Maketing - Part 1

TV/CSD.121

Peter / Donnelly, Jr.

Marketing Management K n o w led g e and S k ills Ninth Edition

This International Student Edition is for use outside of the U.S. %

McGRAW-HILL

jt

INTERNATIONAL

EDITION

TV/CSD.121

Peter / Donnelly, Jr.

Marketing Management K n o w led g e a n d S k ills Ninth Edition

This International Student Edition is for use outside of the U.S.

McORAW-HILL

INTERNATIONAL

EDITION

Marketing Management Ninth Edition

Knowledge and Skills

J. Paul Peter University o f Wisconsin—Madison

James H. Donnelly; Jr. University o f Kentucky

Me Graw Hill

McGraw-Hill Irwin

Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis Bangkok Bogota C aracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

The McGraw-Hill Companies

Me Graw Hill

M c G ra w -H ill Irw in

MARKETING MANAGEMENT: KNOWLEDGE AND SKILLS Published by McGraw-Hill/Irwin, a business unit oiThe McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright to 2009, 2007, 2004, 2001, 1998, 1995, 1992,1989, 1986 by Hie McGraw-Hill Companies, inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, hut not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-firec paper. 1 2 3 4 5 6 7 8 9 0 WCK/WCK 0 9 8 ISBN MHTD

978-0-07-128076-1 0-07-128076-6

www.mhhe.com

About the Authors ). Paul Peter is the James R. M cM anus-Bascom Professor o f M arketing at the University ofW isconsin— Madison. He was a m em ber o f the faculty at Indiana State, Ohio State, and Washington University before joining the W isconsin faculty in 1981. W hile at Ohio State, he was named Outstanding Marketing Professor by the students, and he has won the John R. Larson Teaching Award at W isconsin. He has taught a variety o f courses including M arketing Management, Marketing Strategy. Consumer Behavior, Marketing Research, and Marketing Theory, among others. Professor Peter’s researeh has appeared in the Journal o f Marketing, the Journal o f Mar­ keting Research, the Journal o f Consumer Research, the Journal o f Retailing, and the Acad­ emy o f Management Journal, among others. His article on construct validity won the prestigious William O ’Dell Award from the Journal o f Marketing Research, and he was a fi­ nalist for this award on two other occasions. Recently, he was the recipient o f the Churchill Award for Lifetime Achievement in Marketing Research, given by the American Marketing Association and the Gaumnitz Distinguished Faculty Award from the School o f Business, University o f W isconsin-M adison. He is an author or editor o f over 30 books, including A Preface to Marketing Management, eleventh edition; Marketing Management: Knowledge and Skills, ninth edition; Consumer Behavior and Marketing Strategy, eighth edition; Strate­ gic Management: Concepts and Applications, third edition; and Marketing: Creating Value fo r Customers, second edition. He is one o f the most cited authors in the marketing literature. Professor Peter has served on the review boards o f the Journal o f Marketing, Journal o f Marketing Research, Journal o f Consumer Research, and Journal ofB usiness Research and was measurem ent editor for JM R and professional publications editor for the American M arketing Association. He has taught in a variety o f executive programs and consulted for several corporations as well as the Federal Trade Commission.

James H. Donnelly, Jr.,

% it 3

is the Thomas C. Simons Professor in the Gatton College o f Business and Economics at the University o f Kentucky. In 1990 he received the first Chancellor’s Award for Outstanding Teaching given at the University. Previously, he had twice received the UK. Alumni Associ­ ation’s Great Teacher Award, an award one can only be eligible to receive every 10 years. He has also received two Outstanding Teacher awards from Beta Gamma Sigma, national busi­ ness honorary. In 1992 he received an Acorn Award recognizing “those who shape the fu­ ture” from the Kentucky Advocates for Higher Education. In 2001 and 2002 he was selected as “Best University o f Kentucky Professor.” In 1995 he became one o f six charter members elected to the American Bankers Association’s Bank Marketing Hall o f Fame. He has also received a “Distinguished Doctoral Graduate Award” from the University o f Maryland. During his career he has published in the Journal o f M arketing Research, Journal o f Marketing, Journal o f Retailing, Administrative Science Quarterly, Academ y o f Manage­ ment Journal, Journal ofA p p lied Psychology, Personnel Psychology. Journal o f Business Research, and Operations Research among others. He has served on the editorial review board o f the Journal o f Marketing. He is the author o f more than a dozen books, which in­ clude widely adopted academic texts as well as professional books. Professor Donnelly is very active in the banking industry where he has served on the board o f directors o f the Institute o f Certified Bankers and the ABA’s Marketing Network. He has also served as academic dean o f the ABA’s School o f Bank Marketing and Management.

Preface Welcome to the ninth edition o f M arketing M anagement: Knowledge and Skills. Our goal has always been very clear to us: to enhance students’ knowledge o f m arketing management and to advance their skills in utilizing this knowledge to develop and m aintain successful marketing strategies. Knowledge enhancement and/or skill development are the purpose o f each section included in our book. Our vision always has been to assemble a complete stu­ dent resource fo r marketing management education. This edition is no exception.

The Present Edition Our book must continually change because the resources that students and instructors need continually change. Thus, the basic structure o f the book continues to evolve and expand, particularly during recent editions. Based on extensive feedback from adoptors and students plus our own intuitions and judgm ents, we have made num erous changes in this and recent editions. 1. Because the text chapters are an integral part o f the book, they have been completely revised and updated. New content has been added throughout. There are new or expanded discussions o f the m ajor types o f marketing, branding, m arketing’s role in cross-functional strategic planning, a com parison o f data collection techniques in m arketing research, the most current psychographic and geographic approaches to segmentation, and a new section on Porter’s diamond model o f national competitive advantage. We have changed the title o f Chapter 6 to “Product and Brand Strategy” to more accurately reflect the content o f the chapter. in this edition we have added 25 new “Marketing Highlights” and deleted numerous oth­ ers. A popular feature that has received positive feedback from both students and instructors, these highlights are not the usual news items found in many other texts. Instead they present important tools and content that can be used in analyzing marketing cases and problems. We have carefully selected additional reading for student writing projects and case pre­ sentations. Each chapter has additional readings useful for both MBA students as well as undergraduates. Our goal was to m ake these readings accessible to students at various stages o f marketing education. 2. Approximately one-third o f the cases in this edition are new. Our search for relevant new cases is indeed an unending challenge. We are very fortunate to be able to add 12 new ones to this edition. The em phasis has always been on well-known com panies whenever possible, including both dom estic and global com panies, high-tech companies, consumer and organizational products, small and large businesses, products and services, and manu­ facturers and channel members. We have also made an effort to retain some cases that are popular with instructors and stu­ dents. These cases can truly be considered “classics.” But whether set in 2008 or 1998, these “snapshots in time” enable students to analyze a situation within the time period the case was written and/or to bring the situation up to date with their own research and analysis. 3. An im portant and valuable student resource updated in this edition is an annotated bibliography o f major online databases used in marketing. It is an up-to-date resource for students to use in the analysis o f cases, the developm ent o f m arketing plans, and the analysis o f Internet exercises. It is presented in Section IV immediately following the Internet exercises. The Internet exercises have also been revised and updated.

viii

Preface

to construct a quality m arketing plan for any product or service. Section VII provides a framework for developing such a plan. Instructors can consult the Instructors Manual that accompanies this book for alternative ways to incorporate this stage into their course.

Flexibility for Instructors The six-stage process is very flexible and we have found that it can easily be adapted to the needs o f students and objectives o f instructors. For example, if the course is the first learn­ ing experience in marketing, then emphasis could be placed on the first four stages. I f stu­ dents progress well through these stages, then marketing m anagem ent cases in Section V can be assigned on an individual or group basis. I f the course is for students with one or m ore courses in m arketing or in the capstone m arketing course, then m ajor attention should shift to stages 2 through 6. In this instance, Section I becomes a resource for review and reference and the course focuses more on skill development. Finally, the text can be used for a two-course sequence in marketing management. The first course can em phasize stages 1 through 4 and the second can concentrate on stages 5 and 6.

Acknowledgments M any talented people contributed to our book in the form o f cases and exercises. Our appreciation and thanks go to each one o f them. Their names and affiliations appear in the Contents and at the point in the book where their contribution appears. Their work will help others better educate m arketing students. We also must thank the users who responded to our survey. Your assistance was needed as we planned this edition, especially in m aking the hard choices involved in replacing cases, selecting new cases, and deciding which o f the “classic” cases to retain. Again, thanks for your assistance. We also want to acknowledge those colleagues who provided detailed reviews o f previous editions: Sammy G. Amin Frostburg State University Amy Beattie Champlain College Andrew Bergstcin Pennsylvania State University David B ourff Boise State University B rad Brooks Queens College Carol Bruneau University o f Montana R ichard Campbell California State University-Bakersjield Daniel P. Cham berlin Regent University V. Glenn Chappell Meredith College H enry Chen University o f West Florida Newell Chiesl Indiana State University Pravat K. Choudhury Howard University C lare Comm University o f Massachusetts-Lowe11 John Considine LeMoyne College R obert Cosenza University o f Mississippi L arry Crowson University o f Central Florida R ober C utler Cleveland State University Denver D’Rozario Howard University M ike Dailey University o f Texas, Arlington

C arl Dresden Coastal Carolina University Patricia Duncan

Harris-Stowe State College Adel I. El-Ansary University o f North Florida R andall Ewing Ohio Northern University Renee Foster Delta State University John G authier Gateway Technical College David G riffith University o f Oklahoma Angela Hausm an University ofTexas-Pan American Jack Healey Golden State University JoAnne S. Hooper Western Carolina University J a rre tt Hudnall Mississippi University fo r Women Patricia Hum phrey Texas A& M University A run K. Jain University at Buffalo Wesley H. Jones University o f Indianapolis Benoy Joseph Cleveland State University Dee Anne Larson Mississippi University fo r Women Brian Little Marshall University Anne B. Lowery University o f Mobile Steven Lysonski Marquette University

ix

x Acknowledgments

Gregory M artin University o f West Florida Wendy M artin Judson College M ary K. M cM anam on Lake Erie College Donald J. M essm er College o f William & Mary Hudson Nwakannia Florida A& M University Elaine N otarantonio Bryant University Alphonso Ogbuehi Bryant University Thomas L. Parkinson Moravian College Hatash Sachdev Eastern Michigan University Amit Saini University ofNebraska-Lincoln C hris Samfilippo University o f Mich igan ֊Dearborn William F. SchoeU University o f Southern Mississippi Anusorn M. Singhapakdi Old Dominion University

Jean Shaneyfelt Edicon Community College John Shaw Providence College C harlotte Smedberg Florida Metropolitan University System R. M ark Smith Campbell University Joseph R* Stasio Merrimack College A lbert J. Taylor Austin Peay State University Dillard Tinsley Austin State University Joanne Trotter Gwynedd-Mercy College David J. Vachon CSUN Kevin Webb Drexel University Paula Welch Mansfield University Dale Wilson Michigan State University M ark Young Winona State University

Finally, we want to acknowledge those colleagues who provided valuable m arket feed­ back for this edition: John Stovall Georgia Southwestern State University Amit Saini University ofNebraska-Lincoln Shaoming Zou University o f Missouri-Columbia R obert Cosenza University o f Mississippi Rodney Stum p Towson University M ark Toncar Youngstown State University

Bill M agrogan National Louis University & Columbia Union College C esar Maloles III California State Univ. East Bay Ann Little High Point University Deborah Salvo University o f St. Thomas John Wong Iowa State University

It has always been a pleasure to be M cGraw-Hill authors. Professionals like Dana Pauley, project manager, and Devon Raemisch, editorial assistant, supported our efforts with this edition and we are extremely grateful. M ichael Knetter, Dean o f the School o f B usiness at the University o f W isconsin, and Devanthan Sudharshan, Dean o f the Gatton C ollege o f Business and Econom ics at the University o f Kentucky have always supported our efforts. J. Paul Peter Jam es H. Donnelly, Jr.

Contents Performance o f the Research 3 7 Processing o f Research Data 37 Preparation o f the Research Report 38 Limitations o f the Research Process 38 Marketing Inform ation Systems 40 Conclusion 41

SECTIO N I ESSENTIALS OF MARKETING MANAGEMENT 1 PART A INTRODUCTION

3

C hapter 1 Strategic Planning and the Marketing Management Process 4 The M arketing Concept 4 W hat Is M arketing? 5 W hat Is Strategic Planning? 6 Strategic Planning and Marketing Management The Strategic Planning Process 7 The Complete Strategic Plan 15 The M arketing M anagem ent Process 15 Situation Analysis 16 Marketing Planning 18 Implementation and Control o f the Marketing Plan 20 Marketing Information Systems and Marketing Research 20 The Strategic Plan, the M arketing Plan, and Other Functional Area Plans 20 Marketing Role in Cross-Functional Strategic Planning 20 Conclusion 22 A ppendix Portfolio M odels 25

C hapter 3 Consumer Behavior

6

PART B MARKETING INFORMATION, RESEARCH, AND UNDERSTANDING THE TARGET MARKET 29

C hapter 2 Marketing Research: Process and Systems for Decision Making 30 The Role o f M arketing Research The M arketing Research Process Purpose o f the Research 31 Plan o f the Research 32

30 31

42

Social Influences on Consumer Decision M aking 43 Culture and Subculture 43 Social Class 44 Reference Groups and Families 45 M arketing Influences on Consumer Decision M aking 45 Product Influences 45 Price Influences 45 Promotion Influences 46 Place Influences 46 Situational Influences on Consumer Decision M aking 47 Psychological Influences on Consumer Decision M aking 47 Product Knowledge 47 Product Involvement 48 Consumer Decision M aking 48 Need Recognition 49 Alternative Search 50 Alternative Evaluation 51 Purchase Decision 51 Postpurchase Evaluation 52 Conclusion 54

C hapter 4 Business, Government, and Institutional Buying 55 Categories o f Organizational Buyers 55 Producers 55 Intermediaries 56 Government Agencies 56 Other Institutions 56 The Organizational Buying Process 56

xi

xii Contents

Purchase-Type Influences on Organizational Buying 57 Straight Rebuy 57 Modified Rebuy 57 New Task Purchase 5 7 Structural Influences on Organizational Buying 58 Purchasing Roles 58 Organization-Specific Factors 59 Purchasing Policies and Procedures 59 Behavioral Influences on Organizational Buying 60 Personal Motivations 60 Role Perceptions 60 Stages in the Organizational Buying Process 62 Organizational Need 63 Vendor Analysis 63 Purchase A ctivities 63 Postpurcha.se Evaluation

Conclusion

63

65

C hapter 5 Market Segmentation

66

Delineate the Firm ’s Current Situation 66 Determine Consumer Needs and Wants 67 Divide Markets on Relevant Dimensions 67 A Priori versus Post Hoc Segmentation 68 Relevance o f Segmentation Dimensions 68 Bases fo r Segmentation 69 Develop Product Positioning 75 Decide Segmentation Strategy 76 Design M arketing Mix Strategy 77 Conclusion 78

PART C THE MARKETING MIX

79

C hapter 6 Product and Brand Strategy Basic Issues in Product M anagement Product Definition 80 Product Classification 81 Product Quality and Value 82 Product Mix and Product Line 83 Branding and Brand Equity 84 Packaging 88 Product Life Cycle 89 Product Adoption and Diffusion 91 The Product Audit 92 Deletions 92 Product Improvement 92

80 80

Organizing for Product M anagement Conclusion 95

94

C hapter 7 New Product Planning and Development 96 New Product Strategy 97 New Product Planning and Development Process Idea Generation 99 Idea Screening 101 I’roject Planning 101 Product Developmen t 102 Test Marketing 102 Commercialization 103 The Importance o f Time 103 Some Im portant New Product Decisions 104 Quality Level 104 Product Features 106 Product Design 106 Product Safety 106 Causes o f New Product Failure 107 Needfo r Research 107 Conclusion 108

C hapter 8 Integrated Marketing Communications: Advertising, Sales Promotion, Public Relations, and Direct Marketing 109 Strategic Goals o f M arketing Communication Create Awareness 109 Build Positive Images 110 Identify Prospects 110 Build Channel Relationships 110 Retain Customers 110 The Promotion Mix 110 Integrated M arketing Communications 111 Advertising: Planning and Strategy 113 Objectives o f Advertising 113 Advertising Decisions 114 The Expenditure Question 115 The AIlocation Question 117 Sales Promotion 121 Push versus Pull Marketing 121 Trade Sales Promotions 123 Consumer Promotions 123 What Sales Promotion Can and Can VDo 123 Public Relations 125 Direct M arketing 125 Conclusion 126

1

Contents xiii

A ppendix M a jo r F ederal Agencies Involved in C ontrol of A dvertising 127

A General Pricing Model 165 Set Pricing Objectives 165 Evaluate Product-Price Relationships 165 Estimate Costs and Other Price Limitations 166 Analyze Profit Potential 167 Set Initial Price Structure 167 Change Price as Needed 168 Conclusion 168

C hapter 9 Personal Selling, Relationship Building, and Sales Management 128 Im portance o f Persona! Selling 128 The Sales Process 129 Objectives o f the Sales Force 129 The Sales Relationship-Building Process 130 People Who Support the Sales Force 135 M anaging the Sales and Relationship-Building Process 136 The Sales Management Task 137 Controlling the Sales Force 138 Motivating and Compensating Performance 141 Conclusion 142

C hapter 10 Distribution Strategy

PART D MARKETING IN SPECIAL FIELDS 169

C hapter 12 The Marketing of Services

Important Characteristics o f Services 172 Intangibility 172 Inseparability 173 Perishability and Fluctuating Demand 174 Client Relationship 174 Customer Effort 175 Uniformity 176 Providing Quality Services 176 Customer Satisfaction Measurement 177 The Importance o f Internal Marketing 177 Overcoming the Obstacles in Service Marketing 178 Limited View o f Marketing 179 Limited Competition 179 Noncreative Management 179 No Obsolescence 180 The Service Challenge 180 Banking 181 Health Care 181 Insurance 182 Travel 182 Implications fo r Service Marketers 183 Conclusion 184

143

The Need for M arketing interm ediaries 143 Classification o f M arketing Intermediaries and Functions 143 Channels o f Distribution 145 Selecting Channels o f Distribution 146 Specific Considerations 146 M anaging a Channel o f Distribution 149 Relationship Marketing in Channels 149 Vertical Marketing Systems 149 W holesaling 152 Store and Nonstore Retailing 153 Store Retailing 153 Nonstore Retailing 154 Conclusion 157

C hapter 11 Pricing Strategy

159

Demand Influences on Pricing Decisions 159 Demographic Factors 159 Psychological Factors 159 Price Elasticity 160 Supply Influences on Pricing Decisions 161 Pricing Objectives 161 Cost Considerations in Pricing 161 Product Considerations in Pricing 163 Environmental Influences on Pricing Decisions Competition 164 Government Regulations 164

170

C hapter 13 Global Marketing

164

185

The Competitive Advantage o f Nations 186 Organizing for Global M arketing 187 Problems with Entering Foreign Markets 187 Organizing the Multinational Company 189 Programming for Global M arketing 192 Global Marketing Research 192 Global Product Strategyf 194 Global Distribution Strategy 195

xiv

Contents

Global Pricing Strategy 196 Global Advertising and Sales Promotion Strategy 196 Entry and Growth Strategies for Global Marketing 197 Conclusion 199

SECTIO N II ANALYZING MARKETING PROBLEMS AND CASES 201 A Case Analysis Framework 202 1. Analyze and Record the Current Situation 203 2. Analyze and Record Problems and Their Core Elements 207 3. Formulate, Evaluate, and Record Alternative Courses o f Action 208 4. Select a nd Record the Chosen Alternative and

Implementation Details 208 Pitfalls to Avoid in Case Analysis 209 Communicating Case Analyses 210 The Written Report 211 The Oral Presentation 213 Conclusion 214

SECTIO N III FINANCIAL ANALYSIS FOR MARKETING DECISIONS 215 Financial Analysis 216 Break-Even Analysis 216 Net Present Value Analysis 218 Ratio Analysis 220 Conclusion 224

SECTIO N IV INTERNET EXERCISES AND SOURCES OF MARKETING INFORMATION 225 PART A INTERNET EXERCISES 227 Charles Heath: University of Kentucky

Exercise 3 Consumer Decision-Making Process 229 Exercise 4 Discovering Product Assortments Online 230 Exercise 5 Brand Equity on the Internet

230

Exercise 6 The Impact of Communities on Marketing 231 Exercise 7 Pricing Issues on the Internet

231

Exercise 8 Selecting the Internet as a Distribution Channel 231 Exercise 9 I nternet Advertising

232

Exercise 10 The Adaptation of Services to the Internet 233 Exercise 11 Marketing Communications Techniques in the Internet Age 233

Exercise 1 Corporate Web Sites 228

PART B INTERNET SOURCES OF MARKETING INFORMATION 235 Charles Heath: University of Kentucky

Exercise 2 Online versus Offline Retail Experiences 228

SECTION V MARKETING MANAGEMENT CASES 241

Conlenb xv

Case 8 Pfizer, Inc., Animal Health Products—Industry Downturns and Marketing Strategy 311

CA SE G RO U P A MARKET OPPORTUNITY ANALYSIS 243

Case 1 McDonald’s Corporation in the New Millenium 243 J. Paul Peter and Askish Gokhale: University o f W isconsin-M adison

Case 2 South Delaware Coors, Inc.

Jakki J. M ohr and Sara Streeter: University o f Montana

Case 9 The Launch of the Sony Playstation 3 321 David Wesley and Gloria Barczak: Northeastern University

250

James E. Nelson and Eric J. Karson: University o f Colorado

Case 10 Snacks to Go

336

JoAnn K. Linrud: Central Michigan University

Case 3 Ruth’s Chris: The Qigh Stakes of International Expansion 259

CASE G RO U P C PROMOTION STRATEGY

353

Allen H. Kupetz and lion Alon: University o f Western Ontario

Case 11 Wind Technology 353

Case 4 Coach Inc.: Is Its Advantage in Luxury Handbags Sustainable? 266

Ken Manning: University o f South Carolina Jakki J. Mohr: University o f M ontana

John E. Gamble: University o f South Alabama

Case 12 Mountain Dew: Selecting New Creative 359 Douglas B. Holt: Oxford University

Case 5 Panera Bread Company

281

A rthur A. Thompson: The University o f Alabama

CA SE G RO U P B PRODUCT STRATEGY

Case 6 Starbucks—Early 2008

297 297

Case 13 Red Bull 376 Richard R. Johnson, Jordan M itchell, Paul W. Farris and E n in Shames: University o f Virginia

Case 14 “Hips Feel Good”—Dove’s Campaign for Real Beauty 390 David Wesley: Northeastern University

J. Paul Peter: University o f W isconsin-M adison

CASE G RO U P D DISTRIBUTION STRATEGY

Case 7 easyCar.com

Case 15 IKEA’s Global Strategy: Furnishing the World 404

302

John J. Lawrence: University o f Idaho Luis Solis: University o f Idaho Instituto de Empresa

Paul Kolesa

404

xvi

Contents

Case 16 Blockbuster Entertainment Corporation 412 James A. Kidney: Southern Connecticut State University

Case 24 Abercrombie & Fitch: An Upscale Sporting Goods Retailer Becomes a Leader In Trendy Apparel 516 Janet Rovenpon Manhatten College

Case 17 eBay: In a League by Itself 423

Case 25 Philip Morris Companies

Louis Marino and Patrick Kreiser: The University o f Alabama

Keith Robbins: George M ason University

Case 18 Wal-Mart Stores, Inc.: A New Set of Challenges 451 Arthur A. Thompson: The University o f Alabama

CASE GROUP E PRICING STRATEGY

539

SECTION VI STRATEGIC MARKETING CASES Case 1 Yum! Brands, Pizza Hut, and KFC

555

Jeffrey A. Krug: Appalachian State University

480

Case 19 Schwinn Bicycles 480 J, Paul Peter: University o f Wisconsin Madison

Case 2 Caterpillar, Inc.

569

Sara L. Pitterle and J. Paul Peter: University o f W isconsin-M adison

Case 20 Toyota 483

Case 3 EMR Innovations

Brian Brenner and Chester Dawson: BusinessWeek

Kay M. Pal an: Iowa State University

Case 21 Cowgirl Chocolates

Case 4 Harley-Davidson, Inc.—Motorcycle Division 592

490

John J. Lawrence, Linda J. Morris, and Joseph J. Geiger: University o f Idaho

Case 22 Clearwater Technologies

503

Susan E Sieloff and Raymond M. Kinnunen: Northeastern University

CASE GROUP F SOCIAL AND ETHICAL ISSUES IN MARKETING MANAGEMENT 508 Case 23 E.& .I. Gallo Winery

553

508

A. J. Strickland III and Daniel C. Thurman: The University o f Alabama

581

J. Paul Peter: University o f W isconsin-M adison

Case 5 PepsiCo in 2007: Strategies to Increase Shareholder Value 605 John E. Gamble: University o f South Alabama

Case 6 Kikkomaa Corporation in the Mid-1990s: Market Maturity, Diversification, and Globalization 622 Norihito Tanaka: Kanagawa University Marilyn L. Taylor: University o f M issouri at Kansas City Joyce A. Claterbos: University o f Kansas

Contents xvii

Case 7 The Black & Decker Corporation

644

John E. Gamble: University o f South Alabama A rthur A. Thompson: University o f Alabama

Case 8 Expresso Espresso

666

Calvin M. Bacon, Jr.: University o f South Alabama

Case 9 Krispy Krcme Doughnuts in 2005: Are the Glory Days Over? 688 A rthur A. Thompson: University o f Alabama Am it J. Shah: Frostburg State University

Case 10 Dell, Inc., in 2005: A Winning Strategy? 713 A rthur A. Thompson: University o f Alabama John E. Gamble: University o f South Alabama

SECTIO N VII DEVELOPING MARKETING PLANS 743 A M arketing Plan Framework 744 Title Page 745 Executive Summary 745 Table o f Contents 746 Introduction 746 Situational Analysis 746 Marketing Planning 746 Implementation and Control o f the Marketing Plan 748 Summary 750 Appendix—Financial Analysis 750 References 753 Conclusion 753

Chapter Notes Index 762

755

Section I

Section I

Section tV

Essentials of Marketing Management

Internet Exercises and Sources of Marketing Information .V .,

Section II

Section V

Analyzing Marketing Problems and Cases

Knowledge

Skill

Enhancement

Development

Section III

Section Vii

'.

Financial Analysis for Marketing Decisions

Developing Marketing Plans " :-՜

'Marketing Management Cases,

Section VI Strategic Marketing Cases

Section I Essentials of Marketing M anagem ent

Essentials of Marketing Management

Part

Introduction

Section I Essentials of Marketing M anagem ent

1 Strategic Planning and the M arketing M anagem ent Process

Chapter

Strategic Planning and the Marketing Management Process The purpose o f this introductory chapter is to present the marketing managem ent process and outline what marketing managers must manage if they are to be effective. In doing so, it will also present a framework around which the rem aining chapters are organized. Our first task is to review the organizational philosophy known as the m arketing concept, since it underlies much o f the thinking presented in this book. The remainder o f this chapter will focus on the process o f strategic planning and its relationship to the process o f marketing planning.

The Marketing Concept_________________________________________ Simply stated, the marketing concept means that an organization should seek lo make a profit by serving the needs o f customer groups. The concept is very straightforward and has a great deal o f com m onsense validity. Perhaps this is why it is often misunderstood, forgotten, or overlooked. The purpose o f the marketing concept is to rivet the attention o f marketing managers on serving broad classes o f custom er needs (customer orientation), rather than on the firm ’s current products (production orientation) or on devising methods to attract custom ers to current products (selling orientation). Thus, effective m arketing starts with the recognition o f custom er needs and then works backward to devise products and services to satisfy these needs. In this way, m arketing m anagers can satisfy customers more efficiently in the present and anticipate changes in custom er needs more accurately in the future. This means that organizations should focus on building long-term customer relationships in which the initial sale is viewed as a beginning step in the process, not as an end goal. As a result, the custom er will be more satisfied and the firm will be more profitable. The principal task o f the marketing function operating under the marketing concept is not to manipulate customers to do what suits the interests o f the firm , but rather to f nd effective and efficient means o f making the business do what suits the interests o f customers. This is not to say that all firm s practice marketing in diis way. Clearly, many firm s still emphasize only production and sales. However, effective marketing, as defined in this text, requires that consumer needs come first in organizational decision making.

M arketing Highlight

Some Guidelines foi Executing a Marketing Philosophy

l- l

1. Create custom er focus throughout the business. 2. Listen to the customer. 3. Define and nurture your distinctive com petence, th at is, w hat your organization does well, better than competitors. 4. Define marketing as market intelligence. 5. Target customers precisely. 6. M anage for profitability, not sales volume. 7. Make custom er value the guiding star. 8. Let customers define quality. 9. Measure and m anage customer expectations. 10. Build custom er relationships and loyalty, 11. Define the business as a service business. 12. Commit to continuous im provem ent and innovation. 13. M anage the culture of your organization along with strategy and structure. 14. Grow with strategic partners and alliances. 15. Destroy marketing bureaucracy. Source: See Frederick E. Webster, Jr., "Defining the New Marketing Concept," Marketing Management 2, no. 4 (1994), pp. 22-31. For a classic discussion see Robert L. King; 'The Marketing Concept; Fact or Intelligent Platitude,” The Marketing Concept in Action, Proceedings of the 47th National Conference (Chicago, American Marketing Association, 1964), p. 657. Adapted from Wiltiam O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, II: McGraw-Hill/Irwin, 2007), p. 9.

One qualification to this statem ent deals with the question o f a conflict between con­ sumer wants and societal needs and wants. For example, if society deems clean air and water as necessary for survival, this need may well take precedence over a consum er’s want for goods and services that pollute the environment.

W lial Is Marketing? Everyone reading this book has been a customer for most o f his or her life. Last evening you stopped into a local supermarket to graze at the salad bar. pick up some bottled water and a bag o f Fritos com chips. While you were there, you snapped a $1.00 coupon fora new flavor salad dressing out o f a dispenser and tasted some new breakfast potatoes being cooked in the back o f the store. As you sat down at home to eat your salad, you answered the phone and someone suggested that you need to have your carpets cleaned. Later on in the evening you saw TV commercials for tires, soft drinks, athlcLic shoes, and the dangers o f smoking and drinking dur­ ing pregnancy. Today when you enrolled in a marketing course, you found that the instructor has decided that you must purchase this book. A friend has already purchased the book on the Internet. All o f these activities involve marketing. .And each o f us knows something about mar­ keting because it has been a part of our life .since we had our first dollar to spend. Since we arc all involved in marketing, it may seem sirange that one o f the persistent prob­ lems in the field has been ils definition.1The American Marketing Association defines mar­ keting as “an organizational function and a set o f processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and ils stakeholders.”՜This definition takes into account all parties involved in the marketing effort: members o f die producing organization, resellers o f goods and services, and customers or clients. While the broadness o f die definition allows the inclusion of nonbusiness 5

8 Part A Introduction

FIGURE 1 .2

The Strategic Planning Process

The environment Cooperative Competitive Economic Social Political Legal

The organization's strategic plan

՛ ՝ •'' ■ ՛ ■. '՛

'

. '

Organizational Information

mission

Organizational objectives

Organizational strategies

Organizational portfolio plan

Implementation

these resources, the organization m ust supply the environm ent with quality goods and services at an acceptable price. In other words, every organization exists to accom plish something in the larger environm ent and that purpose, vision, or m ission usually is clear at the organization’s inception. As time passes, however, the organization expands, and Lhe environm ent and managerial personnel change. As a result, one or m ore things are likely to occur. First, the organization’s original purpose may become irrelevant as the organization expands into new products, new markets, and even new industries. For example, Levi Strauss began as a m anufacturer o f w ork clothes. Second, the original mission may rem ain relevant, but m anagers begin to lose interest in it. Finally, changes in the environment may make the original mission inappropriate, as occurred with the M arch o f Dimes when a cure was found for polio. The result o f any or all three o f these conditions is a “drifting” organization, without a clear mission, vision, or purpose to guide critical de­ cisions. When this occurs, managem ent must search for a purpose or emphatically restate and reinforce Lhc original purpose. The m ission statem ent, or purpose, o f an organization is the description o f its reason for existence. It is the long-run vision o f what the organization strives to be, the unique aim that differentiates the organization from sim ilar ones and the m eans by which this differentiation will take place. In esscnce, the mission statem ent defines the direction in which the organization is heading and how it will succced in reaching its desired goal. W hile some argue that vision and mission statements differ in their purpose, the perspec­ tive we w ill take is that both reflect the organization’s attem pt to guide behavior, create a culture, and inspire com m itm ent.5 However, it is m ore im portant that the m ission statem ent com es from the heart and is practical, easy to identity with, and easy to remem ber so that it will provide direction and significance to all m embers o f the organi­ zation regardless o f their organizational level. The basic questions that must be answered when an organization decides to examine and restate its m ission are, What is our business? W ho is the custom er? W hat do custom ers

M arketing H ighlight

Some-Actual Mission Statements r*w?w՛-

O rganization Community bank Skin care products Hotel chain

Mid-size bank

Mission To help citizens successfully achieve and celebrate important iife events with education, information, products, and services. We will provide luxury skitvcare products with therapeutic qualities that make them worth their premium price. Crow a worldwide lodging business using total-quality-management (TQM ) principles to continuously improve preference and profitability. Our commitment is that every guest leaves satisfied. We will become the best bank in the state for medium-size businesses by 2 0 10.

value? and What will our business be?6 The answers are, in a sense, the assum ptions on which the organization is being run and from which future decisions will evolve. Wliile such questions may seem simplistic, they arc such difficult and critical ones that the major responsibility for answering them m ust lie with top management. In fact, the m ission statement remains the most widely used managem ent tool in business today. In developing a statement o f mission, management must take into account three key elements: the orga­ nization’s history, its distinctive competencies, and its environment.7 1. The organization s history. Every organization— large or small, profit or nonprofit has a history o f objectives, accom plishm ents, mistakes, and policies. In formulating a mission, the critical characteristics and events o f the past must be considered. 2. The organization's distinctive competencies. While there are many things an organization may be able to do, it should seek to do what it can do best. Distinctive competencies are things thai an organization does well— so well in fact that they give it an advantage over sim ilar organizations. For Honeywell, it’s their ability to design, m anufac­ ture, and distribute a superior line o f thermostats.8 Similarly, Procter & Gambled distinctive competency is its knowledge o f the market for low-priced, repetitively purchased consumer products. No matter how appealing an opportunity may be, to gain advantage over competi­ tors, the organization must formulate strategy based on distinctive competencies. 3. The organization 's environment. The organization’s environment dictates the oppo­ rtunities, constraints, and threats that must be identified before a mission statem ent is developed. For example, managers in any industry that is affected by Internet technology breakthroughs should continually be asking, I low will the changes in technology affect my custom ers’ behavior and the means by which we need to conduct our business? However, it is extremely difficult to write a useful and effective m ission statement, ft is not uncommon for an organization to spend one or two years developing a useful mission state­ ment. When completed, an effective mission statem ent will he focused on markets rather than products, achievable, motivating; and specific.9

Focused on Markets Rather than Products

The customers or clients o f an organization are critical in determining its mission. Traditionally, many organizations defined their busi­ ness in terms o f what they made (“our business is glass”), and in many cases they named the organization for the product or service (e.g., American Tobacco, Hormel Meats, National Cash Register, Harbor View Savings and Loan Association). Many o f these organizations have found that, when products and technologies become obsolete, their mis­ sion is no longer relevant and the name o f the organization may no longer describe what it does. Thus, a more enduring way o f defining the m ission is needed. In recent years, 9

10 Part A Introduction

therefore, a key feature o f m ission statements has been an external rather than internal focus. In other words, the m ission statement should focus on the broad class o f needs that the organization is seeking to satisfy (external focus), not on the physical product or serv­ ice that the organization is offering at present (internal focus). These market-driven firm s stand out in their ability to continuously anticipate market opportunities and respond before their competitors. Peter D nicker has clearly stated this principle: A business is not defined by the company s name, statutes, or articles of incorporation. It is defined by the want the customer satisfies when he buys a product or service. To satisfy the customer is the mission and purpose of every business. The question “What is our business?” can, therefore, be answered only by looking at the business from the outside, from the point of view of customer and market.10 While Drucker was referring to business organizations, the same necessity exists for both nonprofit and governmental organizations. That necessity is to state the mission in term s o f serving a particular group o f clients or customers and meeting a particular class o f need.

Achievable

W hile the m ission statem ent should stretch the organization toward more effective perform ance, it should, at the same time, be realistic and achievable. In other words, it should open a vision o f new opportunities but should not lead the organization into unrealistic ventures far beyond its competencies.

Motivational

One o f the side (but very important) benefits o f a well-defined m ission is the guidance it provides employees and managers working in geographically dispersed units and on independent tasks. It provides a shared sense o f purpose outside the various activities taking place within the organization. Therefore, such end results as sales, patients cared for, students graduated, and reduction in violent crim es can then be viewed as the Tesult o f careful pursuit and accom plishm ent o f the mission and not as the m ission itself.

Specific

As we mentioned earlier, public relations should not be the prim ary purpose o f a statement o f mission. It m ust be specific to provide direction and guidelines to m anage­ ment when they are choosing between alternative courses o f action. In other words, lt o pro­ duce the highest-quality products at the lowest possible cost” sounds very good, but it does not provide direction for management.

Organizational O bjecth’es Organizational objectives are the end points o f an organization’s m ission and are what it seeks through the ongoing, long-run operations o f the organization. The organizational m is­ sion is distilled into a finer set o f specific and achievable organizational objectives. These objectives m ust be specific, measurable, action commitments by which the m ission o f the organization is to be achieved. As wilh the statem ent o f m ission, organizational objectives are m ore than good inten­ tions. In fact, if formulated properly, they can accomplish the following: 1. They can be converted into specific action. 2. They will provide direction. That is, they can serve as a starting point for more specific and detailed objectives at lower levels in the organization. Each manager will then know how his or her objectives relate to those at higher levels. 3. They can establish long-run priorities for the organization. 4. They can facilitate managem ent control because they serve as standards against which overall organizational perform ance can be evaluated. Organizational objectives are necessary in all areas that may influence the perform ance and long-run survival o f the organization. As shown in Figure 1.3 objectives can be estab­ lished in and across many areas o f the organization. The list provided in Figure 1.3 is by no

M arketing H ighlight

Common Shortcomings in Mission Statements

1 -4

1. Incomplete—not specific as to w here the com pany is headed and what kind of company m anagem ent is trying to create, 2. Vague—does not provide direction to decision makers when faced with product/m arket choices. 3. Not motivational— does not provide a sense of purpose or com m itm ent to som ething bigger than the numbers. 4. Not distinctive—no t specific to our company. 5. Too reliant on superlatives—too many superlatives such as #7, recognized leader, most successful. 6. Too generic—does not specify the business or industry to which it applies. 7. Too broad—does no t rule out any opportunity m anagem ent m ight wish to pursue. Source: Adapted from Arthur A. Thomson, Jr., A. J. Strickland til, and John E. Gamble, Crafting and Executing

Strategy, 14th ed. (Burr Ridge, IL McGraw-Hill/Irwin 2005), p. 21. Examine, Marketing Highlight 1—3. Do any of the above shortcomings apply to the mission statements in Marketing Highlight 1-3?

means exhaustive. For example, some organizations are specifying the prim ary objective as the attainm ent o f a specific level o f quality, either in the marketing o f a product or the providing o f a service. These organizations believe that objectives should reflect an organi­ zation's commitment to the custom er rather than its own finances. Obviously, during the strategic planning process conflicts are likely to occur between various functional depart­ ments in the organization. The important point is that management must translate the orga­ nizational mission into specific objectives that support the realization o f the mission. The objectives may flow directly from the m ission or be considered subordinate necessities for carrying out the mission. As discussed earlier, the objectives are specific, measurable, action commitments on the part o f the organization.

Organizational Strategics Hopefully, when an organization has formulated its m ission and developed its objectives, it knows where it wants to go. The next m anagerial task is to develop a “grand design" to get

FIGURE 1.3 Sample

Area o f Perform ance

Organizational Objectives

1. Market standing

(manufacturing firm)

2. Innovations 3. Productivity 4. Physical and financial resources 5. Profitability 6. Manager performance and responsibility 7. Worker performance and attitude 8. Social responsibility

Possible Objective To make our brands number one in their field in terms of market share. To be a leader in introducing new products by spending no less than 7 percent of sales for research and development. To manufacture all products efficiently as measured by the productivity of the workforce. To protect and maintain all resources— equipment, build­ ings, inventory, and funds. To achieve an annual rate of return on investment of at least 15 percent. To identity critical areas of management depth and succession. To maintain levels of employee satisfaction consistent with our own and similar industries. To respond appropriately whenever possible to societal expectations and environmental needs.

11

M arketing Highlight

Potential Source's of' Cross-Fumiionul Conflict for Marketers ----------- :——------y------------

Functions Research and development

Prod u ction/operatio n s

Finance

Accounting

Human resources

W h at They M ay W ant to Deliver

W hat M arketers M ay W ant Them !o Deliver

Basic research projects Product features Few projects Long production runs Standardized products No model changes Long lead times Standard orders No new products Rigid budgets Budgets based on return on investment Low sales commissions Standardized billing Suict payment terms Strict credit standards Trainable employees Low salaries

Products that deliver customer value Customer benefits Many new products Short production runs Customized products Frequent model changes ' Short lead times Customer orders ՛* Many new products Flexible budgets Budgets based on need to increase sales High sales commissions Custom billing Flexible payment terms Flexible credit standards Skilled employees High salaries

there. This grand design constitutes the organizational strategies. Strategy involves the choice o f m ajor directions the organization will take in pursuing its objectives. Toward this end, it is critical that strategies are consistent with goals and objectives and that top m an­ agement ensures strategies are implemented effectively. As many as 60 percent o f strategic plans have failed because the strategies in them were not well defined and, thus, could not be implemented effectively.11 W hat follows is a discussion o f various strategics organiza­ tions can pursue. We discuss three approaches: (1) strategies based on products and m ar­ kets, (2) strategies based on competitive advantage, and (3) strategies based on value.

Organizational Strategies Based on Products and Markets One means to developing organizational strategies is to focus on the directions the organization can take in order to grow. Figure 1.4, which presents the available strategic choices, is a produet-m arkct m atrix.12 It indicates that an organization can grow by better m anaging what it is presently doing o r by finding new things to do. In choosing one or both o f these paths, it must also decide whether to concentrate on present customers or to seek new ones. Thus, according to Figure 1.4. there are only four paths an organization can take in order to grow. Market Penetration Strategies These strategies focus primarily on increasing the sale o f present products to present customers. For example: • Encouraging present customers to use more o f the product: “Orange Juice Isn't Just for Breakfast Anymore.” • Encouraging present custom ers to purchase more o f the product: multiple packages o f Pringles, instant winner sweepstakes at a fast-food restaurant. • Directing programs at current participants: A university directs a fund-raising program at those graduates who already give the most money. Tactics used to implement a market penetration strategy might include price reductions, advertising that stresses the many benefits o f the product (e.g., “Milk Is a Natural”), pack­ aging the product in different-sized packages, or m aking it available at more locations.

Chapter One Strategic Planning and the Marketing Management Process 13

FIGURE 1.4 \

Organizational Growth Strategies

Products

• P resent Products •:

N ew Products ■

Present custom ers

Market penetration

Product development v • ;V

՝ N ew custom ers V " "> 7 '

Market development •

Diversification

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Other functional areas o f the business could also be involved in implementing the strategy in addition to marketing. A production plan might be developed to produce the product more efficiently. This plan might include increased production runs, the substitution o f pre­ assembled com ponents for individual product parts, or the automation o f a process that previously was performed manually. Market Development Strategies Pursuing growth through m arket development, an or­ ganization would seek to find new customers for its present products. For example: •

Arm & Hammer continues to seek new uses for its baking soda.

•

M cD onald’s continually seeks expansion into overseas markets.

•

As the consumption o f salt declined, the book 101 Things You Can Do with Salt Besides Eat It appeared.

Market development strategies involve much, much more than simply getting the prod­ uct to a new market. Before deciding on m arketing techniques such as advertising and packaging, companies often find they must establish a clear position in the market, som e­ times spending large sums o f money simply to educate consumers as to why they should consider buying the product.

Product Development Strategies

Selecting one o f the remaining two strategies means the organization w ill seek new things to do. W ith this particular strategy, the new products developed would be directed primarily to present customers. For example:

•

Offering a different version o f an existing product: mini-Oreos, Ritz with cheese.

•

Offering a new and improved version of their product: Gillette’s latest improvement in shaving technology.

•

Offering a new way to use an existing product: Vaseline’s Lip Therapy.

Diversification

This strategy can lead the organization into entirely new and even unre­ lated businesses. It involves seeking new products (often through acquisitions) for cus­ tomers not currently being served. For example:

•

Altria, originally a manufacturer o f cigarettes, is widely diversified in financial services, Post cereals, Sealtest dairy, and Kraft cheese, among others.

•

Brown Foreman Distillers acquired Hartmann Luggage, and Sara Lee acquired Coach Leather Products.

•

Some universities are establishing corporations to find commercial uses for faculty research.

Organizational Strategies Based on Competitive Advantage Michael Porter developed a model for form ulating organizational strategy that is applicable across a wide variety o f industries.13 The focus o f the m odel is on devising m eans to gain com petitive advantage. Com petitive advantage is an ability to outperform com petitors in providing som ething

14 Part A Introduction

that the m arket values. Porter suggests that firm s should first analyze their industry and then develop either a cost leadership strategy or a strategy based on differentiation. These general strategies can be used on marketwide bases or in a niche (segm ent) within the total market. Using a cost leadership strategy, a firm would focus on being the low-cost company in its industry. They would stress efficiency and offer a standard, no-frills product. They could achieve this through efficiencies in production, product design, m anufacturing, distribution, technology, or some other means. The im portant point is that to succeed, the organization m ust continually strive to be the cost leader in the industry or market segment it competes in. It must also offer products or services that are acceptable to customers when com pared to the competition. W al-Mart, Southwest Airlines, and Timex Group Ltd. are companies that have succeeded in using a cost leadership strategy. Using a strategy based on differentiation, a firm seeks to be unique in its industry or market segm ent along particular dimensions that the customers value. These dimensions m ight pertain to design, quality, service, variety o f offerings, brand name, or some other factor. The important point is that because o f uniqueness o f the product or service along one or more o f these dimensions, the firm can charge a premium price. L. L. Bean, Rolex, CocaCola, and M icrosoft are companies that have succeeded using a differentiation strategy.

Organizational Strategies Based on Value As com petition increases, the concept o f “custom er value” has becom e critical for marketers as well as customers. It can be thought o f as an extension o f the m arketing concept philosophy that focuses on developing and delivering superior value to customers as a way to achieve organizational objectives. Thus, it focuses not only on custom er needs, but also on the question, How can we create value for them and still achieve our objectives? It has becom e pretty clear that in today’s com petitive environm ent it is unlikely that a firm will succeed by trying to be all things to all people.14 Thus, to succeed firm s m ust seek to build long-term relationships with their custom ers by offering a unique value that only they can offer. It seem s that many firm s have succeeded by choosing to deliver superior custom er value using one o f three value strategies— best price, best product, or best service. Dell Computers, Costco, and Southwest Airlines are am ong the success stories in offer­ ing customers the best price. Rubbermaid, Nike, Starbucks, and M icrosoft believe they of­ fer the best products on the market. Airborne Express, Roadway, Cott C orporation, and Lands’ End provide superior custom er value by providing outstanding service. Choosing an Appropriate Strategy On what basis does an organization choose one (or all) o f its strategies? O f extrem e im portance are the directions set by the m ission statem ent. M anagem ent should select those strategies consistent with its m ission and capitalize on the organization’s distinc­ tive com petencies that will lead to a sustainable com petitive advantage. A sustainable com petitive advantage can be based on either the assets or skills o f the organization. Technical superiority, low-cost production, custom er service/product support, location, financial resources, continuing product innovation, and overall m arketing skills are all exam ples o f distinctive com petencies that can lead to a sustainable com petitive advan­ tage. For exam ple, H onda is known for providing quality autom obiles at a reasonable price. Each succeeding generation o f Honda autom obiles has shown m arked quality im ­ provem ents over previous generations. Likewise, VF C orporation, m anufacturer o f W rangler and Lee jeans, has form ed “quick response” partnerships with both discoun­ ters and departm ent stores to ensure the efficiency o f product flow. The key to sustain­ ing a com petitive advantage is to continually focus and build on the assets and skills that will lead to long-term perform ance gains. V

Chapter One Strategic Planning and the Marketing Management Process

15

Organizational Portfolio Plan The final phase o f the strategic planning process is the formulation o f the organizational portfolio plan. In reality, most organizations at a particular time are a portfolio o f busi­ nesses, that is, product lines, divisions and schools. To illustrate, an appliance manufacturer may have several product lines (e.g., televisions, washers and dryers, refrigerators, stereos) as well as two divisions, consumer appliances and industrial appliances. A college or uni­ versity will have numerous schools (e.g., education, business, law, architecture) and several programs within each school. Some widely diversified organizations such as Altria are in num erous unrelated businesses, such as cigarettes, food products, land development, and industrial paper products. M anaging such groups o f businesses is made a little easier if resources are plentiful, cash is plentiful, and each is experiencing growth and profits. Unfortunately, providing larger and larger budgets each year to all businesses is seldom feasible. Many are not ex­ periencing growth, and profits and resources (financial and nonfinancial) are becoming m ore and more scarce. In such a situation, choices m ust be made, and some m ethod is nec­ essary to help management make the choices. M anagem ent must decide which businesses to build, maintain, or eliminate, or which new businesses to add. Indeed, much o f the recent activity in corporate restructuring has centered on decisions relating to which groups o f businesses m anagement should focus on. Obviously, the first step in this approach is to identify the various divisions, product lines, and so on that can be considered a “business.” W hen identified, these are referred to as strategic business units (SBUs) and have the following characteristics: •

They have a distinct mission.

•

They have their own competitors.

•

They are a single business or collection o f related businesses.

•

They can be planned independendy o f the other businesses o f the total organization.

Thus, depending on the type o f organization, an SBU could be a single product, product line, or division; a college o f business administration; or a state mental health agency. Once the organization has identified and classified all o f its SBUs, some method m ust be established to determine how resources should be allocated among the various SBUs. These methods are known as portfolio models. For those readers interested, the appendix o f this chapter presents two o f the most popular portfolio models, the Boston Consulting Group model and the General Electric model.

The Complete Strategic Plan Figure 1.2 indicates that at this point the strategic planning process is complete, and the organization has a time-phased blueprint that outlines its mission, objectives, and strategies. Completion o f the strategic plan facilitates the development o f marketing plans for each product, product line, or division o f the organization. The marketing plan serves as a sub­ set o f the strategic plan in that it allows for detailed planning at a target market level. This important relationship between strategic planning and m arketing planning is the subject o f the final section o f this chapter.

The Marketing Management Process______________________________ Marketing management can be defined as “the process o f planning and executing the conception, pricing, promotion, and distribution o f goods, services, and ideas to create exchanges with target groups that satisfy custom er and organizational objectives.” 15 It should be noted that tills definition is entirely consistent with the marketing concept, since

16 Part A Introduction

FIGURE 1.5 Strategic Planning and Marketing Planning

The strategic plan Organizational Organizational Organizational Organizational

mission objectives strategies portfolio plan

T The marketing plan Situation analysis Marketing objectives Target market selection Marketing mix Product strategy Promotion strategy Pricing strategy Distribution strategy

____________{ ____________ Implementation and control

it emphasizes serving target market needs as the key to achieving organizational objectives. The rem ainder o f this section will be devoted to a discussion o f the marketing m anagement process according to the m odel in Figure 1.5.

Situation Analysis With a clear understanding o f organizational objectives and mission, the marketing m anager must then analyze and m onitor the position o f the firm and, specifically, the m arketing departm ent, in term s o f its past, present, and future situation. O f course, die future situation is o f prim ary conccm . However, analyses o f past trends and the current situation are m ost useful for predicting the future situation. The situation analysis can be divided into six m ajor areas o f concern: (1) the coopera­ tive environment; (2) the competitive environment; (3) the economic environment; (4) the social environment; (5) the political environment; and (6) the legal environment. Tn ana­ lyzing each o f these environments, the marketing executive must search both for opportu­ nities and for constraints or threats to achieving objectives. O pportunities for profitable m arketing often arise from changes in these environments that bring about new sets o f needs to be satisfied. Constraints on marketing activities, such as limited supplies o f scarce resources, also arise from these environments.

The Cooperative Environment The cooperative environment includes all firm s and indi­ viduals who have a vested interest in the firm ’s accomplishing its objectives. Parties o f pri­ m ary interest to the m arketing executive in this environment are (1) suppliers, (2) resellers, (3) other departm ents in the firm , and (4) subdepartments and employees o f the marketing department. Opportunities in this environment are primarily related to methods o f increas­ ing efficiency. For example, a company might decide to switch from a com petitive bid process o f obtaining m aterials to a single source that is located near the com pany’s plant. Likewise, members o f the marketing, engineering, and manufacturing functions may use a

Chapter One Strategic Planning and the Marketing Management Process

17

teamwork approach to developing new products versus a sequential approach. Constraints consist o f such things as unresolved conflicts and shortages o f materials. For example, a company manager may believe that a distributor is doing an insufficient job o f promoting and selling the product, or a marketing manager may feel that m anufacturing is not taking the steps needed to produce a quality product.

The Competitive Environment The competitive environment includes prim arily other firm s in the industry that rival the organization for both resources and sales. Opportunities in this environment include such things as (1) acquiring com peting firms; (2) offering dem onstrably better value to consum ers and attracting them away from com petitors; and (3) in some cases, driving com petitors out o f the industry. For example, one airline pur­ chases another airline, a bank offers depositors a free checking account with no minimum balance requirem ents, or a grocery chain engages in an everyday low-price strategy that com petitors can’t meet. The prim ary constraints in these environments are the demand stimulation activities o f com peting firm s and the num ber o f consum ers who cannot be lured away from competition. The Economic Environment The state o f the m acroeconom y and changes in it also bring about m arketing opportunities and constraints. For example, such factors as high inflation and unem ploym ent levels can limit the size o f the m arket that can afford to purchase a firm ’s top-of-the-line product. At the sam e time, these factors may offer a profitable opportunity to develop rental services for such products or to develop lessexpensive models o f the product. Tn addition, changes in technology can provide signifi­ cant threats and opportunities. For example, in the com m unications industry, when technology was developed to a level where it was possible to provide cable television using phone lines, such a system posed a severe threat to the cable industry. The Social Environment This environment includes general cultural and social tradi­ tions, norms, and attitudes. W hile these values change slowly, such changes often bring about the need for new products and services. For example, a change in values concerning the desirability o f large families brought about an opportunity to market better methods o f birth control. On the other hand, cultural and social values also place constraints on marketing activities. As a rule, business practices that are contrary to social values become political issues, which arc often resolved by legal constraints. For example, public demand for a cleaner environment has caused the government to require that autom obile m anu­ facturers’ products m eet certain average gas m ileage and emission standards. The Political Environment The political environment includes the attitudes and reactions o f the general public, social and business critics, and other organizations, such as the Bet­ ter Business Bureau. Dissatisfaction with such business and m arketing practices as unsafe products, products that waste resources, and unethical sales procedures can have adverse effects on corporation image and custom er loyalty. However, adapting business and m ar­ keting practices to these attitudes can be an opportunity. For example, these attitudes have brought about markets for such products as unbreakable children’s toys, high-efficiency air conditioners, and more economical automobiles. The Legal Environment

This environment includes a host o f federal, state, and local legislation directed at protecting both business com petition and consum er rights. In past years, legislation reflected social and political attitudes and has been primarily directed at constraining business practices. Such legislation usually acts as a constraint on business behavior, but again can be viewed as providing opportunities for marketing safer and more efficient products. In recent years, there has been less em phasis on creating new laws for constraining business practices. As an example, deregulation has become more common, as evidenced by events in the airlines, financial services, and telecomm unications industries.

M arketing H ighlight

Key Issues in the Marketing Planning Proccss Thai Need to Be Addressed

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Structure. Many executives believe the most important part of planning is not the plan itself but the structure of thought about the strategic issues facing the business. However, the structure should not take precedence over the content so that planning becomes merely filling out forms or crunching numbers. Length of the Plan. The length of a marketing plan m ust be balanced between being so long th at both staff and line managers ignore it and so brief that it ignores key details. Frequency of Planning. Too frequent reevaluation of strategies can lead to erratic firm behavior. However, when plans are not revised frequently enough, the business may not adapt quickly enough to environmental changes and thus suffer a deterioration in its com petitive position. Number of Alternative Strategies Considered. Discussing too few alternatives raises the likelihood of failure, whereas discussing too many increases the time and cost of the planning effort. Cross-Functional Acceptance. A com m on mistake is to view the plan as the proprietary possession of marketing. Successful implementation requires a broad consensus, in­ cluding other functional areas. Using the Plan as a Sales Document. A major but often overlooked purpose of a plan and its presentation is to generate funds from either internal or external sources. Therefore, the better the plan, the better the chance of gaining desired funding. Source: Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning, 6th ed. (Burr Ridge, IL McGraw-Hill//lrwin, 2006), chap. 1.

Marketing Planning The previous sections emphasized that (1) marketing activities must be aligned with organizational objectives and (2) marketing opportunities are often found by systematically analyzing situational environments. Once an opportunity is recognized, the marketing execu­ tive must then plan an appropriate strategy for taking advantage o f the opportunity. This process can be viewed in terms o f three interrelated tasks: (1) establishing marketing objec­ tives, (2) selecting the target market, and (3) developing the marketing mix.

Establishing Objectives M arketing objectives usually are derived from organizational objectives; in some cases where the firm is totally marketing oriented, the two are identical. In either case, objectives must be specified and perform ance in achieving them should be measurable. M arketing objectives are usually stated as standards o f perform ance (e.g., a certain percentage o f m arket share or sales volume) or as tasks to be achieved by given dates. W hile such objectives are useful, the m arketing concept em phasizes that profits rather than sales should be the overriding objective o f the firm and m arketing department. In any case, these objectives provide the framework for the m arketing plan. Selecting the Target Market

The success o f any marketing plan hinges on how well it can identify custom er needs and organize its resources to satisfy them profitably. Thus, a crucial elem ent o f the m arketing plan is selecting the groups or segments o f potential

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Pooriy Stated Objectives

Our objective is to be a leader in the industry in terms of new product development. Our objective is to maximize profits.

Our objective is to better serve customers.

Our objective is to be the best that we can be.

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Well-Stated Objectives -

Our objective is to spend 12 percent of sales revenue between 2005 and 2006 on research and development in an effort to introduce at least five new products in 2006. Our objective is to achieve a 10 percent return on investment during 2005, with a payback on new investments of no longer than four years. Our objective is to obtain customer satisfaction ratings of at least 90 percent on the 2005 annual customer satisfaction survey, and to retain at least 85 percent of our 2005 customers as repeat purchasers in 2006. Our objective Is to increase market share from 30 percent to 40 percent in 2005 by increasing promotional expenditures by 14 percent.

Source: Charles w. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing, 8th ed. (MASON, OH: Thom­ son South-Western Publishing Co., 2006), p. 43.

customers the firm is going to serve with each o f its products. Four important questions must be answered: 1. What do customers want or need? 2. What must be done to satisfy these wants or needs? 3. What is the size o f the market? 4. What is its growth profile? Present target markets and potential target markets are then ranked according to (1) prof­ itability; (2) present and future sales volume: and (3) the match between what it takes to appeal successfully to the segment and the organization’s capabilities. Those that appear to offer the greatest potential are selected. One cautionary note on this process involves the importance o f not neglecting present customers when developing market share and sales strategies. A recent study found that for every 10 companies that develop strategies aimed at increasing the number o f first-time customers, only 4 made any serious effort to develop strategies geared toward retaining present custom ers and increasing their purchases.16 Chapters 3, 4, and 5 are devoted to discussing consum er behavior, industrial buyers, and market segmentation.

Developing the Marketing Mix

The marketing mix is the seto f controllable variables that must be managed to satisfy the target market and achieve organizationalobjectives. These controllable variables are usually classified according to four major decision areas: product, price, promotion, and place (or channels of distribution). The importance o f these decision areas cannot be overstated, and in fact, the major portion o f this text is devoted to analyzing them. Chapters 6 and 7 are devoted to product and new product strategies. Chapters 8 and 9 to promotion strategies in terms o f both nonpersonal and personal selling. Chapter 10 to distribution strategies, and Chapter 11 to pricing strategies. In addition, marketing mix variables are the focus o f analysis in two chapters on marketing in special fields, that is. the marketing o f services (Chapter 12) and international marketing (Chapter 13). Thus, it should be clear that the marketing mix is the core of the marketing management process. 19

20 Part A Introduction

The output o f the foregoing process is the marketing plan. It is a formal statem ent o f decisions that have been made on m arketing activities; it is a blueprint o f the objectives, strategies, and tasks to be performed.

Implementation and Control of the Marketing Plan Im plem enting the m arketing plan involves putting the plan into action and perform ing m arketing tasks according to the predefined schedule. Even the most carefully developed plans often cannot be executed with perfect timing. Thus, the m arketing executive m ust closely m onitor and coordinate implementation o f the plan. Tn some cases, adjustm ents may have to be m ade in the basic plan because o f changes in any o f the situational environments. For example, competitors may introduce a new product. In this event, it may be desirable to speed up or delay implementation o f the plan. In alm ost all cases, some minor adjustm ents or fine tuning will be necessary in implementation. Controlling the m arketing plan involves three basic steps. First, the results o f the im plem ented m arketing plan are measured. Second, these results are com pared with objectives. Third, decisions are m ade on whether the plan is achieving objectives. If serious deviations exist between actual and planned results, adjustm ents may have to be made to redirect the plan toward achieving objectives.

Marketing Information Systems and Marketing Research Throughout the marketing m anagem ent process, current, reliable, and valid information is needed to make effective m arketing decisions. Providing this information is the task o f the marketing information system and marketing research. These topics are discussed in detail in Chapter 2.

The Strategic Plan. The Marketing Plan, and Other Functional Area Plans Strategic planning is clearly a top-management responsibility. In recent years, however, there has been an increasing shift toward more active participation by marketing m anagers in strategic analysis and planning. This is because, in reality, nearly all strategic planning questions have marketing implications. In fact, the two major strategic planning questions— W hat products should we make? and What markets should we serve?— are clearly market­ ing questions. Thus, marketing executives are involved in the strategic planning process in at least two im portant ways: (1) They influence the process by providing im portant inputs in the form o f information and suggestions relating to customers, products, and middlemen; and (2) they must always be aware o f what the process o f stategic planning involves as well as the results because everything they do— the m arketing objectives and strategies they develop— must be derived from the strategic plan. In fact, the planning done in all functional areas o f the organization should be derived from the strategic plan.

Marketing's Role in Cross-Functional Strategic Planning More and more organizations are rethinking the traditional role o f marketing. Rather than di­ viding work according to function (e.g., production, finance, technology, human resources), they are bringing managers and employees together to participate in cross-functional teams. These teams might have responsibility for a particular product, line o f products, or group o f customers. Because team members are responsible for all activities involving their products and/or customers, they arc responsible for strategic planning. This means that all personnel work­ ing in a cross-functional team will participate in creating a strategic plan to serve customers.

Chapter One

FIGU RE 1.6

Strategic Planning and the Marketing Management Process

21

The Cross-Functional Perspective in Planning

Functional a re a p lan s derived from strategic plan

Production plan

Marketing plan

Human resource plan

Finance plan

Technology plan

Objectives Forecast Budgets Strategies and programs Policies

Objectives Forecast Budgets Strategies and programs Policies

Objectives Forecast Budgets Strategies and programs Policies

Objectives Forecast Budgets Strategies and programs Policies

Objectives Forecast Budgets Strategies and programs Policies

~~

Rather than making decisions independently, marketing managers work closely with team members from production, finance, human resources, and other areas to devise plans that address all concerns. Thus, if a team member from production says, ‘T h a t product will be too difficult to produce,” or if a team member from finance says, “We’ll never make a profit at that price,” the team members from marketing must help resolve the problems. This approach requires a high degree o f skill at problem solving and gaining cooperation. Clearly the greatest advantage o f strategic planning with a cross-functional team is the ability o f team members to consider a situation from a num ber o f viewpoints. The re­ sulting insights can help the team avoid costly m istakes and poor solutions. Japanese manufacturers are noted for using cross-functional teams to figure out ways to make desir­ able products at given target costs. In contrast, U.S. manufacturers traditionally have devel­ oped products by having one group decide what to make, another calculate production costs, and yet another predict whether enough o f the product will sell at a high enough pricc. Thus, in well-managed organizations, a direct relationship exists between strategic planning and the planning done by managers at all levels. The focus and time perspectives will, o f course, differ. Figure 1.6 illustrates the cross-functional perspective o f strategic planning. It indicates very clearly that all functional area plans should be derived from the strategic plan while at the same time contributing to the achievement o f it. I f done properly, strategic planning results in a clearly defined blueprint for management action in all functional areas o f the organization. Figure 1.7 clearly illustrates this blueprint using only one organizational objective and two strategies from the strategic plan (above the dotted line) and illustrating how these are translated into elements o f the m arketing de­ partm ent plan and the production departm ent plan (below the dotted line). N ote that in Figure 1.7, all objectives and strategies are related to other objectives and strategies at

22 Part A

Introduction

FIGURE 1 .7

A Blueprint for Management Action: Relating the Marketing Plan to the Strategic Plan and the Production Plan

One organizational objective (the profitability objective) from Figure 1.3

Two possible organizational strategies from the product-market matrix, Figure 1.4

Two possible marketing objectives and two possible production objectives derived from the strategic plan

1. ,

Specific course of action of the marketing and production departments designed to achieve the objective

Marketing .departm ent objective

Increase rate of purchase by existing customers by 10 percent by year֊end

Marketing strategies and programs

Production department objective Design additional features into product that will induce new uses by existing buyers.

Production strategies and programs

3. Marketing department objective

Production department objective

Increase market;^ ■c share by 5 percent by attracting n ew .?■ market segments for existing use by year-end.

Design additional features into product that will open additional markets with new uses.

Marketing strategies and programs

Production strategies and programs

higher and lower levels in the organization: That is, a hierarchy o f objectives and strategies exists. We have illustrated only two possible marketing objectives and two possible pro­ duction objectives. Obviously, many others could be developed, but our purpose is to illus­ trate the cross-functional nature o f strategic planning and how objectives and strategies from the strategic plan must be translated into objectives and strategies for all functional ar­ eas including marketing.

Conclusion This chapter has described the m arketing m anagem ent process in the context o f the organization’s overall strategic plan. Clearly, marketers must understand their crossfunctional role in joining the m arketing vision for the organization with the financial goals

Chapter One Strategic Planning and the Marketing Management Process

23

and m anufacturing capabilities o f the organization. The greater this ability, the better the likelihood is that the organization will be able to achieve and sustain a competitive advan­ tage, the ultimate purpose o f the strategic planning process. At this point it would be useful to review Figures 1.5, 1.6, and 1.7 as well as the book’s Table o f Contents. This review will enable you to better relate the content and progression o f the material to follow to the marketing management process.

Additional Readings

;

••-

Christensen, Clayton, M , Scott Cook, and Taddy Hall. “Marketing Malpactice: The Cause and the Cure ” Harvard Business Review, December 2005, pp. 74 85. Davenport, James H., and Jeanne C. Harris. Competing on Analytics. Boston, MA: HBS Publishing, 2007. Farris, Paul W., Neil T. Bendle, Philip E. Pfeifer, and David Reibstein. Marketing Metrics. Upper Saddle River, NJ: Wharton School Publishing, 2006. Kaplan, Robert S., and David P. Norton. “How to Implement a New Strategy without Disrupting Your Organziation.” Harvard Business Review, March 2006, pp. 100-109. O’Sullivan, Don, and Andrew V. Abdela. “Marketing Performance Measurement Ability and Per­ formance.” Journal o f Marketing, April 2007, pp. 79-93. Seiders, Kathleen, and Leonard L. Berry. “Should Business Care about Obesity?” Sloan Manage­ ment ReviewWinter 2007, pp. 15-17.

26 Part A Introduction

FIGURE A. 1

Experience Curve aud Resulting Profit

view of the experience curve led the members to develop what has become known as the BCG Portfolio Model.

The BCG Model_________________ The BCG is based on the assumption that profitability and cash flow will be closely related to sales volume. Thus, in this model, SBUs are classified according to their relative market share and the growth rate of the market the SBU is in. Using these dimensions, products are either classified as stars, cash cows, dogs, or question marks. The BCG model is presented in Figure A.2. • Stars arc SBUs with a high share of a high-growth mar­ ket. Because high-growth markets attract competition, such SBUs are usually cash users because they are grow­

FIGURE A.2

ing and because the firm needs to protect their market share position. • Cash cows are often market leaders, but the market they are in is not growing rapidly. Bccausc these SBUs have a high share of a low-growth market, they are cash generators for the firm. • Dogs are SBUs that have a low share of a low-growth market. If the SBU has a very loyal group of customers, it may be a source of profits and cash. Usually, dogs are not large sources of cash. • Question marks are SBUs with a low share of a highgrowth market. They have great potential but require great resources if the firm is to successfully build market share. As you can see, a firm with 10 SBUs will usually have a portfolio that includes some of each of the above. Having Relative M arket Share

The Boston Consulting Group Portfolio Model

High

Low :՝

High

Question marks

Stairs V- ՛

Market Growth Rate

.

Low

Cash cows

Dogs

Chapter One Strategic Planning and the Marketing Management Process

developed this analysis, management must determine what role each SBU should assume. Four basic objectives are possible: 1. Build share. This objective sacrifices immediate earnings to improve market share. It is appropriate for promising question marks whose share has to grow if they are ever to become stars. 2. Hold share. This objective seeks to preserve the SBU’s market share. It is very appropriate for strong cash cows to ensure that they can continue to yield a large cash flow. 3. Harvest. Here, the objective seeks to increase the product’s short-term cash flow without concern for the long-run impact. It allows market share to decline in order to maximize earnings and cash flow. It is an appropriate objective for weak cash cows, weak question marks, and dogs. 4. Divest. This objective involves selling or divesting the SBU because better investment opportunities exist else­ where. It is very appropriate for dogs and those question marks the firm cannot afford to finance for growth. There have been several major criticisms of the BCG Portfolio Model, revolving around its focus on market share and market growth as the primary indicators of pref­ erence. First, the BCG model assumes market growth is uncontrollable.18 As a result, managers can become preoccupicd with setting market share objectives instead of trying to grow the market. Second, assumptions regarding market share as a critical factor affecting firm performance may not hold true, especially in international markets.19 Third, the BCG model assumes that the major source of

SBU financing comes from internal means. Fourth, the BCG matrix does not take into account any interdependen­ cies that may exist between SBUs, such as shared distribu­ tion.20 Fifth, the BCG matrix does not take into account any measures of profits and customer satisfaction.21 Sixth, and perhaps most important, the thrust of the BCG matrix is based on the underlying assumption that corporate strategy begins with an analysis of competitive position. By its very nature, a strategy developed entirely on competitive analy­ sis will always be a reactive one.27 While the above criti­ cisms are certainly valid ones, managers (especially of large firms) across all industries continue to find the BCG matrix useful in assessing the strategic position of SBUs.23

The General Elecirie Model Although the BCG model can be useful, it does assume that market share is the sole determinant of an SBU s profitability. Also, in projecting market growth rates, a manager should carefully analyze the factors that influence sales and any opportunities for influencing industry sales. Some firms have developed alternative portfolio models to incorporate more information about market opportunities and competitive positions. The GE model is one of these. The GF model emphasizes all the potential sources of strength, not just market share, and all of the factors that influence the long-term attractiveness of a market, not just its growth rate. As Figure A.3 indicates, all SBUs are classified according to business strength and industry attractiveness. Figure A.4 presents a list of items that can be used to position SBUs in the matrix.

Business Strength

FIG U R E A .3 The General Electric Portfolio Model

Strong

Average

Weak

S l l f l f l i l

Industry Attractiveness

High

A

Medium

A

B

A

B

C - •.

Low

27

0

C

:: .

IS iÉ ị C ;-

28 Part A

Introduction

FIGURE A.4

Business Strength

Components of Industry Attractiveness and Business Strength at GE

Market position : ; Domestic market share World market share Share growth Share compared with leading competitor

. Competitive strengths Quality leadership Technology Marketing Relative profitability

Industry>attractiveness is a composite index made up of such factors as those listed in Figure A.4. For example: market size—the larger the market, the more attractive it will be; market growth—high-growth markets are more attractive than low-growth markets; profitability—higli-profit-margin markets are more attractive than low-profit-margin industries. Business strength is a composite index made up of such fac­ tors as those listed in Figure A.4. Such as market share—the higher the SBU’s share of market, the greater its business strength; quality leadership—the higher the SBU’s quality compared to competitors, the greater its business strength; share compared with leading competitor—the closer the SBU’s share to the market leader, the greater its business strength. Once the SBUs are classified, they are placcd on the grid (Figure A.3). Priority “A" SBUs (often called the green zone)

;.:V .

arc those in the three cells at the upper left, indicating that these are SBUs high in both industry attractiveness and busi­ ness strength, and that die firm should “build share.” Priority “B” SBUs (often called the yellow zone) are those medium in both industry attractiveness and business strength. The firm will usually decide to “hold share” on these SBUs. Priority “C” SBUs are those in the three cells at the lower right (often callcd the red zone). These SBUs are low in both industry attractiveness and business strength. The firm will usually decide to harvest or divest these SBUs. Whether the BCG model, the GE model, or a variation of these models is used, some analyses must be made o f the firm's current portfolio of SBUs as part of any strategic plan­ ning effort. Marketing must get its direction from the organi­ zation’s strategic plan.

Part

2 M arketing Research: Process and Systems for Decision M aking 3 Consumer Behavior 4 Business, Government, and Instimtiona] Buying 5 M arket Segmentation

als of Marketing em ent

Marketing Information, Research, and Understanding the Target Market

Chapter

Marketing Research: Process and Systems for Decision Making CO

CJ 5- 3 Cl

Marketing managers require current, reliable, useful information to make effective decisions. In today’s highly competitive global economy, marketers need to exploit opportunities and avoid mistakes if they are to survive and be profitable. Not only is sound marketing research needed, but also a system lhat gets current, valid information to the marketing decision maker in a timely manner. This chapter is concerned with the marketing research process and information systems for decision making. It begins by discussing the marketing research process that is used to develop useful information for decision making. Then, m arketing information systems are briefly discussed. The chapter is intended to provide a detailed introduction to many o f the important topics in the area, but it does not provide a complete explanation o f the plethora o f m arketing research topics.

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The Role of Marketing Research

30

M arketing research is the process by which inform ation about the environm ent is generated, analyzed, and interpreted for use in m arketing decision m aking.1 It cannot be overstated that marketing research is an aid to decision making and not a substitute fo r it. In other words, m arketing research does not m ake decisions, but it can substantially increase the chances tliat good decisions are m ade. Unfortunately, too many m arketing m anagers view research reports as the final answer to their problem s; whatever the research indicates is taken as the appropriate course o f action. Instead, m arketing m anagers should recognize that (1) even the m ost carefully executed research can be fraught with errors; (2) m arketing research does not forecast with certainty what will happen in the future; and (3) they should make decisions in light o f their own knowledge and experience, since no m arketing research study includes all o f the factors that could influence the success o f a strategy. Although marketing research does not make decisions, it can reduce the risks associated with m anaging marketing strategies. For example, it can reduce the risk o f introducing new products by evaluating consum er acceptance o f them prior to full-scale introduction. M arketing research is also vital for investigating the effects o f various m arketing strategies

Chapter Two Marketing Research: Process and Systems for Decision Making

31

after they have been implemented. For example, marketing research can examine the effects o f a change in any element o f the marketing mix on customer perception and behavior. At one time, marketing researchers were prim arily engaged in the technical aspects o f research, but were not heavily involved in the strategic use o f research findings. Today, how­ ever, many marketing researchers work hand-in-hand with marketing managers throughout the research process and have responsibility for m aking strategic recommendations based on the research.

The Marketing Research Process

______________________ □_____________________________________________________________________________________________ Marketing research can be viewed as systematic processes for obtaining information to aid in decision making. There are many types of marketing research, and the framework illus­ trated in Figure 2.1 represents a general approach to the process. Each element o f this process is discussed next.

Purpose of the Research The first step in the research process is to determine explicitly why the research is needed and what it is to accomplish. This may be much more difficult than it sounds. Quite often a situation or problem is recognized as needing research, yet the nature o f the problem is not clear or well defined nor is the appropriate type o f research evident. Thus, managers and researchers need to discuss and clarify the currcnt situation and develop a clear understanding o f the problem. At the end of this stage, managers and researchers should agree on (1) the current situation involving the problem to be researched, (2) the nature o f the problem, and (3) the specific question or questions the research is designed to investigate. This step is crucial since it influences the type o f research to be conducted and the research design.

FIGU RE 2.1 The Five Ps of the Research Process

ational research involves watching people and recording relevant facts and behaviors. For example, retail stores may use observational research to determ ine what patterns custom ers use in walking through stores, how much time they spend in various parts o f the store, and how many items of merchandise they examine. This information can be used to design store layouts more effectively Similarly, many retail marketers do traffic counts at various intersections to help determine the best locations for stores. Survey research involves the collection o f data by means o f a questionnaire either by mail, phone, or in person. Surveys are commonly used in marketing research to investigate

C h a pte r Two

FIG URE 2.2

Marketing Research: Process and Systems fo r Decision Making

33

Some Syndicated Data Providers

Com pany

Syndicated Service

W h at it Measures

Provides sales tracking across grocery, drug, and mass merchandisers. Provides consumer panel service for tracking retail Homescan purchases and motivations. Measures (quarterly) the confidence levels in Internet Internet Confidence Index Yahoo! and ACNielsen products and services. www.yahoo.com Provides a syndicated study to print and electronic media. Scarborough Research (a service new media companies, outdoor media, sports teams and of Arbitron, Inc., and VNU) leagues, agencies, advertisers, and Yellow Pages on local, www.scarborough.com regional/ and national levels— including local market shopping patterns, demographics, media usage, and lifestyle activities. Provides studies enabling clients to understand and IntelliQuest Millward Brown improve the position of their technology, brands, products, www.intelliquest.com www.millwardbrown.com media, or channels. Collects store tracking data used with consumer panel BehaviourScan Information Resources data to t-ack advertising influence in consumer packaged www.infores.com goods. Provides audience estimates for all national program National People Meter Nielsen Media Research sources, including broadcast networks, cable networks, www.nielsenmedia.com Spanish-language networks, and national syndicators. Provides raw readership scores collected via individual Starch Ad Readership Studies NOP World depth interview; records the percent of readers who saw www.nopworld.com the ad and read the copy. The ad is ranked not only against other ads in the issue but also against other ads in its product category over the last two years. Provides continuous tracking of banking insurance and OPERBAC CSA TMO credit purchases in European markets. www.csa-fr.com Provides online audience measurement services for Web Diameter Doubleclick publishers, advertisers, and agencies. www.doubleclick.com Measures audience data using actual click-by-click Internet Nielsen//NetRatings user behavior measured through a comprehensive real­ www.nielsen-netratings.com time meter installed on individual computers worldwide (home and work). Measures e-commerce activity in 27 countries, providing Taylor Nelson Sofres Intersearch Global eCommerce insights into 37 marketplaces via interviews. www.tns-i.com PowerReport, PowerGram, etc. Publishes in-depth analytical reports on automotive, travel. J.D. Power Associates health, and other industries. www.jdpower.com Supplies multimedia audience research to magazines. MediaMark television, radio, Internet, and other media, leading national www.mediamark.com advertisers, and over 450 advertising agencies, including 90 of 100 agencies in the U.S. Provides telephone research that covers important markets Simmons (SMRB) National critical to advertisers, agencies and media alike— from Kids www.smrb.com to Teens, Adults and Hispanics, to Households. 20,000 adults 18 and older. AC Nielsen www.acnielsen.com

Scantrack

Source՛ Donald R. Cooper and Pamela S Schindler, Marketing Research (Burr Ridge. IL. MuOraw-Hill/lrwin. 2006). p. 43.

M ark c tin g H ighlight

Coach: Using Marketing Research to Turn Around a Business

^. 2 —1

Founded in 1941 in a SoHo loft in New York City, Coach built a reputation for quality leather purses in classic styles. By 1995, however, sales declines had CEO Lew Frankfurt well aware that the com pany was about to hit the wall. Upscale consumers preferred the offer­ ings of companies like Louis Vuitton, Chanel, Gucci, and new com er Kate Spade. Coach purses were viewed as conservative, traditional bags, the kind wom en carried to country clubs, rather than as fun, exciting, sexy, or modern. To turn the com pany around, Coach selected new designs using fabric, nylon, and lighter-weight leathers to make the bags trendier. Instead of offering a new collection twice a year, Coach began offering a new collection every m onth. The com pany also redesigned its stores and expanded its distribution. It priced its bags at an average of about $200, making them an accessible luxury th at appeals both to consumers who have to stretch their budgets to g et one and to those w ho think nothing of spending S700 for Yves Saint Laurent's hot Mombasa bag. Perhaps the m ost im portant change the com pany m ade was to select styles based on w hat consumers thought was cool rather than have designers decide w hat consumers should want. The com pany spends about $2 million a year on consum er surveys alone. A year before rolling out a product, Coach talks to hundreds of customers, asking for their opinions on every feature of a purse from comfort and strap length to style and color. It asks consumers to rank new designs against existing items. Coach test markets new products in a cross-section of stores around the country; This focus on consumers and understanding w hat they w ant sets the com pany apart in the fashion industry. Using marketing research and focusing marketing efforts on w hat customers w ant paid off handsomely for Coach. Coach stores have annual sales per square foot of $865 com pared to traditional retailers, like the Gap, which average $200 to $300. In 2005 Coach earned the num ber 17 spot on the BusinessWeek SO list of top corporate performers. In 2006, Coach's sales grew over 23 percent to $2.11 billion and net income grew over 37 percent to $494 million over the previous year. Clearly, using marketing research that helps Coach under­ stand and deliver products customers want is a profitable strategy for the company. Sources: Coach.com, April 5, 2007; Diane Brady, "Coach's Split Personality," BusinessWeek, November 7, 2005, pp. 60-61; LouAnn Lofton, "Coach's Success Story/ Fool.com, june 12, 2003; Amy Tsao, "It's in the Bag for Coach," BusinessWeek Online, April 23, 2003; Julia Boorstin, "How Coach Got Hot," Fortune, October 28, 2002, pp. 131-134.

custom er beliefs, attitudes, satisfaction, and many other issues. Mail surveys are useful for reaching widely dispersed markets but take more time to get responses than telephone sur­ veys; personal surveys involving structured questions are useful but expensive. Experimental research involves manipulating one variable and examining its impact on other variables. For example, the price of a product could be changed in one test store, while left the same in other stores. Comparing sales in the test store with those in other stores can provide evidence about the likely impact o f a price change in the overall market. Experiments are useful for getting a better idea o f the causal relationships among variables, but they are often difficult to design and adm inister effectively in natural settings. Thus, many marketing research experiments are conducted in laboratories or sim ulated stores to carefully control other variables that could impact results. Mathematical modeling research often involves secondary data, such as scanner data collected and stored in com puter files from retail checkout counters. This approach in­ volves the developm ent o f equations to model relationships am ong variables and uses econometric and statistical techniques to investigate the impact o f various strategies and 34

Chapter Two

FIGURE 2 .3

Marketing Reseatvh: Process and Systems for Decision Making

A Comparison of Data Collection Methods Used in Marketing Research

Method

Advantages

Focus groups

Depth of information collected. Flexibility in use. Relatively low cost Data collected quickly.

Telephone surveys

Centralized control of data collection. More cost-effective than personal interviews. Data collected quickly.

Mail surveys

Cost-effective per completed response. Broad geographic dispersion. Ease of administration. Data collected quickly.

Personal (in-depth) interviews

More depth of response than telephone interviews. Generate substantial number of ideas compared with group methods.

Mall intercepts

Flexibility in collecting data, answering questions, probing respondents. Data collected quickly. Excellent for concept tests, copy evaluations, other visuals. Fairly high response rates. Inexpensive, quickly executed. Visual stimuli can be evaluated. Real-time data processing possible. Can be answered at convenience of respondent.

Internet surveys

Projective techniques

Observation

35

Useful in word association tests of new brand names. Less threatening to respondents for sensitive topics. Can identify important motives underlying choices. Can collect sensitive data. Accuracy of measuring overt behaviors. Different perspective than survey self-reports. Useful in studies of cross-cultural differences.

Disadvantages Requires expert moderator. Questions of group size and acquaintanceships of participants. Potential for bias from moderator. Small sample size. Resistance in collecting income, financial data. Limited depth of response. Disproportionate coverage of low֊income segments. Abuse of phone by solicitors. Perceived intrusiveness. Refusal and contact problems with certain segments. Limited depth of response. Difficult to estimate nonresponse biases. Resistance and bias in collecting income, financial data. Lack of control following mailing. Easy to transmit biasing cues. Not-at-homes. Broad coverage often infeasible. Cost per contact high. Data collection time may be excessive. Limited time. Sample composition or representativeness is suspect. Costs depend on incidence rates. Interviewer supervision difficult.

Responses must be checked for duplication, bogus responses. Respondent self-selection bias. Limited ability to qualify respondents and confirm responses. Difficulty in generating sample frames for probability sampling. Require trained interviewers. Cost per interview high.

Appropriate only for frequently occurring behaviors. Unable to assess opinions of attitudes causing behaviors. May be expensive in data-collection-time costs.

Source: William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge. Marketing. Sth ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 134.

tactics on sales and brand choices. Math modeling is useful because it provides an efficient way to study problems with extremely large secondary data sets. W hich o f these types o f research is best for particular research questions requires considerable knowledge o f each o f them. Often, qualitative research is used in early stages o f investigating a topic to get more inform ation and insight about it. Then, quantitative approaches are used to investigate the degree to which the insights hold across a larger sam ple or population. Figure 2.3 provides a com parison o f a variety o f qualitative and quantitative data collection methods.

M arketing H ighlight

Kinds of Questions that Marketing Research Can Help Answer

- ^

2 -2

A . P la n n in g

:

V. Segm entation: W hat kinds of people buy our products? Where do they live? How much do they earn? How many of them are there? 2. Dem and estimation: Are the markets for our products increasing or decreasing? Are there promising markets that we have not yet reached? tnvironmental assessment: Are the channels of distribution for our products changing? What should our presence on the Internet be? B. P roblem 5olving / v?: 1. Product ■ "'o' **»*.' j- V * .7:* a. In testing new products and product-line extensions, which product design is likely to be the m ost successful? W hat features do consumers value most? b. W hat kind of packaging should we use? c. What are the forecasts for th e product? How m ight we reenergize its life cycle? 2. Price ‘ a. W hat price should we charge for our products? b. How sensitive to price changes are our target segments? c. Given the lifetime value assessments of our segments, should we be discounting or charging a premium to our most valued customers? d. As production costs decline, should we lower our prices or try to develop ; . higher-quality products? ՝ > e. Do consumers use price as a cue to value or a cue to quality in our industry? 3. Place , ՝ - ՝ o. Where, and by whom , are our products being sold? Where, and by whom, should our products be sold? ;•Jv b. What kinds of incentives should we offer the trade to push our products? c. Are our relationships with our suppliers and distributors satisfactory and cooperative? , ’ \ V. / ' / ’ V " ., 4. Promotion . ,r . \ '• t •; . ֊ a. How m uch should we spend on prom otion? How should it be allocated to products and to geographic areas? vA ՝ b. Which ad copy should we run in our markets? With w hat frequency and media expenditures? c. W hat com bination of m edia—newspapers, radio, television, magazines, Internet ad banners—should we use? d. W hat is our consum er coupon redemption rate? C. Control 1. What is our market share overall? In each geographic area? By each custom er type? 2. Are custom ers satisfied with our products? How is our record for service? Are there many returns? Do levels of customer satisfaction vary with market? With segm ent? 3. Are our employees satisfied? Do they feel well trained and em powered to assist our customers? > 4. How does the public perceive our company? What is our reputation with the trade? Source: Gilbert A. Churchill, Jr., and Dawn lacobucei, Marketing Research: Methodological Foundations,

9th ed. (Mason, OH: Thomson South-Western, 2005), p. 9.

Company versus Contract Research M ost large consum er goods companies have m arketing research departm ents that can perform a variety o f types o f research. In addition many m arketing research firm s, advertising agencies, and consulting companies do marketing research on a contract basis. Some m arketing research suppliers have spccial expertise in a particular type o f research that m akes them a better choice than doing the research internally. A decision about 36

՛

.

M ark etin g H ighlight

tlH H §

Data Mining for Marketing Insights

2 -3

Traditional marketing research typically involves identifying possible drivers and then collecting data: for example, increasing couponing (the driver) during spring will increase trial by first-time buyers (the result). Marketing researchers then try to collect information to attem pt to verify this relationship. In contrast, data mining is the extraction of hidden predictive information from large databases. Catalog companies such as Lands' End, Fingerhut, and Spiegel, use data mining to find statistical links that suggest marketing actions. For example, Fingerhut studies about 3,500 variables over the lifetime of a consumer's relationship. It lias found that customers w ho change residences are three times as likely as regular customers to buy tables, fax machines, and decorative products but no m ore likely to buy jewelry or footwear. So Fingerhut has created a catalog especially targeted at consumers w ho have recently moved. Some of these purchase patterns are com m on sense: Peanut butter and grape jelly purchases are linked and m ight suggest a joint prom otion between Skippy peanut butter and Welch's grape jelly. O ther patterns link seemingly unrelated purchases: Supermarkets m ined checkout data from scanners and discovered men buying diapers in the evening sometimes buy a six-pack of beer as well. So they placed diapers and beer near each other. Placing potato chips between them increased sales of all three. Still, the success in data mining ultimately depends on humans—the judgm ents of the marketing managers and researchers in how to select, analyze, and interpret the information. Source: Roger A. Kerin, Eric N. Berkowitz, Steven W. Hartley, and William Rudelius, Marketing, 8th ed. (Burr Ridge, II: McGraw-Hill/Irwin, 2006), pp. 222-23.

whether the m arketing research department has the ability to do a particular type o f research itself or whether all or part o f the research should be contracted with a research supplier must be made. In either case, schedules for task completion, the exact responsibil­ ities o f all involved parties, and cost need to be considered.

Performance of the Research Performance o f the research involves preparing for data collection and actually collecting them. The tasks at this stage obviously depend on the type o f research that has been selected and the type o f data needed. If secondary data are to be used they must be located, prepared for analysis, and possibly paid for. If prim ary data are to be collected, then observational forms, questionnaires, or other types o f measures must be designed, pretested, and validated. Samples must be drawn and interviews must be scheduled or preparations must be made for mailing or phoning selected individuals. In term s of actual data collection, a cardinal rule is to obtain and record the maximal amount o f useful information, subject to the constraints o f time, money, and respondent privacy. Failure to obtain and record data clearly can obviously lead to a poor research study, while failure to consider the rights o f respondents raises both practical and ethical problems. Thus, both the objectives and constraints o f data collection must be closely monitored.

Processing of Research Data Processing research data includes the preparation o f data for analysis and the actual analysis o f them. Preparations include such things as editing and structuring data and coding them for analysis. Data sets should be clearly labeled to ensure they are not misinterpreted or misplaced. The appropriate analysis techniques for collected data depend on the nature o f the research question and the design o f the research. Qualitative research data consist o f interview records that are content analyzed for ideas or themes. Quantitative research data may be analyzed in a variety of ways depending on the objectives o f the research. 37

38 Part B Marketing Information, Research. and Understanding the Target Market

A critical part o f this stage is interpreting and assessing the research results. Seldom, if ever, do m arketing research studies obtain findings that are totally unambiguous. Usually, relationships among variables or differences between groups are small to moderate, and judgm ent and insight are needed to draw appropriate inferences and conclusions. Marketing researchers should always double-check their analysis and avoid overstating the strength o f their findings. The implications for developing or changing a marketing strategy should be carefully thought out and tempered with judgment about the overall quality o f the study.

Preparation of the Research Report The research report is a com plete statement o f everything done in a research project and includes a write-up o f each o f the previous stages as well as the strategic recommendations from the research. The limitations o f the research should be carefully noted. Figure 2.4 illustrates the types o f questions marketing researchers and managers should discuss prior to submitting the final research report. Research reports should be d e a r and unambiguous with respect to what was done and what recommendations are made. Often research reports must trade off the apparent precision o f scientific jargon for everyday language that managers can understand. Researchers should work closely with managers to ensure that the study and its limitations are fully understood.

Limitations of the Research Process Although the foregoing discussion presented the research process as a set o f simple stages, this does not mean that conducting quality marketing research is a simple task. Many problems and difficulties must be overcome if a research study is to provide valuable information for decision making.3 For example, consider the difficulties in one type o f marketing research,

test marketing. The major goal o f most test marketing is to measure new product sales on a limited basis where com petitive retaliation and other factors are allowed to operate freely. In this way, future sales potential can often be estimated reasonably well. Listed below are a num ber o f problems that could invalidate test marketing study results. 1. Test market areas are not representative o f the market in general in term s o f population characteristics, competition, and distribution outlets. 2. Sample size and design are incorrectly formulated because o f budget constraints. 3. Pretest measurements o f competitive brand sales are not made or are inaccurate, limiting the m eaningfulness o f m arket share estimates. 4. Test stores do not give complete support to the study such that certain package sizes may not be carried or prices may not be held constant during the test period.

FIGURE 2.4 Eight Criteria for Evaluating Marketing Research Reports

1. Was the type of research appropriate for the research questions? 2. Was the research well designed? a. W as th e sam p le stu d ied ap p ro p riate fo r the research q u estio n s?

3. 4. 5. 6. 7. 8.

b. Were measures well developed, pretested, and validated? c. Were the data analysis techniques the best ones for the study? Was there adequate supervision of data collection, editing, and coding? Was the analysis conducted according to standards accepted in the field? Do the findings make sense, given the research question and design, and were they considered in light of previous knowledge and experience? Are the limitations of the study recognized and explained in detail? Are the conclusions appropriately drawn or are they over- or understated? Are the recom m endations for marketing strategy clear and appropriate?

M ark etin g H ighlight

Ethical Responsibilities of Marketing J te s e a re h e rs

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Type of Product

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Time and effort devoted by consumer to shopping

Very little

Considerable " x# N *4

Time spent planning the purchase How soon w ant is satisfied after it arises Are price and quality compared?

Very little

Considerable

Immediately

Relatively long time Yes

Price Frequency of purchase

Usually low Usually frequent ; v Unimportant

High 7 'J. ; s Infrequent Often very important

Long Any single store is relatively/-; . ; unimportant As many as possible High Low Producer Very important

Short Important

Short to very short Very important

Few

Few; often only one in a market

Lower. High Retailer Less important

Lo w e r; High Joint responsibility Less important

Brand name

Store name

Both

Very important

Less important

Less important

No

Importance

Cannot generalize; consumer may go to nearby store arid buy with minimum effort Of m ày have to go to distant store and spend much time and effort Considerable Relatively long time No High '• In f r e q u e n t Cannot generalize

MarKeang consiuerunons Length of channel Importance of retailer

Number of outlets Stock turnover -՛ Gross margin Responsibility for advertising Importance of point-of-purchase display Brand or store name importance Importance of packaging

Source: Michael j. Etzel, Bruce j. Walker, and William J. Stanton, Fundamentals of Marketing, 13th ed. (Burr Ridge IL McGraw-Hill/Irwin, 2004), pp. 211, 214.

should not proceed with the addition. Closely related to product line additions are issues associated with branding. These are covered next.

Branding and Brand Equity For some organizations, the primary focus o f strategy development is placed on brand build­ ing, developing, and nurturing activities.5 Factors that serve to increase the strength o f a brand include6 (1) product quality when products do what they do very well (e.g., Windex and Easy-Off); (2) consistent advertising and other m arketing communications in which brands tell theừ story often and well (e.g., Pepsi and Visa); (3) distribution intensity whereby custom ers see the brand wherever they shop (e.g., Marlboro); and (4) brand personality where the brand stands for something (e.g., Disney). The strength o f the Coca-Cola brand, for example, is widely attributed to its universal availability, universal awareness, and trademark protection, which cam e as a result o f strategic actions taken by the parent organization.7

M arketing Highlight

(continued)

B. CLASSES OF ORGANIZATIONAL PRODUCTS—SOME CHARACTERISTICS AND MARKETING CONSIDERATIONS Type of Product Characteristics and M arketing Considerations

Fabricating Parts and M aterials

Installations

Iron ore

Engine blocks

Unit price Length o f life

Very low Very short

Quantities purchased Frequency of purchase

Large

Low Depends on final product Large

Example

Raw M aterials

Accessory Equipm ent

O perating Supplies

Blast furnaces

Storage racks

Paper clips

Very high Very long

Medium Long

Low Short

Very small

Small

Small

Infrequent purchase, but frequent delivery

Very infrequent

Medium frequency

Frequent

Very much

Very little; custom made

Little

Much

Usually no problem

No problem

Usually no problem

Usually no problem

Short; middlemen for small buyers Medium

Short; no middlemen

Middlemen used

Middlemen used

Long

Medium

Short

Important

Not important Very important

Not main factor Important

Important

Sales people very important High Not usually used

Important

Characteristics

Standardization of competitive products Quantity of supply

Frequent delivery; long-term purchase contract Very much; grading is important Limited; supply can be increased slowly or not at all

Marketing considerations Nature of channel

Short; no middlemen

Negotiation period Price competition Presale/postsale service Promotional activity Brand preference Advance buying contract

Hard to generalize Important Not important

Important

Very little

Moderate

None Important; long-term contracts used

Generally low Important; long-term contracts used

High Not usually used

Very little Not too important Low Not usually used

The brand name is perhaps the single most important element on the package, serving as a unique identifier. Specifically, a brand is a name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those o f other sellers. The legal term for brand is trademark* A good brand name can evoke feelings o f trust, confi­ dence, security, strength, and many other desirable characteristics.* To illustrate, consider the case o f Bayer aspirin. Bayer can be sold at up to two times the price o f generic aspirin due to the strength o f its brand image. 85

2. Coca-Cola 3. IBM 4. GE 5 . Intel

86

% ^

;

7. Walt Disney Co. 8 . McDonald's Corp. 9. Toyota M otor Corp 10. Marlboro

Many companies make use o f manufacturer branding strategies in carrying out market and product developm ent strategies. The line extension approach uses a brand name to facilitate entry into a new market segment (e.g., Diet Coke and Liquid Tide). An alternative to line extension is brand extension. In brand extension, a current brand name is used to enter a completely different product class (e.g., Jello pudding pops, Ivory sham poo).10 A third form o f branding is franchise extension or family branding, whereby a company attaches the corporate name to a product to enter either a new market segment or a different product class (e.g., Honda lawnmower, Toyota Lexus). A final type o f branding strategy that is becoming more and more common is dual branding. A dual branding (also known as joint or cobranding) strategy is one in which two or more branded products are integrated (e.g., Bacardi rum and Coca-Cola, Long John Silver’s and A&W Root Beer, Archway cookies and Kellogg cereal, US Airways and Bank o f Am erica Visa). The logic behind this strategy is that if one brand name on a product gives a certain signal o f quality, then the presence o f a second brand name on the product should result in a signal that is at least as powerful as, if not m ore powerful than, the signal in the case o f the single brand name. Each o f the preceding four approaches is an attem pt by com panies to gain a com ­ petitive advantage by m aking use o f its or others’ established reputation, or both. Companies may also choose to assign different brand names to each product. This is known as multibranding strategy. By doing so, the firm makes a conscious decision to allow the product to succeed or fail on its own merits. M ajor advantages o f using multiple brand names are that (1) the firm can distance products from other offerings it markets; (2) the image o f one product (or set o f products) is not associated with other products the company markets; (3) the product(s) can be targeted at a specific market segment; and (4) should the product(s) fail, the probability o f failure impacting on other company products is minimized. For example, many consumers are unaware that Dreft, Tide, Oxydol, Bold, Cheer, and Dash laundry detergents are all m arketed by Procter & Gamble. The m ajor disadvantage o f this strategy is that because new names are assigned there is no consumer brand awareness and significant amoimts o f money must be spent familiarizing customers with new brands. Increasingly, companies are finding that brand names are one o f the most valuable assets they possess. Successful extensions o f an existing brand can lead to additional loyalty and associated profits. Conversely, a wrong extension can cause damaging associations, as perceptions linked to the brand name are transferred back from one product to the other.11 Brand equity can be viewed as the set o f assets (or liabilities) linked to the brand that add (or subtract) value.12 The value o f these assets is dependent upon the consequences or results o f the m arketplace’s relationship with a brand. Figure 6.1 lists the elem ents o f brand equity. Brand equity is determined by the consum er and is the culm ination o f the consum er’s assessm ent o f the product, the company that m anufactures and markets the product, and all other variables that impact on the product between m anufacture and consum er consumption. Before leaving the topic o f manufacturer brands, it is important to note that, as with con­ sum er products, organizational products also can possess brand equity. However, several differences do exist between the two sectors.13 First, organizational products are usually

Chapter Six Product and Brand Strategy

FIGURE 6.1 Elements of Brand Equity Source: David A. Aaker, Managing Brand Equity. © 1991, New York, by David A. Aaker Reprinted with the per­ mission o f free Press, a divi­ sion o f Simon & Schuster. Sec David A. Aaker, Building Strong Brands (New York: Free Press, 1995), lor his seminal work on branding as well as Davrd A. Aaker, Brand Portfolio Strategy: Creating Relewnce, Differentiation, Energy, lever­ age, and Clarity (New York: Free Press, 2004). David A. Aaker, Strategic Market Management (Hoboken, NJ: John Wiley) 2008. Chapter 9.

Name awareness

Perceived quality

Brand associations Other proprietary brand assets

Brand loyalty

Name symbol

Provides value to customer by enhancing customer's • In t e r p re t a tio n / p r o c e s s in g

of information • Confidence in the purchase decision • Use satisfaction

87

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՝ Provides value to firm by enhancing • Efficiency and effectiveness of Brand loyalty Prices/m argins

Brand extensions Trade leverage Competitive advantage

branded with firm names. As a result, loyalty (or disloyalty) to the brand tends to be o f a more global nature, extending across all the firm ’s product lines. Second, because firm versus brand loyalty exists, attem pts to position new products in a m anner differing from existing products may prove to be difficult, if not impossible. Finally, loyalty to organiza­ tional products encompasses not only the firm and its products but also the distribution channel members employed to distribute the product. Therefore, attem pts to establish or change brand image must also take into account distributor image. As a related branding strategy, many retail firms produce or market their products under a so-called private label. For example, Kmart has phased in its own store-brand products to compete with the national brands. T here’s N ature’s Classics, a line o f fancy snacks and cookies; Oral Pure, a line o f dental care products; Prevail house cleaners; B.E., a Gap-style line o f weekend wear; and Benchmark, a line o f “made in the U.S.A.” tools. Such a strategy is highly important in industries where middlemen have gained control over distribution to the consumer. The growth o f the large discount and specialty stores, such as Kmart, Wal-Mart, Target, The Gap, Limited, and others, has accelerated the development o f private brands. If a m anufacturer refuses to supply certain m iddlemen with private branded merchandise, the alternative is for these middlemen to go into the manufacturing business, as in the case o f Kroger supermarkets. Private label products differ markedly from so-called generic products that sport labels such as “beer,” “cigarettes,” and “potato chips.” Today’s house brands are packaged in distinctively upscale containers. The quality o f the products used as house brands equals and sometimes exceeds those offered by name brands. While generic products were posi­ tioned as a means for consumers to struggle through recessionary times, private label

M arketing Highlight

Qualities of a Good Urand Name _

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1. The nam e should suggest the product benefits. Names such as Easy Off (oven cleaner) and PowerBook (laptop computer) clearly suggest the benefits of purchasing the product. 2. The nam e should be memorable, distinctive, and positive. Many autom obiles such as Mustang, Eagle, Firebird, and Bronco have strong names. 3. The nam e should fit th e com pany or product im age. Sharp (audio and video funo- . tions), M ustard's Last Stand (hot dogs), and Paddy O'Furniture (patio furniture) are some examples. : ՝ ; .՛ 4. The nam e should have no legal restrictions. For example, the U.S. Food and Drug Administration discourages the use of word heart in food brand names. Also since brand nam es often need a corresponding address on the Internet, the choice may be complrcated because millions of dom ain names have already been selected. 5. The name should be simple (such as Bold detergent and Sure deodorant), and emotional (Beautiful, Opium, and Obsession perfumes). Source: Adapted from Roger A. Kerin, Steven W. Hartley, Eric N. Berkowitz, and William Rudelins, Marketing, 8U՛ ed. (Burr Ridge, IL McGraw-Hill/Irwin), 2006. Also see Kevin Lane Keller, Strategic Brand Management, 2 nd ed. (U pper Saddle River, Nj: Prentice Hall, 2003), chap. 4.

brands are being m arketed as value brands, products that are equivalent to national brands but are priced much lower. Private brands are rapidly growing in popularity. For example, it only took JC Penney Company, Inc., five years to nurture its private-label jeans, the Arizona brand, into a powerhouse with annual sales surpassing $500 million. Consolidation within the supermarket industry, growth o f super centers, and heightened product m arketing are poised to strengthen private brands even further.14 However, these gains will not com e w ithout a fight from national m anufacturers who are undertaking aggressive actions to defend their brands’ market share. Some have significantly rolled back prices, while others have instituted increased prom otional campaigns. The ultim ate winner in this ongoing battle between private (store) and m anufacturer (national) brands, not surprisingly, should be the consumer who is able to play off these store brands against national brands. By shopping at a mass m erchandiser like W al-M art or Walgreens, consumers are exposed to and able to choose from a wide array o f both national and store brands, thus giving them the best o f both worlds: value and variety.

Packaging Distinctive or unique packaging is one method o f differentiating a relatively homogeneous product. To illustrate, shelf-stable microwave dinners, pumps rather than tubes o f toothpaste or bars o f soap, and different sizes and designs o f tissue packages are attempts to differen­ tiate a product through packaging changes and to satisfy consum er needs at the same time. In other cases, packaging changes have succeeded in creating new attributes o f value in a brand. A growing num ber o f manufacturers are using green labels or packaging their products totally in green wrap to signify low- or no-fat content.15 Frito-Lay, Quaker Oats, ConAgra, Keebler, Pepperidge Farm, Nabisco, and Sunshine Biscuits are all examples o f companies involved in this endeavor. Finally, packaging changes can make products urgently salable to a targeted segment. For example, the products in the Gillette Series groom ing line, including shave cream, razors, aftershave, and skin conditioner, come in ribbed, rounded, metallic-gray shapes, looking at once vaguely sexual and like precision engineering.16 Marketing managers must consider both the consumer and costs in making packaging de­ cisions. On one hand, the package must be capable o f protecting the product through

Chapter Six Product and Brand Strategy 89

the channel o f distribution to the consumer. In addition, it is desirable for packages to have a convenient size and be easy to open for the consumer. For example, single-serving soups and zip-lock packaging in cereal boxes are attempts by manufacturers to serve consumers better. Hopefully, the package is also attractive and informative, capable o f being used as a com­ petitive weapon to project a product’s image. However, maximizing these objectives may in­ crease the cost o f the product to such an extent that consumers are no longer willing to purchase i t Thus, the marketing m anager must determ ine the optimal protection, conven­ ience, positioning, and promotional strengths o f packages, subject to cost constraints.

Product Life Cycle____ __________ ______________________________ V

A firm ’s product strategy m ust take into account the fact that pi re acts have a life cycle. Figure 6.2 illustrates this life-cycle concept. Products are introduced, grow, mature, and decline. This cycle varies according to industry, product, technology, and market. M arket­ ing executives need to be aware o f the life-cycle concept because it can be a valuable aid in developing m arketing strategies. During the introduction phase o f the cycle, there are usually high production and marketing costs, and since sales are only beginning to materialize, profits are low or nonexistent. Profits increase and are positively correlated with sales during the growth stage as the market begins trying and adopting the product. As the product matures, profits for the initiating firm do not keep pace with sales because o f competition. Here the seller may be forced to “remarket” the product, which may involve making price concessions, increasing product quality, or expand­ ing outlays on advertising and sales promotion just to maintain market share. At some point sales decline, and the seller must decide whether to (1) drop the product, (2) alter the product, (3) seek new uses for the product, (4) seek new markets, or (5) continue with more o f the same. The usefulness o f the product life-cycle concept is prim arily that it forces management to take a long-range view o f m arketing planning. In doing so, it should becom e clear that shifts in phases o f the life cycle correspond to changes in the m arket situation, competition, FIGU R E 6.2 The Product Life Cycle

M arketing H ighlight

Marketing Strategy Implications of llie Product Lile Cycle *՝ >: '

S trategy Dimensi o n Basic objectives

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Pricing ,

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Channels

Promotion

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r.

Provide high quality; select a qood brand; get patent or trademark protection

Often high to recover development costs; sometimes low to build demand rapidly Limited number of . : ՝ . channels . ..

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Build sales and ■ ՛•՝•••֊ market share; develop preference for >-; [ \ brand •' Provide high quality; add sci vices to enhance value

Defend brand's share of market; seek growth by luring customers from competitors Improve quality; add features lo distinguish brand from competitors' brands

5omewhat high because of • heavy demand

Greater number of channels to meet demand Aimed at wider audience; messages focus on brand benefits; for consumer products, emphasis on advertising

Low, reflecting heavy competition

Greater number of channels and more incentives to resellers : Messages focus on differentiating brand from its competitors' brands; heavy use of incentives such as coupons to induce buyers to switch brands

Decline Limit costs or seek ways to revive sales and profits Continue '< v : providing high quality to maintain brand's reputation; seek ways to make the product new again Low to sell off remaining inventory or high to serve a niche market Limited number of channels

Minimal, to keep costs down

and demand. Thus, the astute marketing manager should recognize the necessity o f altering the marketing m ix to m eet these changing conditions, it is possible for managers to under­ take strategies that, in effect, can lead to a revitalized product life cycle. For example, past advancements in technology led to the replacement o f rotary dial telephones by touch-tone, push-button phones. Today, even newer technology has enabled the cordless and cellular phone to replace the traditional touch-tone, push-button phone. W hen applied with sound judgm ent, the life-cycle concept can aid in forecasting, pricing, advertising, product planning, and other aspects o f m arketing management. However, the m arketing m anager must also recognize that the life cycle is purely a tool for assisting in strategy development and not let the life cycle dictate strategy development.17 As useful as the product life cycle can be to managers, it does have lim itations that require it to be used cautiously in developing strategy. For one thing, the length o f time a product will remain in each stage is unknown and can’t be predicted with accuracy. Thus, while each stage will likely occur for a successful product, marketers can’t forecast when one stage will end and another will begin in order to adapt their strategies at the appropri­ ate time. Also, they may misjudge when a stage is ending and implement an inappropriate strategy. For example, marketers who believe their products are ending the maturity stage 90

Chapter Six Product and Brand Strategy՝ 91

may cut promotion costs and thus push the product into decline, whereas the product might have continued to sell if prom otion had been m aintained and altered. Another limitation is that not all products go through the product life cycle in the same way. For example, many products are failures and do not have anything approaching a complete life cycle. Several variations o f the life cycle also exist, two o f which are fashions and fads. Fashions are accepted and popular product styles. Their life cycle involves a distinc­ tiveness stage in which trendsetters adopt the style, followed by an em ulation stage in which more customers purchase the style to be the trendsetters. N ext is the economic stage, in which the style becomes widely available at mass-m arket prices. Many fashions, such as skirt length and designer jeans, lose popularity, then regain it and repeat the fashion o f cycle. The fashion cycle is clearly visible in clothing, cosmetics, tattoos, and body piercing. Fads are products that experience an intense but brief period o f popularity. Their life cycle resembles the basic product life cycle but in a very compressed form. It is usually so brief that competitors have no chance to capitalize on the fad. Some fads may repeal their popularity after long lapses.

Product Adoption and Diffusion Obviously not all custom ers immediately purchase a product in the introductory stage o f the product life cycle. The shape o f the life-cycle curve indicates that most sales occur after the product has been available for awhile. The spread o f a product through the population is known as the diffusion o f innovation, as illustrated in Figure 6.3, which presents five adopter categories. The first category is innovators, those who are the first to buy a new product. W hen innovators are consumers, they tend to be people who are venturesome and willing to take risks. When innovators are organizational buyers, they tend to be organizations that seek to remain at the cutting edge through the use o f the latest technology and ideas. i f the experience o f innovators is favorable, early adopters begin to buy. These buyers, who are respected social leaders and above average in education, influence the next group. Influenced by what early adopters have, the rest o f the market begins to get interested in the product. The biggest category o f buyers is divided into groups called the early majority and late majority. M embers o f the early majority tend to avoid risk and to make purchases care­ fully. They also have many informal contacts. M em bers o f the late majority not only avoid risks, but are cautious and skeptical about new ideas. Eventually, the product becomes

FIG U R E 6.3 A dopter Categories

Innovators (2.5%)

Early • Early Late Laggards AdoptersMajority Majority (16%) (13.5%) (34%) (34%)

92 Part C

The Marketing Mix

commonplace, and even laggards are ready to buy. laggards are reluctant to make changes and are comfortable with traditional products. They also have a fear o f debt, but may even­ tually purchase a well-established brand.

The Product Audit The product audit is a marketing m anagement technique whereby die com pany’s currcnt product offerings are reviewed to ascertain whether each product should be continued as is, improved, modified, or deleted. The audit is a task that should be carried out at regular intervals as a m atter o f policy. Product audits are the responsibility o f the product manager unless specifically delegated to someone else.

Deletions In today’s environment, a growing number o f products arc being introduced each year that are com peting for limited shelf space. This growth is primarily due to (1) new knowledge being applied faster, and (2) the decrease in time between product introductions (by a given organization).18 In addition, companies are not consistently removing products from the m arket at the same time they are introducing new products. The result is a situation in which too many products are fighting for too little shelf space. One o f the main purposes o f the product audit is to detect sick products and then bury them. Rather than let the retailer or distributor decide which products should remain, organizations them selves should take the lead in developing criteria for deciding which products should stay and which should be deleted. Some o f the more obvious factors to be considered are

Sales trends. How have sales moved over time? W hat has happened to m arket share? Why have sales declined? W hat changes in sales have occurred in competitive products both in our line and in those o f other manufacturers?

Profit contribution. W hat has been the profit contribution o f this product to the com­ pany? If profits have declined, how are these tied to price? Have selling, promotion, and distribution costs risen out o f proportion to sales? Does the product require exces­ sive m anagem ent tim e and effort?

Product life cycle. Has the product reached a level o f maturity and saturation in the market? Has new technology been developed that poses a threat to the product? Are more effective substitutes on the market? Has the product outgrown its usefulness? Can the resources used on this product be put to better use?

Customer migration patterns. If the product is deleted, will customers o f this product switch to other substitute products marketed by our firm ? In total, will profits associated with our line increase due to favorable switching patterns? The above factors should be used as guidelines for m aking the final decision to delete a product. Deletion decisions are very difficult to make because o f their potential impact on customers and the firm . For example, eliminating a product may force a company to lay off some employees. There are other factors to consider as well, such as keeping consumers supplied with replacem ent parts and repair service and m aintaining the goodwill o f distributors who have an inventory o f the product. The deletion plan should also provide for clearing out o f stock in question.

Product Improvement One o f the other im portant objectives o f the audit is to ascertain whether to alter the prod­ uct in some way or to leave things as they are. Altering the product means changing one or more o f its attributes or m arketing dimensions. Attributes refer mainly to product features,

M arketing H ighlight

Advantages of Rejuvenating a Product

6-6 Instead of abandoning or harvesting an older, mature product, many companies are look­ ing instead to rejuvenate that product and extend its life cycle. The advantages of product rejuvenation include the following: Less risk. Past experience in all phases of the product's life cycle permits the company to focus on improving business practices instead of formulating completely new, untested methods. Lower costs. Most, if not all, of the product's start-up costs are now avoided. Plus, prior ex­ perience in both marketing and producing the product makes spending more efficient. Less time. Because the beginning stages of product development have already occurred, the time involved in rejuvenating a product is significantly less than a new venture. Cheaper market share. The money new products need to invest to create initial brand recognition as well as the lower costs mentioned above can be saved, used to enhance the product offering, or enable the product to be offered at a lower price. Higher profits. Efficiency, brand recognition, superior product quality, and the ability to have a narrow focus all contribute to lower costs or increased sales, or both, thus increasing the potential for higher profits. Source: Conrad Berenson and Iris Mohr-jackson, "Product Rejuvenation: A Less Risky Alternative to Product Innovation," Business Horizons, November-Oecember 1994, pp. 51-57. © 1994 by the Foundation for the School of Business at Indiana University. Used with permission. Also see Kevin Lane Keller, Strategic Brand Management, 3rd ed. (Upper Saddle River, N|: Prentice-Hall, 2008), pp. 574-577.

design, package, and so forth. Marketing dimensions refer to such tilings as price, promo­ tion strategy, and channels o f distribution. It is possible to look at the product audit as a management device for controlling the prod­ uct strategy. Here, control means feedback on product performance and corrective action in the form o f product improvement. Product improvement is a top-level management decision, but the information needed to make the improvement decision may come from the consumer or the middlemen. Advertising agencies or consultants often make suggestions. Reports by the sales force should be structured in a way to provide management with certain types o f product information; in fact, these reports can be the firm ’s most valuable productimprovement tool. Implementing a product improvement decision will often require the coordinated efforts o f several specialists, plus some research. For example, product design improvement decisions involve engineering, manufacturing, accounting, and marketing. When a firm becomes aware that a product’s design can be improved, it is not always clear how consumers will react to the various alterations. To illustrate, in blind taste tests, the CocaCola Company found that consumers overwhelmingly preferred the taste o f a reformulated, sweeter new Coke over old Coke. However, when placed on the market in labeled containers, new Coke turned out to be a failure due to consumers’ emotional attachments to the classic Coke. Consequently, it is advisable to conduct some market tests in realistic settings. A discussion o f product improvement would not be complete without taking into account the benefits associated with benchmarking, especially as they relate to the notion o f the extended product, the tangible product along with the whole cluster o f services that accompany it.,v The formal definition o f benchmarking is the continuous process o f m ea­ suring products, services, and practices against those o f the toughest competitors or com ­ panies renowned as leaders. In other words, benchm arking involves learning about best practices from best-performing companies— bow they are achieving strong performance. It is an effective tool organizations use to improve on existing products, activities, functions, or processes. M ajor corporations such as IBM, AT&T, DuPont, Ford, Eastman Kodak, 93

94

Part C

The Marketing Mix

Miliken, M otorola, and Xerox all have numerous benchmarking studies in progress. For example, IBM has already perform ed more than 500 benchmarking studies. Benchmarking can assist companies in many product improvement efforts, including (1) boosting product quality, (2) developing more user-friendly products, (3) improving custom er orderprocessing activities, and (4) shortening delivery lead times. In the case o f benchmarking, com panies can achieve great success by copying others. Thus, by its very nature, bench­ marking becomes an essential elem ent in the ongoing product auditing process.

Organizing for Product Management______________________________ W hether m anaging existing products or developing new products (the subject o f the next chapter), organizations that are successful have one factor in common: They actively m an­ age both types. Obviously, if a firm has only one product, it gets everyone’s attention. But as the num ber o f products grow and the need to develop new products becom es evident, some rational managem ent system is necessary. U nder a marketing-manager system, one person is responsible for overseeing an entire product line with all o f the functional areas o f marketing such as research, advertising, sales prom otion, sales, and product planning. This type o f system is popular in organizations with a line or lines o f similar products or one dominant product line. Sometimes referred to as category managem ent, the marketing m anager system is seen as being superior to a brand m anager system because one manager oversees all brands within a particular line, thus avoiding brand competition. Organizations such as PepsiCo, Purex, Eastman Kodak, and Levi Strauss use some form o f marketing-manager system. Under a brand-manager system, a manager focuses on a single product or a very small group o f new and existing products. Typically, this person is responsible for everything from m arketing research and package design to advertising. Often called a productm anagement system, the brand-m anager system has been criticized on several dimensions. First, brand m anagers often have difficulty because they do not have authority commensu­ rate with their responsibilities. Second, they often pay inadequate attention to new products. Finally, they are often more concerned with their own brand’s profitability than with the profitability o f all o f the organization’s brands. These criticisms are not aimed at people but at the system itself, which may force brand managers into the above behaviors. Despite its drawbacks, organizations such as RJR Nabisco and Black & Decker have used this system. Successful new products often come from organizations that try to bring all die capabili­ ties o f the organization to bear on the problems o f customers. Obviously, this requires the co­ operation o f all the various functional departments in the organization. Thus, the use o f cross-functional teams has become an important way to manage the development o f new products. A venture team is a popular method used in such organizations as Xerox, Polaroid, Exxon, IBM, Monsanto, and Motorola. A venture team is a cross-functional team responsible for all the tasks involved in the development o f a new product. Once the new product is already launched, the team may turn over responsibility for managing the product to a brand manager or product manager or it may manage the new product as a separate business. The use o f cross-functional team s in product managem ent and new product develop­ ment is increasing for a very sim ple reason: Organizations need the contributions o f all functions and therefore require their cooperation. Cross-functional teams operate inde­ pendently o f the organization’s functional departm ents but include members from each function. A team might include a member from engineering, marketing, finance, service, and designers. Some organizations even include important outsiders (e.g., parts suppliers) on cross-functional teams. Figure 6.4 presents some important prerequisites for the use o f cross-functional teams in m anaging existing products and developing new products.

Chapter Six Product and Brand Strategy 95

FIGURE 6.4 Some Requirements for the Effective Use of Cross-Functional Teams in Product Management and New Product Development

A growing number of organizations have begun using cross-functional teams for product management and new product development Having representatives from various departments clearly has its advantages, but most important, effective teams must have the nurture and support of management. Some requirements for effective teams are 1. Commitment of top management and provision o f clear goah. Organizations that successfully use cross-functional teams in product management or development have managers who are deeply committed to the team concept. As a result, high-performance teams have a clear understand­ ing of the product management and development goals of the organization* The importance of these goals encourages individuals to defer their own functional or departmental concerns to team goals. ՛ ՝ „ ' ՝ ՝ 2. Trust among members. For cross-functional teams to work, a high level of trust must exist among members. The climate of trust within a team seems to be highly dependent on mem­ bers' perception of management's trust of the group as a whole. 3. Cross-functional cooperation. If a team is to take responsibility and assume the risk of product development, its members will need detailed information about the overall operation of the organization. It often requires that functional units be willing to share information that previ­ ously was not shared with other departments. 4. Time and training. Effective cross-functional teams need time to mature. They require massive planning and intense and prompt access to resources, financial and other. Because members have to put aside functional and departmental loyalties and concerns, training is usually necessary.

Conclusion This chapter has been concerned with a central elem ent o f m arketing management product strategy. The first part o f the chapter discussed some basic issues in product strat­ egy, including product definition and classification, product quality and value, product mix and product lines, branding and brand equity, and packaging. The product life cycle was discussed as well as the product audit. Finally, three m ethods o f organizing for product m anagem ent were presented. Although product considerations are extremely important, remember that the product is only one element o f the marketing mix. Focusing on product decisions alone, without consideration o f the other m arketing mix variables, would be an ineffective approach to marketing strategy.

Additional

Readings

De Luca, Luigi M., and Kwaku Atuahcnc-Gima. “Market Knowledge Dimensions and CrossFunctional Collaboration: Examining the Different Routes to Product Innovation Performance.” Journal o f Marketing, January 2007, pp. 95-112. Gladwell, Malcolm. The Tipping Point. NY: Book Bag Books, 2006. Haigh, David, and Jonathan Knowles. “What’s in a Brand?” Marketing Management, May/June 2004, pp. 22-28. Hanlon, Patrick. Primal Branding. NY: Free Prees. 2006. Pullig, Chris, Carolyn J. Simmons, and Richard G. Nctcmcycr. “Brand Dilution: When Do New Brands Hurt Existing Brands? Journal o f Marketing April 2006, pp. 52 64. Rust, Roland, Debora Viana Thompson, and Rebecca Thompson. “Defeating Feature Fatigue.” Harvard Business Review, February 2006, pp. 98-109.

7_____ New Product Planning and Development New products are a vital part o f a firm ’s competitive growth strategy. Leaders o f successful firm s know that it is not enough to develop new products on a sporadic basis. W hat counts is a climatc o f product development that leads to one triumph after another. It is com m on­ place for m ajor com panies to have 50 percent or more o f their current sales in products introduced within the last 10 years. For example, the 3M Company derives 30 percent o f its revenues from products less than four years old.1 Some additional facts about new products are important to remember: • Many new products are failures. Estimates o f new product failures range from 33 percent to 90 percent, depending on industry. • New product sales grow far more rapidly than sales o f current products, potentially providing a surprisingly large boost to a com pany’s growth rate. • Companies vary widely in the effectiveness o f their new product programs. • A m ajor obstacle to effectively predicting new product demand is limited vision. • C om m on elem ents appear in the m anagement practices that generally distinguish the relative degree o f efficiency and success between companies. In one recent year, almost 22,000 products were introduced in supermarkets, drugstores, m ass merchandisers, and health food stores.2 O f these, only a small percentage (less than 20 percent) m et sales goals. The cost o f introducing a new brand in some consum er m ar­ kets can range from $50 million to hundreds o f millions o f dollars. In addition to the out­ lay cost o f product failures, there are also opportunity costs. These opportunity costs refer not only to the alternative uses o f funds spent on product failures but also to the time spent in unprofitable product development. Product development can take many years. For example, Hills Brothers (now owned by Nestle) spent 22 years in developing its instant coffee, while it took General Foods (now owned by Altria) 10 years to develop Maxim. However, the success o f one new product is no guarantee that additional low-cost brand extensions will be successful. For example, on the positive side, Gillette was able to leverage the research and monies spent on the original Sen­ sor to successfully develop and launch the Sensor razor for women and the Sensor Excel ra­ zor. On the negative side, Maxwell House (Altria), Folgers (Procter & Gamble), and Nestle are still struggling to develop commercially successful lines o f fresh whole bean coffee, having been beaten to the punch by smaller companies such as Starbucks, Millstone Coffee, Inc., and Brothers Gourmet Coffees.3

Chapter Seven New Product Planning and Development 97

Good management, with heavy emphasis on planning, organization, and interaction among the various functional units (e.g., marketing, manufacturing, engineering, R&D), seems to be the key factor contributing to a firm ’s success in launching new products. The prim ary reason found for new product failure is an inability on the part o f the selling com ­ pany to match its offerings to the needs o f the customer. This inability to satisfy customer needs can be attributed to three m ain sources: inadequacy o f upfront intelligence efforts, failure on the part o f the com pany to stick close to what the company does best, and the inability to provide better value than competing products and technologies.

New Product Strategy

------------------------------------------ LLii________________________________________________________________________ In developing new products, the first question a m arketing m anager m ust ask is, In how many ways can a product be new? C. Merle Crawford and Anthony DiBenedetto developed a definition o f new products based on the following five different categories:4 1. New֊to-the~worldproducts. Products that are inventions: for example, Polaroid camera, the first car, rayon, the laser printer, in-line skates. 2. New category entries. Products that take a firm into a category new to it, but that are not new to the world: for example, P& G ’s first shampoo, Hallm ark gift items. 3. Additions to product lines. Products that are line extensions, flankers, and so on, to the firm ’s current m arkets, for example, Tide Liquid detergent, Bud Light, A p p le’s Power Mac. 4. Product improvements. Current products made better; virtually every product on the market has been improved, often many times. 5. Repositionings. Products that are retargeted for a new use or application; a classic case is Arm & Hammer baking soda, which was repositioned several times as drain deodor­ ant, refrigerator freshener, toothpaste, deodorant, and so on. The new product categories listed above raise the issue o f imitation products, strictly me-too or improved versions o f existing products. If a firm introduces a form o f dry beer that is new to them but is identical or similar to other beers on the market, is it a new product? The answer is yes, because it is new to the firm. Managers should not get the idea that to imitate is bad and to innovate is good, for most o f the best-selling products on the market today are improvements over another company's original invention. The best strategy is the one that will maximize com­ pany goals. It should be noted that Crawford and DiBenedetto’s categories don’t encompass variations such as new to a country, new channel o f distribution, packaging improvement, and different resources or method o f manufacture, which they consider to be variations o f the five categories, especially as these variations relate to additions to product lines. A second broader approach to the new product question is the one developed by H. Igor A nsoff in the form o f growth vectors.5 This is the matrix first introduced in Chapter 1 that indicates the direction in which the organization is moving with respect to its current prod­ ucts and markets. It is shown again in Figure 7.1. Market penetration denotes a growth direction through the increase in market share for present product markets. Product development refers to creating new products to replace existing ones. Firms using either market penetration or product development strategies are attem pting to capitalize on existing markets and com bat competitive entry and/or further market inclusions. Market development refers to finding new customers for existing prod­ ucts. Diversification refers to developing new products and cultivating new markets. Firms using market development and diversification strategies are seeking to establish footholds in new markets or preem pt competition in emerging market segments.

98 Part C

The Marketing Mix

FIG U R E 7.1 Products

Organizational Growth Strategies

.

New

P resent

New

Market penetration

Product development

Market development

Diversification . •

As shown in Figure 7.1, market penetration and market development strategies use pres­ ent products. A goal o f these types o f strategies is to cither increase frequency o f consumption or increase the num ber o f customers using the firm ’s product(s). A strategic focus is placed on altering the breadth and depth o f the firm ’s existing product lines. Product development and diversification can be characterized as product mix strategies. New products, as defmed in the growth vector matrix, usually require the firm to make significant investments in research and development and may require major changes in its organizational structure. Firms are not confined to pursuing a single direction. For example, Miller Brewing Co. has decided four key strategies should dictate its activities for the next decade, including (1) building its premium-brand franchises through investment spending, (2) continuing to de­ velop value-added new products with clear consumer benefits, (3) leveraging local markets to build its brand franchise, and (4) building business globally.6 Success for M iller depends on pursuing strategies that encompass all areas o f the growth vector matrix. It has already been stated that new products are the lifeblood o f successful business firms. Thus, the critical product policy question is not whether to develop new products but in what direction to move. One way o f dealing with this problem is to formulate standards or norms that new products must m eet if they are to be considered candidates for launching. In other words, as part o f its new product policy, management must ask itself the basic question, What is the potential contribution o f each anticipated new product to the company? Each company m ust answer this question in accordance with its long-term goals, cor­ porate m ission, resources, and so forth. Unfortunately, some o f the reasons commonly given to justify the launching o f new products are so general that they become meaningless. Phrases such as additional profits, increased growth, or cyclical stability must be translated into more specific objectives. For example, one objective may be to reduce manufacturing overhead costs by using plant capacity better. This may be accomplished by using the new product as an off-season filler. Naturally, the new product proposal would also have to include production and accounting data to back up this cost argument. In every new product proposal some attention must be given to the ultim ate economic contribution o f each new product candidate. If the argument is that a certain type o f prod­ uct is needed to keep up with competition or to establish leadership in the market, it is fair to ask, Why? To put the question another way, top m anagement can ask: W hat w ill be the effect on the firm ’s long-run profit picture if we do not develop and launch this or that new product? Policy-making criteria on new products should specify (1) a working defini­ tion o f the profit concept acceptable to top management, (2) a minimum level or floor o f profits, (3) the availability and cost o f capital to develop a new product, and (4) a specified time period in which the new product must recoup its operating costs and begin contribut­ ing to profits. It is critical that firm s not become solely preoccupied with a short-term focus on earn­ ings associated with new products. For example, in some industrial m arkets, a 20-year spread has been found between the development and wide-spread adoption o f products, on

M arketing lligliligliL

Factors Associated with -jNew Product Success

1. A superior differentiated product that is unique by virtue of features, benefits, quality, and value. 2. A market-driven and customer focused new product development process. 3. Predevelopment work prior to beginning the development process. 4. Clear and early product definition. 5. Appropriate internal organizational structure. 6. A product that is familiar to the company's current products and markets. 7. A new product development process that uses profiles of previous product successes. 8. Controls on the new product development process that ensure sound execution. 9. Sound execution rather than speed. ? 10. Support for the new product through friendly, courteous, prompt, and efficient cus­ tomer service. Source: Based on Robert G. Cooper, "What Distinguishes the Top Performing New Products in Financial Services/ Journal of Product Innovation Management, September 1994, pp. 281-99; and 'The New Product System: The Industry Experience," J o u r n a l o f Product Innovation Management, June 1992, pp. 113-27; and William O. Beardon, Thomas N, Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL McGraw-Hill/Irwin, 2007), p. 219.

average. Indeed, an advantage that some Japanese firm s appear to possess is that their m anagem ent is free from the pressure o f steady im provem ent in earnings per share that plagues American managers who em phasize short-term profits. Japanese managers believe that market share will lead to custom er loyalty, which in turn will lead to profits generated from repeat purchases. Through a continual introduction o f new products, firms will succeed in building share. This share growth will then ultim ately result in earnings growth and profitability that the stock market will support through higher share prices over the long term.

New Product Plaimin»՜ and Development Pr ;՝ ‘V v ' ՛ •'

Return on sales N el Present value (Npv) n o n f in a n c ia l c r it e r ia

Performance of new products Market share achieved Satisfaction of custom er needs Other market-related benefits Strategic issues/fit/synergy Technical aspects of production Uniqueness of the new products

Source: Albert L Page/ "Assessing New Product Development Practices and Performance: Establishing Crucial Norms/' Journal of Product Innovation Management, September 1993, pp. 273-90.1993 by Elsevier Science Inc. Reprinted by permission of the publisher. Also see Kevin Lane Keller, Strategic Brand Manage­ ment, 3rd ed. (Upper Saddle River, NJ: Prentice-Hall, 2008), chaps. 8-10.

tim e betw een product definition and product availability. It has been well docum ented that com panies that are first in bringing their products to m arket enjoy a com petitive advantage both in term s o f p ro fits and m arket share.16 Successful tim e-based innova­ tions can be attributed to the use o f short production runs, w hereby products can be im proved on an increm ental basis, and the use o f cross-functional team s, decentralized w ork scheduling and m onitoring, and a responsive system for gathering and analyzing custom er feedback. Several U S. companies, including Procter & Gamble, have taken steps to speed up the new product development cycle by giving managers, at the product class and brand family level, more decision-m aking power. Increasingly, companies are bypassing tim e-consum ing re­ gional test markets, when feasible, in favor o f national launches. It is becoming important, more than ever, that firm s do a successful job o f developing new products right the first time. To accom plish this, com panies m ust have the right people with the right skills and talents in key positions within the new product framework.

Some Important New Product Decisions In Lhe development o f new products, marketers have several im portant decisions to make about the characteristics o f the product itself. These include quality level, product features, product design, and product safety levels.

Quality Level Both consumers and organizational buyers consider the level o f product quality when mak­ ing purchase decisions for both new and existing products. At a m inim um , buyers want products that will perform the functions they are supposed to and do so reasonably well. Some customers are willing to accept lower quality if product use is not demanding and the price is lower. Some homeowners might prefer Sears brand hand tools over the higher-quality Craftsman brand since they are lower priced and may be used only occasionally, industrial buyers o f nuts and bolts for autom obiles seldom use the highest quality used in aircraft since cars arc used in less dem anding situations. 104

Marketing Highlight

Why Cross-Functional Product Development Teams Can Work

7 -5

When specialized knowledge is needed to satisfy the needs of customers, cross-functional teams can greatly improve product developm ent success. Such teams bring together com ­ plem entary skills in one of three areas: technical or functional expertise, problem-solving and decision-making skills, and interpersonal skills. 1. Technical or functional skills. It would make little sense for a marketer to design technical specifications for a new type of cellular phone. Likewise, it would make little sense for an engineer to try to guess w hat features consumers find most im portant in choosing what type of phone to purchase. In this case, a product developm ent group th at consists solely of marketers or engineers would be less likely to succeed than a cross-functional team using the com plem entary skills of both. 2. Problem-solving and decision-making skills. Cross-functional team s possess the ability to identify problems and opportunities the entire organization faces, identify feasible new product alternatives, and make the necessary choices quicker. Most industrial functional units are not able to perform all of these tasks effectively. However, it is likely th at the necessary skills are present in a well-chosen cross-functional team and that these skills can be used in the organization's best interests. 3. Interpersonal skills. Common understanding and knowledge of problems faced and deci­ sions needed for effective product developm ent cannot arise w ithout effective com m u­ nication and constructive conflict. What is needed is risk-taking, helpful criticism, objectivity, active listening, support, and recognition of the interests and achievements of others. An effective, cross-functional team is m ade up of members who, in total, pos­ sess all of these skills. Individual members, at various times, will be called on to use their interpersonal skill to move the team forward. The use of the com plem entary interper­ sonal skills of team members can lead to extraordinary results for organizations.

In designing new products, marketers must consider what criteria potential customers use to determine their perceptions o f quality. While these will vary by product, Figure 7.3 presents eight general criteria. An im portant indicator o f a num ber of rhe criteria listed in Figure 7.3 is the presence and extent o f a new product warranty. A w arranty is the producer's statem ent o f what it will do to com pensate the buyer if the product is defective or does not work properly. In many instances, the courts also hold that businesses have im plied warranties or un­ stated prom ises to com pensate buyers if their products fail to perform up to the basic standards o f the industry or to the level promised. Certainly an organization that wants to em phasize high quality will offer custom ers more than im plied warranties enforced by the courts.

FIGURE 7.3 Some Criteria for Determining Perceptions of Quality Source: Adopted from David A. Garvin, “Competing on the Eight Dimensions o f Quality.” H u n vrd Business Review. November-December 1987. For n discussion o f some determi­ nants of quality for service burlinesses, see chnpter 12, "The Marketing o f Services,՛՝

1. Performance— How well doe* the product do what it is supposed to do? 2. Features— Does the product have any unique features that are desirable? 3. Reliability—Is the product likely to function well and not break down over a reasonable time period? 4. Conformance—Does the product conform to established standards for such things as safety? 5. Durability—How long will the product last before it will be worn out and have to be replaced? 6. Serviceability—How quickly and easily can any problems be corrected? 7. Aesthetics— How appealing is the product to the appropriate senses of sight, taste, smell, feel, and/or sound? 8. Overall hvaluation— Considering everything about the product, including its physical character­ istics, manufacturer, brand image, packaging, and price, how good is this product? 105

Marketing Highlight

Factors Related to Successful Advertising for New Products

— 7 -6

new breakfast cereal was positioned as the "crispiest cereal" and a new beverage as the "sm oothest soft drink." • Communicating that the product difference is beneficial to customers. Nearly all the successful commercials linked a benefit directly to the new product's difference. • Supporting the idea that something about the product is different and/or beneficial to consumers. All the successful commercials com m unicated support for the product's differene claim or relevance to customers. Support took the form of dem onstrations of per­ formance, information supporting a uniqueness claim, endorsem ents, or testimonials. Source: Based on research using commercials for new products conducted by Evalucom Inc., and reported in George E. Belch and Michael A Belch, Advertising and Promotion, 7lh ed. (Burr Ridge, IL: McGraw-Hill/ Irwin, 2007), p. 202.

Finally, many marketers offer a guarantee instead o f or in addition to a warranty on new products. A guarantee is an assurance that the product is as represented and will perform properly. Typically if the product fails to perforin, the organization m aking the guarantee replaces the product or refunds the custom er’s money. Guarantees im ply to some buyers that the m anufacturer is confident o f the new products’ quality.

Product Features A product feature is a fact or particular specification about a product (e.g., “less calories than all other soft drinks,” “more vitamin C than any other multiple vitamin”). Marketers se­ lect new product features by determining what it is that customers want their products to of­ fer. Effective marketers attempt not only to ask potential customers what they want, but to learn what these customers are likely to need. Such marketers may identify a need for new features that target markets have not yet thought o f and may not yet even understand.

Product Design Many well-designed products are easy to use as intended and pleasing to the senses. D e­ signing new products with both ease o f use and aesthetic appeal can be difficult, but it can clearly differentiate a new product from competitors. Good design can add great value to a new product. A well-designed product can please custom ers without necessarily cost­ ing more to make. This fs especially likely to happen when the organization uses cross­ functional team s to develop its products. If employees from engineering, marketing, and m anufacturing work together on what the product will look like and how it will operate, they are more likely to create a design that is easy and economical to make as well as use.

Product Safety Clearly, new products m ust have a reasonable level o f safety. Safety is both an ethical and practical issue. Ethically, customers should not be harmed by using a product as intended. The practical issue is that when users get harmed by a product, they may stop buying, tell others about their experience, or sue the company that made or sold it. Some products are inherently dangerous and can result in injury to users. However, it may be so expensive to make them safer that buyers could not afford to buy them. Such

Chapter Seven New Product Planning and Development

107

products include automobiles, farm equipment and other machinery, and guns. Other prod­ ucts such as patented medicines can harm a small portion o f users. Hopefully, the benefits such products offer outweigh their risks.

Causes of New Product Failure Many new products with satisfactory potential have failed to make the grade for reasons related to execution and control problems. What follows is a brief list o f some o f the more im portant causes o f new product failures after the products have been carefully screened, developed, and m arketed.17 1. No competitive point o f difference, unexpected reactions from competitors, or both. 2. Poor positioning. 3. Poor quality o f product. 4. Nondelivery o f prom ised benefits o f product. 5. Too little marketing support. 6. Poor perceived price/quality (value) relationship. 7. Faulty estimates o f market potential and other m arketing research mistakes. 8. Faulty estimates o f production and marketing costs. 9. Improper channels o f distribution selected. 10. Rapid change in the market (economy) after the product was introduced. Some o f these problems are beyond the control o f management, but it is clear that suc­ cessful new product planning requires large am ounts o f reliable inform ation in diverse areas. Each departm ent assigned functional responsibility for product development autom atically becomes an input to the inform ation system that the new product decision m aker needs. For example, when a firm is developing a new product, it is wise for both en­ gineers and marketers to consider both the kind o f market to be entered (e.g., consumer, or­ ganizational, international) and specific target segments. These decisions will be o f param ount influence on the design and cost o f the finished good, which will, o f course, directly influence price, sales, and profits.

Need for Research In many respects it can be argued that the keystone activity o f any new product planning system is research— not ju st m arketing research, but technical research as well. Regardless o f the way the new product planning function is organized in the company, top m anagem ent’s new product development decisions require data that provide a base for making more intelligent choices. New product project reports ought to be more than a col­ lection o f “expert” opinions. Top m anagement has a responsibility to ask certain questions, and the new product planning team has an obligation to generate answers to these questions based on research that provides marketing, economic, engineering, and production infor­ mation. This need will be more clearly understood if some o f the specific questions com ­ monly raised in evaluating product ideas are examined: 1. W hat is the anticipated market demand over time? Are the potential applications for the product restricted? 2. Can the item be patented? Are there any antitrust problems? 3. Can the product be sold through present channels and the current sales force? What number o f new salespersons will be needed? What additional sales training will be required? 4. At different volume levels, what will be the unit manufacturing costs?

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The Marketing Mix

5. W hat is the most appropriate package to use in term s o f color, material, design, and so forth? 6. What is the estimated return on investment? 7. What is the appropnate pricing strategy? W hile this list is not intended to be exhaustive, it serves to illustrate the serious need for reliable inform ation. N ote also that som e o f the essential facts required to answer these questions can be obtained only through tim e-consum ing and expensive m arketing research studies. O ther data can be generated in the engineering laboratories or pulled from accounting records. Certain types o f inform ation m ust be based on assum ptions, which may or may not hold true, and on expectations about what will happen in the future, as in the case o f anticipated com petitive reaction or the projected level o f sales.

Conclusion This chapter has focused on the nature of new product planning and development. Atten­ tion has been given to the m anagement process required to have an effective program for new product development, it should be obvious that this is one o f the most im portant and difficult aspects o f m arketing management. The problem is so complex that, unless m an­ agement develops a plan for dealing with the problem, it is likely to operate at a severe competitive disadvantage in the marketplace.

Additional Readings

Biyalogorsky, Eyal, William Boulding, and Richard Staelin. “Stuck in the Past: Why Managers Per­ sist with New Product Failures ” Journal o f Marketing, April 2006, pp. 108-122. Carson, Stephen J. “When to Give up Control of Outsourced New Product Development.” Journal o f Marketing, January 2007. pp. 49 66. Kerber, Ronald L., and Timothy M. Laster. Strategic Product Creation. NY: McGraw-Hill, 2007. Leliman, Donald R., and Russell S. Winer. Product Management. 4th ed. Burr Ridge, IL: McGrawI lill/Irwin, 2005. Mack, Ben. Think Two Products Ahead. NY: John Wiley, 2007.

Chapter

Integrated Marketing C ommunications: Advertising, Sales Promotion, Public Relations, and Direct Marketing Com municating with custom ers will be the broad subject o f the next two chapters that focus on various elem ents o f promotion. To sim plify our discussion, the topic has been divided into two basic categories: nonpersonal com m unication (Chapter 8) and personal com m unication (Chapter 9). This chapter also discusses the necessity to integrate the various elements o f marketing communication.

Strategic Goals of Marketing Communication______________________ M arketers seek to com m unicate with target custom ers for the obvious goal o f increased sales and profits. Accordingly, they seek to accom plish several strategic goals with their marketing communications efforts.

Create Awareness Obviously, we cannot purchase a product if we are not aware o f it. An important strategic goal must be to generate awareness o f the firm as well as its products. M arketing com m u­ nications designed to create awareness are especially im portant for new products and brands in order to stimulate trial purchases. As an organization expands globally, creating awareness m ust be a critical goal o f marketing communications.

110 Part c

The Marketing Mix

Build Positive Images When products or brands have distinct images in the minds o f customers, the customers better understand the value that is being offered. Positive images can even create value for custom ers by adding m eaning to products. Retail stores and other organizations also use communications to build positive images. A m ajor way marketers create positive and dis­ tinct images is through m arketing communications.

Identify Prospects Identifying prospects is becoming an increasingly important goal o f m arketing communi­ cations because m odern technology makes inform ation gathering much m ore practical, even in large consum er markets. M arketers can m aintain records o f consum ers who have expressed an interest in a product, then more efficiently direct future communications. Technology now enables marketers to stay very close to their customers. Web sites are used to gather inform ation about prospects, and supermarkets use point-of-sale term inals to dispense coupons selected on the basis o f a custom er’s past purchases.

Build Channel Relationships An important goal o f marketing communications is to build a relationship with the organi­ zation’s channel mem bers. W hen producers use marketing com m unications to generate awareness, they are also helping the retailers who carry the product. Producers may also arrange with retailers to distribute coupons, set up special displays, or hold prom otional events in their stores, all o f which benefit retailers and wholesalers. Retailers support man­ ufacturers when they feature brands in their ads to attract buyers. Because o f such efforts, all members o f the channel benefit. Cooperating in these marketing communication efforts can build stronger channel relationships.

Retain Customers Loyal custom ers are a m ajor asset for every business. It costs far m ore to attract a new custom er than to retain an existing customer. M arketing com m unications can support efforts to create value for existing custom ers. Interactive m odes o f com m unication— including salespeople and Web sites— can play an im portant role in retaining customers. They can serve as sources o f inform ation about product usage and new products being developed. They can also gather inform ation from custom ers about what they value, as well as their experiences using the products. This two-way com m unication can assist m arketers in increasing the value o f what they offer to existing custom ers, which will influence retention.

The Promotion Mix The prom otion m ix concept refers to the com bination and types o f nonpersonal and personal com m unication the organization puts forth during a specified perio d .1 There are five elem ents o f the prom otion m ix, four o f which are nonpersonal form s o f com ­ m unication (advertising, sales prom otion, public relations, and direct m arketing), and one, personal selling, which is a personal form o f com m unication. L et’s briefly examine each one.

Chapter Eight Integrated Marketing Communications

111

1. Advertising is a paid form o f nonpersonal com m unications about an organization, its products, or its activities that is transmitted through a mass medium to a target audience. The mass medium might be television, radio, newspapers, magazines, outdoor displays, ear cards, or directories. 2. Sales promotion is an activity or material that otters custom ers, sales personnel, or resellers a direct inducem ent for purchasing a product. This inducem ent, which adds value to or incentive for the product, might take the form o f a coupon, sweepstakes, refund, or display. 3. Public relations is a nonpersonal form o f com m unication that seeks to influence the attitudes, feelings, and opinions o f customers, noncustom ers, stockholders, suppliers, employees, and political bodies about the organization. A popular form is publicity, which is a nonpaid form o f nonpersonal communication about the organization and its products that is transmitted through a mass medium in the form o f a news story. Obvi­ ously, marketers seek positive publicity. 4. Direct marketing uses direct form s o f com m unication with customers. It can take the form o f direct mail, online marketing, catalogs, telem arketing, and direct response advertising. Sim ilar to personal selling, it may consist o f an interactive dialog between the marketer and the customer. Its objective is to generate orders, visits to retail outlets, or requests for further inform ation. Obviously, personal selling is a form o f direct m arketing, but because it is a very personal form o f communication, we place it in its own category. 5. Personal selling is face-to-face com m unication with potential buyers to inform them about and persuade them to buy an organization’s product. It will be examined in detail in the next chapter. Obviously, marketers strive for the right mix o f promotional elements to ensure that their product is well received. For example, i f the product is a new soft drink, promotional effort is likely to rely more on advertising, sales prom otion, and public relations (publicity) in order to (1) make potential buyers aware o f the product, (2) inform these buyers about the benefits o f the product, (3) convince buyers o f the product’s value, and (4) entice buyers to purchase the product. If the product is more established but the objective is to stabilize sales during a nonpeak season, the promotion mix will likely contain short-run incentives (sales prom otions) for people to buy the product immediately. Finally, if the product is a new complex technology that requires a great deal o f explanation, the promotional mix will likely focus heavily on personal selling so that potential buyers can have their questions answered. As seen by the previous exam ples, a firm ’s prom otion m ix is likely to change over tim e. The mix m ust be continually adapted to reflect changes in the m arket, com peti­ tion, the p roduct’s life cycle, and the adoption o f new strategies. In essence, the firm should take into account three basic factors w hen devising its prom otion mix: (1) the role o f prom otion in the overall m arketing mix, (2) the nature o f the product, and (3) the nature o f the market.

Integrated Marketing Communications____________________ ________ In many organizations, elements o f the promotion mix are often managed by specialists in different parts o f the organization or, in some cases, outside the organization when an advertising agency is used. For example, advertising plans might be developed jointly by the advertising departm ent and the advertising agency; plans for the sales force might be

M ark etin g H ighlight

Some Differences between Traditional Marketing Communication Efforts and Integrated Marketing Communications

Traditional Approach Focus on: 1. Making transactions. 2. Customers. 3. Independent brand messages. A. Mass media—monologue with customers. 5. Product claims. 6. Adjusting prior year's plan. 7. Functional department planning and monitoring. 8. Communication specialists^ 9. Mass marketing and customer acquisition. 10. Stable of agencies.

U -l

Integrated Approach Focus on: 1. Building and nourishing relation ships,. 2. All stakeholders in the organization. 3 Strategic consistency on brand messages. 4 . Interactivity— dialogue with customers. 5 Corporate mission marketing. 6. Zero-based campaign planning. 7. Cross-functional planning and monitoring. 8. Creating core competencies. 9. Building and managing databases to retain customers. 10. One communication management agency.

Source: Adapted from Tom Duncan and Sandra Mortality Driving Brand Value: Using Integrated Marketing to Manage Profitable Stakeholder Relationships (New York: McGraw-Hill, 1997), pp. 16-19.

112

developed by m anagers o f the sales forcc; and sales prom otions might be developed independently o f the advertising and sales plans. Thus, it is not surprising that the concept o f integrated marketing communications has evolved in recent years. The idea o f integrated m arketing communications is easy to understand and certainly has a great deal o f com m onscnse validity. But like so many concepts in marketing, it is difficult to im plement. The goal o f integrated m arketing com m unications is to develop m arketing com m unications program s that coordinate and integrate all elem ents o f prom otion— advertising, sales promotion, personal selling, and publicity— so that the organization presents a consistent message. Integrated marketing com m unication seeks to manage all sources o f brand or company contacts with existing and potential customers. Marketing Highlight 8֊ 1 presents the critical aspects o f integrated m arketing communica­ tions and how they differ from the way traditional marketing comm unications efforts have been managed. The concept o f integrated m arketing communication is illustrated in Figure 8.1. It is generally agreed that potential buyers usually go through a process o f (1) awareness o f the product or service, (2) comprehension o f what it can do and its im portant features, (3) con­ viction that it has value for them, and (4) ordering. Consequently, the firm ’s marketing communication tools must encourage and allow the potential buyer to experience the vari­ ous stages. Figure 8.1 illustrates the role o f various m arketing com m unication tools for a hypothetical product. The goal o f integrated m arketing communication is an important one, and many believe it is critical for success in today’s crowded marketplace. As with many m anagem ent con­ cepts, implementation is slower than many would like to see. Internal “tu rf” battles within organizations and the reluctance o f some advertising agencies to willingly broaden their

r Chapter Eight

FIGURE 8.1 How Various Promotion Tools Might C ontribute to the Purchase of a Hypothetical Product

To produce:

A w areness

Comprehension

Integrated Marketing Communications

Conviction

113

Ordering

Personal selling

Advertising

Soles promotion

Public relations

role beyond advertising are two factors that arc hindering the successful implementation o f integrated marketing communication.

Advertising: Planning and Strategy

_____________

Advertising seeks to promote the seller’s product by means o f printed and electronic media. This is justified on the grounds that messages can rcach large numbers o f people and make them aware and persuade and remind them about the firm ’s offerings. From a marketing m anagement perspective, advertising is an important strategic device for maintaining a competitive advantage in the marketplace. Advertising budgets represent a large and growing elem ent in the cost o f goods and services. In a year it is possible for large m ultiproduct firm s to spend $1.5 to $2 billion advertising their products, and it is common to spend $74 to $100 million on one individual brand. Clearly, advertising must be carefully planned.

Objectives of Advertising There are at least three different viewpoints about the contribution o f advertising to the econom ic health o f the firm . The generalist viewpoint is prim arily concerned w ith sales, profits, return on investment, and so forth. At the other extrem e, the specialist viewpoint is represented by advertising experts who are prim arily concerned w ith m easuring the effects o f specific ads or cam paigns; here prim ary attention is given to organizations that offer services that m easure different aspects o f the effects o f advertising such as the N ielsen Index, Starch R eports, A rbitron Index, and Sim m ons R eports. A m iddle view, one that m ight be classified as m ore o f a m arketing m anagem ent approach,

114 Part C

The Marketing Mix

understands and appreciates the other two view points but, in addition, sees advertising as a com petitive weapon. Em phasis in this approach is given to the strategic aspects o f the advertising function.2 Building on what was said earlier, objectives for advertising can be assigned that focus on creating awareness, aiding comprehension, developing conviction, and encouraging ordering. Within each category, more specific objectives can be developed that take into account tim e and degree o f success desired. Obviously, com pared to the large num ber o f people that advertising makes aware of the product or service, the num ber actually motivated to purchase is usually quite small. In the long run and often in the short run, advertising is justified on the basis o f the revenue it produces. Revenue in this case may refer to either sales or profits. Economic theory assumes that firm s are profit maximizers, and the advertising outlays should be increased in every market and medium up to the point where the additional cost o f gaining more business equals the incremental profits. Since most business firm s do not have the data required to use the marginal analysis approach, they usually employ less-sophisticated decision-making models. Evidence also shows that many managers advertise to maximize sales on the assumption that higher sales mean more profits (which may or may not be true). The point to be m ade here is that the ultimate objective o f the business advertiser is to make sales and profits. To achieve this objective, custom ers m ust purchase and repur­ chase the advertised product. Toward this end, an approach to advertising is needed that provides for intelligent decision making. This approach must recognize the need for meas­ uring the results o f advertising, and these m easurem ents m ust be as valid and reliable as possible. M arketing managers must also be aware that advertising not only com plem ents other forms o f communication but is subject to the law o f diminishing returns. This means that for any advertised product, it can be assumed a point is eventually reached at which additional advertising produces little or no additional sales.

Advertising Decisions____________________________________________ In line with what has just been said, the marketing manager must make two key decisions. The first decision deals with determining the size o f the advertising budget, and the second deals with how the advertising budget should be allocated. Although these decisions are highly interrelated, we deal with them separately to achieve a better understanding o f the problems involved. Today’s most successful brands o f consumer goods were built by heavy advertising and marketing investment long ago. Many marketers have lost sight o f the con­ nection between advertising spending and market share. They practice the art o f discount­ ing: cutting ad budgets to fund price promotions or fatten quarterly earnings. Companies employing these tactics may benefit in the short term but may be at a severe competitive disadvantage in the long term. M arketers at som e com panies, however, know that brand equity and consum er pref­ erence for brands drive m arket share. They understand the balance o f advertising and prom otion expenditures needed to build brands and gain share, m arket by m arket, regardless o f growth trends in the product categories w here they com pete. For example, Procter & G am ble has built its J if and Folger’s brands from single-digit shares to being am ong category leaders. In peanut butter and coffee, P&G invests m ore in advertising and less in discounting than its m ajor com petitors. W hat P&G and other sm art m ar­ keters such as Kellogg, General M ills, Coke, and PepsiCo hold in com m on is an aware­ ness o f a key factor in advertising: consistent investm ent spending. They do not raid their ad budgets to increase earnings for a few quarters, nor do they view advertising as a discretionary cost.

M arketing Highlight

Ethical and Legal Issues in Marketing Communications » -2

Element Advertising

Public relations

Sales promotion

Personal selling

Direct marketing communications

Ethical and Legal Concerns Using deceptive advertising Reinforcing unfavorable elhnic/racial/sex stereotypes Encouraging materialism and excessive consumption Lack of sincerity (paying lip service to worthwhile causes) Using economic power to gain favorable publicity Orchestrating news events to present a false appearance of widespread support for the company position Offering misleading consumer promotions Paying slotting allowances to gain retail shelf space Using unauthorized mailing lists to reach consumers Using high-pressure selling Failing to disclose product limitations/safety concerns Misrepresenting product health Invading privacy with telemarketing Using consumer database information without consumers' authorization Creating economic waste with unwanted direct mail

Source: William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 383.

The Expenditure Question Most firm s determine how much to spend on advertising by one o f the following methods.

Percent o f Sales This is one o f the most popular rule-of-thumb methods, and its appeal is found in its sim ­ plicity. The firm simply takes a percentage figure and applies it to either past or future sales. For example, suppose next y ea rs sales are estim ated to be $1 million. Using the criterion o f 2 percent o f sales, the ad budget would be $20,000. This approach is usually justified by its advocates in terms o f the following argument: (1 ) Advertising is needed to generate sales; (2) a num ber o f cents (i.e., the percentage used) out o f each dollar o f sales should be devoted to advertising in order to generate needed sales; and (3) the percentage is easily adjusted and can be readily understood by other executives. The perccnt-of-sales approach is popular in retailing.

Per-Unit Expenditure Closely related to the above technique is one in which a fixed monetary amount is spent on advertising for each unit o f the product expected to be sold. This method is popular with higher-priced merchandise, such as automobiles or appliances. For instance, if a company is marketing color televisions priced at $500. it may decide that it should spend S30 per set on advertising. Since this $30 is a fixed amount for each unit, this method amounts to the same thing as the pcrcent-of-sales method. The big difference is in the rationale used to justify each o f the methods. The per-unit expenditure method attempts to determine the retail price by using production costs as a base. Here the seller realizes that a reasonably competitive price must be established for the product in question and therefore attempts to cost out the gross margin. All this means is that, if the suggested retail price is to be $500 and manufacturing costs are $250. a gross margin o f $250 is available to cover certain expenses, such as trans­ portation. personal selling, advertising, and dealer profit. Some o f these expense items are flexible, such as advertising, while others are nearly fixed as in the case of transportation.

M ark etin g H ighlight

Developing Advertising Objectives: Nine Questions « -3

• Perform the com plete selling function. • Close sales to prospects already partly sold. • Announce a special reason for buying now (price, premium, and so forth). • Remind people to buy. \ ' • Tie in with special buying event. ■, / • Stimulate impulse sales. 2 . Does th e advertising aim at near-term sales? If so, objectives m ight be to • Create awareness. ■ • Enhance brand image. • Implant information or attitude. • Com bat or offset competitive claims. • Correct false impressions, misinformation. V Build familiarity and easy recognition.

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• Persuade prospect to visit a showroom, ask for a demonstration. \ S՝U •,•/; , • Induce prospect to sample the product (trial offer). 6. How im portant are supplem entary benefits of adver­ tising? Objectives would be to • Help salespeople open new accounts. ^ ■ Help salespeople g e t larger orders from whole- .՝••); saiers and retailers. s • Help salespeople get preferred display space. • Give salespeople an entree. . '՛ • • Suild morale of sales force. ' • Impress the trade. J / v ^ '

7. Should the advertising impart information needed to consum m ate sales and build custom er satisfaction? ;; i 3. Does the advertising aim at building a long-range If so, objectives may be to use ' V ' *. . > consumer franchise? If so, objectives m ight be to • "Where to buy it" advertising. • Build confidence in com pany and brand: ' ; • "How to use it" advertising: ; i • Build custom er dem and. • NJew models, features, package. . ‘ . T. !՝ • Select preferred distributors and dealers. • NJew prices. ՛'•՛■•%*r; : • Secure universal distribution. • Special terms, trade-in offers, and so forth. • Establish a "reputation platform" for launching • Mew policies (such as guarantees). new brands or product lines. 8. Should advertising build confidence and goodwill • Establish brand recognition and:d ^ p ^ n c ^ for the corporation? Targets may include 4. Does the advertising aim at helping increase sales? If • Customers and potential customers. so, objectives would be to • The trade (distributors, dealers, retail people). • Hold present customers. • Employees and potential employees. • Convert other users to advertiser's brand. • The financial community. • Cause people to specify advertiser's brand. • The public at large. • Convert nonusers to users. 9. What kind of images does the company wish to build? • Make steady customers out of occasional pnes. • Product quality, dependability. • Advertise new uses. • Service. • Persuade custom ers to buy larger sizes or multi­ • Family resemblance of diversified products. ple units. • Corporate citizenship. • Remind users to buy. • Growth, progressiveness, technical leadership. • Encourage greater frequency or quantity of use. Source: William F. Arens, Michael F. Weigold, and Christian Arens, Contemporary Advertising, 11th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2008), pp. 624-27 and RL 8-3.

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Chapter Eight Integrated Marketing Communications 117

The basic problem with this method and the percentage-of-sales method is that they view advertising as a function o f sales, rather than sales as a function o f advertising.

A ll You Can Afford Here the advertising budget is established as a predeterm ined share o f profits or financial resources. The availability o f current revenues sets the upper limit o f the ad budget. The only advantage to this approach is that it sets reasonable limits on the expenditures for advertising. However, from the standpoint o f sound marketing practice, this m ethod is undesirable because there is no necessary connection between liquidity and advertising opportunity. Any firm that limits its advertising outlays to the am ount o f available funds will probably miss opportunities for increasing sales and profits.

Competitive Parity This approach is often used in conjunction with other approaches, such as the percent-ofsales method. The basic philosophy underlying this approach is that advertising is defen­ sive. A dvertising budgets are based on those o f com petitors or other members o f the industry. From a strategy standpoint, this is a “followership” technique that assum es that the other firm s in the industry know what they are doing and have sim ilar goals. Competi­ tive parity is not a preferred method, although som e executives feel it is a safe approach. This may or may not be true depending in part on the relative market share o f com peting firm s and their growth objectives.

The Research Approach Here the advertising budget is argued for and presented on the basis o f research findings. Advertising media are studied in terms o f their productivity by the use o f media reports and research studies. Costs are also estimated and com pared with study results. A typical experiment is one in which three or m ore test m arkets are selected. The first test market is used as a control, either with no advertising or with norm al levels o f advertising. Advertis­ ing with various levels o f intensity is used in the other markets, and comparisons are made to see what effect different levels o f intensity have. The marketing manager then evaluates the costs and benefits o f the different approaches and intensity levels to determine the over­ all budget. Although the research approach is generally more expensive than some other models, it is a more rational approach to the expenditure decision.

The Task Approach Well-planned advertising program s usually make use o f the task approach, which initially formulates the advertising goals and defines the tasks to accomplish these goals. Once this is done, m anagement determ ines how much it will cost to accomplish each task and adds up the total. This approach is often in conjunction with the research approach.

The Allocation Question This question deals with the problem o f deciding on the m ost effective way o f spending advertising dollars. A general answer to the question is that m anagem ent’s choice o f strate­ gies and objectives determines the media and appeals to be used. In other words, the firm ’s or product division’s overall m arketing plan will function as a general guideline for an­ swering the allocation question. From a practical standpoint, however, the allocation question can be framed in term s o f message and media decisions. A successful ad campaign has two related tasks: (1) say the right things in the ads themselves, and (2) use the appropriate media in the right amounts at the right time to reach the target market.

M ark etin g H ighlight

Preparing Ilit* Advertising Campaign: The Eighl-M FormiJa—"

8-1

Effective advertising should follow a plan. There is no one best way to go about planning a r P advertising campaign, but in general, marketers should have good answers to the following eight questions: / 1. The management question: Whowill m anage the advertising program? 2. The money question: How much should be spent on advertising as opposed to other forms of communication? . . ֊ •• ‘ \;՝ 32 The market question: To whom should the advertising be directed? 4. The message question: W hat should the ads say about the product? 5. The media question: W hat types and combinations of media should be used? 6. Themacroscheduling question: How long should the advertising campaign be in effect before changing ads or them es? 7. The microscheduling question: At w hat times and dates would it be best for ads to appear during the course of the campaign? 8. The measurement question: How will the effectiveness of the advertising campaign be measured and how will the campaign be evaluated and controlled?

M essage Strategy The advertising process involves creating m essages with words, ideas, sounds, and other forms o f audiovisual stimuli that are designed to affect consumer (or distributor) behavior. It follows that much o f advertising is a communication process. To be effective, the adver­ tising m essage should m eet two general criteria: (1) It should take into account the basic principles o f com m unication, and (2) it should be predicated upon a good theory o f consum er motivation and behavior. The basic com m unication process involves three elements: (1) the sender or source o f the com m unication, (2) the communication or message, and (3) the receiver or audience. Advertising agencies are considered experts in the communications field and are employed by most large firm s to create meaningful messages and assist in their dissemination. Trans­ lating the product idea or m arketing message into an effective ad is term ed encoding. In advertising, the goal o f encoding is to generate ads that the audience understands. For this to occur, the audience must be able to decode the message in the ad so that the perceived con­ tent o f the m essage is the sam e as the intended content o f the message. From a practical standpoint, all this means is that advertising messages must be sent to consumers in an un­ derstandable and m eaningful way. Advertising messages, o f course, must be transmitted and carried by particular communi­ cation channels commonly known as advertising media. These media or channels vary in effi­ ciency, selectivity, and cost. Some channels are preferred to others because they have less “noise," and thus messages are more easily received and understood. For example, a particular newspaper ad must compete with other ads: pictures, or stories on the same page. In the case o f radio or TV, while only one firm ’s message is usually broadcast at a time, other distractions (noise) can hamper clear communications, such as driving while listening to the radio. The relationship betw een advertising and consum er behavior is quite obvious. For many products and services, advertising is an influence that may affect the consum er’s decision to purchase a particular product or brand. It is clear that consum ers are subjected to m any selling influences, and the question arises about how im portant advertising is or can be. In this case, the advertising expert m ust operate on some theory o f consum er behavior. The reader will recall from the discussion o f consum er behavior that the buyer was viewed as progressing through various stages from an unsatisfied

M arketing H ighlight

Some R elative M erits.of Major Advertising Media

8 —5 NEWSPAPERS

Disadvantages

Advantages

1. 2. 3. 4.

1. Flexible and timely. 2. Intense coverage of local markets. 3. Broad acceptance and use. 4. High believability of printed word.

Nonselectivity of audience. Fleeting impressions. Shortlife. Expensive.

MAGAZINES

Disadvantages

Advantages

1. Shortlife. 2. Read hastily. 3. Small "pass-along" audience.

1. 2. 3. 4.

RADIO

High geographic and dem ographic selectivity. Psythology of attention. Quality of reproduction. Pass-along readership.

Disadvantages

Advantages

1. 2. 3. 4.

Mass use (over 25 million radios sold annually). Audience selectivity via station format. Low cost (per unit of time). Geographic flexibility.

Disadvantages

'I. 2. 3. 4.

Audio presentation only. Less attention than TV. Chaotic buying (nonstandardized rate structures). Short life.

1. Long closing periods (six to eight weeks prior to publication). 2. Some waste circulation. 3. No guarantee of position (unless premium is paid). DIRECT MAIL Advantages

1. 2. 3. 4.

Audience selectivity. Flexible. No com petition from com peting advertisements. Personalized.

OUTDOOR

Disadvantages

Advantages

1. Relatively high cost. 2. Consumers often pay little attention and throw it away.

1. 2. 3. 4.

Flexible. Relative absence of com peting advertisements. Repeat exposure. Relatively inexpensive.

Disadvantages

1. 2. 3. 4.

Creative limitations. Many distractions for viewer. Public attack (ecological implications). No selectivity of audience.

TELEVISION Advantages

1. 2. 3. 4.

Combination of sight, sound, and motion. Appeals to senses. Mass audience coverage. Psychology of attention.

INTERNET Advantages

1. 2. 3. 4. 5. 6.

Interactive. Low cost per exposure. Ads can be placed in interest sections. Timely. High information content possible. New favorable medium.

Disadvantages

1. 2. 3. 4. 5.

Low attention getting. Short message life. Reader selects exposure. May be perceived as intruding. Subject to download speeds. \

19

120

Part C

The Marketing Mix

need through and beyond a purchase decision. The end goal o f an advertisem ent and its associated cam paign is to move the buyer to a decision to purchase the advertised brand. By doing so, the advertisem ent w ill have succceded in moving the consum er to the trial and repeat purchase stage o f the consum er behavior process, w hich is the end goal o f advertising strategy. The planning o f an advertising campaign and the creation o f persuasive messages require a mixture o f marketing skill and creative know-how. Relative to the dimension o f marketing skills, some important pieces o f marketing information are needed before launching an ad campaign. M ost o f this information must be generated by the firm and kept up-to-date. Listed below are some o f the critical types o f information an advertiser should have. 1. Who the firm ’s customers and potential customers are: their demographic, economic, and psychological characteristics and any other factors affecting their likelihood o f buying. 2. How many such custom ers there are. 3. How much o f the firm ’s type and brand o f product they are currently buying and can reasonably be expected to buy in the short-term and long-term future. 4. Which individuals, other than customers and potential customers, influence purchasing decisions. 5. Where they buy the firm ’s brand o f product. 6. When they buy, and frequency o f purchase. 7. Which competitive brands they buy and frequency o f purchase. 8. How they use the product. 9. Why they buy particular types and brands o f products.

M edia Mix M edia selection is no easy task. To start with, there are numerous types and combinations o f media to choose from. M arketing Highlight 8-5 presents a b rief sum m ary o f the advan­ tages and disadvantages o f some o f the major advertising media. In the advertising industry, a common measure o f efficiency or productivity is cost per thousand, or CPMs. This figure generally refers to the dollar cost o f reaching 1,000 prospects, and its chief advantage lies in its simplicity and allowance for a common base o f comparison between differing media types. The major disadvantage o f the use o f CPMs also relates to its simplicity. For example, the same commercial placed in two different television programs, having the same viewership and the same audience profile, may very well gener­ ate different responses depending on the level o f viewer involvement. This “positive effects” theory states that the more the viewers are involved in a television program, the stronger they will respond to commercials. In essence, involving programs produce engaged respondents who demonstrate more favorable responses to advertising messages. Generally, such measures as circulation, audience size, and sets in use per com m er­ cial minute are used in the calculation. O f course, different relative rankings o f m edia can occur, depending on the measure used. A related problem deals with what is meant by “effectively reaching” the prospect.3 Reach, in general, is the num ber o f different targeted audience members exposed at least once to the advertiser’s message within a predetermined time frame. Just as important as the number o f different people exposed (reach) is the num ber o f times, on average, that they are exposed to an advertisement within a given time period. This rate o f exposure is called average frequency. Since marketers all have budget constraints, they m ust decide whether to increase reach at the expense o f average frequency or average frequency at the expense o f reach. In essence, the m arketer’s dilemma is to develop a media schedule that both (1) exposes a sufficient num ber o f targeted customers (reach) to the firm ’s product and (2) exposes them enough times (average

Chapter Eight Integrated Marketing Communications

121

frequency ) to the product to produce the desired effect. The desired effect can come in the form o f reaching goals associated with any or all o f the categories o f advertising objectives (the prospect becomes aware o f the product, takes action, etc.) covered earlier in the chapter.

Sales Promotion Over the past two decades, the popularity o f sales promotion has been increasing. Two reasons for this increased popularity are undoubtedly die increased pressure on management for short-term results and the emergence o f new purchase tracking technology. For example, many supermarket cash registers are now equipped with a device that dispenses coupons to a customer at the point o f purchase. The type, variety, and cash amount o f the coupon will vary from customer to customer based on their purchases. In essence, it is now possible for the Coca-Cola Company to dispense coupons only to those customers who purchase Pepsi Cola, thus avoiding spending promotional dollars on aừeady-loyal Coke drinkers. Figure 8.2 presents some popular targets o f sales promotion and the methods used.

Push versus Pull Marketing Push and pull marketing strategies comprise the two options available lo marketers interested in getting their product into the hands o f customers. They are illustrated in Figure 8.3. Push strategies involve aiming promotional efforts at distributors, retailers, and sales personnel to gain their cooperation in ordering, stocking, and accelerating the sales o f a product. For example, d ấ local rock band may visit local DJs seeking air play for their record, offer distrib­ utors special prices to carry the CD, and offer retailers special allowances for putting up posters or special counter displays. These activities, which are usually in the form o f price allowances, distribution allowances, and advertising dollar allowances, arc designed to “push” the CD toward the customer.4 Pull strategies involve aiming promotional efforts directly at customers to encourage them to ask the retailer for the product. In the past few years drug manufacturers have begun to advertise prescription drugs directly to consumers. Customers arc encouraged to “Ask Your Doctor” about Viagra or Paxil. These activities, which can include advertising and sales promotion, are designed to “pull” a product through the channel from manufacturer to buyer.

FIGURE 8.2

Exam ple of Sales Promotion Activities

Source: William D. Perreault, Jr. and E. Jerome McCarthy. Basic Marketing. A Global Managerial Approach. 15tli ed. Irwin/McGraw-Hill, 2005, cliap. 14.

Aim ed at final consumers or users

Contests Coupons Aisle displays Samples Trade shows Point-of-purchasing materials Banners and streamers Trading stamps Sponsors ‘ , ;

•

Aimed at middlemen

. ՛.■ •: ;** -• '.V-՛• •

-

Price deals Promotion allowances Sales contests Calendars Trade shows Meetings Catalogs Merchandising aids

Aimed at com pany's ow n sales force

Contests Courses Meetings Portfolios Displays Sales aids Training materials

—

M arketing Highlight

Procedures for Evaluating Advertising Programs and Some Services Using the Procedures

8 —6

PROCEDURES FOR EVALUATING SPECIFIC ADVERTISEMENTS

>:

1. Recognition tests. Estimate the percentage of people claiming to have read a m ag azin e: who recognize the ad when it is shown to them (e.g., Starch Message Report Service) ; ;՛% 2. Recoil tests. Estimate the percentage of people claiming lo have read a m agazine who can (unaided) recall the ad and its contents (e.g., Gallup and Robinson Impact Service, various services for TV ads as well). 3. Opinion tests. Potential audience members are asked to rank alternative advertisements as m ost interesting, m ost believable, best liked. v ; 4. Theater tests. Theater audience is asked for brand preferences before and after an ad is shown in context of a TV show (e.g., Schwerin TV Testing Service), i v j PROCEDURES FOR EVALUATING SPECIFIC ADVERTISING OBJECTIVES 1. Awareness. Potential buyers are asked to indicate brands that com e to mind in a product category. A m essage used in an ad campaign is given and buyers are asked to identify the brand that was advertised using that message. 2. Attitude. Potential buyers are asked to rate com peting or individual brands on determ i­ nant attributes, benefits, and characterizations using rating scales. PROCEDURES FOR EVALUATING MOTIVATIONAL IMPACT 1. Intention to buy. Potential buyers are asked to indicate the likelihood they willbuy a brand (on a scale from "definitely will not" to "definitely will"). 2. Market test. Sales changes in different markets are monitored to com pare the effects of different messages, budget levels. Source: Joseph Cuiltinan and Gordon Paul, Marketing Management, 6th ed., © 1997, New York, McGraw-Hill, Inc., p. 274. Reproduced by permission of The McGraw-Hill Companies.

FIG U R E 8.3

122

Push versus Pull Strategies in M arketing Communications

Chapter Eight Integrated Marketing Communications 123

Trade Sales Promotions Trade promotions are those prom otions aimed at distributors and retailers o f products who make up the distribution channel. The major objectives o f trade promotions are to (1) con­ vince retailers to carry the m anufacturer’s products, (2) reduce the m anufacturer’s invento­ ries and increase the distributor’s or retailer’s inventories, (3) support advertising and consum er sales promotions, (4) encourage retailers either to give the product more favor­ able shelf space or to place more emphasis on selling the product, and (5) serve as a reward for past sales efforts. Promotions built around price discounts and advertising or other allowances are likely to have higher distributor/retailer participation levels than other type promotions because a direct economic incentive is attached to the prom otion.5 The im portance attached to individual types o f prom otions may vary by the size o f distributor/retailer. For example, small retailers do not consider contests, sweepstakes, and sales quotas as being important to their decision to participate in promotions; getting the full benefit o f such promotions is difficult due to their size. M arketers must keep in m ind that not all distributors or retailers will have the same reaction to promotions offered. The m anufacturer m ust carefully con­ sider differences in attitudes when designing and im plementing trade promotion programs.

Consumer Promotions Consumer promotions can fulfill several distinct objectives for the manufacturer. Some o f the more commonly sought-after objectives include (1) inducing the consum er to try the product, (2) rewarding the consum er for brand loyalty, (3) encouraging the consum er to trade up or purchase larger sizes o f a product, (4) stimulating the consum er to make repeat purchases o f the product, (5) reacting to com petitor efforts, and (6) reinforcing and serving as a complement to advertising and personal selling efforts. Figure 8.4 presents a b rief description o f some o f die m ost commonly used forms o f consum er promotion activities.

What Sales Promotion Can and Can't Do Advocates o f sales promotion often point to its growing popularity as a justification for the argument that we don’t need advertising; sales prom otion itself will suffice. M arketers should bear in mind that sales prom otion is only one part o f a well-constructed integrated marketing comm unications program. While sales prom otion is proven to be effective in achieving the objectives listed in the previous sections, there are several compelling reasons why it should not be used as the sole promotional tool. These reasons include sales pro­ m otion’s inability (1) to generate long-term buyer com m itm ent to a brand in many cases; (2) to change, except on a tem porary basis, declining sales o f a product; (3) to convince

FIG U R E 8.4 Some Commonly Used Forms of Consum er Promotions

• Sampling.

Customers are offered regular trial sizes of the product either free or at a nominal price.

• Price deals. • Bonus packs.

Customers are offered discounts from the product's regular price. Additional amounts of the product are given to buyers when they purchase the product. Customers are given reimbursements for purchasing the product either on the spot or through the mail. Prizes are available either through chance selection or games of skill.

• Rebates and refunds. • Sweepstakes and

contests. • Premiums. • Coupons.

A reward or gift can come from purchasing a product. Probably the most familiar and widely used of all consumer pro­ motions, now often available at point of purchase.

M arketing Highlight

Some Objectives of Sales Promotion

8 -7 WHEN DIRECTED AT CONSUMERS 1. 2. 3. 4. 5.

To obtain the trial, of a product. To introduce a new or improved product. To encourage repeat or greater usage by current users. ՝ ; ‘ To bring more customers into retail stores. ' * : To increase the total num ber of users of an established product y՝;֊: :

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WHEN DIRECTED AT SALESPEOPLE

1. To m otivate the sales force. 2. To educate the sales force about product improvements. 3. To stabilize a fluctuating sales pattern. WHEN DIRECTED AT RESELLERS

1. 2. 3. 4.

124

To increase reseller inventories. To obtain displays and other support for products, To improve product distribution. To obtain more and better shelf space.

buyers to purchase an otherw ise unacceptable product; and (4) to make up for a lack o f advertising or sales support for a product. In addition, promotions can often fuel the flames o f competitive retaliation far m ore than other m arketing activities. When the competition gets drawn into the promotion war, the effect can be a significant slowing o f the sharp sales increases predicted by the initiator o f the promotion. Worse yet, prom otions can often devalue the image o f the promoted brand in the consum er’s eyes. The dilem m a m arketers face is how to cut back on sales prom otions without losing market share to competitors. In an effort to overcome this problem, some consum er prod­ ucts com panies are instituting new pricing policies to try to cut back on the am ount o f sales prom otions used. For example, Procter & Gamble and General Mills have instituted everyday low-price strategies for many of their products. The intent o f this type o f policy is to give retailers a lower list price in exchange for cutting trade promotions. W hile the net cost o f the product to retailers remains unchanged, retailers are losing promotional dollars that they controlled. In many situations, although trade allowances are supposed to be used for encouraging retail sales, it is not uncommon for retailers to take a portion o f the trade allowance m oney as profit. The rationale behind com panies’ (such as Procter & Gamble and General M ills) efforts to cut back on trade and other prom otions is (1) not to force brand-loyal custom ers to pay unusually high prices when a product isn’t on special; (2) to allow consum ers to benefit from a lower average shelf price, since retailers will no longer have discretion over the use o f allowance dollars; and (3) to improve efficiencies in manufacturing and distribution systems because retailers will lose the incentive to do heavy forward buying o f discounted items. In addition to developing pricing policies to cut back on short-term prom otions, some consum er products com panies are starting to institute frequency marketing programs in which they rew ard consum ers for purchases o f products or services over a sustained period o f tim e.6 These program s are not technically considered sales prom otions due to their ongoing nature. Frequency m arketing originated in 1981 when Am erican Airlines launched its frequent-flyer program with the intention o f securing the loyalty o f business travelers.

M a r k e t i n g H ig h lig h t

Consumer-Oriented Sales Promotion Fools for Various Marketing Objectives

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8 -8

M arketing Objective Consumer Reward Incentive

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Immediate

Delayed

Induce trial

Customer retention/loading

Support IMC program/ build brand equity

• Sampling • Instant coupons • In-store coupons • In-store rebates

• Price-off deals • Bonus packs • In- and on-package free premiums • Loyalty programs

• •

• Media- and maildelivered coupons • Mail-in refunds and * rebates • Free mail-in premiums • Scanner- and Internet-

• In- and on-package coupons • Mail-in refunds and rebates • Loyalty programs

• Self-liquidating premiums • Free mail-in premiums • Contests and sweepstakes • Loyalty programs

Events In- and on-package free premiums

delivered coupons

Source: George E. Belch and Michael A. Belch, Advertising and Promotion, 7th ed. (Burr Ridge, IL: McGrawHill/Irwin, 2007), p. 525.

Public Relations As noted earlier in the chapter, public relations is a nonpersonal form o f communication that tries to influence the overall image o f the organization and its products and services among its various stakeholder groups. Public relations managers prefer to focus on communicating positive news about the organization, but they must also be available to minimize the nega­ tive impacts o f a crisis or problem. We have already noted that the most popular and fre­ quently used public relations tool is publicity. There are several forms o f publicity: 1. News release. An announcem ent regarding changes in the organization or the product line, sometimes called a press release. The objective is to inform members o f the media o f a newsworthy event in the hope that they will convert it into a story.

2. News conference. A meeting held for representatives o f the media so that the organiza­ tion can announce m ajor news events such as new products, technologies, mergers, acquisitions, and special events, or, in the case o f a crisis or problem, present its position and plans for dealing with the situation. 3. Sponsorship. Providing support for and associating the organization’s name with events, programs, or even people such as amateur athletes or teams. Besides publicity, sponsor­ ship can also include advertising and sales prom otion activities. Many organizations sponsor sporting events, art festivals, and public radio and television programs. 4. Public service announcements. Many nonprofit organizations rely on the media to do­ nate time for advertising for contributions and donors. Many nonprofit organizations cannot afford the cost o f advertising or in some cases are prohibited from doing so.

Direct Marketing j ________________________l

______________________________________________________________________________

We already know that with direct marketing the organization communicates directly with customers either online or through direct mail, catalogs, direct response advertising, or per­ sonal selling (the subject o f the next chapter).

126

Part C

The Marketing Mix

Direct m arketing m ethods arc certainly not new. In fact, several o f them will be dis­ cussed later in the book as m ethods o f nonstore retailing. W hat is new is the ability to design and use them m ore efficiently and effectively because o f the availability o f com ­ puters and databases. Technology has clearly been the catalyst in the trem endous growth in direct m arketing activities in the last decade. Because o f technology, it is now possible for m arketers to custom ize communication efforts and literally create one-to-one connec­ tions and dialogues with customers. This would be especially true for those organizations that have successfully implemented an integrated marketing com m unications program. Another obvious catalyst for growth in direct marketing has been consum ers' increased use o f the Internet for purchasing many types o f products. The projected growth rates for online expenditures continue to rise. As growth continues in the num ber o f households with Internet access and in the num ber o f businesses with Web sites and product or service offerings via the Internet, it will likely fuel even greater growth in direct marketing. For the Am erican consum er facing a “poverty o f time,” direct marketing offers many benefits. In addition to saving time, consumers often save money, get better service, and en­ joy increased privacy; many even find it entertaining. For the marketer, sales revenues are the obvious benefit but not the only one. Direct marketing activities are often very effective in generating sales leads when a customer asks for more inform ation about a product or service and can also increase store traffic when potential buyers are encouraged to visit a dealership or retail store.

Conclusion This chapter has been concerned with integrated marketing communications. Remember that advertising and sales promotion are only two o f the ways by which sellers can affect the de­ mand for their product. Advertising and sales promotion are only part o f the firm^s promotion mix, and in turn, the promotion mix is only part o f the overall marketing mix. Thus, advertis­ ing and sales promotion begin with the marketing plan and not with the advertising and sales promotion plans. Ignoring this point can produce ineffective and expensive promotional pro­ grams because o f a lack o f coordination with other elements o f the marketing mix.

Additional

Readings

Arens, William. Contemporary Advertising. 8th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2007. Belch, George E., and Michael A. Belch. Advertising and Promotion: An Integrated Marketing Communication’s Perspective. 7th cd. Burr Ridge, IL: McGraw-Hill/Irwin, 2007. Biehal, Gabriel, and Daniel A. Shenin. “The Influence of Corporate Messages on lYoduct Portfolio.” Journal o f Marketing, April 2007, pp. 12-25. Khermouch, Gerry. “The Top 5 Rules of the Ad Game.” Business Week, January 20, 2003, pp. 72—73. Prins, Remco, and Peter C. Verhoef. “Marketing Communication Drivers of Adoption Timing of a New E-Service among Existing Customers.” Journal o f Marketing, April 2007, pp. 169-83. Shultz, Don E. “IMC Receives More Appropriate Definition.” Marketing News, September 15, 2004, pp. 8-9.

Appendix

Major Federal Agencies Involved in Control of Advertising Agency Federal Trade Commission

Food and Drug Administration

Federal Communications Commission Postal Service Alcohol and Tobacco Tax Division Grain Division Securities and Exchange Commission

Information Source Patent Office Library of Congress Department of Justice

Function Regulates commerce between states; controls unfair business practices; takes action on false and deceptive advertising; most important agency in regulation of advertising and promotion. Regulatory division of the Department of Health, Education, and Welfare; controls marketing of food, drugs, cosmetics, medical devices, and potentially hazardous consumer products. Regulates advertising indirectly, primarily through the power to grant or withdraw broadcasting licenses. Regulates material that goes through the mails, primarily in areas of obscenity, lottery, and fraud. Part of the Treasury Department; has broad powers to regulate deceptive and misleading advertising of liquor and tobacco. Unit of the Department of Agriculture responsible for policing seed advertising. Regulates advertising of securities.

Description Regulates registration of trademarks. Controls protection of copyrights. Enforces all federal laws through prosecuting cases referred to it by other government agencies.

Chapter

Personal Selling, Relationship Building, and Sales Management Personal selling, unlike advertising or sales promotion, involves direct relationships between the seller and the prospect or customer. In a formal sense, personal selling can be defined as a two-way flow o f communication between a potential buyer and a salesperson that is designed to accomplish at least three tasks: (1) identify the potential buyer’s needs; (2) match those needs to one or more o f the firm ’s products or services; and (3) on the basis o f this match, convince the buyer to purchase the product.1The personal selling element o f the prom otion mix can cncompass diverse forms o f direct interaction between a salesper­ son and a potential buyer, including face-to-face, telephone, written, and com puter com ­ m unication. The behavioral scientist would m ost likely characterize personal selling as a type o f personal influence. Operationally, it is a complex communication process, one still not fully understood by marketers.

Importance of Personal Selling;___________________________________ The importance o f the personal selling function depends partially on the nature o f the product. As a general rule, goods that are new and different, technically complex, or expensive require more personal selling effort. The salesperson plays a key role in providing the consumer with information about such products to reduce the risks involved in purchase and use. Insurance, for example, is a complex and technical product that often needs significant amounts o f personal selling. In addition, many organizational products cannot be presold, and the sales­ person has a key role to play in finalizing the sale. It is im portant to rem em ber that, for many companies, the salesperson represents the custom er’s main link to the firm . In fact, to some, the salesperson is the company. There­ fore, it is imperative that the company take advantage o f this unique link. Through the efforts o f the successful salesperson, a company can build relationships with customers that continue long beyond the initial sale. It is the salesperson who serves as the conduit through which inform ation regarding product flaws, improvements, applications, or new uses can pass from the custom er to the m arketing department. To illustrate the importance o f using salespeople as an information resource, consider this fact: In some industries, custom er information serves as a major source for up to 90 percent o f new product and process ideas. 128

Chapter Nine Personal Selling. Relationship Building, and Sales Management

129

Along with techniques described in the previous chapter, personal selling provides the push needed to get middlemen to carry new products, increase their amount o f goods purchased, and devote more effort in merchandising a product or brand. In summary, personal selling is an integral part o f the marketing system, fulfilling two vital duties (in addition to the core sales task itself): one for customers and one for compa­ nies.2 First, the salesperson dispenses knowledge to buyers. Lacking relevant information, custom ers are likely to make poor buying decisions. For example, com puter users would not learn about new equipment and new programming techniques without the assistance o f com puter sales representatives. Doctors would have difficulty finding out about new drugs and procedures were it not for pharmaceutical salespeople. Second, salespeople act as a source o f m arketing intelligence for management. M arketing success depends on satisfy­ ing custom er needs. If present products cion’t fulfill custom er needs, then profitable opportunities may exist for new or improved products. If problems with a com pany’s product exist, then m anagem ent must be quickly apprised o f the fact. In either situation, salespeople are in the best position to act as the interm ediary through which valuable information can be passed back and forth between product providers and buyers.

The Sales Process Personal selling is as much an art as it is a science. The word art is used to describe that por­ tion o f the selling process that is highly creative in nature and difficult to explain. This does not mean there is little control over the personal selling element in the promotion mix. It does imply that, all other things equal, the trained salesperson can outsell the untrained one. Before m anagem ent selects and trains salespeople, it should have an understanding o f the sales process. Obviously, the sales process will differ according to the size o f the com ­ pany, the nature o f the product, the market, and so forth, but some elem ents are common to alm ost all selling situations. For the purposes o f this text, the term sales process refers to two basic factors: (1) the objectives the salesperson is trying to achieve while engaged in selling activities; and (2) the sequence o f stages or steps the salesperson should follow in trying to achieve the specific objectives (the relationship-building process).

Objectives of the Sales Force M uch like the concepts covered in the previous chapter, personal selling can be viewed as a strategic means to gain competitive advantage in the marketplace. For example, most organizations include service representatives as part o f their sales team to ensure that custom er concerns with present products arc addressed and remedied at the same time new business is being solicited. In a similar manner, m arketing management understands that while, ultimately, personal selling must be justified on the basis o f the revenue and profits it produces, other categories o f objectives are generally assigned to the personal selling function as part o f the overall prom otion mix.3 These objectives are 1. Information provision. Especially in the case o f new products or customers, the sales­ person needs to fully explain all attributes o f the product or service, answer any ques­ tions, and probe for additional questions. 2. Persuasion. Once the initial product or scrvice information is provided, the salesperson needs to focus on the following objectives: •

Clearly distinguish attributes o f the firm ’s products or services from those o f competitors.

•

Maximize the num ber o f sales as a percent o f presentations.

Source: Roger Kerin, Steven W. Hartley, Eric Berkowitz, and William Rudelins, Marketing՝ , 8th ed., (Burr Ridge, IL McGraw-Hill/Irwin, 2007), p. 532.

•

Convert undecided customers into first-tim e buyers.

•

Convert first-tim e customers into repeat purchasers.

•

Sell additional or com plem entary items to repeat customers.

• Tend to the needs o f dissatisfied customers. 3. After-sale service. W hether the sale represents a first-tim e or repeat purchase, the sales­ person needs to ensure the following objectives arc met: •

Delivery or installation o f the product or service that meets or exceeds custom er expectations.

•

Im m ediate follow-up calls and visits to address unresolved or new concerns.

•

Reassurance o f product or service superiority through demonstrable actions.

The Sales Relationship-Building Process For many years, the traditional approach to selling emphasized the first-tim e sale o f a prod­ uct or service as the culmination o f the sales process. As emphasized in Chapter 1, the mar­ keting concept and accompanying approach to personal selling view the initial sale as merely the first step in. a long-term relationship-building process, not as the end goal. As we shall see later in this chapter, long-term relationships between the buyer and seller can be considered partnerships because the buyer and seller have an ongoing, mutually beneficial affiliation, with each party having concern for the other party’s well-being.4 The relationship-building process, which is designed to meet the objectives listed in the previous section, contains six sequential stages (Figure 9.1). These stages are (1) prospecting, (2) planning the sales call, (3) presentation, (4) responding to objections, (5) obtaining com­ mitment/closing the sale, and (6) building a long-term relationship. W hat follows is a brief description o f each o f the stages.

Prospecting The process o f locating potential customers is called prospecting. The prospecting activity is critical to the success o f organizations in m aintaining or increasing sales volume.

Chapter Nine Personal Selling, Relationship Building, and Sales Management

131

FIGUR E 9.1 The Sales Relationship-Building

Process Source: Adopted from material discussed in Barton A. Weitz, Stephen B. Castleberry, and Jolin K Tanner, Selling: Building Partnerships, 6th ed. (Burr Ridge, II.: Irwin/McGraw-Hill. 2007), p. 171.

Continual prospecting is necessary for several reasons, including the fact that custom ers (1) switch to other suppliers, (2) move out o f the organization’s market area, (3) go out o f business because o f bankruptcy, (4) arc acquired by another firm , or (5) have only a one­ time need for the product or service. In addition, the organization’s buying contracts with present customers may be replaced and organizations that wish to grow must increase their custom er base. Prospecting in some fields is more im portant than in others. For example, a stockbroker, real estate agent, or partner in an accounting firm with no effective prospect­ ing plan usually doesn’t last long in the business. In these positions, it may take as many as 100 contacts to gain 10 prospects who will listen to presentations from which one to two sales may result. On the other hand, a Procter & Gamble sales representative in a certain geographic area would likely know all the potential retailers for Crest toothpaste. The prospecting process usually involves two m ajor activities that are undertaken on a continual, concurrent basis. First, prospects m ust be located. When nam es and addresses o f prospects are not available, as is usually the case when firm s enter new markets or a new salesperson is hired, they can be generated by randomly calling on businesses or house­ holds or by employing mass appeals (through advertising). This process, called random lead generation, usually requires a high num ber o f contacts to gain a sale. A lead is a potential prospect that may or may not have the potential to be a true prospect, a candidate, to whom a sale could be made. For m ost professional, experienced salespeople, a more system atic approach to gen­ erating leads from predeterm ined target markets is used. This approach, aptly named selected-lead searching, uses existing contacts and knowledge to generate new prospects. In general, the best source o f prospects is referrals from satisfied customers. The more sat­ isfied one’s customers are, the higher the quality o f leads a salesperson will receive from them. M arketing Highlight 9 -2 lists some common sources o f leads and how they are used to generate new contacts.

M arketingn H ighlight n n ...

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Common Sources of Sales Leads '

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FIG URE 10.6 M ajor Types of Vertical Marketing Systems

members in the channel. However, one o f the im portant developments in channel manage­ ment in recent years is the increasing use o f vertical marketing systems. Vertical m arketing systems are channels in which members are more dependent on one another and develop long-term working relationships in order to improve the efficiency and effectiveness o f the system. Figure 10.6 shows the m ajor types o f vertical m arketing systems, which include administered, contractual, and corporate systems.3

Administered Systems A dm inistered vertical m arketing system s are the m ost sim ilar to conventional channels. However, in these system s there is a higher degree o f interorganizational planning and m anagem ent than in a conventional channel. The dependence in these systems can result from the existence o f a strong channel leader such that other channel m em bers work closely with this com pany in order to maintain a long-term relationship. W hile any level o f channel m em ber may be the leader o f an adm inistered system , W al-Mart, Km art, and Scars are excellent examples o f retailers that have established adm inistered system s with many o f their suppliers.

Contractual Systems Contractual vertical m arketing system s involve independent production and distribution companies entering into formal contracts to perform designated m arketing functions. Three m ajor types o f contractual vertical marketing systems are the retail cooperative organiza­ tion, wholesaler-sponsored voluntary chain, and various franchising programs. In a retail cooperative organization, a group o f independent retailers unite and agree to pool buying and m anagerial resources to improve competitive position. In a wholesalersponsored voluntary chain, a wholesaler contracts with a num ber o f retailers and performs channel functions for them. Usually, retailers agree to concentrate a m ajor portion o f their purchasing with the sponsoring wholesaler and to sell advertised products at the same price. The m ost visible type o f contractual vertical m arketing systems involves a variety o f franchise program s. Franchises involve a parent company (the franchisor) and an independent firm (the franchisee) entering into a contractual relationship to set up and operate a business in a particular way. Many products and services reach consumers through franchise systems, including automobiles (Ford), gasoline (M obil), hotels and m otels (Holiday Inn), restaurants (M cDonald’s), car rentals (Avis), and soft drinks (Pepsi). In fact, some analysts predict that within the next 10 years, franchises will account for 50 percent o f all retail sales.

Corporate Systems C orporate vertical marketing system s involve single ownership o f two or more levels o f a channel. A m anufacturer’s purchasing wholesalers or retailers is called forward

M ark etin g H ighlight

Franch ising: An ;VIterriaUv.e to .ConventionalhaniH-Is oj Disi iibufion

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A franchise is a means by which a producer of products or services achieves a direct chan­ nel of distribution without wholly owning or m anaging the physical facilities in the market. In effect, the franchisor provides the franchisee with the franchisor's knowledge, manufac­ turing, and marketing techniques for a financial return. INGREDIENTS OF A FRANCHISED BUSINESS Six key ingredients should be included within a well-balanced franchise offered to a fran­ chisee. These are given in order of importance. • Technical knowledge in its practical form is supplied through an intensive course of study. • Managerial techniques based on proven and tim e-tested program s are im parted to the franchisee on a continuing basis, even after the business has been started or taken over by the franchisee. • Commercial knowledge involving prescribed m ethods of buying and selling is explained and codified. Most products to be obtained, processed, and sold to the franchisee are supplied by the franchisor. • Financial instruction on m anaging funds and accounts is given to the franchisee during the indoctrination period. • Accounting controls are set up by the franchisor for the franchisee. • Protective safeguards are included in the intensive training of the franchisee for employ­ ees and customers, including the quality of the product, as well as the safeguards for assets through adequate insurance controls. ELEMENTS OF AN IDEAL FRANCHISE PROGRAM • High gross margin. In order for the franchisee to be able to afford a high franchise fee (which the franchisor needs), it is necessary to operate on a high gross m argin per­ centage. This explains the w idespread application of franchising in th e food and serv­ ice industries. • In-store value added. Franchising works best in those product categories in which the product is at least partially processed in the store. Such environm ents require constant on-site supervision—a chronic problem for com pany-ow ned stores using a hired m an­ ager. Owners simply are willing to work harder over longer hours. • Secret processes. Concepts, formulas, or products that the franchisee can't duplicate without joining the franchise program. • Real estate profits. The franchisor uses income from ownership of property as a significant revenue source. • Simplicity. The m ost successful franchises have been those thal operate on autom atic pilot: All the key decisions have been thought through, and the owner merely implements the decisions. Source: Partially adapted from Philip D. White and Albert D. Bates, "Franchising Will Remain Retailing Fixture, but Its Salad Days Have Long Since Gone," Marketing News, February 17, 1984, p. 14; and Scott Shane and Chester Spell, "Factors for New Franchise Success," Sloan Management Review, Spring 1998, pp. 43-50. Also see Stephen Spinelli, jr., Robert M. Rosenberg, and Sue Birley, Franchising (Upper Saddle River, NJ: PrenticeHall PTR, 2004).

integration. W holesalers or retailers’ purchasing channel m em bers above them is called backward integration. Firms may choose to develop corporate vertical marketing systems in order to com pete more effectively with other marketing systems, to obtain scale economies, and to increase channel cooperation and avoid channel conflict. 151

152 Part C

The Marketing Mix

Wholesaling_______ As noted, w holesalers are m erchants that are prim arily engaged in buying, taking title to, usually storing and physically handling goods in large quantities, and reselling the goods (usually in sm aller quantities) to retailers or to industrial or business users.4 W holesalers are also called distributors in some industries, particularly when they have exclusive distribution rights, such as in the beer industry. O ther w holesalers that do not take title to goods are called agents, brokers, or manufacturers *representatives in vari­ ous industries. There are over 890,000 w holesalers in the U nited States. W holesalers create value for suppliers, retailers, and users o f goods by perform ing dis­ tribution functions efficiently and effectively. They may transport and warehouse goods, exhibit them at trade shows, and offer advice to retailers concerning which lines o f prod­ ucts are selling best in other areas. Producers use wholesalers to reach large m arkets and extend geographic coverage for their goods. W holesalers may lower the costs for other channel m em bers by efficiently carrying out such activities as physically moving goods to convenient locations, assuming the risk o f managing large inventories o f diverse products, and delivering products as needed to replenish retail shelves. While producers may actively seek out wholesalers for their goods, wholesalers also try to attract producers to use their services. To do so, they may offer to perform all the distribution functions or tailor their services to include only the functions that producers do not have the ability to perform effectively. Naturally, wholesalers especially seek producers o f major brands for which sales and profit potential are likely to be the greatest. Wholesalers may com­ pete with other wholesalers to attract producers by offering lower costs for the functions they perform. Wholesalers with excellent track records that do not carry directly competing prod­ ucts and brands, that have appropriate locations and facilities, and that have relationships with m ajor retail customers can more easily attract manufacturers o f successful products. Also, wholesalers that serve large markets may be more attractive since producers may be able to reduce the num ber o f wholesalers they deal with and thereby lower their costs. Long-term profitable produccr-wholesaler relationships are enhanced by trust, doing a good job for one another, and open communication about problems and opportunities. W holesalers also need to attract retailers and organizational custom ers to buy from them. In many cases, wholesalers have exclusive contracts to distribute products in a par­ ticular trading area. For popular products and brands with large market shares, the whole­ saler's task is sim plified because retailers want to carry them. For example, distributors o f Coke and Pepsi can attract retailers easily because the products sell so well and consumers expect to find them in many retail outlets. Retail superm arkets and convenience stores would be at a competitive disadvantage without these brands. However, for new or sm all m arket-share products and brands, particularly those o f less w ell-know n m anufacturers, wholesalers may have to do considerable m arketing to get retailers to stock them . W holesalers may get placem ent for such products and brands in retail stores because they have previously developed strong long-term working relationships w ith them . Alternatively, wholesalers may have to carefully explain the m arketing plan for the product, why it should be successful, and why carrying the prod­ uct will benefit the retailer. W hile there are still many successful wholesalers, the share o f products they sell is likely to continue to decrease. This is becausc large retail chains such as Wal-Mart have gained such market power that they can buy directly from manufacturers and bypass wholesalers altogether. The survival o f wholesalers depends on their ability to m eet the needs o f both m anufacturers and retailers by performing distribution functions more efficiently and effectively than a channel designed without them.

M arketing H ighlight

Some Benefits of W holesalers tor Various C hannel Members

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BENEFITS FOR MANUFACTURERS

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• Provide the ability to reach diverse geographic markets cost effectively. • Provide information about retailers and end users in various markets. • Reduce costs through greater efficiency and effectiveness in distribution functions performed. • Reduce potential losses by assuming risks and offering expertise. BENEFITS FOR RETAILERS • • • •

Provide potentially profitable products otherwise unavailable for resale in retail area. Provide information about industries, manufacturers, and other retailers. Reduce costs by providing an assortment of goods from different manufacturers. Reduce costs through greater efficiency in distribution functions performed.

BENEFITS FOR END USERS • Increase the product alternatives available in local markets. • Reduce retail prices by the efficiency and effectiveness contributed to the channel. • Improve product selection by providing information to retailers about the best products to offer end users.

Store and Nonstore R etaili 11 g________________

___________________

_____________

As noted, retailers are merchants who arc prim arily engaged in selling to ultim ate con­ sumers. The more than 3.2 million retailers in the United States can be classified in many ways. For example, they are broken down in the North American Industry C lassification System (NAICS) codes into eight general categories and a num ber o f subcategories based on the types o f merchandise they sell.5 Marketers have a num ber o f decisions to make to determ ine the best way to retail their products. For example, decisions have to be made about whether to use stores to sell mer­ chandise, and if so, whether to sell through com pany-owned stores, franchised outlets, or independent stores or chains. Decisions have to be made about whether to sell llirough non­ store methods, such as the Internet, and if so, which methods o f nonstore retailing should be used. Each o f these decisions brings about a num ber o f others such as what types o f stores to use, how many o f them, what locations should be selected, and what specific types o f nonstore retailing to use.

Store Retailing Over 90 percent o f retail purchases are m ade through stores. This makes them an appropriate retail m ethod for m ost types o f products and services. R etailers vary not only in the types o f merchandise they carry bul also in the breadth and depth o f their prod­ uct assortm ents and the am ount o f service they provide. In general, mass merchandisers carry broad product assortm ents and com pete on two bases. Superm arkets (Kroger) and departm ent stores (M acy’s) com pete with other retailers on the basis o f offering a good selection in a number o f different categories, whereas supercenters (Wal-Mart Supercenters), warehouse clubs (Costco), discount stores (W al-Mart), and off-price retailers (T.J. Maxx) compete more on the basis o f offering lower prices on products in their large assortments. 153

154 Part C

The Marketing Mix

Manufacturers o f many types o f consum er goods must get distribution in one or more types o f mass merchandisers to be successful. Specialty stores handle deep assortments in a limited number o f product categories. Spe­ cialty stores include limited-line stores that offer a large assortment o f a few related prod­ uct lines (The Gap), single-line stores that emphasize a single product (Batteries Plus), and category killers (Circuit City), which are large, low-priced limited-line retail chains that attem pt to dom inate a particular product category. If a product type is sold prim arily through specialty stores and sales are concentrated in category killer chains, manufacturers may have to sell through them to reach customers. Convenience stores (7-Eleven) are retailers whose prim ary advantages to consumers are location convenience, close-in parking, and easy entry and exit. They stock products that consumers want to buy in a hurry, such as milk or soft drinks, and charge higher prices for the purchase convenience. They are an important retail outlet for many types o f conven­ ience goods. In selecting the types o f stores and specific stores and chains to resell their products, man­ ufacturers (and wholesalers) have a variety of factors to consider. They want stores and chains that reach their target market and have good reputations with consumers. They want stores and chains that handle distribution functions efficiently and effectively, order large quantities, pay invoices quickly, display their merchandise well, and allow them to make good profits. Selling products in the right stores and chains increases sales, and selling in prestigious stores can increase the equity o f a brand and the price that can be charged. The locations o f retail stores, the types o f people who shop at them, and the professionalism o f the salespeople and clerks who work in them all affect the success o f the stores and the products they sell. In addition to the merchandise offered, store advertising, and price levels, the characteristics o f the store itself—including layout, colors, smells, noises, lights, signs, and shelf space and displays— influence the success o f both the stores and the products they offer.

Nonstore Retailing A lthough stores dom inate sales for m ost products, there arc still opportunities to m arket products successfully in other ways. Five nonstore m ethods o f retailing include catalogs and direct mail, vending m achines, television hom e shopping, direct sales, and elec­ tronic exchanges.6

Catalogs and D irect M ail As shown in Figure 10.7, catalogs and direct mail dominate nonstore retailing. The advan­ tages o f this type o f nonstore retailing for m arketers are that consumers can be targeted effectively and reached in their homes or at work, overhead costs are decreased, and assorUnents o f specialty merchandise can be presented with attractive pictures and in-depth descriptions o f features and benefits. Catalogs can also remain in hom es or offices for a lengthy time period, m aking available potential sales. Catalogs can offer specialty products for unique markets that are geographically dispersed in a cost-effective manner. Although consumers cannot experience products directly as they can in stores, catalog retailers with reputations for quality and generous return policies can reduce consum ers’ risks. For example, Levenger, which sells pens, desks, and “other tools for serious readers,” sends consumers a postage-paid label to return unwanted merchandise. Many consum ers enjoy the time savings o f catalog shopping and are willing to pay higher prices to use it.

Vending M achines Vending machines are a relatively limited method o f retail merchandising, and m ost vend­ ing machine sales are for beverages, food, and candy. The advantages for marketers include the following: They are available for sales 24 hours a day, they can be placed in a variety o f

Chapter Ten Distribution Strategy

155

FIGU R E 10.7 Annual Nonstore Retail Sales Source: Adapted from Michael Levy and Barton A. Weitt. Retailing Management. 5th ed. (Burr Ridge, IL: McGrawHill/Irwin. 2004). pp. 57-62. Reproduced with permission from The McGraw-Hill Companies

Electronic exchanges $38 billion (17.7%)

TV home shopping $6 billion (2 .8%)

Direct sales $25.6 billion (11.9%) Catalogs and direct mail $120 billion (55.7%)

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Vending machines $25.6 billion (11.9%)

high-traffic locations, and m arketers can charge higher prices. While uses o f vending machines for such things as airline insurance and concert and game tickets are not unusual, this m ethod has limited potential for most products.

Television Home. Shopping Television home shopping includes cable channels dedicated to shopping, infom ercials, and direct-response advertising shown on cable and broadcast networks. Home Shopping Network and QVC are the leaders in this m arket, and the m ajor products sold are inex­ pensive jewelry, apparel, cosm etics, and exercise equipm ent. W hile this m ethod allows better visual display than catalogs, potential custom ers m ust be watching at the time the m erchandise is offered; if not, they have no way o f knowing about the product or purchasing it.

Direct Sales Direct sales are made by salespeople to consumers in their homes or offices or by telephone. The most common products purchased this way are cosmetics, fragrances, decorative accessories, vacuum cleaners, home appliances, cooking utensils, kitchenware, jewelry, food and nutritional products, and educational materials. Avon, M ary Kay, and Tupperware are probably the best-known retail users o f this channel. Salespeople can demonstrate products effectively and provide detailed feature and benefit information. A limitation o f this method is that consumers are often too busy to spend their time this way and do not want to pay the higher prices needed to cover the high costs o f this method o f retailing.

Electronic Exchange Electronic exchanges or Internet marketing involves customers collecting information, shopping, and purchasing from Web sites on the Internet. Electronic exchange has had its greatest success in business-to-business marketing, although it accounts for only about 10 percent o f business-to-business commerce. In the business-to-consum er market, elec­ tronic exchange is the fastest-growing type o f nonstore retailing. However, sales in this

M ark etin g H ighlight

Questions to Ask When Developing Successful Commercial Web Sites

i . i>peed of page downloads—does each page load quickly en o u g h / 3. Effectiveness of search features—-are search features returning the information users are looking for? ՝ ' ’ , •^ 4. Frequency of product updates—is product information updated often enough to m eet user needs? ^ ՝ EVALUATION OF ALTERNATIVES 1. Ease of product comparisons—is it easy to com pare different products offered on the W ebsite? . ~ V՜՝ ** ' V 2. Product descriptions—are product descriptions accurate, clear, and comprehensive enough to allow customers to make informed decisions? 3. Contacting custom er service representatives—are custom er service phone numbers easy to locate? : V' \ 4. In-stock status—are out-of-stock products flagged before the custom er proceeds to the checkout process? ՝՛\ O ^ ‘' 7 :; ; } PURCHASE 1. Security and privacy issues—do users feel comfortable transmitting personal information? 2. Checkout process—are users able to move through the checkout process in a reasonable am ount of time? \ \ ‘ : 3. Payment options—are paym ent options offered that nonbuyers desire? 4. Delivery options—are delivery options offered that nonbuyers desire? 5. Ordering instructions—are ordering instructions easy to understand? Source: Based on Douglas K. Hoffman and John L G. Bateson, Services Marketing: Concepts, Strategies, and Coses. 3rd ed. (Mason, OH,* Thomson South Western, 2006), p. 86.

market arc still a small portion o f the sales in traditional retail stores. In fact, W al-M art’s sales in its traditional stores are far greater than the total o f all business-to-consum er exchanges on the Internet taken collectively. Initially, many analysts thought that electronic exchange would become a leading source o f comm crce because o f its potential to reduce costs for marketers and prices for cus­ tomers. However, these analysts may have overestimated the ability o f electronic exchange to do so; m arketing functions in a channel still have to be perform ed although, admittedly, some o f them can be done more efficiently using this method. For example, order-taking and processing can be done more efficiently and accurately by electronic means. Figure 10.8 lists some o f the advantages and disadvantages o f the electronic exchange for marketers. In examining this figure, it is important to recognize that there are some dif­ ferences in the advantages and disadvantages depending on whether the marketer is a small, entrepreneurial venture or a large, established company. Since electronic exchange offers low-entry barriers, this is an advantage for a small company that wants to get into a market and compete for business with less capital. However, for large, established companies, this is less o f an advantage since they have the capital to invest; low-entry barriers create more com petition for them from smaller companies. 156

Chapter Ten Distribution Strategy

FIGURE

10.8

Electronic Commerce: Advantages and Disadvantages for Marketers

157

A dvantages for M arketers Reduces the need for stores, paper catalogs, and salespeople; can be cost efficient. Allows good visual presentation and full description of product features and benefits. Allows vast assortments of products to be offered efficiently. Allows strategic elements, such as product offerings, prices, and promotion appeals, to be changed quickly. Allows products to be offered globally in an efficient manner. Allows products to be offered 24 hours a day, 365 days a year. Fosters the development of one-on-one, interactive relationships with customers. Provides an efficient means for developing a customer database and doing online marketing research.

D isadvantages for M arketers Strong price competition often squeezes profit margins. Low entry barriers lead some e-marketers to overemphasize order-taking and not develop sufficient infrastructure for order fulfillment. Customers must go to the Web site rather than having marketers seek them out via salespeople and advertising; advertising their Web sites is prohibitively expensive for many small e-marketers. Limits the market to customers who are willing and able to purchase electronically; many countries still have a small population of computer-literate people. Not as good for selling touch-and-feel products as opposed to look-and-buy products unless there is strong brand/store/site equity (Dell computers/Wal-Mart/Amazon.com) or the products are homogeneous (books, CDs, plane tickets, etc.). Often less effective and efficient in business-to-consumer markets than in business-to-business markets.

Similarly, large com panies w ith established nam es and brand equity can m ore easily m arket products that custom ers w ould ordinarily w ant to exam ine before purchase (touch-and-feel products) than can sm aller com panies w ith less brand equity. For exam ple, com panies like L ands’ End, J.C. Penney, and W al-M art are m ore success­ ful in attracting custom ers electronically because custom ers know the com panies and their offerings better and perceive less risk in purchasing from them than from a new or unknown electronic m arketer. This does not m ean that new er com panies that sell only by electronic m eans cannot com pete for business. Com panies such as A m azon.com and Priceline.com have created w ell-know n Web sites and have generated considerable sales. However, as with m ost dot.com businesses, generating profits has been difficult for them. in sum, while electronic exchange has not m et the growth expectations o f many m ar­ keters, it is an established alternative for marketing some products and services. It does pro­ vide custom ers with a wealth o f product inform ation and product assortm ents that are readily available. Many electronic marketers have found ways to deliver superior customer value and become profitable and many others are close to doing so.7

Conclusion This chapter introduced the distribution o f goods and services in a com plex, highly com petitive, highly specialized economy. It em phasized the vital need for m arketing interm ediaries lo bring about exchanges betw een buyers and sellers in a reasonably efficient manner. The chapter exam ined various types o f interm ediaries and the distri­ bution functions they perform as well as topics in the selection and m anagem ent o f distribution channels. Finally, both w holesaling and store and nonstore retailing were discussed.

158 Part C

The Marketing Mix

------------ —

A dditional

Readings

Chopra, Sunil, and Peter Meindl. Supply Chain Management. 2nd ed. Upper River Saddle, NJ: Prentice Hall, 2004. Coughlin, Anne T.; Erin Anderson; Louis W. Stem; and Adel L El-Ansary. Marketing Channels. 7th ed. Upper Saddle River, NJ: Prentice Hall, 2006. Levy, Michael, and Burton A. Weitz. Retailing Management. 6th ed. Burr Ridge, IL: Irwin/ McGraw-Hill, 2007. Rosenbloom, Bert. Marketing Channels: A Management View. 7th ed. Mason, OH: Tomson SouthWestern, 2004. Simchi-Levj, David; Philip Kaminsky, and Edith Simchi-Levi. Designing and Managing the Supply Chain. 3rd cd. Burr Ridge, IL: McGraw-Hill, 2008.

-

Chapter

Pricing Strategy One o f the m ost important and complex decisions a firm has to make relates to pricing its products or services. If consumers or organizational buyers perceive a price to be too high, they may purchase competitive brands or substitute products, leading to a loss o f sales and profits for the firm. If the price is too low, sales might increase, but profitability may suffer. Thus, pricing decisions must be given carcful consideration when a firm is introducing a new product or planning a short- or long-term price change. This chapter discusses demand, supply, and environmental influences that affect pricing decisions and emphasizes that all three must be considered for effective pricing. However, as will be discussed in the chapter, many firm s price their products without explicitly con­ sidering all o f these influences.

Demand Influences on Pricing Decisions___________________________ Demand influences on pricing decisions concern primarily the nature o f the target market and expected reactions o f consumers to a given price or change in price. There are three primary considerations here: demographic factors, psychological factors, and price elasticity.

Demographic Factors In the initial selection o f the target market that a firm intends to serve, a num ber o f dem o­ graphic factors are usually considered. Demographic factors that are particularly im portant for pricing decisions include the following: 1. Number o f potential buyers. 2. Location o f potential buyers. 3. Position o f potential buyers (organizational buyers or final consumers). 4. Expected consumption rates o f potential buyers. 5. Economic strength o f potential buyers. These factors help determine market potential and are useful for estimating expected sales at various price levels.

Psychological Factors Psychological factors related to pricing concern prim arily how consum ers will perceive various prices or price changes. For example, m arketing m anagers should be concerned with such questions as these: 1. Will potential buyers use price as an indicator o f product quality? 2. Will potential buyers be favorably attracted by odd pricing (e.g. 990, $3,999)? 159

M ark etin g H ighlight

Effects on Profitability for Small Changes in Price 1 1 -1

Small changes in price can lead to large differences in net income. For example, at CocaCola, a 1 percent im provem ent in the price received tor its products would result in a net income boost of 6.4 percent; at Fuji Pholo, 16.7 percent; a t Nestle, 17.5 percent; at Ford, 26 percent; and at Philips, 28.7 percent. In some companies, a 1 percent im provem ent in the price received would be the difference between a profit and a significant loss. Given the cost structure of large corporations, a 1 percent boost in realized price yields an average net income gain of 12 percent. In short, when setting pricing objectives and developing pricing strategies, it's worth the effort to do pricing research to see w hat prices consumers are willing to pay and still feel they are receiving good value. Source: Based on Robert J. Dolan and Hermann Simon, Power Pricing: How Managing Price Transforms the Botlom Line (New York: Free Press, 1996), p. 4. Also see Kent B. Monroe, Pricing: Making Profitable Decisions, 3rd ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2003), Chapter 12.

3. W ill potential buyers perceive the price as too high relative to the service the product gives them or relative to competition? 4. Are potential buyers prestige oriented and therefore willing to pay higher prices to fulfill this need? 5. How much will potential buyers be willing to pay for the product? W hile psychological factors have a significant effect on the success o f a pricing strategy and ultimately on marketing strategy, answers to the above questions may require consid­ erable marketing research. In fact, a review o f buyers’ subjective perceptions o f price con­ cluded that very little is known about how price affects buyers’ perceptions o f alternative purchase offers and how these perceptions affect purchase response.1 However, some ten­ tative generalizations about how buyers perceive price have been formulated. For example, research has found that persons who choose high-priced items usually perceive large quality variations within product categories and see the consequences o f a poor choice as being undesirable. They believe that quality is related to price and see themselves as good judges o f product quality, in general, the reverse is true for persons who select low-priced items in the same product categories. Thus, although information on psychological factors involved in purchasing may be difficult to obtain, marketing m anagers must at least con­ sider the effects o f such factors on their desired target market and m arketing strategy.2 There are three types o f psychological pricing strategies. First there is prestige pricing, in which a high price is charged to create a signal that the product is exceptionally tine. Prestige pricing is commonly used for some brands o f cars, clothing, perfume, jewelry, cosmetics, wine and liquor, and crystal and china. Second, there is odd pricing, or odd-even pricing, in which prices are set a few dollars or a few cents below a round number. For example, Frito-Lay’s potato chips arc priced at 69 cents a bag rather than 70 cents to encour­ age consumers to think o f them as less expensive (60 some-odd cents) rather than 70 cents. Hertz economy cars are rented for $129 rather than $130 to appear less expensive. Third, there is bundle pricing, in which several products are sold together at a single price to suggest a good value. For example, travel agencies offer vacation packages that include travel, accommodations, and entertainment at a single price to connote value and conven­ ience for customers.

Price Elasticity Both dem ographic and psychological factors affect price elasticity. Price elasticity is a measure o f consum ers’ price sensitivity, which is estimated by dividing relative changes in 160

i

Ch apter Eleven Pricing Strategy

161

the quantity sold by the relative changes in price: _ Percent change in quantity demanded Percent change in price Although price elasticity is difficult to measure, two basic methods are commonly used to estimate it. First, price elasticity can be estimated from historical data or from priee/quantity data across different sales districts. Second, price elasticity can be estimated by sampling a group o f consumers from the target market and polling them concerning various price/quantity relationships. Both o f these approaches provide estimates o f price elasticity; but the former approach is limited to the consideration o f price changes, whereas the latter is often expensive and there is some question as to the validity o f subjects’ responses. However, even a crude estimate o f price elasticity is a useful input to pricing decisions.3

Supply Influences on Pricing Decisions____________________________ For the purpose o f this text, supply influences on pricing decisions can be discussed in term s o f three basic factors. These factors relate to the objectives, costs, and nature o f the product.

Pricing Objectives Pricing objectives should be derived from overall m arketing objectives, which in turn should be derived from corporate objectives. Since it is traditionally assum ed that business firm s operate to maximize profits in the long run, it is often thought that the basic pricing objective is solely concerned with long-run profits. However, the profit maximization norm does not provide the operating marketing manager with a single, unequivocal guideline for selecting prices. In addition, the marketing m anager does not have perfect cost, revenue, and market information to be able to evaluate whether or not this objective is being reached. In practice, then, many other objectives are employed as guidelines for pricing decisions. In some cases, these objectives may be considered as operational approaches to achieve long-run profit maximization. Research has found that the m ost common pricing objectives are (1) pricing to achieve a target return on investment, (2) stabilization o f price and margin, (3) pricing to achieve a target market share, and (4) pricing to meet or prevent competition.

Cost Considerations in Pricing The price o f a product usually m ust cover costs o f production, promotion, and distribution, plus a profit for the offering to be o f value to the firm . In addition, when products are priced on the basis o f costs plus a fair profit, there is an implicit assumption that this sum represents the economic value o f the product in the marketplace. Cost-oriented pricing is the m ost common approach in practice, and there are at least three basic variations: markup pricing, cost-plus pricing, and rate-of-return pricing. Markup pricing is commonly used in retailing: A percentage is added to the retailer’s invoice price to determine the final selling price. Closely related to markup pricing is cost-plus pricing. in which the costs o f producing a product or com pleting a project are totaled and a profit amount or percentage is added on. Cost-plus pricing is most often used to describe the pric­ ing o f jobs that are nonroutine and difficult to “cost” in advance, such as construction and m ilitary weapon development. Rate-of~return or target pricing is commonly used by manufacturers. With this method, price is determ ined by adding a desired rate o f return on investment to total costs. Gener­ ally, a break-even analysis is perform ed for expected production and sales levels and a rate

M ark etin g Highlight

Retail Pricing Strategies: EDLP or I ligh/Low?

11-2

Four successful U.S. retailers—Home Depot, Wal-Mart, Office Depot, and Toys 'R' U s-^iave adopted EDLP, while many fashion, grocery, and drug stores use high/low. Below is a list of ihe advantages of each of these pricing strategies. ADVANTAGES OF EDLP

read the ads and wait for items they want to go on sale. • : y; : • Reduces advertising and operating expenses. The stable prices caused by EDLP limit the need for the weekly sale advertising used in the high/low strategy. In addition, EDLP re­ tailers do not have to incur the labor costs of changing price tags and signs and putting Up sales signs. — • Reduces stockouts and improves inventory management. The EDLP approach reduces the large variations in dem and caused by frequent sales with large markdowns. As a result, retailers can m anage their inventories with more certainty. Fewer stockouts m ean more satisfied customers, higher sales, and fewer rain checks. ADVANTAGES OF HIGH/LOW • Increases profits through price discrimination. High/low pricing allows retailers to charge higher prices to customers w ho are not price sensitive and are willing to pay the "high" price and lower prices to price-sensitive customers w ho will wait for the "low" sale price. • Soles create excitement. A "get them while they last" atm osphere often occurs during a sale. Sales draw a lot of customers, and a lot of custom ers create excitement. Some retailers augm ent low prices and advertising with special in-store activities like product dem onstrations, giveaways, and celebrity appearances. • Sells merchandise. Sales allow retailers to g e t rid of slow-selling merchandise. Source: Based on Michael Levy and Barton A. Weitz, Retailing Management, 6th ed. (Burr Ridge, IL McGrawHill/Irwin, 2007), p. 418.

o f return is added on. For example, suppose a firm estim ated production and sales to be 75,000 units at a total cost o f $300,000. If Lhe firm desired a before-tax return o f 20 per­ cent, the selling price would be (300,000 + 0.20 X 300,000) -s- 75,000 = $4.80. Cost-oriented approaches to pricing have the advantage o f simplicity, and many practi­ tioners believe that they generally yield a good price decision. However, such approaches have been criticized for two basic reasons. First, cost approaches give little or no consider­ ation to demand factors. For example, the price determined by m arkup or cost-plus methods has no necessary relationship to what people will be willing to pay for the product. In the case o f ratc-of-retum pricing, little emphasis is placed on estimating sales volume. Even if it were, rate-of-retum pricing involves circular reasoning, since unit cost depends on sales volum e but sales volume depends on selling price. Second, cost approaches fail to reflect com petition adequately. Only in industries where all firm s use this approach and have sim ilar costs and markups can this approach yield similar prices and minim ize price com petition. Thus, in many industries, cost-oriented pricing could lead to severe price com petition, which could elim inate smaller firm s. Therefore, although costs are a highly important consideration in price decisions, numerous other factors need to be examined. 162

M ark etin g H ighlight

Basic Break-Rven Formulas 1 1 -3

The following formulas are used to calculate break-even points in units and in dollars: \

_ ____FC BE% units) ' (SP - VC)

BEP/....... y

DCt (in dollars)

֊ # 1

֊ ֊

(VC/SP)

where FC = Fixed cost VC = Variable cost SP = Selling price If, as is generally the case, a firm wants to know how many units or sales dollars are nec­ essary to generate a given am ount of profit, profit (P) is simply added to fixed costs in the formulas. In addition, if the firm has estimates of expected sales and fixed and variable costs, the selling price can be solved for. (A more detailed discussion of break-even analysis is provided in the financial analysis section of this book.)

Product Considerations in Pricing Although numerous product characteristics can affect pricing, three o f the most important arc (1) perishability, (2) distinctiveness, and (3) stage in the product life cycle.

Perishability Some products, such as fresh meat, baker}' goods, and some raw m aterials are physically perishable and must be priced to sell before they spoil. Typically, this involves discounting the products as they approach being no longer fit for sale. Products can also be perishable in the sense that demand for them is confined to a specific time period. For example, high fashion and fad products lose most o f their value when they go out o f style and marketers have the difficult task o f forecasting demand at specific prices and judging the time period o f custom er interest. W hile the time period o f interest for other seasonal products, such as winter coats or Christmas trees, is easier to estimate, marketers must still determine the ap­ propriate price and discount structure to maximize profits and avoid inventory losses or carrying costs.

Distinctiveness M arketers try to distinguish their products from those o f com petitors and if successful, can often charge higher prices for them. While such things as styling, features, ingredients, and service can be used to try to make a product distinctive, competitors can copy such physi­ cal changes. Thus, it is through branding and brand equity that products are commonly made distinctive in custom ers’ minds. For example, prestigious brands like Rolex, Tiffany’s, and Lexus can be pneed higher in large measure because o f brand equity. O f course, higher prices also help create and reinforce the brand equity o f prestigious products.

Life Cycle The stage o f the life cycle that a product is in can have important pricing implications. With regard to the life cycle, two approaches to pricing are skimming and penetration price poli­ cies. A skimming policy is one in which the seller charges a relatively high price on a new product. Generally, this policy is used when the firm has a temporary monopoly and when demand for the product is price inelastic. In later stages o f the life cycle, as competition 163

164 Part C

The Marketing Mix

moves in and other market factors change, the price may then be lowered. Digital watches and calculators are examples o f this. A penetration policy is one in which the seller charges a relatively low price on a new product. Generally, this policy is used when the firm expects com petition to move in rapidly and when dem and for the product is, at least in the short run, price clastic. This policy is also used to obtain large economies o f scale and as a major instrument for rapid creation o f a mass market. A low price and profit margin may also dis­ courage competition. In later stages o f the life cycle, the price may have to be altered to meet changes in the market.

Environmental Influences on Pricing Decisions_____________________ Environmental influences on pricing include variables that the m arketing manager cannot control. Two o f the most im portant o f these are competition and government regulation.

Competition In setting or changing prices, the firm must consider its com petition and how com pe­ tition will react to the price o f the product. Initially, consideration m ust be given to such factors as 1. N um ber o f competitors. 2. M arket shares, growth, and profitability o f competitors. 3. Strengths and weaknesses o f competitors. 4. Likely entry o f new firm s into the industry. 5. Degree o f vertical integration o f competitors. 6. Num ber o f products sold by competitors. 7. Cost structure o f competitors. 8. Historical reaction o f competitors to price changes. These factors help determ ine whether the firm ’s selling price should be at, below, or above competition. Pricing a product at competition (i.e., the average price charged by the industry) is called going-ruie pricing and is popular for homogeneous products, since this approach represents the collective wisdom o f the industry and is not disruptive o f industry harmony. An example o f pricing below competition can be found in sealed-bid pricing, in which the firm is bidding directly against competition for project contracts. Although cost and profits are initially calculated, the firm attempts to bid below com petitors to obtain the job contract. A firm may price above competition because it has a superior product or because the firm is the price leader in the industry.

Government Regulations Prices o f certain goods and services are regulated by state and federal governments. Public utilities are examples o f state regulation of prices. However, for most m arketing managers, federal laws that make certain pricing practices illegal are o f prim ary consideration in pric­ ing decisions. The list below is a summary o f some o f the more important legal constraints on pricing. O f course, since most marketing managers are not trained as lawyers, they usu­ ally seek legal counsel when developing pricing strategies to ensure conformity to state and federal legislation. 1. Price fixing is illegal per se. Sellers must not make any agreem ents with competitors or distributors concerning the final price o f the goods. The Sherm an A ntitrust Act is the prim ary device used to outlaw horizontal price fixing. Section 5 o f the Federal Trade Com mission Act has been used to outlaw price fixing as an unfair business practice.

Chapter Eleven Pricing Strategy1 165

2. Deceptive pricing practices are outlawed under Section 5 o f the Federal Trade Commis­ sion Act. An example o f deceptive pricing would be to mark merchandise with an exceptionally high price and then claim that the lower selling price actually used repre­ sents a legitimate price reduction. 3. Price discrimination that lessens competition or is deemed injurious to it is outlawed by the Robinson-Patman Act (which amends Section 2 o f the Clayton Act). Price discrimi­ nation is not illegal per se, but sellers cannot charge com peting buyers different prices for essentially the same products if the effect o f such sales is injurious to competition. Price differentials can be legally justified on certain grounds, especially if the price dif­ ferences reflect cost differences. This is particularly true o f quantity discounts. 4. Promotional pricing, such as cooperative advertising, and price deals arc not illegal per se; but if a seller grants advertising allowances, m erchandising service, free goods, or special prom otional discounts to customers, it m ust do so on proportionately equal terms. Sections 2(d) and 2(e) o f the Robinson-PaUnan Act are designed to regulate such practices so that price reductions cannot be granted to some customers under the guise o f prom otional allowances.4

A General Pricing Model_________________________________________ It should be clear that effective pricing decisions involve considerations o f many factors, and different industries may have different pricing practices. Although no single model will fit all pricing decisions. Figure 11.1 presents a general model for developing prices for products and services.5 While all pricing decisions cannot be made strictly on the basis o f this model, it does break pricing strategy into a set o f m anageable stages that are integrated into the overall marketing strategy.

Set Pricing Objectives Given a product or service designed for a specific target market, the pricing process begins with a clear statement o f the pricing objectives. These objectives guide the pricing strategy and should be designed to support the overall marketing strategy. Because pricing strategy has a direct bearing on demand for a product and the profit obtained, efforts to set prices must be coordinated with other functional areas. For example, production will have to be able to m eet demand at a given price, and finance will have to manage funds flowing in and out o f the organization at predicted levels of production.

Evaluate Product-Price Relationships As noted, the distinctiveness, perishability, and stage o f the life cycle a product is in all af­ fect pricing. In addition, m arketers need to consider what value the product has for cus­ tom ers and how price will influence product positioning. There are three basic value positions. First, a product could be priced relatively high for a product class because it of­ fers value in the form o f high quality, special features, or prestige. Second, a product could be priced at about average for the product class because it offers value in the form o f good quality for a reasonable price. Third, a product could be priced relatively low for a product class because it offers value in the form o f acceptable quality at a low price. A Porsche or Nike A ir Jordans are examples o f the first type o f value; a Honda Accord or Keds tennis shoes are examples o f the second; and Hyundai cars and private label canvas shoes are examples o f the third. Setting prices so that targeted custom ers will perceive products to offer greater value than competitive offerings is called value pricing. In addition, research is needed to estimate how much o f a particular product the target market will purchase at various price levels— price elasticity. This estimate provides

166 Part C

The Marketing Mix

FIG U R E 11.1 A General Pricing Model

valuable inform ation about what the target market thinks about the product and what it is worth to them.

Estimate Costs and Other Price Limitations The costs to produce and market products provide a lower bound for pricing decisions and a baseline from which to compute profit potential, i f a product cannot be produced and m arketed at a price to cover its cosLs and provide reasonable profits in the long run, then it should not be produced in its designed form. One possibility is to redesign the product so that its costs arc lower. In fact, some companies first determ ine the price custom ers are willing to pay for a product and then design it so that it can be produced and m arketed at a cost that allows targeted profits. Other price limitations that need to be considered are government regulations and the prices that competitors charge for similar and substitute products. Also, likely competitive

M ark etin g H ighlight

Eight Tips for Improving a Company’s Pricing Strategy

11

J

1. Base pricing strategies on sound research. Although a recent study found that few com pa­ nies do serious pricing research, it is a must for sound pricing strategies. Research is needed to understand the factors that influence supply and dem and. 2. Continuously monitor pricing decisions. Pricing should be treated as a process of develop­ ing prices and changing them as needed rather than an annual budgeting exercise. Price decisions define an organization's value image in the eyes of customers and competitors. 3. Recognize that buyers may have difficulty in computing price differences. Buyers do not con­ stantly m onitor the prices of many products and will not necessarily quickly recognize the value in a price deal. 4. Recognize that customers evaluate prices comparatively. Behavioral pricing research sug­ gests that customers com pare prices and price deals relative to internal or external ref­ erence prices rather than just evaluating them in an absolute sense. An internal reference price is the price a custom er has in mind for a product and an external reference price is one the custom er has seen in advertisting, a catalog, or on a store sign or price tag. 5. Recognize that buyers typically have a range of acceptable prices. Buyers often have an up­ per and lower threshold or range of acceptable prices rather than only one acceptable price they are willing to pay. 6. Understand the importance of relative price to buyers. The relative price of a product com ­ pared to competitive offerings or to w hat a buyer previously paid for it may be more im­ portant than the absolute price asked. 7. Understand the importance of price information. Price information can affect preferences and choices for different models in a product line or for competitive offerings, particu­ larly when buyers cannot easily evaluate product quality. 8. Recognize that price elasticities vary. Price elasticities vary according to the direction of a price change, and buyers are generally more sensitive to price increases than to price de­ creases. Thus, it is easier to lose sales to current custom ers by increasing prices than it is to gain sales from new buyers by reducing them . Source: Based on Kent B. Monroe and Jennifer L Cox, "Pricing Practices That Endanger Profits," Marketing

Management, September/October 2001, pp. 42-46.

reactions that could influence the price o f a new product or a price change in an existing one need to be considered.

Analyze Profit Potential Analysis in the preceding stages should result in a range of prices that could he charged. Marketers must then estimate the likely profit in pricing at levels in this range. At this stage, it is important to recognize that it may be necessary to offer channel members quantity discounts, promotional allowances, and slotting allowances to encourage them to actively market the product. Quantity discounts are discounts for purchasing a large num ber o f units. Promotional allowances are often in the form o f price reductions in exchange for the channel member performing various promotional activities, such as featuring the product in store advertising or on in-store displays. Slutting allowances are payments to retailers to get them to stock items on their shelves. All o f these can increase sales but also add marketing cost to the manufacturer and affect profits.

Set Initial Price Structure Since all o f the supply, dem and and environmental factors have been considered, a m ar­ keter can now set the initial price structure. The price structure takes into account the price to various channel members, such as wholesalers and retailers, as well as the recommended price to final consumers or organizational buyers. 167

168 Part C

The Marketing Mix

Change Price as Needed There are many reasons why an initial price structure may need to be changed. Channel members may bargain for greater margins, competitors may lower their prices, or costs may increase with inflation. In the short term, discounts and allowances may have to be larger or more frequent than planned to get greater m arketing effort to increase demand to prof­ itable levels. In the long term, price structures tend to increase for most products as production and m arketing costs increase.

Conclusion Pricing decisions that integrate the firm ’s costs with marketing strategy, business condi­ tions, com petition, demand, product variables, channels o f distribution, and general resources can determ ine the success or failure o f a business. This places a very heavy burden on the price maker. M odern-day marketing managers cannot ignore the complexity or the im portance o f price m anagem ent. Pricing strategies m ust be continually reviewed and m ust take into account that the firm is a dynamic entity operating in a very com peti­ tive environm ent. There are many ways for m oney to flow out o f a firm in the form o f costs, but often there is only one way to bring in revenues and that is by the price-product m echanism.

Additiona I p iP tH

111,9

Mazumdar, Tridib; S. P. Raj, and Indrajit Sinha. "‘Reference Price Research: Review and Propositions.” Journal of Marketing, October 2005, pp. 84102. Monroe, Kent B. Pricing: Making Profitable Decisions. 3d ed. New York: McGraw-Hill, 2003. Nagle, Thomas T., and John Hogan. The Strategy>and Tactics of Pricing. 4th ed. Englewood Cliffs, NJ: Prentice Hall, 2006. Winer. Russell S. Pricing. Cambridge, MA: Marketing Science Institute, 2005.

P art

12

The M arketing o f Services

13

Global Marketing

Section I Essentials of Marketing M anagement

in Special Fields

Chapter

The Marketing of Services Over the course o f the past 40 years, the fastest-growing segment o f the American economy has not been the production o f tangibles but the performance o f services. Spending on services has increased to such an extent that today it captures more than 50 cents o f the con­ sumer's dollar. In addition, the service sector in the United States produces a balance-oftrade surplus and is expected to be responsible for all net jo b growth in the forseeable future.1The dominance o f the service sector is not limited to the United States. The service sector accounts for more than h alf the GNP and employs more than half the labor force in m ost Latin American and Caribbean countries. Over the course o f the next decade, the service sector will spawn whole new legions o f doctors, nurses, medical technologists, phys­ ical therapists, home health aids, and social workers to administer to the needs o f an aging population, along with armies o f food servers, child care providers, and cleaning people to cater to the wants o f two-income families. Also rising to the forefront will be a swelling class o f technical workers, including com puter engineers, systems analysts, and paralegals. Many m arketing textbooks still devote little attention to program developm ent for the marketing o f services, especially those in the rapidly changing areas o f health care, finance, and travel. This omission is usually based on the assumption that the marketing o f products and services is basically the same, and, therefore, the techniques discussed under products apply as well to the m arketing o f services. Basically, this assumption is true. W hether sell­ ing goods or services, the marketer must be concerned with developing a marketing strategy centered on the four controllable decision variables that comprise the m arketing mix: the product (or service), the price, the distribution system, and promotion. In addition, the use o f marketing research is as valuable to service marketers as it is to product marketers. How­ ever, because services possess certain distinguishing characteristics, the task o f determ in­ ing the marketing mix ingredients for a service marketing strategy may raise different and more difficult problems than those encountered in marketing products. The purpose o f this chapter is fourfold. First, the reader will become acquainted with the special characteristics o f services and their strategy im plications. Second, key concepts associated with providing quality services will be discussed. Third, obstacles will be described that in the past impeded and still continue to impede developm ent o f services marketing. Finally, current trends and strategies o f innovation in services m arketing will be explored. With this approach, the material in the other chapters o f the book can be inte­ grated to give a better understanding o f the marketing o f services. Before proceeding, some attention must be given to what we refer to when using the term services. Probably the most frustrating aspect o f the available literature on services is 170

C ha pter Twelve

The Marketing o f Services

171

that the definition o f what constitutes a service remains unclear. The fact is that no com­ mon definition and boundaries have been developed to delim it the field o f services. The American M arketing Association has defined services as follows:2 1. Service products, such as a bank loan or hom e security, that are intangible, or at least substantially so. if totally intangible, they are exchanged directly from producer to user, cannot be transported or stored, and are almost instantly perishable. Service products are often difficult to identify, since they come into existence at the same time they are bought and consumed. They are composed o f intangible elements that are inseparable; they usually involve customer participation in some important way, cannot be sold in the sense o f ownership transfer, and have no title. Today, however, most products are partly tangible and partly intangible, and the dominant form is used to classify them as either goods or services (all are products). These com m on, hybrid forms, whatever they are called, may or may not have the attributes ju st given for totally intangible services. 2. Services, as a term, is also used to describe activities perform ed by sellers and others that accompany the sale o f a product and that aid in its exchange or its utilization (e.g., shoe fitting, financing, an 800 number). Such services arc either presale or postsale and supplement the product but do not comprise it. The first definition includes what can be considered alm ost pure services, such as insurance, banking, entertainment, airlines, health care, telecom m unications, and hotels; the second definition includes such services as wrapping, financing an autom obile, pro­ viding warranties on com puter equipment, and the like because these services exist in con­ nection with the sale o f a product or another service. This suggests that marketers o f goods are also marketers o f services. For example, one could argue that M cDonald’s is not in the ham burger business. Its hamburgers are actually not very different from those o f the competition. M cDonald’s is in the service business. M ore and more m anufacturers are also exploiting their service capabilities as stand­ alone revenue producers. For example, General Motors, Ford, and C hrysler all offer financing services. Ford and General Motors have extended their financial services offerings to include a MasterCard, which offers discounts on purchases o f their automobiles. The reader can imagine from his or her own experience that some purchases are very tangible (a eoffeemaker) while others are very much intangible (a course in marketing). Others have elements o f both (lunch on a flight from New York to Chicago). In other words, in reality there is a goods-service continuum, with many purchases including both tangible goods and intangible services. Figure 12.1 illustrates such a continuum. On the goods side o f the continuum, the buyer owns an object after the purchase. On the services side o f the continuum, when the transaction is over, the buyer leaves with an experience and a feeling. W hen the course in marketing is over or the flight from New York to Chicago is completed, the student or passenger leaves with a feeling. The examples o f services on the right side o f Figure 12.1 arc mosdy or entirely intangi­ ble. They do not exist in the physical realm. They cannot appeal to the five senses.

FIG U R E 12.1 The Goods-Service Continuum

Tangible

Golf clubs Car Suif Airplane

-