have to ask for help, or were you ‘pounced’ upon by eager members of
staff?
At the end of your time in the store, how likely is it that you would go back? Did
you end up enjoying the experience?
ACTIVITY FEEDBACK
Whatever your experience you will have concluded that it was broadly
speaking, enjoyable or not enjoyable. You will have formed an impression of the
store, showroom or restaurant.
Along the way you will have experienced ‘moments of truth’ when the service
personnel had to judge what you, the customer, wanted. At these moments,
your experience could have been positively or negatively affected.
For example, if you had booked a meal, but then arrived at a restaurant to find
your table not available, the service has already failed. If you are then expected
to wait a long time and no apology is given, it may be that the quality of the meal
itself is irrelevant.
Every moment you come into contact with an organisation is called a ‘touch
point’. Companies can improve service and customer loyalty greatly by
identifying these and managing them.
Loyalty schemes
Loyalty schemes aim to reward loyal behaviour by linking increased
value, for the customer, to repeat purchases.
Often these involve some kind of card, which must be presented at the
point of purchase and notional points which can be redeemed against
other products or services.
Some loyalty schemes, such as AirMiles™ or Nectar™ (in the UK) are
stand alone schemes that several brands can buy into. This may make
the scheme more attractive to consumers since they are more able to
collect substantial rewards. However, the rewards are not unique to a
brand and the scheme must be managed carefully so that there is no
competition between brands in the scheme. For example, it is likely that
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only one supermarket and only one bank would be in the Nectar
scheme.
Companies also develop their own schemes. Airlines, for example, have
developed ‘frequent flyer’ programmes for their most valuable
customers.
L oyals
S wit cher s
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· Loyals
- Active (involved) decision making based on product
features, quality, referral
- Smaller portfolios
· Variety Seekers
- Multibrand buying, active search based on quality
- Large portfolios
- Unlikely to defect permanently when choice out of
stock
· Switchers
- Large, varied portfolios
- Sensitive to price and promotions
- Low perceived risk in changing
ACTIVITY
How do you think understanding of a company’s customer base in these terms
might influence customer retention activity?
Which customers do you think comprise the largest group; which the smallest?
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Would this form of analysis have any effect on the acquisition of new
customers?
ACTIVITY FEEDBACK
Knox’s ‘Diamond of Loyalty’ suggests that the Loyals are likely to be the most
valuable customers. Whilst Habituals have less commitment, they still buy a lot
and Variety Seekers, though they are committed actually support many brands.
Switchers are likely to be least valuable since they select from many brand
alternatives and do not feel committed to any.
It is impossible to say which group is the largest. Knox suggests that the
categories are relative and determined by cluster analysis. That is, when all
customers are plotted according to the strength of their commitment and
support, a line can be drawn separating the above four segments. Different
companies in different markets may each discover a distinctive distribution on
the diamond grid.
It seems the main battle is likely to be for Habituals and Variety Seekers. Having
recruited them, however, the challenge would be to transform them into truly
loyal, totally satisfied customers.
Research that enabled you to compare the loyalty profile of the customers of
competing companies or brands would enable you to assess the vulnerability or
strength of the customer bases. This is illustrated simply in Figure 7.7.
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Loyals
A
B
Size of circle
denotes volume
Switchers
Figure 7.7: Mapping customer loyalty profiles of brand A and brand B. Source Knox, S.
(1996)
It is clear that loyalty is a complex idea and that companies often expect
loyalty when they do little to earn it.
Loyalty offers us a basis for segmentation of our customer base that can
have enormous benefits. Tapp (1998) reports that the credit card
company MBNA found strong correlations between loyalty amongst its
users and their profession. Teachers, accountants, nurses and engineers
were identified and the company was able to develop successful new
products – ‘affinity’ credit cards targeted at clubs and societies with the
added incentive of a donation to the group. In the US as many as one in
four credit cards is now an affinity card.
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ACTIVITY
Case Study: Ocean Spray
Adapted from Smith (2003)
In the UK, the juice market had been static and supermarket labels, priced at up
to 20% lower, were dominating. However, Ocean Spray had no branded
competition in the cranberry juice sector and had 80% awareness. The
marketers’ challenge was to encourage consumer trial in the hope that new,
frequent, users would be created.
How would you apply the principles of loyalty to this example? What form
might a loyalty scheme take?
ACTIVITY FEEDBACK
For every 100 customers recruited by Ocean Spray’s campaign, 58 would have
been attracted by advertising and 42 by price promotions. Furthermore, of the
58 ‘advertising customers’ some 34 would repeat their purchase whilst just 18
‘promotion customers’ would.
Using Knox’s (1996) model (see above) new customers could not be classified
as ‘Loyals’ yet. It seems as though the campaign could be attracting customers
who are Habituals and Variety Seekers, who are likely to repeat their
purchases. Those that do not repeat the purchase may be Switchers.
However, you would need to exercise some caution. Careful research might
tell you that Variety Seekers have a ‘repertoire’ of, say, ten juice products. In
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this case they may purchase Ocean Spray only every two or three months and
you might wrongly have categorised them as Switchers.
Ocean Spray should begin a loyalty scheme which encouraged new purchasers
to tell about their purchase patterns. They may note the range of brands they
buy, how many different flavours they buy over the year and the basis upon
which their purchase decisions were made. The reward for providing this
information may be tailored to appeal to Habitual Purchasers (for example, by
rewarding frequent purchase over a long time) or Variety Seekers (by
emphasising quality and the range of uses to which cranberry juice can be put).
At the same time, the loyalty scheme could develop a collectible theme (such as
on-pack coupons) to track the heaviest purchasers and to reward them with,
for example, a tie-up with a major health and fitness brand or program to build
towards high value rewards.
To be even more precise, we could say that LTV should be the ‘net
present value’ of all future contributions. This calculation gives us the
ability to allow for the cost of spending on these customers now for an
anticipated return at some date in the future. After all, at the very least,
the additional marketing expenditure we are proposing could be
banked and be gaining interest!
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Looking ahead five years gives a reasonable projection for the business,
but figures must be based on reality as far as possible. Frequently
companies overestimate the loyalty of their customers believing that
there is no substitute for their brand or product. It is all too easy to take
profit from a customer initially and to fail to invest in the future
relationship. Later on we discuss retention activity.
· Targeting.
· Motivating action.
· Interactivity.
· Transactional information.
· Relationships.
· Databases.
· Measurement.
· Testing.
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ID prospects
Identify prospects
Target media
Sell products
Gather information
The information from the sale, and from all responses, must be
captured. Horror stories circulate about ‘successful’ campaigns that
generated thousands of coupons which then languished in a filing
cabinet until both the company and its prospective customers forgot.
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Analyse
We can now analyse our customer base even more. Not only do we now
know which media produced the best initial response, we also know
which customers then went on to buy two or more products from us in
the future.
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S t r at egic decision 1
Initial consideration of the role of direct marketing
S t r at egic decision 2
Allocate resources between existing and new customers
Figure 7.9: Strategic decisions in direct marketing. Adapted from Tapp, 1998.
The two halves of the direct marketing strategy relate closely to the two
sides of the ‘spiral of prosperity’ diagram explained above.
ACTIVITY
On what basis do you think the strategic decisions listed above are made?
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ACTIVITY FEEDBACK
Decision 1 considers whether direct marketing is, in fact, appropriate for the
company.
Strategic decision 2 allocates the budget for marketing activity on the basis of
efficiency in achieving the objectives. The intention is to maximise sales within a
given budget by converting the least expensive sales first. Most likely these will
be existing customers whom we wish to retain.
Having developed a retention plan and predicting its results we may then find
that we still have not achieved our overall marketing objectives. Often the
strategy to gain new customers – an acquisition strategy, decision 4 – will
appear to be very similar to a conventional marketing plan. However,
experience and data built up on existing customers will help us target new
customers more effectively.
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Acquisition
We have looked at direct marketing strategy and seen that it divides
into two major ‘substrategies’; acquisition and retention. In this section
we look at direct marketing’s approach to acquiring new customers.
With that in mind, we have seen that direct marketing campaigns aim to
acquire the lowestcost sales first. These are usually existing customers
but if these are insufficient to meet our targets then we will need to
approach a hierarchy of targets as below.
ACTIVITY
If direct marketing emphasises the importance of existing customers, why do
you think acquisition is important? It might help you to think about this example.
ACTIVITY FEEDBACK
Acquisition is important because all companies lose customers. Some
customers simply lose touch (it is estimated that annually around 15% of all
households change address in the UK) and some, unfortunately die.
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Recently
lapsed
customers
Former customers
Enquirers
Referrals
Profiled prospects
Handraisers
Suspects
Fig 7.11: The hierarchy of acquisition targets. Source: Tapp, 1998 p150.
Broadly speaking, those at the top of the pyramid are few in number but
relatively easy to acquire. Book and music clubs spend considerable
time and effort persuading recently lapsed members to rejoin.
ACTIVITY
Why do you think someone who has just stopped their membership of, say, a
health club and gymnasium might be a better prospect than the reader of a local
newspaper?
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ACTIVITY FEEDBACK
A recently lapsed member already knows the club, he or she has already shown
that the club is convenient and, unless we know to the contrary (i.e. from
complaints), they have received some benefit from membership. If you think
back to what you know of consumer behaviour (Unit 3), you will remember the
influences on consumer decision making. A recently lapsed member is already
in the correct segment for the health club.
Of course, we would hope not to have lost customers in the first place. It
has been said ‘we acquire with product and retain with service’. If the
product and service fail to meet expectations no amount of clever direct
marketing can make it into a success.
ACTIVITY
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ACTIVITY FEEDBACK
Glenmore should target the cheapest sales first. Although there are only 2,500
existing customers, they cost 1/3rd of the cost of recruiting customers who
bought a year ago. The other lists, though larger, do not present as good value
per customer or per sale. The budget is used up selling to the smaller, cheaper
lists and Glenmore have no need to use less qualified lists such as the
competition entrants.
ACTIVITY
Now consider what Glenmore should do if they have €150,000 in their budget.
Calculate the figures as above. How would you allocate this budget?
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ACTIVITY FEEDBACK
You will see that with this significantly larger budget, Glenmore is able to use all
the lists they have.
You may have considered spending more on one or other of the lists but this
would not have given you any greater return.
Of course, these figures are simplified but the crucial aid to your decision
making was knowing the cost of acquiring each kind of customer. Looking at
the hierarchy of prospects pyramid above, you might consider the competition
entrants to be ‘handraisers’; that is, they have simply expressed an interest in
the Glenmore product, but they are not committed. You might advise
Glenmore to look for other, better qualified customer lists – do they, for
example, keep track of all the people they send brochures or catalogues and
who have never bought? These may prove to be more efficient lists.
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We should know also what the value of such a sale is and how much
profit is expected from each sale and so we can also calculate AMC in a
slightly different way.
ACTIVITY
Belloud is a security company that installs a simple ‘one-box’ burglar alarm in
homes and small offices. The price is €500, whilst the product costs €250 and
the cost of the engineer visiting to install is estimated at €40. The ‘required
profit’ figure is a 60% mark up on the cost of the product
minus Costs
€290.00
In the right hand column, you can fill in your own figures adjusting the required
margin or the selling price. You might also judge that the costs for the engineer
are rather low. What happens to the AMC when you change other figures?
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ACTIVITY FEEDBACK
Obviously, changes in the other figures have an effect on the AMC at the end of
the calculation. For example, doubling the installation costs to €80 means that
AMC is only €20. If this is not a realistic figure for the sales operation (one might
imagine that customers will require some reassurance that the burglar alarm is
appropriate for their premises) then an additional €40 added to the price
restores the AMC to €60.
We might also be able to negotiate the level of profit required, but having an
analysis such as the one above can only strengthen out argument.
In the future, if our €60 budget is borne out by experience, we may also
use this figure to establish an overall marketing budget. If the marketing
objective is to gain 5000 new customers then –
= €60 x 5000
= €300,000
However, given what we now know about AMC, we can set a target
response rate.
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ACTIVITY
Look back at the Belloud figures. Our objective is to gain 5000 customers with a
budget of €300,000. Two possible campaigns have been suggested. In both
cases respondents will be sent a brochure and then called by phone to place an
order. It is estimated that only 1 in 10 of these will result in an order.
In each case what would the target response rate be and how would this help
you evaluate each option?
ACTIVITY FEEDBACK
First of all this case accurately reflects reality in that a high value (and, therefore,
high risk purchase) is rarely bought by the consumer in one stage. The
campaigns are intended to generate ‘enquirers’. Hence, for every customer to
be acquired we need 10 such enquirers. The target of each campaign is then to
attract 50,000 responses!
In fact, the only way to judge the suitability of each campaign would be based on
past experience which may be your own or that of a specialist direct marketing
agency. It is likely that both figures are rather optimistic and this could be an
argument to trim the costs of the campaign to enable a larger audience to be
reached.
For example, if in campaign B the costs of mailing came down to €0.90 per item
then we could mail over 333,000 names. Our target response rate would then
fall to 15%.
Crucially however, the simple calculations have enabled us to set a target rather
than simply executing a plan and ‘hoping for the best’.
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We have also defined LTV as the total of all future revenues from a
customer. In practice, again, this is easier if we have some historical data
upon which to base our figures. Even if a company does not have the
figures now, it is a strong argument for establishing a database now in
order to make decision making easier in the future.
For companies that are wholly ‘direct’, such as mail order catalogue
companies where every transaction is recorded against each customer,
the process is more straightforward.
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members to a book club, but you can adapt it to reflect almost any kind
of business. It looks at customer lifetime value over 6 years.
Line 1 shows the year under consideration. Note this table shows
customers recruited in year ‘0’. This is customary in such calculations
because (as we shall see later) applying a discount factor requires us to
use these numbers in a certain way. For now it is best to think of these as
marking the ‘anniversary’ of the customers’ recruitment.
Line 3 gives net profit from each customer. Hence, their initial order in
the first year realises £30 profit whilst in the second year the remaining
customers generate only £22.50 each. In subsequent years this declines
as customers buy fewer books.
Line 4 simply shows the cumulative profit, per customer, from the
beginning of the campaign.
Line 5 shows the total profit from all customers (acquired from this
campaign) each year. Clearly as the number of customers and the
amount they spend declines each year, this amount reduces
significantly from £30,000 to £2,600.
Line 6 is simply the cumulative profit figure for all these customers.
Note that, in fact, this table is somewhat simplified. It does not break
down costs in order to show how the profit figure is arrived at. The
allowable marketing cost calculation discussed earlier could be
introduced to allow us to track changing costs of order and marketing
costs. In this case we are assuming that all the marketing (acquisition)
costs come into year 0.
ACTIVITY
Familiarise yourself with the figures above and check to see how the figures are
calculated.
Cover up years 1 – 6 and imagine you are the marketing manager making a
decision about which campaign to try and emulate. Which is the most
successful?
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Now uncover year 1. Remember this table is showing the ongoing value of
customers recruited in year 0 and NOT new customers each year. However,
now that you have two years’ information does your assessment of the success
of the campaigns change?
Now uncover the remaining columns. How would you assess the campaign
now?
ACTIVITY FEEDBACK
You have just made judgements based on lifetime value.
You should have, rightly, concluded that Campaign B was the most effective
initially. In fact, it was until we look at years 2 and 3. The problem is that the
customers recruited by campaign B simply did not stay and so their LTV over
the longer term was lower.
This kind of behaviour can be seen in customers who are offered a significant
incentive to join or to make an initial purchase. Arguably, Hoover, some years
ago offering free flights to the US for UK purchasers of a vacuum cleaner fell
into this trap. They certainly did not create loyal Hoover customers – especially
when they could not keep up with demand for air tickets!
The next table shows the same calculations but with the added
complexity of a ‘discount factor’ This is simply a way of allowing for the
fact that £100 today has more value than £100 earned in the future. As
we stated before, money earned today could be invested and earn
interest. Very often, therefore, calculations of net present value (NPV)
use the prevailing bank interest rates.
Line 7 shows the selected interest rate for the NPV calculation.
Line 8 shows this interest rate translated into a discount factor. Clearly,
year upon year, the discount factor is cumulative. Incidentally, that is
why the first year is ‘0’. If we apply the discount rate (7%) multiplied by
the year (0) we get 0, i.e. no discount. In year 1 we discount by 7% x 1 =
7%.
For the sake of completeness, the actual figure shown in line 8 and used
to is derived from –
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1
year
(1 + Interest rate as a decimal)
So after the first year (i.e. in year 1) this calculation is –
1 1
1
= = 09345794
.
(1 + 0. 7 ) 107
.
which we round down to two decimal places for the sake of clarity!
ACTIVITY
Now repeat the same procedure as with the previous table. Cover up years 1-6
and evaluate the campaign. As you work through the columns of figures check
the calculations to ensure you understand them. For each year of data, which
campaign appears to be the most successful?
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Uncover the remaining columns one by one and review your decision. What
has changed?
ACTIVITY FEEDBACK
As you worked through year 0 again you should have concluded that campaign
B is the more successful. In contrast to the previous example, however, where
we were not applying the concept of net present value, campaign B continues
to be the most profitable over the longer term until we reach year 4. This is
because the discounting of future revenues from campaign A customers
ensures that they never generate as much profit as campaign B customers do in
years 0 and 1. However, across years 5 and 6 i.e. The extended longer term,
campaign A appears to perform better as the dwindling number of customers
continue to spend.
Now that you are familiar with the LTV calculation, you should try and
set up a spreadsheet in an application like Lotus or Excel to be able to
replicate the figures above and to experiment with your own. Such
calculations have real business value for a company.
ACTIVITY
Use the table above with some of your own figures to see the effects of the
following scenarios. Start with the original figures and make only the first
change suggested. Note the differences and think how this might change your
evaluation of the two campaigns. Then add the second change and reflect on its
effect. Finally, add the final amendment.
A. What happens when the bank interest rate is very low, say 1.5%?
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N.B. work through your calculations fully before comparing your answers with
the feedback.
ACTIVITY FEEDBACK
The tables below show the effects fully worked through with some comment.
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You might also like to try reverting back to a more realistic discount rate at this
point to see the impact.
Overall, you should have demonstrated to yourself that the initial value and
number of customers is important, but that this is moderated by a
consideration of the lifetime value of such customers.
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Retention
The other side of the direct marketing strategy is retention. You will
recall that, for an existing company, this is in fact the first ‘strategic
decision’ to be made. To what degree can its objectives be achieved by
existing customers?
Again LTV can inform us. We would want to look at both current and
future profits from customers.
The table above repeats some of the data we looked at in the section on
acquisition. In effect, we have decided to examine the higher value
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The table shows retention as being low. A 20% retention rate is also an
‘attrition rate’ of 80%. It is clear that keeping customers active for longer
would benefit our overall profit.
ACTIVITY
What should the reaction of the marketing team be to the news that these
customers cease to be profitable in year 6? How would you suggest they
address this?
ACTIVITY FEEDBACK
Once customers become unprofitable a decision may be made to ‘demarket’
them. This may mean ceasing to contact them. In a B2B market, minimum
order values may be imposed to deter customers where the cost of transaction
outweighs the revenue.
However, avoiding this situation is preferable. The aim should be to keep the
customers more profitable for longer. Increasing the order value would help.
Some mail order companies do this by offering free postage and packing on
orders over a certain value. Of course, the cost of the incentive must be
accounted for in the allowable marketing cost calculation.
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ACTIVITY
Using the data above, suppose we increase our expenditure to £5 per
customer and this has the effect of increasing the retention rate to 25%. What
is the effect on profit?
Repeat this exercise but, in addition, increase the net profit per customer by
20%.
ACTIVITY FEEDBACK
The initial results are disappointing. This is because our retention rates are so
low to begin with.
The table shows that these customers are simply too costly to maintain. It could
be that they are intrinsically disloyal and they search for offers from our
competitors.
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Even here, the effect of the retention activity is still minimal and these
customers become unprofitable in year 5.
Finally, let us look at a similar scenario to the one above. In this case
customers recruited from campaign C are higher value and more loyal.
Our retention rate is 70% per annum.
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Figure 7.24: Retention activity with more valuable, more loyal customers.
ACTIVITY
What actions would you recommend in year 4 to avoid the loss in annual profit?
One very successful mail order book club in the UK mails its lapsed customers
(i.e. those who have cancelled their membership and so are generating no
income whatsoever) up to 15 times before treating them as ‘lost’. How can this
be justified?
ACTIVITY FEEDBACK
You may have suggested, as in the previous exercise, trying to rid the company
of unprofitable customers. However, it may be worth testing lower-cost
retention activities.
The book club in question has tested its attempts to revive customers on
previous lapsed customers. Again they are projecting LTV, but this time for a
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In addition, whilst the early mailings and the most successful (and, therefore,
can be more expensive), the final mailings may be as simple as a greetings card
in a plain envelope bearing the caption –
“What can we do to tempt you back? Five books for 50p each.”
The mailing itself is very low cost and the selection of books in the offer is likely
to be costed very carefully. The book club may well be making some profit even
on this order.
The important point is that understanding profit on a per customer basis lets us
calculate both a target response rate and the allowable marketing cost.
REVIEW ACTIVITY
1. What is the difference between direct marketing and direct mail?
6. What are the two halves of the typical direct marketing strategy?
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11. We are selling a product via direct marketing for €125 that costs €75
to produce. We wish to take a 30% profit margin on the price. What is
our allowable marketing cost per order?
12. When using the concept of net present value to help calculate lifetime
values, does a period of higher interest rates make the long term value
of retained customers appear higher or lower?
ACTIVITY FEEDBACK
1. What is the difference between direct marketing and direct mail?
So called junk mail does not have a precise definition. A customer may
call any mail ‘junk’ when it is unwanted. Hence, direct communication
runs the risk of being dismissed when it is poorly planned.
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- Identify prospects.
- Target media.
- Sell products.
- Gather information.
- Analyse.
6. What are the two halves of the typical direct marketing strategy?
Two lists were given in this unit, they are condensed below –
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11. We are selling a product via direct marketing for €125 that costs €75
to produce. We wish to take a 30% profit margin on the price. What is
our allowable marketing cost per order?
= €87.50 – €75
12. When using the concept of net present value to help calculate lifetime
values, does a period of higher interest rates make the long term value
of retained customers appear higher or lower?
In periods of high interest rates, future earnings will appear lower than
they would if interest rates were low. This is because the interest rate
is used in NPV calculations (of lifetime value) to allow for the cost of
deferring income until later.
References
Bird, D. (1989). Commonsense Direct Marketing. London, Kogan Page.
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Unit 8
LEARNING OUTCOMES
After studying this unit you should be able to:
Introduction
Marketing has undergone an almost revolutionary change in the last 30
years. Much of this has been driven by changes in technology such as
the massive increase in processing power available in personal
computers. The developments in communication networks – such as
the World Wide Web, satellite television and mobile telephony – have
also brought significant changes both to markets and to marketing.
In this module, we will look at some of the major changes that have
taken place globally and examine the impact they have had – and may
have in the future – on marketing strategy. In particular we will
examine important marketing concepts, such as customer loyalty which
have developed partly in response to emerging technologies, increased
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The latter point may seem farfetched, but no doubt when Vint Cerf and
Robert Kahn developed the TCP/IP protocol that made the Internet
possible over 30 years ago, they would have been amazed at the kind of
global network we see today. Even in the early 1990s few people had
even heard of the Internet, yet in the space of 15 years as many as 800
million people are using it.
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NOTES: (1) Internet Usage and Population Statistics were updated on December 3, 2004. (2)
Demographic (population) numbers are based on data contained in the web site gazetteer.de. (3)
Internet usage information comes from data published by Nielsen//NetRatings, by International
Telecommunications Union, by NICs and other reliable sources. (4) Data from this site may be cited,
giving the due credit and establishing an active link back to InternetWorldStats.com.
ACTIVITY
If you were launching a strategic marketing course on the Internet, and given
that it is written in English, where would you anticipate your customers coming
from?
ACTIVITY FEEDBACK
One aspect of the web as a communication technology is that it exposes
companies to larger audiences than ever before. Many small and medium-sized
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enterprises (SMEs) have been surprised that the moment they set up websites
they receive enquiries from the other side of the world.
Of course, you might also take into account the penetration of English as a
second language. Students in countries such as Hong Kong or Greece might
accept that their education should be in English. You might expect more
resistance in France or in Spanish-speaking South America. You might also
consider the benefits of translating your material into other languages such as
Chinese and Spanish.
For universities in the US and the UK, much of the interest comes from Asia.
The country producing the largest number of engineering graduates, for
example, is China and China is also the provider of the most overseas students
in the US university system.
However, the growth of the Internet should not blind us to the fact that
half the world’s population have never even made or received a
telephone call, let alone used the World Wide Web.
The range of technologies which affect markets (that is, both customers
and producers of goods and services) is almost infinite. Communication
technology like the Internet, satellite and digital television and third
generation (3G) mobile phones are the most visible to us as consumers.
Ten years ago Pine, Peppers and Rogers noted the need for technology
to be at the service of the customer relationship (Pine II et al. 1995). For
example, Bandag, a company supplying truck tyres, planned to embed
a chip into a tyre to be able to monitor wear. In this way the company
hoped to be able to add value not so much to the tyre but to the
relationship with its customers, avoiding emergency tyre changes,
keeping trucks on the road longer and, by the way, marginally
increasing the number of tyres consumed since they would be changed
before they wore out.
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ACTIVITY
As a consumer, think about your regular trip to a store to buy basic household
items or groceries. How has technology changed this experience in your
lifetime? Visit a local store and note down how technology has had a positive (or
negative) impact on the customer experience. How might this change in the
future?
ACTIVITY FEEDBACK
Depending on your local store, you may have noted obvious changes such as
increasingly sophisticated tills. Increasingly, tills are part of EPOS (electronic
point of sale) systems and facilitate EFTPOS (electronic funds transfer at the
point of sale).
Other, less obvious trends you may have noticed include the range of products
and brands available to you and, as importantly, now familiar to you thanks to
TV and other forms of advertising. Or you may have noticed the number of
products that invite your comments, or entry into competitions, by telephone,
e-mail or on the Internet.
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Commercial
Idea R&D Manufacturing Marketing product
Figure 8.2: Interactive model of innovation. Adapted from Rothwell and Zegveld, 1985, by Trott (1998) p19
The central row running from left to right represents the conventional
new product development process depicted in many textbooks. But all
such development takes place in a dynamic environment and,
ironically, new technology (most notably the web) enables the faster
communication of other changes in technology as well as developments
in society across the globe.
ACTIVITY
Consider a product such as Apple’s iPod or its spiritual ancestor, Sony’s
Walkman. Both designed to make music mobile. But do you think these are
inventions driven by consumer demands and changes in lifestyle or is it a case of
technology leading the way?
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ACTIVITY FEEDBACK
You have probably realised that the answer is somewhere between the two.
There is no doubt that digitisation and data compression technology has
enabled the iPod and a host of competitors to exist. But it’s also true that
without the massive popularity of home computers and the rise in internet
access, demand would be much less. There is also a sense in which society has
changed. It is now quite normal to see young people with headphones as they
walk the streets or ride trains; perhaps this was made possible by the Walkman.
More difficult to appreciate, for many, is the rise in ‘audio-piracy’ with the
sharing of MP3 files without payment to the copyright holder. Again this has
only been made possible by the affordability of data storage and by rapid online
access. Of course, without portable players these ‘pirates’ could still download
to their PCs and burn CDs (illegally). A small box of electronics that weighs a
few grams and holds thousands of tracks makes the whole business a lot easier.
You may recall in Unit 5 Baker and Hart’s extended growth vector
matrix. It suggested that the greatest change (i.e. to both product and
market) involved the greatest risk. However, some recent research also
suggests that Zone 3 innovators have the opportunity to generate
disproportionate profits by creating new ‘market spaces’. There is little
doubt that Apple has done just that with the iPod.
You can read more about the CIM’s assessment of the risks and benefits
of innovation at www.shapetheagenda.com.
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ACTIVITY
Read the following article from the “Wireless Economy” special report from
Times Online December 2004
Case: We’ve got your number
The latest example of Big Brother, and more a useful tool for vehicle
recognition, the e-numberplate has arrived, as Andrew Heavens reports
It is not every day that you get to push the boundaries of car number plate
design.
Michael Cordell and his management team managed it in a few minutes when
they sat down for a brainstorming session in the offices of Hills Numberplates,
their Birmingham-based company.
“We were sitting there with this plate, looking at it, saying ‘What else can we do
with it?’” said the managing director of the UK’s leading plate supplier. “Then
someone said ‘Look, there’s a great big lump of plastic in the back – we must be
able to shove something inside it’.”
It may not have been the most exhaustive of research and development
procedures, but it did the trick. A few months later, Hills was drawing up plans
for the world’s first e-plate, a cutting edge, wireless-enabled powerhouse of a
number plate that started rolling off the production line this summer.
The electronics that they shoved into the back of their plate was a Radio
Frequency Identification (RFID) transmitter, a stamp-sized piece of circuitry
designed to send out a wireless signal to anyone listening in with a wireless
receiver.
With the addition of that simple piece of wireless technology, Mr Cordell and
his team gave their company a brand new line – a rare thing in the mature
industry of number plate manufacture.
They also came up with a product that, if it catches on, could have just as
profound an impact on the businesses of their customers.
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The key selling point of Hills’ new e-plate is its ability to send out a unique,
encrypted radio signal from both ends of a car, lorry or any other kind of
marked vehicle. That signal can be picked up be a receiver up to 1,000 metres
away, even if the vehicle is driving through thick fog, parked up behind a
warehouse or stuck six lanes deep in traffic.
That ability, Hills hopes, will make their e-plate a must-have accessory for the
burgeoning fleet management and car hire sectors in the UK, Europe and
beyond.
Up to now, one of the key challenges of the car hire sector has been to keep
track of the hundreds of cars moving in and out of their garages.
Companies like Avis and Hertz have had to spend millions employing armies of
garage hands to check cars in and out of their yards, then bill their customers
for every hour on the road.
With an e-plate, a lot of that could be done automatically. “You can let your
customers return a vehicle any time of the day or night,” said Mr Cordell. “The
receiver would clock the car in, let you in to the garage then shut the gates to
prevent you driving out.” In a worse case scenario, fleet management
companies could also drive around with a mobile wireless receiver to track
down lost or stolen vehicles.
Having written your answers to the above questions, read the continuation of
the article below.
Case: We’ve got your number (continued)
Once every car in the country was fitted with an e-plate, police would be able
to set up a receiver at the side of the road and scan for suspect and stolen cars.
That vision of the future may not be as far-fetched as it first appears.
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Most of the technologies involve some sort of tagging, with various kinds of
identification chips lodged in the dashboard, chassis or indeed, in Hill’s case, the
number plate. Each chip could, conceivably, automatically report a car for
anything from speeding and dangerous driving to road tax evasion.
Plans like these have predictably raised the hackles of civil rights and drivers’
interest groups. But fears of a Big Brother future miss the point, according to
Mr Cordell.
According to him, the wireless technology in his new e-plates could have a
much more immediate and subtly subversive impact on the way we live and
drive.
Hills currently supplies plates to car retailers and manufacturers for about
£4.50 a go trade price. Those retailers and manufacturers then sell the plates on
to the consumer for as much as £20-£25.
But new plates will call for a new distribution chain. To ensure the integrity of
the radio equipment in each plate, Mr Cordell thinks he will have to cut out the
middle man and supply direct to consumers, for about the same £20 price tag.
The retailers and manufacturers could miss out on the deal altogether.
ACTIVITY FEEDBACK
1. It is clear that the value chain for each different application will be
distinct. As it stands Hills appears not to have considered a value-based
analysis. (See Unit 2). Hills is straying into the area of new product
development (NPD) into which some major manufacturers are already
investing. For example, suppliers of electronic components to motor
manufacturers may already be meeting the need for tracking by
embedding similar technology in other parts of the car. As a
consequence, Hills is likely to be seen as a competitor.
2. The article suggests that Hills have not yet considered who the
customers are for this new technology. Possible end-users include car
hire companies who might use it to track their vehicles, but the
unintended effects of the technology – which may be benefits to the
police, government or even to criminals – may create resistance from
some consumers.
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Moreover, their existing partners in the value chain (such as car dealers
and parts suppliers in the after-care market) may feel aggrieved that
Hills is to sell direct to the end user. At the launch of a new product this
could be very damaging to Hill’s core business.
ACTIVITY
Review your understanding of direct marketing and the various techniques or
activities that may be included in a direct marketing strategy. How have these
been affected by developments in technology? Why is the direct marketing
paradigm appropriate in a technologically advanced world?
ACTIVITY FEEDBACK
You should have noted the strategic decisions referred to in Unit 7.
You should certainly have recalled the parallel emphasis on acquisition and
retention and the impact of considering lifetime value.
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Fragmentation and Satellite, cable and digital media along with an increasing number of
proliferation of media specialist and lifestyle magazines and web sites make large scale brand
building more of a challenge. At the same time, such targeted channels are
opportunities for direct approaches.
Consumer sophistication Arguably, consumers are more demanding than they have ever been,
expecting continuously improved levels of service and, above all,
convenience. So called ‘time-poor’ consumers expect to be able to access
services 24 hours a day, 7 days a week.
Increasing concern for Companies are increasingly questioning marketing expenditure and
cost-effectiveness seeking to make departments accountable for their spending. Direct
marketing offers improved levels of control.
The continued fall in More and more companies are now able to manage sophisticated
computing costs databases, often without specialist people or equipment.
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The answer is, of course, that with computer based systems, huge
quantities of data can be recorded and analysed. For many retailers the
challenge is to capture the data in the first place.
ACTIVITY
Consider that you wish to instigate a direct marketing strategy in a retail
decorating store selling paint, wallpaper and related items. Itemise the
information you would record from customers. Against each one note how you
might acquire it; for example, is it routinely recorded when a transaction is
made? If not, how might it be gathered?
ACTIVITY FEEDBACK
According to Logan (1998) a typical database for B2C marketing consists of –
Accounts data – reference number(s), account type, start date, last used date,
average balance, account worth indicator, other accounting codes.
Activity codes for media or source (in examples of LTV in Unit 7, this might be
‘campaign A’), activity dates, type of response, recency of response, frequency
of response and value of response.
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In addition, the decorating store may also have customers that are themselves
businesses. In this case, subtly different additional data may be collected –
Business person records – name, job code, job title (as they wish to be
addressed), telephone number, fax number, e-mail address, department, other
decision-makers, type of business (using standard industrial classifications or
SIC codes).
Some data such as the products bought and their value is, of course, collected in
a retail setting. But it is often difficult to ‘tie’ this data to a particular customers.
Businesses (and students) often make the mistake of assuming that such
information can only be collected by research. In fact, most market research is
prohibitively expensive for this kind of data collection and customers may well
resent being asked for all this information.
In fact many organisations, including retail stores, have solved this problem by
offering loyalty cards, credit accounts or similar schemes. Loyalty cards offer
incentives (usually discounts) for customers to identify themselves when they
pay. In this way companies can ensure records are maintained.
You will see that the amount of data held on each customer can be
daunting and it is for this reason that computers have been so influential
in the growth of direct marketing. In order to make data more
manageable, often disparate elements of data are linked under
indicators. This is a form of segmentation that makes the data easier to
read. However extreme caution must be exercised when clustering
customers on the basis of these ‘artificial’ indicators and it is the job of
the strategic marketer to question and test these.
or
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ACTIVITY
Why do you think RVA or FRAC analyses are useful? Would you give a high
score to someone who has purchased a large amount from you on the basis that
they are more valuable or a lower score on the basis that they are unlikely to
buy again for some time?
ACTIVITY FEEDBACK
RVA and FRAC analysis can simplify decision making by allocating a numerical
value to each customer. A high score is usually based on experience of
particular types of customer. Stone and Shaw (1988) argue that the best
indicators of future transactions are past transactions.
For example, motor manufacturers know that cars are changed, on average,
every five years whilst banks know that customers with two or three of their
products (say, a current account, a savings account and a mortgage) are much
more likely to buy further products (such as a credit card).
“The more your customers have spent with you, the more they are likely to
spend with you in the future” (Tapp 1998)
The logic may seem difficult to accept but it is borne out by direct marketing
practice. In fact, the statement can be understood by metaphor. Complete
strangers are the least likely to believe what you say (or indeed even listen),
whilst your closest friends are likely to trust and like you, will already have
talked with you and believed many things you have told them. By definition,
your closest friends will trust you and what you say most of all.
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For example, each time a new campaign runs, new customers will be
added. In addition, each time existing customers are contacted or
themselves contact the company, that ‘event’ will need to be recorded.
Some years ago a company that sold insurance products to the elderly
failed to include on its database a method of recording the deaths of its
policyholders or their partners. As a result it continued to send offers for
life assurance, often addressed to a recently deceased person.
Profiling
One of the most intriguing uses of the database is in profiling for
acquisition.
When the two databases are matched to some extent – at least 1000
customer records but ideally over 10% – then a range of further useful
things can be achieved using this sample.
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Names and addresses from the external database are also usually
available to purchase. Hence, a company may test the usefulness of the
profiling by, perhaps, mailing a sample of the most closely matched
consumers on the external database. The cost of these names and
addresses depends on their value and the intended use.
Data may also be added into the company database from the external
database. However, the customer database must be structured to accept
and make use of this data. If it is not then it is often better to repeat the
profiling process periodically.
There are two ways of looking at ecommerce and its development. One
is to hail it as a new and revolutionary ‘shakeup’ to marketing, the
other is to see it in the context of much of what we have discussed so far
in this unit.
ACTIVITY
Case: Club Nokia’s website creates customer loyalty
Read the case study (Hollensen pp391-393) and answer the three questions.
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ACTIVITY FEEDBACK
Case: Nokia
Going there may not be the most exciting experience that you can get on the
web. Considering that Nokia is selling so many mobile phones to young people,
it should be possible to approach them in a more appealing way. The target
market is technologically aware and already heavy web users.
Nokia is an excellent producer of mobile phones but maybe they are not the
right firm to run a website with an e-commerce strategy. One option would be
to outsource this kind of e-commerce to a specialist who knows how to attract
a web-audience, or to set up an alliance with a strong online brand which
already has the target audience and the traffic such as eMusic and MusicMatch.
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In the early days of the web, opponents argued either that the
technology would affect all markets or that there were some that it
would be impossible to ‘digitise’. It is important for a firm to consider to
what extent its whole value offering to the end consumer may be
affected by electronic technologies.
ACTIVITY
Read Sections 10.2 and 10.3 in Hollensen, pp396-398.
For newspaper publishers over the past twenty years, new technology
drove down the cost of production. Initially, digital typesetting and
imaging enabled journalists to compose their columns directly onto a
page and, thus, to work to ever tighter deadlines. More recently the
availability of digital cameras and satellite communication has enabled
reporters to file reports, with high quality colour photography, instantly
from around the world. Even just in the last year or two, digital cameras
integrated into mobile phones have enabled readers themselves to send
images – typically of disasters or of celebrities – for publication in the
newspaper.
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Pine, Peppers and Rogers (op cit) pointed out that whilst many firms
were rich in information on their customers and should, therefore, be
able to customise their offering, they often continued to behave like
mass marketers.
ACTIVITY
In each case note down a few reasons why you think that an offering falling into
one of the above categories could or should be customised for the individual
customer. Think of an example of a company that falls into each category. Does
it customise its offering?
ACTIVITY FEEDBACK
Complex products or services
Most people do not want to spend a lot of time comparing complex costs and
specifications. Hence, despite the technological basis of mobile phone
companies there are a large number of intermediaries online selling phones and
airtime packages and, crucially, allowing the consumer to compare competing
networks.
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Pine et al use the logic of lifetime value discussed in Unit 7 to argue for this
category. It is also clear that for a company such as Boeing, manufacturing
passenger jets, one customer’s order is very significant to their turnover.
Online services
Obviously, online services (which may deal with digitisable products) should be
able to be customised. However, Pine et al point out that some online services
fail to do so. (See below; The world wide web and web ‘presence’)
Retailing services
Almost by definition, retail services adapt their offering to the individual client.
However, the difficulty is ‘standardising’ such adaptation. Pine et al cite the
Ritz-Carlton hotel chain in which many different customer-facing staff may
meet a given customer and behave in different ways. The key, they say, is to
capture and remember important information, such as room preference
(smoking or non-smoking) or favoured newspaper so that the customer need
not be asked repeatedly.
Learning relationships
Clearly the key to learning and acting upon knowledge of individual
customer preferences is a database which supports organisational
learning. When an organisation, as opposed to individuals within the
organisation are focused, then the whole organisation is able to meet
and sometimes exceed the expectations of customers. Where these are
personal, detailed and complex, then a barrier is built up around the
customer. It becomes increasingly difficult for the customer to leave
knowing that it will take time for any new supplier to learn the same
features of the required service.
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It is not sufficient simply to builds the walls, as Jones and Sasser have
warned above. Banks traditionally depend on customers’ inertia and
the potential problems of transferring sensitive data from one set of
accounts to another. However, in these circumstances customers may
still not be satisfied and may look for opportunities to spread their risk,
perhaps by taking up products from rivals and so making any future
defection easier.
Pine et al suggest that there are four distinct strategies that need to be
developed in order to maintain true learning relationships.
An assessment strategy Finally Pine et al advocate the assessment of lifetime value and share
of customer as vital. Drawing the connection once more between
customer satisfaction and loyalty, they also suggest measuring the
gap between customers ideal and what is actually supplied. Again,
given a sufficiently sophisticated database, this is to be done for each
customer.
Figure 8.1: Strategies needed to develop learning relationships. Adapted from Pine et al (1995).
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1. Vertical disintegration
A reversal of the integration of the value chain seen in previous
decades. Companies could now move quicker by collaborating
with outsourced service.
2. The Vale of the intangibles
Far from being the main location of value, physical assets can
increasingly be seen as barriers to rapid restructuring.
Knowledge, skills, brands, reputation and customers are all less
tangible and, potentially, more valuable. (see Unit 4)
3. Increasing returns
The intangibility of many products on the web lead to the
expectation of better returns on investment. Each additional
customer on eBay or Amazon.com costs virtually nothing.
4. Perfect information
A principle feature of the classical economist’s model of a market
is (almost) a reality. In some markets buyers and sellers have
total knowledge of the price of competing offerings and can
negotiate on that basis. Power shifts towards buyers and the
market is likely to reach an equilibrium price level.
5. Instant supply chains
The electronic integration of the complete supply chain where
each order triggers instant orders of materials and production
means that customers will increasingly expect instantaneous
responses. Companies that have any element of the value chain
‘offline’ will suffer.
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ACTIVITY
Read Section 10.6, Hollensen, pp410-422.
What are the main features of buyer behaviour in B2C and B2B market spaces?
ACTIVITY FEEDBACK
The main difference between B2B and B2C buyers online is that consumers are
characterised as individuals either making predominantly affective decisions,
enjoying the experience of the web environment (hedonistic) or rational,
instrumental decisions. Business users, however, may also be consumers but
may also be sellers and intermediaries.
Newsgroups, chatrooms and peer-to-peer file sharing forums are all market
spaces where consumers can share experiences, act together to purchase in
bulk or promote tools to strengthen the customer in an online transaction.
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However, companies should not assume that all customers are about to
make all their purchases online. Particular sectors and particular brands
are known for their web presence.
For example, consumer electronics are high price products where the
potential for saving is of great interest to consumers. Given that the
main brands are wellknown and have reputations for good quality it is
likely that many customers carry out extensive product searches (see
Unit 3) and compare price and performance. Similarly, brand loyal
customers of Lands’ End or Fat Face wearers may visit the web sites in
order to check on the latest offers or to browse through a wider range of
products than are in the paperbased catalogue. (www.landsend.com
and www.fatface.com). These websites also offer a further taste of the
brand values that loyal customers of these companies so admire; for
example, Fat Face’s website links to a ‘Fat Planet’ subsite on extreme
sports.
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ACTIVITY
Read the following case and answer the questions that follow.
Murray Wells set up the company after facing a bill for £150 for a pair of
spectacles as a student. As he investigated the cost he found only one
laboratory willing to give him the ‘inside’ information he needed. To test his
idea he simply sent his own prescription to the lab and ended up paying a
fraction of the cost.
With some IT help James set up the website and launched the company from
his parents’ spare bedroom. At first, the job fitted around study time, but then
after distributing some leaflets and advertising in a local directory in the nearest
city Murray Wells was faced with employing eight and using three more rooms
at home.
Glasses Direct is now selling more than 300 pairs of glasses a day to more than
8,000 customers – sales could be around £150,000. The workforce is 11 and
they have just moved to business premises.
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There has been resistance. Some high street chains suggest that Glasses Direct
doesn’t fit spectacles properly. One supplier suddenly refused to work with the
new company. A large US company has sounded Murray Well out about a
possible takeover.
The future may be their own manufacturing and the website may soon enable
customers to view themselves online wearing the various styles of glasses.
Not bad for an idea that was just going to provide pocket money for a hard-up
student.
www.glassesdirect.com
2. Evaluate the business, given what you know about direct and
relationship approaches to marketing.
3. What does the future hold for Glasses Direct. Do you see future
technological developments as an opportunity or a threat?
ACTIVITY FEEDBACK
1. How has technology enabled Glasses Direct to prosper?
However, the web presence has given Glasses Direct access to a world
audience.
2. Evaluate the business, given what you know about direct and
relationship approaches to marketing.
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3. What does the future hold for Glasses Direct. Do you see future
technological developments as an opportunity or a threat?
It is highly likely that ‘copy cat’ glasses suppliers will continue to appear
on the Internet. Customers shopping in this was are concentrating on
value and making price-based decisions – Glasses Direct will be under
pressure to contain costs. With the transparency of comparison
possible on the web, customers may make decisions based on the
difference of pennies.
The danger is that, in the ‘gold rush’ mentality that prevailed in the
dotcom boom, companies may see opportunities for new customers,
new markets or new processes without also seeing the significant
problems that may exist. This is arguably the case with the Glasses
Direct example above.
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Interaction – how did they respond before? With web technology this
can be tracked and interaction built around individual requirements.
REVIEW ACTIVITY
1. Do you consider innovation to be a driving force in marketing or a
source of threats?
6. Why does the marketing concept fit well with the Internet?
ACTIVITY FEEDBACK
1. Do you consider innovation to be a driving force in marketing or a
source of threats?
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market, monitoring such change can lead to insights that, in turn, may
lead to competitive advantage.
Repeat purchases, as Dick and Basu point out, do not necessarily define
a loyal customer. However, Simon Knox’s examination of loyalty seeks
to provide a tool with which to measure and manage customers
segmented by loyalty. Combining these two perspectives ensures that
repeat patronage is not taken for granted and that strategies to build
loyalty are based on a more accurate picture of customers’ attitudes
and behaviour.
6. Why does the marketing concept fit well with the Internet?
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- The future role of the Internet should form part of the vision of
a company since its future impact will be significant to most
businesses.
- Online services.
- Retailing services.
References
Chaffey, D., R. Mayer, K. Johnston and F. EllisChadwick (2000). Internet
Marketing. Strategy, Implementation and Practice. Harlow, Pearson
Education Limited.
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Pine II, B. J., D. Peppers and M. Rogers (1995). “Do you want to keep
your customers for ever?” Harvard Business Review (March/April):
103114.
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