effective marketing strategies

Effective Marketing Strategies

Course Notes

Contents of Module Notes

Section 1 The role and responsibility of the board in determining marketing strategy.......... 1

Learning objectives ..................................................................................................................... 2

Introduction ................................................................................................................................. 3

1.1 Marketing strategy................................................................................................................. 5

1.1.1 The director’s perspective ............................................................................................... 5

1.1.2 Outcomes of a value-based relationship ......................................................................... 6

1.2 Marketing planning ................................................................................................................ 7

1.2.1 Marketing planning within corporate planning.................................................................. 7

1.2.2 A framework for marketing planning................................................................................ 8

1.2.3 A simple marketing outline plan..................................................................................... 10

1.2.4 Benefits of marketing planning ...................................................................................... 10

1.3 Financial implications of marketing strategy......................................................................... 13

1.4 Implications of a customer-focused approach for how the business is managed ................. 15

1.5 Key legal and regulatory references .................................................................................... 16

Section 2 Situation Appraisal..................... ............................................................................... 18

Learning objectives ................................................................................................................... 19

2.1 Understanding the organisation’s markets and segments.................................................... 20

2.1.1 The marketing audit ...................................................................................................... 20

2.1.1.1 The internal audit.................................................................................................... 20

2.1.1.2 The external audit................................................................................................... 22

2.1.1.3 The nature of competition ....................................................................................... 22

2.1.2 Market segmentation and Targeting.............................................................................. 28

2.1.2.1 Identifying market segments................................................................................... 28

2.1.2.2. Market segmentation criteria.................................................................................. 29

2.1.2.3 Segmentation in consumer markets........................................................................ 29

2.1.2.4. Segmentation in industrial markets ........................................................................ 31

2.1.2.5 Targeting ................................................................................................................ 32

2.2 Customers’ needs, problems and behaviour........................................................................ 34

2.2.1 Customers, consumers and their needs ........................................................................ 34

2.2.2 Buyer behaviour............................................................................................................ 35

2.3 Marketing capability analysis ............................................................................................... 38

2.3.1 Marketing capability ...................................................................................................... 38

2.3.2 Creating value............................................................................................................... 39

2.3.3 Sustainable Distinctive Competitive Advantage (DCA).................................................. 40

2.4 Company performance analysis .......................................................................................... 42

2.4.1 Key financial assumptions............................................................................................. 42

2.4.2 Key non-financial assumptions...................................................................................... 42

2.5 Marketing information and market sensing .......................................................................... 43

2.5.1 Sources of information .................................................................................................. 43

2.5.1.1 Internal data ........................................................................................................... 43

2.5.1.2 External primary data.............................................................................................. 44

2.5.1.3 External secondary data ......................................................................................... 44

2.5.2 Types of research ......................................................................................................... 45

2.5.3 Choosing marketing research methods......................................................................... 46

2.5.4 Marketing information systems...................................................................................... 47

2.5.5 Other MIS issues .......................................................................................................... 48

2.5.6 Legal and ethical matters in research............................................................................ 49

Section 3 Marketing strategy formulation .......... ...................................................................... 51

Learning objectives ................................................................................................................... 52

3.1 Determine the basis for marketing strategy.......................................................................... 53

3.2 Fundamental marketing strategy options ............................................................................. 55

3.2.1 Market and product life cycles....................................................................................... 55

3.2.2. Company competitive position ..................................................................................... 56

3.2.3 Strategic balance .......................................................................................................... 56

3.3 Strategy for exploiting the opportunities – differentiation, positioning and branding ............. 58

3.3.1 Competitive strategy ..................................................................................................... 58

3.3.2 Positioning strategies .................................................................................................... 60

3.3.3 Branding ....................................................................................................................... 62

3.3.3.1 Branding decisions ................................................................................................. 63

3.3.3.2 Levels of branding .................................................................................................. 64

3.3.3.3 Functions of the brand............................................................................................ 64

3.3.3.4 Business-to-business branding............................................................................... 65

3.3.3.5 Managing brands over the product life cycle........................................................... 66

3.4 The product/ market matrix.................................................................................................. 69

3.5 Market entry ........................................................................................................................ 71

3.5.1 Markets to enter ............................................................................................................ 71

3.5.2 Methods of entry ........................................................................................................... 72

3.5.3 Marketing programme................................................................................................... 73

3.5.4 Organising for international marketing........................................................................... 74

Section 4 Marketing tactics....................... ................................................................................ 75

Learning Objectives................................................................................................................... 76

4.1 Overview of tactics and impact of IT .................................................................................... 77

4.1.1 The marketing mix......................................................................................................... 77

4.1.2 The impact of IT ............................................................................................................ 83

4.1.2.1 IT and the marketing mix ........................................................................................ 84

4.2 Service and product marketing ............................................................................................ 86

4.3 A customer-focused organisation ........................................................................................ 87

4.3.1 A customer-centred outlook .......................................................................................... 87

4.3.1.1 Customer Relationship Management (CRM) .......................................................... 89

4.3.1.2 Direct marketing ..................................................................................................... 91

4.3.1.3 The marketing and sales budget............................................................................. 91

4.3.2 Achieving ownership of the marketing strategy ............................................................. 92

4.3.3 Organisational implications ........................................................................................... 93

4.4 Resources - monitoring and control ..................................................................................... 95

4.4.1 Evaluating marketing strategy ....................................................................................... 95

4.4.2 Strategic evaluation....................................................................................................... 96

Appendix 1 Typical sources of external information................................................................... 99

References and Useful Information ......................................................................................... 100

References .......................................................................................................................... 100

Useful books and articles ..................................................................................................... 100

Useful organisations and web sites...................................................................................... 101

Tables and Figures Figure 1.1 The corporate planning process..................................................................................... 7

Figure 1.2 Key components of the strategic marketing and planning processes ............................. 9

Table 1.1 Financial effect of changes in marketing activity............................................................ 13

Table 2.1 Capabilities subject to internal audit .............................................................................. 21

Table 2.2 Typical external marketing audit issues......................................................................... 24

Table 2.3 Typical PESTLE factors ................................................................................................ 26

Table 2.4 Typical internal factors identified in SWOT analysis ...................................................... 27

Table 2.5 Typical external factors identified in SWOT analysis ..................................................... 27

Table 2.6 Women's clothing market segmentation criteria summary ............................................. 29

Table 2.7 Segmentation variables used in consumer markets....................................................... 30

Table 2.8 Social grading system ................................................................................................... 31

Table 2.9 Market segmentation by sector and size ....................................................................... 32

Figure 2.1 Marketing Information System...................................................................................... 48

Table 3.1 Business and marketing strategies................................................................................ 54

Table 3.2 Sources of differentiation............................................................................................... 59

Figure 3.1 Perceptual map............................................................................................................ 61

Figure 3.2 Product Life Cycle ........................................................................................................ 67

Table 3.3 Product/market Matrix ................................................................................................... 69

Table 4.1 Marketing mix – tactical and strategic issues................................................................. 82

Table 4.2 Service issues and implications..................................................................................... 86

Director Development

Copyright Institute of Directors 2007

EMS reference notes 2007 Vn01FC Dec 06 Page 1

Section 1

The role and responsibility of the board in determining marketing

strategy




Learning objectives

Section 1 - The role and responsibility of the boar d in determining marketing strategy

This section provides you with the knowledge to be able to:

• Demonstrate what marketing strategy is and explain why it is important in delivering strategic objectives.

• Produce an outline marketing plan and show how it is linked to business strategy

• Identify the outcomes of a well-managed value-based relationship for buyer and seller

• Describe the relationship between marketing strategy and financial performance

• Appreciate the implications of a customer-focused approach for how the business is managed

• Identify and locate the source of key legal and regulatory references




Introduction Sales- or production-oriented organisations sell what they can make.

Customer-oriented organisations make what they can sell.

Anon

The purpose of business is the creation of value for key stakeholders, customers, shareholders, employees, and other collaborators in the process. An organisation cannot create value for any of them unless it can create value for customers. The essential element in marketing is to view the exchange process from the perspective of the customer.

The marketing function within an organisation is the primary means by which customer value is created and delivered. It can be thought of as the process by which an organisation focuses its resources, systems, structure and culture on achieving value for customers as the key to achieving its own objectives.

Directors have to create value in global markets and against global competition. They have knowledgeable and highly critical customers and demanding shareholders.

Marketing-orientated thinking is absolutely vital for success in this business environment. Company directors have to:

• Understand their company’s market position and capability, and their customers’ real needs and the influences on themUse this knowledge effectively to establish and maintain the company’s place in its chosen markets.

A marketing-led company

Marketing is an attitude of mind, a philosophy and a culture which must permeate the organisation at all levels and in all functions. To achieve this, a company must retain its customer focus at all times, change with its customers, develop new products and move into new markets at the right moment.

The company must be prepared to adapt in line with market changes. This implies an understanding of both the changes that are taking place and their causes. The board must also be able to change in the right direction in order to keep ahead of both current and potential competitors. However, even identifying competitors has become a complex issue in its own right, as customers have an ever-wider choice of ways in which to satisfy their needs.

The marketing function's primary task is to deliver the marketing strategy as a starting point for the determination of the company's corporate strategy. Directors will only be able to maximise their company’s potential if they have a good understanding of marketing strategy and are prepared to apply marketing principles throughout the organisation. The board must give strong commitment and support to strategic marketing, and the directors must personally ensure that marketing attitudes prevail at all levels of the company.

The marketing approach is sometimes contrasted with the approaches of production-led and sales-led companies.

A production-led company

A production-led company focuses on optimising the use of its own production facilities. Typically, this involves maximising use of production capacity and staff time, streamlining operations and improving product quality. It may be highly time-efficient, cost-efficient and apparently thriving.




The problem with such companies is that they can lose touch with market needs and sometimes even develop products to fill production capacity, without a clear idea of whether there is a demand for them. At best they react to market changes but are often too late to take advantage of new opportunities, so any success is likely to be short lived.

A sales-led company

A sales-led company might have problems that arise from the focus on maximising sales. They see resistance by potential customers as a problem that can be overcome by stronger selling techniques and more active promotion. Goals tend to be short-term and general.

The tendency is to use pressure-selling techniques to chase turnover at almost any cost. Salespeople who are judged on meeting sales targets are tempted to offer lower prices in order to win business. The sales force may then be blamed for loss of business, lower margins or even selling below cost.

The result is a de-motivated and vulnerable sales force who cannot rectify the problems. They have no defence against competitors who can match their product to the needs of their target customers and offer a more attractive proposition.




1.1 Marketing strategy This section provides an overview of marketing from the director’s perspective. Some of the issues will be picked up in more detail in later sections.

1.1.1 The director’s perspective The term ‘marketing’ is used in two quite different ways:

1. Marketing is a philosophy that places customers at the centre of the organisation’s approach to its strategy. It must be led by the directors and senior managers, and permeate the organisation at all levels. The board has to understand that success in marketing derives from the effectiveness with which the organisation can focus the attention of all its members on the creation of customer value. This means, in particular, a willingness to invest in the systems, processes, training etc. to bring it about and sustain it over time.

2. Marketing is a set of management tools and techniques. It is a sophisticated methodology designed to instil a disciplined approach into the organisation. The board has to be aware of the different strategic responses required to create value through changing market conditions, and the analytical tools and techniques available to assist in the process.

The board should require the marketing function to contribute to the delivery of the company's objectives, and ensure that the marketing strategy adheres to the broader vision and values of the company at all times. The board should support the marketing planning process, emphasise its importance and ensure that it is effectively integrated with the other functions of the business.

The responsibility of ensuring the board’s commitment and support for the marketing strategy rests with the marketing director. Once the board has signed up to the company’s strategic marketing perspective the directors will support the marketing planning process, ensure that the capabilities and competencies are available, keep the planners involved and motivated, co-ordinate their activities and monitor the results.

The marketing director’s role is to develop the strategy, obtain the funding from the board by justifying the budget and produce timely reports that explain to all the directors whether the expenditure is proving to be cost-effective.

So, what is marketing? Consider the following definitions:

‘Marketing is the management process responsible for identifying, anticipating and satisfying customer requirements profitably.’

Chartered Institute of Marketing (2003)

Marketing is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organisational objectives’

American Marketing Association (2003)

‘Marketing is selling goods that don’t come back to people who do.’

Anon




Marketing is about creating value for customers and extracting value from them.

John Lines, IoD Consultant (2006)

The creation of value

Value for customers is created through the manipulation of the ‘Marketing Mix’ - a set of tools available to the organisation to deliver the intended solution to the target audience. Central to the mix is the product or service, the element which has the basic functionality sought by the customer.

However in order for the functionality to be effective it must be made available in the right place at the right time (place). This may require investment in distribution. The company must ensure that there are processes and networks in place, both now and into the future, that enable customers to gain access to its products and services.

There is a need for information about the product and how it can be obtained to be conveyed to the target audience. In some circumstance there may be a need for some persuasion (promotion or marketing communications).

There is always a price to be paid to participate in or benefit from the goods or services on offer. The price is usually but by no means always financial. It is important to understand how customers perceive price and the implications for their ability to pay it. Successful delivery involves the effective management of people, processes and physical evidence.

In return, value from customers is achieved from the revenues generated by their willingness to pay for the value they have received. This customer value is turned into profit by the organisation’s ability to capture and manage the associated costs.

1.1.2 Outcomes of a value-based relationship An organisation that focuses on creating value will generate benefits for itself and its customers.

Outcomes for the customer include:

• Improvements in efficiency and therefore costs

• More effective problem-solving

• Proactive value creation

• Early access to innovation

Benefits to the seller include:

• Greater customer loyalty

• Purchase decisions less influenced by price

• Marketing programmes generally more effective (greater return on investment)

• More focused product/ service development

• More flexible response to change with respect to customers.




1.2 Marketing planning It is only safe not to plan if the future is going to be similar to the present, and preferably similar to the past. Since this is unlikely in any market, the company with strategic marketing plans reduces its risk of failure and increases its chance of success at the expense of its rivals with less well devised or no plans.

1.2.1 Marketing planning within corporate planning Marketing planning should be a central element of the corporate planning cycle. The marketing plan identifies what the company sees as the optimum combination of products and markets to achieve its corporate objectives. To justify the decisions, the plan should analyse the company in the context of its competitive environment and quantify its conclusions.

Figure 1.1 The corporate planning process

Figure 1.1 illustrates the place of marketing planning within corporate planning. It shows that all stages of the cycle interrelate both horizontally and vertically. This denotes the need for continuous communication between the different functions involved. Each stage of planning is dependent upon information gained during other stages of the cycle.

The most effective approach to strategic planning is to start by gaining a clear picture of the company, its position in the marketplace and the wider environment, its strengths and weaknesses, and all the options open to it. This makes it easier to set realistic objectives based on sound market information, and to create a workable plan to achieve the objectives.

The corporate plan should answer three questions:

Vision

Capability

Strengths & weaknesses

PESTLE

Marketing Audit

Segments

Customer needs

Position

Competition

Value partners

Business Objectives

e.g. profitable growth

Business strategy

e.g. develop the brand,

diversification

Other functional strategies

Measurement & control

Marketing strategy

ID Target markets

Positioning/Brands

NPD

Marketing Tactics

Promotion

Pricing

Distribution

People

Processes

Physical evidence

Forecast




1. Where is the company now?

2. Where does the company want to be?

3. How does it propose to get there?

The strategic marketing plan answers the same three questions in terms of the company’s products/ services and markets:

• What is the current competitive position of the company’s products/services within its chosen markets?

• With which products/services, and within which of the markets accessible to it, is the company best able to meet its objectives over an agreed period (usually three to five years)?

• Which activities with which products/services and in which markets will enable it to meet those objectives?

Only once the strategy has been decided should the tactical plan be prepared. A tactical marketing plan simply adds detail, timings and responsibilities to the first year of the strategy. It will usually determine the marketing mix, for example. It should contain plans for advertising and promotion, including costs and expected returns wherever possible. It may show costs and timings of activities such as investment in capital goods. It may detail when new recruitment will take place and when market research will be undertaken.

This order of events forces management into the discipline of completing the necessary analytical and longer-term planning work before making short-term decisions. It also helps to ensure that these decisions are based on a thorough analysis of the environment in which the company operates.

This approach is likely to be much more effective than that of a company that simply projects targets forward from its current position. While this may appear to produce an effective plan, it is actually blinkered because it is not taking into account any changes in the marketing environment.

1.2.2 A framework for marketing planning Figure 1.2 illustrates the key components of the strategic marketing planning process, shows the meaning of the marketing terms and indicates the key benefits to the company.




The Strategic Marketing Plan

Stages of planning

What they mean Benefits to the company

Company mission and objectives

• The company, philosophy, purpose, pledge to staff, customers, etc

• Clear, measurable objectives

Answers key questions:

• Why does the company exist?

• What business is it in?

Marketing audit Where is the company now?

• Detailed analysis using company information and market trends

Establishes a starting point – without this any plan is of limited use

Marketing information

• Systems provide marketing information in usable form

• Structures to ensure that data feeds back into the system for future use

Ensure accessible data to meet marketing needs at all times and at all levels of the company

Marketing objectives

Where does the company want to be?

How can the company best achieve its corporate objectives?

Clarifies company goals in a marketing context, i.e. in terms of products and markets

Marketing strategy How will the company get there?

• Examining all options and creating a workable strategy

Creating strategy based on marketing analysis increases potential for achieving company objectives

Tactical action plan • Costed action plan for the first year of strategy

• Actions, responsibilities, timings and a ‘plan for planning’

Shows ‘who does what and when’ to achieve the first year of the marketing strategy

Control systems Monitoring and checking systems to ensure that:

• Opportunities are not missed

• Potential problems are foreseen

Increase sales/profit opportunities and allows ‘proactive not reactive’ response to problems

Figure 1.2 Key components of the strategic marketin g and planning processes




1.2.3 A simple marketing outline plan This simple plan must be regarded as comprising six stages that are iterative. In other words, the final measurement stage leads to a review of the situation, a new beginning and a revision of the plans.

1. Strategic Marketing Audit - Where are we now?

a. Internal - Total marketing investment, marketing performance

b. External - Market size, penetration, share,

2. Forecasts – what is going to happen?

a. Market trends, broad-scale influences

3. Business/ market objectives/ budget - What do we want?

a. Sales, profit, customer satisfaction

b. Overall allocation of funds for marketing effort

4. Marketing strategy - How will we get it?

a. Target markets & objectives

b. Allocate budget to markets

c. Product strategy

d. Competitive stance

e. Positioning & branding

5. Implementation – What must we do for each market or customer?

a. Distribution strategy

b. Pricing strategy

c. CRM strategy (internal & external)

d. Communications strategy

e. Capability strategy – systems, structure, training etc.

f. Forecast outcomes – market share, sales, profit

g. Review budget

6. Control – How can we make sure we succeed?

a. Measure cost of marketing effort (above) by market/customer

b. Measure results by market/customer, compared with forecast & budget

1.2.4 Benefits of marketing planning Companies with effective marketing planning gain a number of advantages over less well-planned competitors:

• They can predict and sometimes influence the pace and direction of market change to their own advantage. For example, having established its ‘twin pot’ yoghurts and desserts in the UK during the 1980s, the German dairy company Müller anticipated the higher level of competition in the twin pot market in the early 1990s. Müller pre-empted it with an aggressive campaign of advertising and promotions that gave the company a dominant and largely unassailable share




of the twin pot market by 1995. By 2002, however, this market had diminished but they had moved strongly into the single pot health food market with Mullerlight, Fromage Frais and Vitality Probiotic Yoghurt. By 2004 they had added Müller Corner, My First Müller Corner (yogurt for young children), Müllerice Banana with added Glucose, Müllerlight yogurt with blackcurrant, and Müller Vitality with prunes (promoted as being a powerful antioxidant, an important source of boron, to help maintain healthy bones, and a good source of potassium). By 2006 there were also Müller Little Stars with 100% natural ingredients matched by a new direction for yoghurt with Müller Amoré to “treat your tastebuds to some Continental indulgence” and Cadbury Chocolate Bliss.

• Easily accessible marketing information gives them tight cost control, leading to potential price or profit advantage over competitors. By maximising cost efficiencies, they can match or better the margins of their competitors. This gives them a ‘margin cushion’, and they can use it either to enjoy the benefits of high margins or perhaps to adopt an aggressive stance. The latter is vital when price competition becomes severe, as they are at least as strong as their competitors to withstand a price war. For example, Dell has always focused its production on building custom PCs against direct telephone and internet orders which set the specifications of each package required. The system flags up changing needs. In 2004 they became the leading US PC supplier. But now because of changing market and competitive conditions Dell are reassessing their strategy looking at new products, new markets, new suppliers and improving service levels – nothing is forever.

• Focused monitoring of external markets helps them to anticipate developments. They are ready to react to market developments, or even to pre-empt them. Contact lenses are no longer made individually for each customer and soft lenses come off production lines. They are a commodity, albeit in a tightly regulated market. A qualified optician set up a company, Postoptics, to sell lenses online. In 2003 the company was increasing turnover by 30 - 40% a year and had 90% of an online market expected to grow to 15% of the total market. One potential rival was taken to court by the General Optical Council for failing to verify prescriptions. By 2004 Postoptics had increased its online and mail order market share by using Google. In 2006, however, the Association of Optometrists claimed there was no evidence of the forecast rise of internet sales.

• They accept the need for continuous change and are better prepared for it, having the right attitudes and culture in place throughout the organisation. 3M's declared business policy is to have at least 50% of income derived from products less than five years old.

• They can allocate resources to meet short- and longer-term goals for sound commercial reasons, thus reducing waste. For example, a well-planned manufacturing company might decide on a factory extension to meet anticipated growth within one of their key markets. Had they only planned short term, they might have installed higher capacity production lines within the existing factory. Then they might have found in the longer term that these were inadequate, the growth exceeded their expectations and the factory extension was still needed.

• Their pricing is strategic and based on solid market information. They can make both long- and short-term decisions on such issues as whether to adopt a market skimming high price strategy, a market penetration low price strategy, or perhaps a two-stage combination of the two. Market information helps the company to identify the optimum price in either case.

• Managers have better direction and focus, and are more motivated as a result. Key managers have contributed to the plan, understand and accept the objectives, take ownership and feel commitment to the strategy. They are also more ready to be measured against clear goals, especially when they have contributed to setting them.




Marketing strategy and planning are now company-wide activities, not a task to be left to the marketing department. Inter-functional relations are improved by shared goals and clear objectives. Well-defined direction for all and clear responsibilities for each function in achieving the shared goals tend to iron out perennial differences between the functions. Planning should specify sales activity to meet expectations based on sound marketing information and customer targeting, and plan production capacity needs accordingly.

To be effective, planning must have strong support from the board, and must be built into the company’s total activities. Good planning processes feed off existing strategy and feed into future planning and make it both easier and more accurate.

The idea of a plan for planning is simply to ensure a mechanism exists through which to update the marketing plan on a regular basis. Strategy may be reviewed quarterly, and tactics weekly or even daily. The results of a quarterly review can be analysed and adjustments made to improve the accuracy of the plan’s remaining years, and add a further quarter to the strategy. It can also take into account any changes in the external environment which alter previous estimates.

The people who are involved in planning vary with company size and culture, and may even change at different stages of the company’s life cycle. It is more important that the process is supported and guided strongly and visibly by the board, and that input is sought from as broad a range of management and staff as is practical and relevant.

Board level support is essential to maintaining momentum and keeping the planning process on track. Broad-ranging input does more than just ensure a wide range of valuable ideas. If it is well handled, it also means that all employees:

• know what is going on

• feel that they are contributing to the plan

• gain a sense of responsibility for making it succeed.

The communication process during consultation for marketing planning should be two-way: management gain valuable input for the marketing plan, and those being consulted gain an insight into the reasons for marketing planning. When it works well, staff are less threatened by the perceived change, and often become more marketing-orientated as a result.




1.3 Financial implications of marketing strategy The board must be aware of the financial implications of its marketing activities to ensure they generate revenue and produce a profit.

Although the company may be able to increase profit by raising the price of its product or service, it may also have to demonstrate improvements in value for the customer. This process may require investment in the product or service itself, distribution (place), training for the front line people and promotion. The cost of this investment must not outweigh the expected benefits of higher prices.

An attempt to increase the size of the business may involve entry into new markets. The company can only implement this strategy if it invests in all the stages of a marketing plan and the marketing mix. Such investment can only be justified by the returns forecast for the market selected, adjusted for anticipated risk (competition, interest rate, substitution etc.) and discounted for a reasonably accurate time period.

The simple examples in Table 1.1 illustrate the changes that can be influenced by marketing activity, assuming the objective of the firm is to achieve a good return on assets.

Profit Margin Asset Turnover Return on Assets

Net profit Net Sales

X Net Sales Assets employed

= ROA

80,000 2,000,000

X 2,000,000 500,000

= 80,000 500,000

4 X 4 = 16%

Changing the rate of profit by raising the price, lowering input prices or reducing variable costs produces:

100,000 2,020,000

X 2,020,000 500,000

= 100,000 500,000

5 X 4.04 = 20.2%

Changing the turnover of assets by improving productivity and improving working capital utilisation (reduce stock, longer credit terms, shorter payment terms etc.) produces:

80,000 2,000,000

X 2,000,000 400,000

= 80,000 400,000

4 X 5 = 20%

If making both changes at the same time is possible the impact is:

100,000 2,020,000

X 2,020,000 400,000

= 100,000 400,000

5 X 5.05 = 25.25%

Table 1.1 Financial effect of changes in marketing activity

The marketing function can play an important in both elements. Customer value can be improved by a better understanding of customer needs and consequent improvements to the offering, which may lead to higher sales volume and higher prices. The same information can assist in the more accurate (and cost effective) tailoring of customer service and ensure better control over input prices as procurement becomes more accurate.




The board’s investment in the marketing function is required for both the short and long term. While short-term support for particular promotional campaigns or limited discounts is important, long term investment in the marketing infrastructure is critical. This establishes the long term positioning, branding, distribution systems, recruitment and training, customer relationship management and so on.

Shareholder value creation is determined by three main issues:

1. Funds from operations – sales revenue and direct and indirect costs

2. Investment in assets – the acquisition, disposal and efficiency of assets and working capital

3. Financing costs – the mix of funding between debt and equity.

Marketing strategy, therefore, needs to be evaluated in terms of the impact it will have on these three issues. New strategies will almost certainly alter the means by which the company creates value for its customers by introducing a new value chain and a new value system. Their success will largely be determined by the combination of attractive markets and appropriate offerings.

The profit and cash generation will be determined by the cost drivers associated with the revenue generation. These include the capital expenditure and outlay on working capital.

The board will have to assess:

1. The implications for all of the cost drivers – direct and indirect, capital expenditure, capital efficiency, and financing costs.

2. The sources of finance (internal, debt, equity)

3. The implications of (2) above for the capital structure of the company and for key ratios such as return on capital, asset turnover, gearing.

The functional implications for the strategy will affect the cost and value drivers. For example a differentiation strategy may require investment in new products, marketing campaigns, systems, and training. In addition, if some of the cost and revenue drivers are outside the company there are implications for the management of relationships with key collaborators.

Alternative marketing strategies must always be considered and compared in the light of their ability to generate value for shareholders in keeping with the long term objectives of the organisation’s key stakeholders.




1.4 Implications of a customer-focused approach for how the business is managed products don’t make profits, customers do.

Anonymous

A customer-focused approach has significant implications for the board, management and the structure of the organisation. The customer focus must become an integral, continuous and long-term feature of the corporate culture, its values, beliefs, ways of doing things, relationships, structure and systems.

The directors should show leadership and commitment to the philosophy to ensure it is embedded in what is popularly called the organisation’s DNA. Management can then:

• Identify suitable target markets and concentrate resources on them to achieve the overall business goals

• Ensure everyone in the organisation understands that their clear purpose, and the prime source of business success, is to create value for customers, shareholders, external value partners and employees

• Use the structure and governance of the organisation to facilitate the focus and co-operation of the different functions on value creation

• Implement measurement and reward systems that connect the individuals’ daily activities with the pursuit of this philosophy

• Deliver focused training and development to enhance capability

• Demonstrate the financial implications of customer focus – customer lifetime value, profitability, shareholder value, investment, costs

• Invest in high quality information about customers’ real needs in terms of the benefits they seek from the company’s offering, and their psychological and environmental wants that determine and determine their needs

• Collect similar information about competitors

• Benchmark the company’s performance

• Maintain systematic approaches to the delivery, monitoring and control of marketing strategies and resources

• Support the company’s position, image and brand both inside and outside the organisation

• Encourage the belief in the company’s global opportunity.




1.5 Key legal and regulatory references Numerous acts and regulations exist to protect consumers through open competition in defined markets. The Competition Act 1998 set out the basis for competition and the Enterprise Act 2002 established the Office of Fair Trading and strengthened the Competition Commission to implement a tougher regime.

The Competition Act 1998 regulates the competitive conduct of businesses in the UK. The rationale behind the act is:

• to bring about a better deal for consumers by preventing and remedying anti-competitive behaviour more effectively

• to avoid placing unnecessary burdens on businesses

• to bring UK competition law into line with EC competition law.

The act prohibits anti-competitive agreements designed to prevent, restrict or distort competition within the UK. The effect on trade has to be appreciable, which is taken to be over 25% of a market. Abuse of a dominant position is also unlawful. The OFT can define a relevant market because market shares can be calculated only after the boundaries of a market have been defined.

The Data Protection Act 1998 repealed all previous law in relation to data protection. In 2004 the Information Commissioner issued a statement to help organisations get it right.

The act gives rights to individuals to access personal data from which the living individual can be identified. Special protection is given to sensitive personal data (relating to race or ethnic origin, political or religious beliefs, trade union membership, physical or mental health/condition, sexual life, commission or alleged commission of an offence and proceedings relating to the committed offence and the sentence imposed). There is a bar on the transfer of data outside the European Economic Area (subject to exceptions).

Those involved in processing data must register with the Data Protection Registrar.

Data is defined as any information which:

• is processed automatically by means of equipment or is recorded with the intention that it should be processed or

• is or is intended to be recorded as part of a relevant filing system or

• forms part of an accessible record.

The Data Protection Principles, principles of good conduct set out in the act, are that:

• data held should be accurate, up to date, relevant and not excessive for the purpose for which data is obtained

• before data can be processed either the Data Subject must consent to the processing or it must be necessary for certain specified purposes

• if the data is “Sensitive Personal Data” explicit consent is required

• appropriate technical and organisational measures have to be taken to prevent unauthorised or unlawful processing and against accidental loss destruction or damage to the Personal Data




An individual has the right to be told if his personal data are being processed by the Data Controller. Subject to some exceptions the Data Subject can require a Data Controller to cease or refrain from commencing processing on the grounds that it will cause substantial damage or distress.

The Data Subject can prevent the use of his personal data for direct marketing purposes.

In addition, the telephone, mailing and fax preference services enable an individual to register a name, address, telephone and fax numbers to prevent unauthorised approaches via these media from organisations. For marketing purposes an organisation is only allowed to use any of these media for a registered person if they have a previous or existing relationship with the individual.

The marketing industry is further regulated by a series of industry codes of practice. These are issued as required by regulatory and advisory authorities such as the Direct Marketing Authority, the Advertising Standards Authority, the Committee of Advertising Practice (CAP), and the Broadcast Committee of Advertising Practice (BCAP)

The ASA is here to make sure all advertising, wherever it appears, meets the high standards laid down in advertising codes.

www.asa.org.uk (2006)

Further information on relevant legislation can be found in the module reference notes for The Director and the Law.




Section 2

Situation Appraisal




Learning objectives

Section 2 - Situation appraisal: the position of th e company with respect to its strategy for current markets, performance and value creation.


• Carry out an internal and external situation appraisal to underpin the creation of marketing strategy.

• Analyse customers’ needs/ problems, and how they are influenced

• Demonstrate how customer value is created and its contribution to competitive advantage

• Demonstrate the means by which marketing information can be successfully obtained and managed.




2.1 Understanding the organisation’s markets and segments

Marketing decisions are concerned with the application of organisational capability to the creation of customer satisfaction in a constantly changing environment. An essential input to the marketing planning process, described in the previous section, is good information about the organisation’s capability with respect to marketing, and about the external environment in which it proposes to operate.

2.1.1 The marketing audit The marketing audit is one of the primary methods by which the organisation identifies its current position with respect to its external and internal environment. It acts as a checking system for the marketing planning systems already in place. It should measure regularly, usually annually, the success of the current plan before the company makes adjustments or enters the next planning phase.

The marketing audit analyses the company’s performance in terms of products and customers. To be of value, this information must be set against the company’s environment, and take account of how its competitors perform against the same criteria; market trends, innovations, and wider issues such as political and economic trends.

The discipline of undertaking a marketing audit using proven methods forces management to examine a wide range of issues, and reduces the dangers of tunnel vision. It is also concerned with forecasting the development of key internal and external elements.

The internal audit analyses the ability of the organisation to meet the needs of current and potential customers.

2.1.1.1 The internal audit

All the issues examined during the internal marketing audit and the planning which follows have implications for the capability of the organisation. Capability is based on four fundamental elements:

1. Resources – quantity, quality and appropriateness for marketing.

2. Systems – capable of delivering value to customers (sales, service, logistics communication etc.).

3. Structure – provides for appropriate accountability and authority to deliver customer value.

4. Culture – everyone has a customer focus and will exhibit appropriate behaviour.

It should allow the company to evaluate its performance in marketing; that is how well the investment in marketing effort (the mix variables) has succeeded in producing the appropriate output in terms of results (sales, profit, customer satisfaction etc).




Financial Results – sales (value/volume) & profit by:

• customer, product, Industry/market segment

Non-financial Results:

• customer satisfaction, loyalty

Market share by:

• total market

• Industry/market segment

Marketing organisation:

• Organisation structure

• Marketing control systems and data

Marketing procedures:

• Current marketing planning system

• Marketing information systems

• Measurement and control procedures

• Marketing data analysis

• Action planning and results feedback

• Marketing HR responsibilities

• Inter-functional responsibilities

Marketing mix variables:

• Product range/quality/development

• Pricing

• Discounts and credits

• Stockholding policy

• Unit of sale

• Distribution

• Sales channels

• Sales support:

• Advertising and promotion

• Point of sale

• Public relations

• Packaging

• Sampling

• Exhibitions

• Training and development

Table 2.1 Capabilities subject to internal audit

To put this internal audit analysis in context the organisation should benchmark itself where possible against each major competitor.

It is important to align internal information collected for marketing purposes with the information collected for the board when preparing or updating corporate strategy. The purpose of the marketing information on the firm's resource strengths and competitive weaknesses is to determine the best strategic fit between the firm and its environment. The main areas are:

• Financial resources - Present assets, their sources and uses; liabilities; financial ratios for comparison with industry ratios; level of risk; basic sales and cost analyses.

• Physical resources - Current, short- and long-term facilities, such as property, plant, equipment, inventory.

• Human resources - Talents and abilities of managers and all other human resources, including outside specialists, key suppliers and customers.

• Technological resources - IT facilities and processes, including production, databases and intellectual property.

• Organisational resources - Firm's structure, systems, and procedures that support implementation of the strategic plan.




2.1.1.2 The external audit

To see the company’s internal audit in perspective, the directors should put it into the context of the wider environment. The internal audit examines factors over which the company has some control. The external audit, however, looks at factors in the external market that the company may be able to influence but cannot control.

These include:

1. The operating or narrow external picture covering elements such as the total size of each of the markets or segments, competition, paths to market, and the trends in these things.

2. The broader picture covering all the social, economic, political, legal, environmental and cultural factors which can have an impact upon the company.

The external audit should give a clearer view of the markets as a precursor to identifying where the best opportunities lie and where the most likely threats to the company’s market position might lie.

This information should help determine the strength of the company’s position compared with that of the competitors, in supplying the benefits sought by the target customers.

2.1.1.3 The nature of competition

One of the key issues in the narrow external environment is competition. In global markets, competition comes from an increasingly wide range of sources. To protect its position as a successful organisation every company must identify new opportunities, understand and recognise the types and sources of competition, and predict the activities where possible.

Underlying any analysis of competition is the economic concept of supply and demand.

In simple terms, a market begins life as a monopoly, with one supplier. A company identifies a need, develops a product and launches it at a price that will generate a net profit. With obvious rewards to be gained and without too many barriers to entry, competitors will probably be quick to enter the market, often with improved products. The story of the Sony Walkman portable music player in its cassette-tape, compact disk, mini-disk and solid state MP3 and video formats is an example.

As supply increases to meet demand, prices tend to fall. While rewards are still considered to be worthwhile, competition tends to increase, often until saturation is reached. Once supply exceeds demand, there is a shakeout of weaker suppliers and only the stronger and most differentiated competitors remain in the market. Tight cost controls, economies of scale and the cost savings resulting from experience play a significant part in determining which suppliers continue to compete.

PC market

Few of the many players who entered the PC markets in the 1980s and 1990s have survived. Even Compaq and Hewlett-Packard, huge companies in their own areas, had to merge to avoid collapse. Their merger has still failed to ensure their future as PC suppliers against the domination of Dell. When HP and Compaq were at their height, Michael Dell was a college drop-out building PCs in his bedroom to his friends’ specifications. His vision of the PC market and enormous success were based on ‘build to order.

When a market reaches relative equilibrium of supply and demand, it does not remain static. The remaining players then develop competitive strategies based on:




• price

• high volume

• low cost

• product and service differentiation

• market niche domination.

Markets may become polarised and those suppliers caught in the middle find it increasingly difficult to remain profitable.

Supermarkets

In UK food retailing, large supermarkets became concentrated in the hands of Tesco, Sainsbury's and Asda/Wal-Mart, all of whom entered the battle for Safeway in 2003. Morrisons were allowed by the Competition Commission to take over Safeway in 2004 as this acquisition did not give a monopolistic advantage to any one player. Sainsbury’s struggled to deliver top-quality along with low prices. At the other end of the scale, family-run corner shops with long opening hours survived. Companies in the middle such as Gateway suffered badly and were taken over.

A similar polarisation occurred in price positioning. The major store groups moved either towards the quality or discounted price ends of the spectrum, and mid-priced outlets suffered if they could not offer differentiated benefits.

The retail food market continued to change in 2005. The major supermarkets bought into the corner shop sector as the OFT put this into a different class of provision. Morrisons failed to turn the Safeways branches outside its more northern patch into profitable outlets quickly enough for its shareholders. The Executive Chairman, Sir Ken Morrison, managed to avoid being forced to step down by taking a non-executive role and appointing a separate CEO.

By 2006, four non-executive directors, a finance director and deputy chairman had been appointed and Morrisons had retrained 90,000 Safeway staff, integrated the operational systems and become a national provider. The OFT had reversed its decision and was investigating the role of supermarkets in the small store sector. Sainsbury’s recovered its profitability, mainly by focusing on quality.

Concentration in the hands of buyers and suppliers is a growing trend that represents a threat to many smaller companies. It often results from mergers and take-overs. Large companies may reduce the number of their suppliers to improve efficiency. This creates an interdependency which can benefit both supplying and buying companies. It also leaves smaller companies to find niches in which to survive.




Total and individual market segments:

• Size (value/volume)

• Growth trends (value/volume)

• Buying patterns

• Geographical trends

• Demographic trends

Communications:

• Principal methods used

• Sales methods and structures

• Levels of advertising and promotion

Products and industry segments:

• Innovation trends

• Quality expectation

• Product usage

• Product sourcing

• Packaging

• Legal requirements

Prices:

• Level and range

• Credit terms

• Discounting practices

Industry structure:

• Major (i.e. closest) competition by relevant measurements from internal audit

• Number, hierarchy and characteristics of companies in the industry

• Their capacity to produce, market and deliver

• Their ownership, origins, level of investment and likely diversification

• Trends in new entrants

• International links

• Levels of concentration

Table 2.2 Typical external marketing audit issues

Competitor analysis can be applied to an industry or market, or preferably both. In its narrowest definition a firm’s competitors are other firms in the same industry supplying similar products. From a broader perspective, there are latent competitors that could supply similar products if they chose to do so, but do not currently produce them.

From a market perspective, substitute products could fulfil the same needs for the same customers. Video or DVD movie rentals and downloads compete with cinemas, for example. So suppliers of these substitutes could be regarded as competitors. From a still broader perspective, a competitor includes any alternative use for the same portion of the customer’s spending power. In this sense, DIY products compete with holidays.

The competitive position within an industry is also affected by the bargaining power of buyers and suppliers, a function of supply and demand. Where demand exceeds supply, suppliers exert their bargaining power by raising the price of raw materials. When supply exceeds demand, buyers increase their demands or force prices down. Both situations represent a threat to stability by intensifying competition.

Competitor analysis helps to identify the behaviour patterns competitors might adopt in response to marketing tactics such as price-cutting or promotion. Kotler (1991) describes the most common competitor reaction profiles as:

• the laid back competitor, which does not react quickly or strongly to a competitive move. This may be because it is confident of customer loyalty, because its strategy is to ‘milk’ the business, or because it is ill-informed. Kotler adds that the reasons for laid back behaviour should be assessed.




• the selective competitor, which will react only to certain types of attack such as price cuts but not to advertising.

• the tiger competitor, which reacts quickly and strongly to anything it sees as an attack, and will fight to the last. Kotler adds that it is always better to attack a sheep than a tiger.

• the stochastic competitor, which does not have any predictable reaction pattern.

A particular competitive pattern may permeate a whole industry. Markets with many similar competitors tend to be unstable and in a state of perpetual conflict. Undifferentiated commodity markets, for example, tend to have price wars as a result of the overcapacity. Analysing an industry’s competitive pattern can help directors and marketing managers make strategic and tactical marketing decisions such as pricing changes, promotion and advertising spend.

The types of industry where competitor analysis is most important are those that show the least growth and the least potential, since market share can only be increased by taking it away from competitors.

The information gathered can be used to create a map of the likely actions and reactions of particular competitors in different situations. Some idea of each competitor’s strategy helps define the best market opportunities and the likely outcome of particular actions such as price changes or new product launches.

Analysing competitor information reveals which competitors are weak and open to attack. A weak competitor in a highly valued segment may lose customers to others with relatively few resources. Strong competitors may be moving ahead and setting industry standards but they too have weaknesses, and parts of their business may be vulnerable.

Other reasons for examining the strengths and weaknesses of competitors are:

• the strongest competitors may act as a benchmark or industry standard

• the failure of a weaker competitor may not be beneficial to a strong company.

Porter (1985) makes the point that there are good and bad competitors, and it is in the interests of the industry as a whole to support the good and attack the bad. Porter defines as good those competitors who play by the rules, make reasonable assumptions about the industry’s growth potential, set sensible prices in relation to costs, limit themselves to a certain market share and co-operate to some extent with others to encourage lower costs or differentiation. Bad competitors are those who take risks to win share for themselves, and upset the equilibrium of the industry to their own advantage.

The wider point made by the good and bad competitor example is that an industry and its participants benefit from having competitors. Competition increases total awareness and demand, reduces the risk of anti-trust legislation, shares development and technology costs and increases total market coverage by serving different segments.

PESTLE and SWOT analyses

The company should look beyond market and industry boundaries at the wider external environment and its impact on the company’s position. These are factors that the company cannot control, but that can have a significant impact on the company.

Directors need an overview of the whole business environment in order to gauge the influences on their industry, their markets, their company and their actual and potential customers. This type of analysis is often called PESTLE for the relevant headings from Political factors, Economic




conditions, Socio-cultural trends, Technological developments, Legal issues and Environmental issues.

Table 2.3 shows some typical areas of influence that the company may need to investigate in order to find out whether the factors will affect the business either positively or negatively.

Political issues:

• Regulations: safety, quality, labelling

• Government policies

• Taxation

Economic issues:

• Inflation, labour costs

• House prices, labour mobility

• Energy prices

• Unemployment

• Party political stance on particular issues

Social issues:

• Lifestyle changes

• Consumer attitudes

• Demographic factors: age, wealth, geographical distribution

Technology issues:

• New materials

• New manufacturing processes

• Information technology

• New inventions

Legal issues

• National and international legislation

• Import and export regulations

Environmental issues

• Popular attitudes to aspects of the environment

• Pressure group activity

• Media coverage

Table 2.3 Typical PESTLE factors

Directors should have regular discussions on the areas of PESTLE analysis, as they are the main sources of the changes that influence longer-term strategy. The factors will help determine the most appropriate areas of marketing research. Having explored the relevant PESTLE factors marketing planners can use this information to examine trends and identify the likely impact of each factor on the business over the planning period.

A SWOT analysis (strengths, weaknesses, opportunities, threats) is a useful marketing tool because it can be used to crystallise the key issues that arise from the marketing audit. It can act as a stepping stone between the audit and the later stages of marketing planning.

The SWOT combines well with brainstorming sessions with a group of managers to produce a creative result. The SWOT analysis should not simply be a repetition of the audit. It should concentrate on eliciting the Critical Success Factors (CSF) and analysing the key issues surrounding them.

A company operating in a single market may need to complete one SWOT analysis. With complex and diverse markets, it may be necessary to split the business by market sector, and complete a SWOT analysis for each one.




Internal factors

Strengths Weaknesses

Company serves high growth markets Low penetration in export markets

Well known company name Main products easy to copy

20% share of market with main product High level of company borrowing

Higher gross margins than main competitors Distribution – location of production facility

Low staff turnover No succession plan for managers retiring soon

Highly qualified management team Resistance to planning/change

Products perceived as high quality Inflexibility in production facility

High tech/efficient production facility High fixed costs

Table 2.4 Typical internal factors identified in SW OT analysis

External factors

Opportunities Threats

Investigate/penetrate key export markets Cheap imported copies of products

Merge with/take over main competitor Increase in fuel costs

Relocate production/distribution facility Aggressive competitor pricing policies eroding margins

Invest more in new product development Bad publicity for products

Advertise main product to defend/increase market share

Interest rate increases

Launch secondary products into new market sectors

Technology changes – product obsolescence

Raise company profile through stronger branding

Recession – reduction in customer buying power

Poach key managers from competitors Exchange rates increasing raw material price

Table 2.5 Typical external factors identified in SW OT analysis

Assumptions and risk analysis

Assumptions are dangerous and would be avoided in an ideal world. However, the real world is unpredictable and perfect information is unobtainable. Assumptions fill the gaps left by the audit and the SWOT analysis, usually in the area of external threats. An assumption has to be made for each unanswered question which may impact upon the successful implementation of the plan.

Some typical assumptions might be:

• the interest rate will rise by 1% over the next two years

• average fuel prices will remain static over the period of the plan

• cheap imports will account for 20% of the market in four years’ time.




One reason for making assumptions is to force the discipline of considering such questions, and making a ‘best guess’, probably following consultation. This is almost always better than failing to consider the question at all. Another reason is the preparation of contingency plans to allow for the range of possibilities between best outcome and worst outcome.

It may be useful to use formal risk analysis techniques to quantify the likelihood of the assumptions being correct.

2.1.2 Market segmentation and Targeting Market segmentation is a key prerequisite in the development of marketing strategy. The segments – large or small – are the arenas in which the organisation will seek to generate value both for itself and its customers. When the segments have been defined it is possible to identify the needs of the customers within them and any critical success factors that will be critical in the creation of the strategy for that market.

Market segmentation has been defined as:

The subdividing of the total market into groups that represent distinct marketing opportunities and have to be reached with a distinct marketing package.

Philip Kotler

2.1.2.1 Identifying market segments

Very few, if any, markets can be thought of as consisting of customers all having identical needs which they satisfy in similar ways. A situation such as this could truly be described as a mass market.

Since such a market does not exist, an organisation cannot hope to serve all potential customers with the same offering. It must decide what proportion of a market it must capture and hold if it is to meet its business objectives (normally profit an/or shareholder value, although in a public sector context the objectives might include obtaining maximum value for money, or making best use of the resources available to serve the largest need). It has then to determine which customers and/or customer groups might make up this proportion, what is distinctive about them (requirements and purchasing behaviour), and the best way to satisfy their needs, given the existence and activities of competitors and limited resources.

The purpose of segmentation and targeting therefore is to identify the groups of customers within a market that the company is best able to supply. This enables the directors to allocate the company’s resources more effectively than by taking a mass market or ‘scatter-gun’ approach. Mass production for mass markets was favoured in the past because it delivered economies of scale. Now, however, customers’ expectations have changed. Companies are more likely to succeed if they can identify and meet the needs of particular groups of customers rather than try to please all customers with an undifferentiated offer.

To qualify as a market segment, a group of customers must have similar needs or seek similar benefits. These must be distinct from other customer groups within their market and be identifiable according to relevant criteria such as age, sex, social class, family life cycle stage, and geographical location.

The benefits of market segmentation can be summed up as follows:

1. The company is better able to identify market opportunities and maximise the value of the overall market.




2. It is possible to allocate resources to the areas of the market where they can be most effective and therefore obtain a better return for the investment in marketing effort.

3. It is also possible to tailor the marketing mix more precisely to the specific needs, perceptions etc. of the customers in the target segment.

4. Segments provide the basis for a strategy that differentiates between one group of customers and another marketing.

2.1.2.2. Market segmentation criteria

If the segments resulting from the segmentation process are to be of some use to the company they must conform to the criteria set out in Table 2.6. The specific examples are from a business to consumer market.

Segmentation criteria Examples

Customer needs or benefits sought should be similar within a segment

Professional women aged 25-45 with no children could be an attractive segment for an upmarket clothing brand to target

There should be identifiable differences between segments in terms of benefits sought

Women of 18-25 would have clearly different needs from the example above – generally greater price sensitivity, shorter life expectancy of clothes, more fashion conscious

Measurement criteria must exist and be relevant Segmenting the women’s clothing market by alcohol consumption habits or leisure pursuits would be less relevant than factors such as age, social class or income

Segments must have distinct and recognisable characteristics

Age, sex, geographical location, housing type etc. are all clear characteristics. Alcohol consumption habits or weekend leisure pursuits would be more difficult to isolate

Segments must be large enough to provide a worthwhile return

Women of 18-25 in full time education might be too small a segment to be worthwhile, and would also be likely to have a limited level of disposable income

Segments must be accessible Even if the alcohol consumption of women was relevant to their choice of clothing, it would be much more difficult to reach them as a target than if they were segmented according to age, as well as lifestyle factors such as magazine readership

Table 2.6 Women's clothing market segmentation crit eria summary

2.1.2.3 Segmentation in consumer markets

The most common variables used in consumer markets are shown in Table 2.7. Demographic and geographic variables are generally quantitative, and they are widely used in published sources to describe customer profiles, readership etc. Benefit segmentation is also largely amenable to quantitative analysis although the amount of publicly available information will be less, this type of information is generally the result of market research and therefore commercially confidential to the




companies that commission it. Psychographic variables are generally assessed qualitatively and although their reliability may not be so easy to verify as their quantitative counterparts, the insights they provide may be of great value.

Geodemographic segmentation

Demographic variables Geographic variables

Sex region

Age urban/suburban/rural

marital status population density

family size and background city or county size

race/ethnic group market density

Education residential location

Occupation housing type

Income climate

Religion terrain

home ownership

socio-economic class

Behavioural segmentation

Benefit variables Psychographic variables

usage rate and volume lifestyles

product benefits personality

consumer need satisfied self image

technical aspects value perceptions

price sensitivity social aspirations

brand loyalty psychological aspirations

End use motives

benefit expectations

Hutchings (1995)

Table 2.7 Segmentation variables used in consumer m arkets

Geodemographic segmentation was developed in the late 1970s by CACI Ltd. The initial product was ACORN (A Classification of Residential Neighbourhoods), which linked demographic and geographic data. This created a grouping system based on the assumption that people living in similar neighbourhoods behave in broadly similar ways.

Birds of a feather flock together

ACORN divided the population into 17 main groups. These were then subdivided into 54 neighbourhood types matched to corresponding social grades. Districts were then analysed according to the number of postcodes allocated to each type.




A similar system is MOSAIC, developed by CCN (now Experian) as a database. MOSAIC is also available in specialist versions covering international, financial and business to business classifications.

Experian’s Mosaic UK is an award winning people classification system that combines over 400 separate data sources and divides the UK adult population into 61 different types and eleven groups, covering the full spectrum of British and Northern Ireland society.

Experian website November 2006

MOSAIC is also available in specialist versions covering Scotland, Northern Ireland, London, global, automotive, daytime, grocery and financial classifications.

A simpler approach has been to classify consumers into groups, assuming similar buying and spending habits. This method resulted in the ‘Social Grading System’ used as a basis of analysis for many years. It is shown in Table 2.8.

Social grading system

Social grade

Social status Occupation of chief income earner

A upper middle class higher managerial, administrative or professional

B middle class intermediate managerial, administrative or professional

C1 lower middle class supervisory, clerical, junior managerial, administrative or professional

C2 skilled working class skilled manual workers

D Working class semi-skilled and unskilled manual workers

E Low subsistence levels state pensioners, widows, casual or low-grade earners

Table 2.8 Social grading system

2.1.2.4. Segmentation in industrial markets

Industrial markets tend to have fewer buying and selling points than consumer markets, and are by definition less personal in nature. They are generally segmented according to criteria such as:

• industry type

• product specification

• purchase quantity and/or frequency

• delivery speed and/or frequency

• method of purchase

• application for product

• geographical location

• customer size

• after-sales service required.




Information is available from companies such as D&B that guarantee a speedy service with a high level of accuracy. They list companies by line of business (Standard Industrial Classification code), number of employees, sales turnover, location type, economic regions, UK postcodes and named executives. Database companies also offer financial classifications, information about companies and their subsidiaries, and access to linked databases holding European business data.

D&B Market Insight holds the whole D&B Marketing Universe with your customer data overlayed. You can profile any part or the whole of your customer base against any part or the whole of the D&B Marketing Universe at any time from any web browser. You can then score the entire D&B Marketing Universe by how well each record fits the profile you have established. This score can then be used to prioritise the data you chose to purchase.

www.dnbmi.com (2006)

Business markets exist for agricultural services, mining, construction, manufacturing, transportation, wholesale trade, retail trade, finance and insurance, and services. The end user is either the business itself or, at the ultimate end of the distribution chain, a personal consumer. Business customers are usually trained professional buyers though many small businesses carry out the activity without any specialist training

2.1.2.5 Targeting

Markets are segmented in a number of ways and the variables are generally used in combination to create useful profiles. The table below is a simple combination of sector and size producing eighteen segments:

Retail Financial services

Manufacturing Distribution Telecoms Entertainment

Small

Medium

Large

Table 2.9 Market segmentation by sector and size

Clearly a company may not find all the segments equally attractive, also they may not have the resources to exploit them. A means must be found of identifying the priority segments, those which if successfully exploited will enable the company to achieve its objectives.

Criteria for the assessment of the attractiveness of a market segment include:

• Size and growth trends of segment: larger companies can target large market segments to achieve higher volume, but a smaller company might be wary of the high investment of resources required to serve such a large market segment. Potential profitability and ROI

• Number of strong competitors: a segment with a number of aggressive competitors already active in it may be unattractive, especially if it is relatively easy for others to enter the market with similar or substitute products

• Ease of entry: a market segment that is easy to enter may offer rapid returns with low risks, but this means it is also easy for competitors to enter. This type of segment may be attractive for a short-term venture, but not for a company seeking high margin business over the longer-term

• Competition and ease of product/service substitution: substitution and obsolescence are dangers sometimes ignored by companies entering new market segments




• Balance of supply and demand: as the balance of supply and demand determines the bargaining power of buyers and suppliers, it can affect the attractiveness of the segment as a target

• Matching with the company objectives and capability: the company’s longer-term objectives affect the way it views such issues as the investment required to enter a market segment, the risks involved, and the likely long-term sales and profit potential of the segment.

Where the company seeks access to global markets it must consider carefully the current commercial infrastructure in the target area (distribution, communications etc.), geographical & cultural proximity (including language), and political and currency risk.

The potential market for any company is the entire world. In practice, however, the scope is restricted to the areas where there is the ability and willingness to buy those products and services offered by company that can be sustained.




2.2 Customers’ needs, problems and behaviour

2.2.1 Customers, consumers and their needs In marketing terms, customers are the people and/or organisations that engage in an economic exchange process to obtain something they want or need either for themselves or for another customer.

There are three broad classes of customer of increasing importance:

1. The internal customer 'buys' the output of another part of the organisation, makes a value adding contribution and 'sells' the product on. The application of basic marketing principles to these exchanges increases the effectiveness and efficiency with which they are carried out.

2. The external intermediary customer adds further value to the product and sells it on to the next stage in the distribution chain. The ideal relationship between the companies involved in creating value for the final customer should be co-operative and mutually supportive.

3. The final customer buys and consumes the product without adding value and is the most important element of the distribution chain. The organisation needs to be well informed about their purchase behaviour and the factors such as economic circumstances that affect it. The organisation should also be ready to respond quickly to any change.

Another player at the end of the marketing chain is the consumer, or end-user. Although they may take no direct part in the exchange processes as buyers, they consume the results so their interests are often of vital importance. They exist in both for-profit and not-for-profit markets.

The final customer may actually be the consumer but that is often not the case. The needs of the consumer may differ from those of the customer in a variety of ways such as basic motivation, perceptions of supplier and attitudes towards the process. Complete satisfaction of all the parties will only be achieved where these issues are understood and acted upon by the supplier. The consumer may also put pressure on the customer - children's pester power, for example

The reason for the purchase by the final customer and/or consumer is the belief that using the product will assist them in achieving their own particular objectives or in satisfying a need. In simple terms, people buy a car because they need transport. The type of vehicle they buy - luxury saloon, sports car, 4x4 off-roader, old banger, second-hand white van - depends on many other factors.

Words such as reward, motivation, need, want and value are all used to describe the rationale of purchase and consumption. It is important that the real short-, medium- or long-term objectives are clearly understood and built into the processes by which suppliers attempt to achieve customer satisfaction.

At all the exchange points along the supply chain, and particularly in business-to-business (B2B) markets, suppliers have to ensure the satisfaction of both customers and consumers. For example, company car fleet managers may use objective criteria when setting their purchasing policy for vehicles but they are significantly influenced by pressure from the company car users.

The first essential requirement is that the product or service fulfils the actual need of the customer and consumer. In other words, the directors understand simple adages such as "people don't buy drills, they buy holes". The ultimate purpose of the customer and consumer is the critical factor in the purchase.




The second essential requirement is that the customer is satisfied in ways that are consistent with their circumstances. It may not be enough that the drill makes holes, as there may also be a need for advice and instructions to facilitate the correct hole, and thus fulfil the real need. The seller must understand the whole process by which value is created for the customer.

Merely meeting the customer’s apparent needs may not be enough to guarantee success. The supplier has to satisfy the elements that the customer has a right to take for granted from the supplier. For example, plumbers must be able to bend pipes and fix taps, but to be really successful they have to surprise and delight the customer with excellent service – cleaning up afterwards would be wonderful!

An example of a customer-led organisation is the Disney Corporation. They train their cleaners more thoroughly than any other staff because they come into most frequent contact with the customers and therefore have a very significant effect on the value that is created for the customer. The Disney Institute is used by many other companies for training in this approach to customers.

2.2.2 Buyer behaviour

Buying process

Success in creating value depends on an understanding of the means by which customers make decisions to purchase. The buying process consists of a series of steps that lead to the act of purchase. To make good purchase decisions the customer requires a systematic approach and adequate information. To influence a purchase decision the seller requires understanding of the process.

Typical steps are:

• Problem Recognition where the buyer becomes aware of a need. This may be the result of obsolescence, items wearing out, a desire to expand etc. The need may be stimulated from within, or by the activities of the external environment, advertising for example.

• Problem Specification where the buyer identifies the real problem that must be solved and sets some criteria for the identification of a solution. It is possible that this process is also influenced by external forces.

• Solution Identification where the buyer examines the alternative methods available to solve the problem. This may involve a careful evaluation using established criteria; on the other hand it may be an impulse decision. In either case there is still the possibility of external influence.

• Supplier Selection Criteria where the buyer identifies the criteria which will guide the choice of supplier. The opportunity to influence events at this point is considerable through the use of proactive vendor rating scales for example.

• Supplier Selection where the buyer decides the source of the solution. This process may have at least two dimensions. First, the buyer may choose a particular make of brand, again using established choice criteria, and second there may also be a need to select a particular supplier or outlet. Obviously the opportunity for external influence is considerable.

• Purchase Process where the buyer undertakes the act of purchase and will almost certainly be further influenced by the circumstances surrounding the process, the level of service etc. and offers cope for the seller to influence the buyer. There will almost certainly be a need to minimise the post purchase concerns of the recent buyer.

• Performance Assessment where the buyer considers the entire process including functionality, process, service, and the likely future performance of the supplier. This may involve the buyer in specific quality assurance programmes.




Perceived risk

Potential buyers are sensitive to the perceived risk in the buying decision process. The seller needs to be aware of the form and consequences of risk and to be able to convince the potential customer that it is minimal. The major components of risk are;

1. The probability of error i.e. that the product or service will not perform its function. The marketing implication for the seller is to reduce perceived likelihood of error by creating and maintaining a reputation for quality and reliability for example.

2. The consequences of error i.e. that the customer will suffer loss as result of the error or lack of performance. The marketing implication for the seller is to reduce the perceived consequences of error by offering simple compensation and rapid response for example.

Risk may also be in the form of psychosocial elements i.e. the seller may fear losing face or prestige as a result of purchasing in a particular category or particular brand. In these circumstances the seller will probably need to embark on an extensive communications campaign aimed at changing attitudes.

Influences on buyer behaviour

The behaviour of buyers is influenced by a variety of factors. Although the pressures on purchasing managers or others buying for an organisation are different from those on a personal buyer, there are obvious similarities. Influences on individuals making personal or organisational buying decisions are:

• Psychological - perception, motivation, attitude, risk profile, previous experience etc.

• Personal - age, sex, life cycle stage etc.

• Social - reference groups, membership groups, social class etc.

• Cultural - values, beliefs, norms etc. associated with the society in which customers live

• Environmental factors - social, technological, economic, ecological, political

• Source characteristics - quality, service, guarantees, reputation, price, support etc.

Additional influences on organisational buyers include:

• Interpersonal influences - formal, informal, role in the decision-making unit (influencers), age, sex, life cycle stage etc.

• Organisational variables - position/status, purchase process, reward system, culture, information management etc.

Organisational buyer behaviour differs from that of consumers for a number of reasons. Professional purchasing managers:

• are specialised in the types of goods and services they purchase

• function as a member of a team or decision-making unit

• purchase goods and services for use in providing goods and services for their own customers

• are professional and trained

• buy in large quantities




• purchase from a few sellers

• use short distribution channels

• buy from manufacturers and distributors who are centrally located

• negotiate prices and other terms of sale

• form long-term relationships with key suppliers

• require at least some level of customisation in their purchases

• emphasise specifications and performance

• are concerned with technology and rate of change

• require specific services with their purchases.

• are dealing with derived rather than direct demand

• often involve technical specialists in the buying process.

• often expect reciprocity

There is also an important difference between the first purchase and the repeat purchase in terms of the behaviour of the customer

Business buyers are often working as a purchasing agent and are subject to a decision-making unit. The key players in the decision-making unit may include:

• User or initiator - person(s) who will benefit the most, or recognises the benefits of the acquisition.

• Influencers - the greater the complexity and cost, the more influencers that are involved who can affect the final purchase decision in some way.

• Deciders - individuals who can approve/disapprove of the proposed purchase, including product specifications and terms of sale, etc.

• Approvers - individuals who make a go/no go decision about proceeding with the purchase process, and the appropriateness of purchase activities.

• Buyers – have responsibility and authority to select suppliers, negotiate terms of sale, and otherwise complete details of purchase

• Gatekeepers – individuals in a position to control information flows to those involved in purchase decisions




2.3 Marketing capability analysis

2.3.1 Marketing capability Successful and sustainable value creation can only be achieved if the organisation is prepared to invest in information that provides a continuous picture of their customers and of their own operations. The organisation must be prepared constantly to take action on the basis of the findings and make modifications to existing marketing strategies where necessary.

1. Competitive advantage will be achieved if the action taken succeeds in:

2. Changing the customer's perception of the value they can expect from a distributor or stockist.

3. Changing how value is delivered, i.e. levels of distribution service, support etc.

4. Creating a gap between the company's offering and that of its competitors.

The final customer buys and consumes the product without adding value. Any internal and intermediary customers need to demonstrate how they contribute to the value creation processes. If, for example, the organisation supplies high quality organic ingredients to a smart restaurant, they might collect information about the how the restaurant uses and presents them, what the atmosphere is like and whether it adds value in other ways such as offering valet parking or a taxi booking service for customers.

The organisation needs to pinpoint the basis for the creation and maintenance of value for final customers and the implications for the marketing capability of the value chain. The organisation has to ask itself questions such as:

1. What is the role of our customer in creating value for their customers and for themselves?

2. How does our customer fulfil this role i.e. what processes and procedures do they undertake?

3. How do they use our product/service in the value creating process?

4. How can we improve our own organisation’s contribution to the process?

The answers to these questions have significant implications. For example:

• The need to review the capability (competence x capacity) of the organisation and the potential that this capability has to create value, win market share and generate profit

• It may be necessary to re-position the organisation’s offering (product, price, promotion, distribution) to create a better fit between its capability and the value required by the customer

• There may be a need to create new processes and alliances, acquisitions or mergers to develop the capability if it is lacking and the opportunity is significant.

Every aspect of the organisation will be called upon to contribute to the value creating process. The ideas, systems, structure, resources of the business must be leveraged to this end. Value that is easy to create is also easy to duplicate. Low value attracts 'me-too' competition. However, high value arising from investment in information, knowledge and other resources is far more difficult for a competitor to duplicate.




Creating value, therefore, does not necessarily mean adding a large number of features and delivering them all at a very high level. The Formula One hotel chain, for example, offers a very restricted service, but each element is of good quality. It does not attempt to match the competition in areas of service not considered important by its target customers. So, de-specifying can also create value.

In order to compete successfully in the long term, organisations must attempt to innovate. However advanced the value offering it will be copied if it stands still. Investment in innovation can be demonstrated to have a measurable impact on customer growth and value.

A customer-led organisation analyses all its activities to identify the part each plays in the value creation process, and to determine how improve it. One approach to the analysis is that of Michael Porter (1985) who uses the term ‘Value Chain’ to describe the process of linking all the areas within the company where competitive advantage could be achieved.

He argues that companies should examine each activity in their value chain to find ways of improving it in terms of both costs and performance. This involves looking beyond the company boundary, and examining the value chains of suppliers, distributors, customers and end users. It should also include an analysis of the value chains of its competitors so as to use these as benchmarks against which to measure their own performance.

The end result has two dimensions:

1. The company manages the process of merging the competencies of everyone involved in the product from concept to end-user.

2. The whole chain should work together so that, at every stage of the chain, the company maximises its potential for creating customer satisfaction and loyalty as well as gaining competitive advantage.

The practical results of involving all the parties might be an integrated order administration and invoicing system set up jointly by the company and a supplier. For example, Marks & Spencer’s stock control for gloves was linked by electronic point of sale (EPOS) to the supplier’s factory. As a result paperwork was handled by fewer people or eradicated altogether. A manufacturer might offer also merchandising training and support to its retail outlets.

Further development of this approach exists in the automobile industry where a customer's purchase order of a new vehicle in an independent dealership transmits information to the distributor, to the factory and right through the manufacturer's supply chain to the suppliers of materials such as sheet metal and paint.

A good example of co-operation between companies and their suppliers is in retail ‘category management’, where a panel of suppliers work with a buyer to find the optimum selection and layout for a category of products within a store.

To maintain successful value creation, companies need a continuous picture of the changing needs of their customers so that they can match them with changes to their products or strategies. In the longer term, they must create and maintain their customers’ perception of a gap between their offering and that of their competitors. This is their competitive advantage. In simple terms, it may be a lower price or a better offering.

2.3.2 Creating value Value can be said to have three dimensions:

1. A person's judgement of what is important in life

2. The ability of a thing to serve a purpose or cause an effect




3. The amount buyers are prepared to pay for what a company provides them.

Customer value is achieved when the company's offering provides the customer with greater value than their perception of the total cost to them of the offering. This involves the company being able to:

1. Understand how customers create value for themselves or for their own customers or consumers, and identify all the elements involved, including resources, systems and processes.

2. Understand the customer value chain or experience cycle from the search and purchase steps right through to the use and ultimate disposal

3. Be capable of producing and delivering a significant positive impact on these elements through the effective use of products, services, distribution, information etc.

4. Have a well enough informed system to avoid making a negative impact on the process.

In other words directors must ensure that their company is part of the customer’s solution not part of their problem.

If the company is successful in creating value for customers over time the relationship will develop to its advantage. Customer satisfaction becomes customer retention or loyalty, and loyalty may become advocacy. The ratio of customers who would advocate the company to others to those who would not, is a significant indicator of its strength and potential. Customer advocates are the key to maximising customer lifetime value and increasing market share.

The ability of the organisation to create customer value more effectively than its competitors often results from the company’s possession of sustainable, distinctive competitive advantage (DCA).

2.3.3 Sustainable Distinctive Competitive Advantage (DCA) The main purpose in identifying the key benefits sought by target customers and those provided by the company and by its competitors is to use the information to create Distinctive Competitive Advantage (DCA).

A DCA is a benefit perceived by the customer to be relevant and unique, that is not provided by the competitors. At its best, it is uncopiable. As it is a very valuable commodity, often rather intangible and perishable, the company needs to nurture and maintain it, and alter it as customer needs or perceptions change.

Marketing experts argue at length about whether a competitive advantage is sustainable at all. If a particular competitive advantage proves to be attractive to customers it is likely to be equalled or bettered by competitors, and will eventually become the expected minimum standard. For example, in the 1990s National Westminster Bank put all their management through specific training to help them target the small business market and claim to be the most expert of the high street banks in this area. At the same time, the Co-operative Bank offered a preferential charging rate for businesses, and promised only ethical investment of their funds. These initiatives differentiated the two companies from each other and from other banks in the short term, but were relatively easy for other banks to copy.

However, companies should provide relevant benefits to customers and maintain a competitive advantage by changing the benefits provided as customer needs change. This means keeping close to the customer at all times, remaining well-informed about competitor activity, and being




aware of changes in the market and the wider environment. Regular and effective marketing audits should help to ensure that this is achieved.

Critical Success Factors (CSF)

Distinctive competitive advantage is only relevant if it is instrumental in creating value for customers. It is a similar concept to that of the Critical Success Factor (CSF).

CSFs are those elements which can contribute most to the success of the company if they are right, and to its underperformance if they are wrong. Five to ten CSFs would normally be identified as having the greatest potential impact on the company’s prospects. These may be internal factors that directors can wholly or partly control or external factors beyond their control.

Examples of internal CSFs are:

• proof of successful track record

• speedy delivery

• knowledgeable and professional sales staff

• quality.

Examples of external CSFs, together with the company types to which they might apply, are:

• low interest rates – mortgage lender

• favourable exchange rates – exporters or importers

• low oil prices – charter holiday operator

• hot summer – ice cream manufacturer

The CSFs might also be prioritised and given weightings according to their relative importance. This helps in further analysis, for example, when comparing the company’s performance against that of its closest competitors.




2.4 Company performance analysis The marketing performance of the company will be strongly influenced by the financial and non-financial assumptions and forecasts that are made about the future. These assumptions must be understood and challenged on a rigorous and regular basis. If there are significant changes to any of them then there will be changes to the forecast and almost certainly to any strategies that flow from it.

2.4.1 Key financial assumptions The key financial assumptions include:

1. Shareholders or owners continue to be satisfied with the current return they receive.

2. The business strategy will not require any financial restructuring that will impact the marketing strategy.

3. Marketing budgets will continue to be allocated in the usual way.

2.4.2 Key non-financial assumptions The key non-financial assumptions include:

1. No significant change is expected in any of the elements in the broad-scale business environment (political, economic, technological, social, environmental) nor in the relationships between them.

2. All customers continue to trade at current levels, i.e. there are no significant changes in the elements which determine the level of usage, and therefore demand, by customers for the products/services the organisation provides.

3. There will be no changes in the elements that determine entry conditions to the market for new customers (price rises for example) and that may change the profile of customers.

4. The organisation is not seeking new markets. Although this is a controllable element, the organisation should take into account the full implications of any new market ventures upon its performance in those markets in which it currently operates.

5. Competitors continue to trade in line with previous trends and no fundamental shift in the balance of marketing effort in the market is expected.

6. No new competitors enter the market offering similar products and services and change the competitive balance.

7. No significant developments in technology are expected that would:

a. Render the product/service obsolete (substitution).

b. Radically improve the cost structure of a competitor.

c. Change the means by which the product/service is delivered to the customer

8. The identity and relationship with value partners (intermediaries, suppliers, collaborators etc.) remains similar.

9. The basic competitive parameters or critical success factors, (quality, price, innovation etc.) remain the same for the majority of customers.




2.5 Marketing information and market sensing The two elements of collecting and using information are:

• Marketing information – effective marketing decision-making is impossible without the availability of reliable, up to date and appropriate information. Directors should devote resources to creating a system which will provide such information in the most cost effective and timely fashion

• Market sensing – the emphasis in the area of marketing information should be on interpretation. Directors should ensure that analysis of the data is well done so that the interpretation will be of high value. Appropriate quantitative and qualitative techniques will produce information inputs that can be integrated to enable the organisation to “sense” what is happening in the market place.

Marketing decisions are concerned with the application of organisational capability to the creation of customer satisfaction in a constantly changing environment. The system must be capable of delivering information about the organisation (strengths and weaknesses), the market (structure competition etc.), the things that influence it (economic forces, competitor actions etc.) and customers (needs, profiles etc.) both actual and potential.

2.5.1 Sources of information There are three major sources of data:

1. Internal data, which is generated by the organisation as a result of trading.

2. External primary data, which is gathered directly by or for the organisation.

3. External secondary data, which is published already.

2.5.1.1 Internal data

Information technology captures real time data at every stage of trading and most organisations have access to large quantities of marketing data. However, they may not be able to use it if their IT systems are specified to facilitate the business transactions but not to gather or analyse the data. Careful specification of information needs can help to ensure that the best use is made of the data available.

Sources of data generated within the company include:

• Sales reports

• Opportunity and prospect monitoring

• EPOS customer purchase records

• Customer complaints

• Charge and loyalty card accounts

• Employee surveys

• Inventory records

• Accounting and finance reports




Information gathered in this way can be used to assess customer profitability, to measure the productivity of marketing effort, sales conversion rates for example, and to identify customer buying patterns and customer payment profiles.

2.5.1.2 External primary data

Primary data is gathered specifically for the organisation and analysed for the first time. Primary research can be carried out in a variety of ways and it is important to select the appropriate methodology.

Original marketing research may be commissioned to provide information about customers in the following areas:

• Usage behaviour i.e. How the products are used

• Motivation and attitudes

• Responses to company initiatives

• Process requirements in terms of purchase, search activity etc.

• Levels of satisfaction and comparisons with competitors

• Customer behaviour and decision processes

• Sources of information used

• Attitudes to prices

• Reaction to new product ideas

• Pre-testing promotions

• Measuring the performance of front line staff.

2.5.1.3 External secondary data

There are many market research topics for which secondary data offer valuable information. Desk research may provide all the necessary data at a modest cost or help to determine the scope of any primary research projects The topics include broad scale issues; market definition; market size estimation; geographical effects; spending patterns; competitor analysis; initial segmentation.

Sources of external data include:

• Census data

• Government publications

• Trade publications

• Professional journals

• Published industry data

• Customer surveys

• Test markets

• Commercial research companies

• Competitors.




Since the data is already available, it is important to confirm its relevance and reliability. Checks should be made on the original source of the data to ensure that it is totally objective, on the data collection and analysis techniques and on its age.

Some examples of sources are given at Appendix 1.

2.5.2 Types of research There are two basic types of research,

1. Quantitative research provides data that can be analysed statistically and provide results that can be expressed numerically.

2. Qualitative research provides data on subjects that do not lend themselves to simple quantitative analysis such as attitudes, perception, motivation etc.

The three principal methods of primary data collection are observation, experimentation and surveys.

Observation

Observation can be carried out mechanically using cameras or by eye, does not involve the respondent, they are normally unaware of the process. It is useful for the analysis of shopping behaviours, store layout design, traffic flow monitoring etc. Observation can also be used to gain a greater understanding of product-in-use behaviour, although it may not be possible to achieve this without the subject being aware of the process.

Experimentation

Experimentation is more than mere data gathering, it involves the attempt to measure the effects of controlled change significant variables. It is used, for example, to measure the effects of alternative pricing policies, alternative pack designs or store layout, advertising treatments etc.

Surveys

Surveys are the most frequently used data collection technique, they rely on collecting data from a sample of the population under investigation and using the results obtained to draw inferences about the population as a whole. The survey can be used to gather both quantitative and qualitative data, and may be continuous, (collecting data from the same respondent over time using a panel), or ad hoc (one-off) surveys. Particular applications may include on-street interviews, mystery shopper surveys, business-to-business interviews, customer satisfaction surveys etc. If the survey is to generate inferences about the population that are statistically valid it is most important to ensure that:

1. The sampling frame – the listing from which the sample is drawn - is representative of the total population.

2. The sampling process produces a sample that is representative and of the correct size.

Traditionally the survey could be carried out using three communications vehicles - post, telephone, or face-to-face. The internet is also now available. The characteristics of the three traditional vehicles are as follows:




Postal

While the postal survey can offer advantages in terms of speed and cost in the correct circumstances it is limited to the collection of fairly simple information. It is difficult to control the identity of the respondent and to be confident of obtaining sufficient replies to be confident that the response is representative of the population under investigation. Similar problems may occur with the internet.

Telephone

Offers more flexibility than postal surveys, and can also be cost effective in the appropriate circumstances i.e. well targeted business-to-business. It is possible to control the identity of the respondent and, there is an adequate sampling frame - telephone directory. Care has to taken to control interviewer bias.

Personal, face-to-face

Offers the greatest flexibility and opportunity to deal with complex issues. It is also possible to control the identity of the respondent, use visual aids, use observation etc. Care has to be taken to control interviewer bias.

Other techniques

Other research techniques do not fall strictly into any of the categories above. The most notable is the focus group interview or group discussion. This is in effect a group interview designed to provide a richer flow of data than would be possible using a structured survey or questionnaire. It is normally used as an exploratory activity prior to a survey to complement the data gathered by the survey.

2.5.3 Choosing marketing research methods Marketing research should be conducted as part of the marketing planning process. This enables the research programmes to be better co-ordinated and their cost more accurately budgeted and justified. Occasionally companies have to conduct marketing research as a piecemeal response to a particular marketing problem or crisis.

The factors to take into account when determining the method of marketing research and the amount to spend to solve a particular problem include:

1. The potential value of success and the potential loss in failure, given the perceived risk of the proposed activity

2. The nature of the problem and the information coverage it warrants in terms of sample size and depth of detailed data

3. The budget available for total marketing research and the proportion assigned to solving the particular problem

4. The accuracy level of information required.

5. The timetable for the research to be completed

6. The methods used in the past, their effectiveness, and their compatibility with the options suitable for this occasion.

Budgeting for marketing research is not easy. In a cost/benefit exercise, the costs are much easier to identify than the benefits. Benefits may be expressed in terms of:




• likely additional profit through identification of market opportunities

• avoidance of loss through costly mistakes

• estimates of the probability and the cost of failure of a project or product

• maximum loss expectation as a budget ceiling for marketing research.

In general terms, the less a manager knows about a marketing situation and the greater the risk attached to a wrong decision, then the more valuable the information becomes.

Those undertaking primary market research normally must recognise that there is a trade-off between accuracy and budget. A sample size that provides a level of accuracy (plus /minus 5%) may be affordable but it may not be ideal. To increase the level above this level will normally require the sample size to grow rapidly and make the project difficult to justify. Market research agencies should be able to give advice about this trade off and indicate where the sample size make the reliability of the information suspect.

Overall, it is important that the method of market or marketing research is chosen because it is the most appropriate method to solve the particular problem, and not because of the relative costs of the different types of research (see above postal research).

2.5.4 Marketing information systems Advances in IT mean that companies can access, collect, store and analyse vast amounts of data. However, all businesses need a marketing information strategy if they are to make regular and consistent sense of the information they generate.

The information is generated in four main areas:

• company information systems - sales, costs, profit, stocks, orders

• marketing intelligence systems - competitors, external markets, wider environment

• marketing research systems - solving marketing problems, information sources, data collection

• marketing analysis systems - marketing information, interpretation of results.

Companies may create an in-house Marketing Information System (MIS) or outsource the process. The question of outsourcing customer data raises fundamental policy issues as this may be considered to be the heart of the business and the real source of competitive advantage. Many marketing organisations now manage databases that provide the information companies require for their marketing intelligence. The type, scope, and quality of data vary to meet each company's particular needs.

For a company to use marketing research to its full potential the board must have:

• A clear understanding of the scope of marketing information - directors must have a broad view of how it could support the company’s activities, so that they can give full and well-thought out direction on the brief for the researcher.

• A long-term view of information - rather than commissioning marketing research in response to a crisis, or an individual problem or need, the board can gain much greater value from research that is ongoing and planned to contribute to achievement of the company’s objectives.

• An appreciation of the value of information - directors need to be aware of the cost of all the elements of marketing research so that they can evaluate the research itself and not just react




to a raw cost figure – a long-term approach and an excellent brief for a thorough piece of work are more likely to produce valuable results than a short-term, ill-conceived project.

• An ability to handle complex research - they need to be well versed in the research objectives and techniques so that they can give a clear briefing at the outset and ensure that the end result is a coherent report which answers the questions asked and can be presented to the board as a basis for action.

Whether outsourced or in-house an MIS should have the components shown in Figure 2.1.

Marketing EnvironmentAssessingInformation

Needs

DistributingInformation

InternalRecords

MarketingDecisionSupportSystems

MarketingIntelligence

MarketingResearch

Analysis

Planning

Implemen -tation

Control

TargetMarkets

Channels

Competitors

Publics

Macro -environment

Marketing Information System

Figure 2.1 Marketing Information System

Marketing information is so valuable that a marketing research plan should be made in parallel with the marketing mix plans. Otherwise information is unlikely to be collated, processed and distributed for the benefit of the organisation as a whole. It is more likely to remain in individual islands or simply never be collected at all.

The important feature of the MIS is the interactive nature of the factors. All systems and information should be monitored and kept up-to-date.

2.5.5 Other MIS issues The major issues for directors in determining how to acquire and use marketing information are:

1. In-house or outsourced research tasks, plus the advantages and disadvantages of obtaining information from internal or external information providers.

2. Scope of research focused on the information needed to solve the research problem.

3. Organisational resources:




• In-house expertise and ability of internal human resources to perform the research.

• MDSS/MIS availability (and appropriateness/quality).

4. Adequate financial resources available for quality research.

5. Adequate time available to make decisions if deadlines determine the research that can be conducted.

6. Managerial unbiased objectivity and ability to use and act on information if marketing mistakes are to be avoided.

7. Quality of research information:

• quality of the research process

• quality of the data and information obtained

• quality of the management decision process and implications for use of resources and implementation plans

8. Complex processes of international marketing research which is valuable in spite of cultural and language differences and higher costs.

Marketing Information and Marketing Decisions

Information is a necessary basis for decision-making. It enables management to quantify and reduce the risks associated with decision-making. It is important however never to rely on one source of information as a basis for decision-making In the case of customer satisfaction analysis may be base on some or all of the following:

• General customer satisfaction surveys carried out at regular intervals to identify customers' perception of key attributes and the performance levels of the organisation and competitors.

• Job completion surveys designed to gather immediate feedback on the performance of a particular operation and specific issues known to be of concern to customers.

• Customer contact reports designed to monitor the effectiveness of customer contact management, with dates, times and comments.

• Customer complaints analyses set up to record complaints and identify trends.

• Ad hoc research commissioned to investigate difficult issues not explained by the other methods in use.

• Voluntary customer feedback organised via response forms, or comment cards in hotel rooms.

• Focus groups or panels of customers facilitated to feed back their attitudes to or experiences of the company over a period.

2.5.6 Legal and ethical matters in research The board may need expert advice in particular areas before commissioning research activities:

• Regulatory issues - government regulations, industry standards, and legal guidelines provide challenges for marketing intelligence users and providers.

• Privacy issues - problems may exist in the gathering and manipulating of marketing intelligence relative to customers and others if, for example, promises of anonymity are not maintained




• Ethical issues - research ethics include honesty throughout the research process; no manipulation, deception, fraudulent practices to achieve desired results, and respect for the rights of respondents and others.

• Bias issues - all sources of potential bias related to the researcher and the research process must be eliminated.




Section 3

Marketing strategy formulation




Learning objectives

Section 3 - Marketing strategy formulation


• Specify the elements that form the basis for marketing strategy

• Identify the fundamental marketing strategy options

• Create and employ a product/market matrix

• Recognise and exploit the key concepts of differentiation positioning and branding to define marketing strategy




3.1 Determine the basis for marketing strategy The first step in developing the marketing strategy is to return to the business strategy and examine the context within which marketing planning will be carried out. The company should have a clear picture of where its own strengths lie and where resources are needed to rectify weaknesses. From the marketing point of view, the planners will have already:

• Identified the markets or segments they intend to operate in

• Identified the critical success factors for each one

• Analysed the broad-scale influences (PESTLE) for each one

• Analysed the needs of the customers in those segments

• Analysed the competitive situation in each segment.

Based on the internal audit, the board should have assessed which of the company strengths are most relevant to its customers and potential customers, and which might provide the basis of competitive advantage.

The directors should also have identified any constraints embedded in the vision and mission statements or corporate strategy. These might include limited borrowing levels, commitment to a particular business, retention of a particular production site or selling to a limited market or in a specific geographical area.

From the market audit, the directors should have listed the marketing assumptions and should refer to them in considering the strategic options.

Essential components of the successful creation and execution of marketing strategy include:

• Strong support by the board – directors have to direct, co-ordinate and motivate all those involved to keep a clear focus and maintain the momentum to become a marketing-led company. This must be continuous not once-a year

• Clear middle and junior management support – managers who have contributed significantly to the marketing planning process will feel ownership and be more committed to its implementation and success.

• Written plans – a real strategic marketing plan is fully described and not a numerical compromise

• Integration of marketing planning into the total corporate planning structure – the board has to ensure that the interdependency of corporate and marketing planning is fully understood and acted upon.

The components of the business strategy are derived from the organisation’s values, culture and distinctive competencies. They set out its purpose and drive the marketing strategy.




Business strategy Marketing strategy

Vision – its highest level of aspiration; how it sees itself and wishes to be seen

Mission – the functional aspect of the desired achievement, its role and business, distinctive competencies and future direction

Goal – the general statement of aim or purpose; for example, become more profitable

Objective – a quantified goal for the business; for example, achieve a 10% growth in pre-tax profit level in the next financial year

Strategy – the flexible long-term route the organisation needs to take in order to deliver the vision and objectives

Tactics – actions that implement the strategy; for example, work with suppliers to increase raw material supply chain efficiency

Marketing objectives – based on the business strategy:

• sales revenue

• profit

• market share

• sales volume

• customer satisfaction

• some combination of the above.

Target market or segment strategies – for the targets identified in the business strategy:

1. Set specific objectives e.g. profitability

2. Establish the competitive stance e.g. cost leadership

3. Develop a positioning or branding strategy

4. Develop a detailed product or service strategyDevelop the marketing mix to implement the strategy

6. Assess capability and resources required to achieve objectives

7. Install control mechanisms

Table 3.1 Business and marketing strategies

Corporate targets are the aggregate of marketing targets. So, detailed marketing objectives are essential in developing the link between the corporate strategic plan and specific, actionable marketing plans. Each overall objective above will be achieved by through success in each market or segment the company competes in. The overall sales objective for example will be the aggregate of sales in each individual market, sales area, and for each sales person.




3.2 Fundamental marketing strategy options The marketing strategy must fit the circumstances, which vary with the market and product life cycles, the attitude of potential customers to innovation and the company competitive position.

3.2.1 Market and product life cycles

Market life cycle

Strategy needs to vary according to the stage of development the market or market segment has reached as revealed by the research. Each of the five stages has certain strategy implications.

1. Embryonic ; a potential market not yet identified - the task is to gather information, identify major opportunities, anticipate changing customer needs, assemble capabilities and develop products and services.

2. Start-up ; a new market with only innovative customers buying and new entrants supplying - the task is to set an entry strategy, create awareness, inform, and decide price policy.

3. Growth ; a market with developed customer needs and fewer market entrants - the task is to determine market coverage, consolidate distribution channels, inform, persuade and sustain quality.

4. Maturity ; an established market with unchanging customer needs and a few large suppliers - the task is to differentiate the offering, improve cost management, price and promote competitively and manage distribution effectively.

5. Decline ; a reducing market superseded by new products - the task is to reduce support, cull products that contribute less to the company’s results and determine an exit route.

Product life cycle

The market life cycle has a parallel in the product life cycle, where strategy is adjusted according to the relative newness of the product or service. A successful product and/or service is thought to pass through four stages in its life cycle:

1. Introduction - as sales of the product grow with increased awareness and wider distribution, the company can use a strategy such as skimming with a high price to take short-term advantage of the new product or penetration with a low price to gain a foothold on which to build market share.

2. Growth - a rapid increase in sales is accompanied by increasing brand competition and static or falling prices, so the company distributes the product to wider markets and develops more variants.

3. Maturity - sales reach a stable peak but with tighter margins in a long mature phase marked by expensive battles for market share and new market segments.

4. Decline - a gradual or perhaps even sudden fall in sales to a steady lower level may be turned back up with facelifts, but the strategy is generally to harvest or maximise profit.




3.2.2. Company competitive position The competitive position of the organisation also has strategy implications depending on whether it is a:

• Market leader - maintain innovation, promotional intensity, distribution coverage and price leadership to defend position; expand usage levels, identify new uses, find new users or expand market share to increase volume of business; use strength to develop new markets.

• Market challenger - identify most attractive targets, attack target's weakness, have realistic goals; a powerful challenger may attack the leader at the point of greatest strength and attempt to defeat them in their major market by offering greater value to the customer.

• Market follower - offer equivalent levels of service and quality to market leader with minor differences to facilitate customer choice, copy or adapt innovations; avoid direct confrontation; differentiate product perhaps with premium price.

• Nicher - be the sole supplier of a specific market need; maintain high value, unique offerings and satisfy requirements major competitors cannot, or will not.

The marketing strategy needs to vary according to the propensity of customers to accept innovation. Rogers (2003) estimated the proportions as follows in decreasing likelihood of adopting an innovation from its initial launch - 3% innovators, 13% early adopters, 34% early majority, 34% late majority and 16% laggards.

3.2.3 Strategic balance Most businesses have three major sources of revenue and four sources of profit. A clear strategy should be developed for each source of business, and resources allocated.

Sources of revenue

1. Retained business from current customers - custo mer retention

The company identifies the most valuable current customers and provides the resources required to maintain their business.

The Pareto Rule indicates that about 20% of customers are found to deliver 80% of the company’s turnover and profits. Research shows that this is the most cost-effective source of business so it may warrant running a customer retention, loyalty or key account programme.

2. Incremental business from current customers – cu stomer development

The company focuses on current customers who have unsatisfied needs or buy competitor products. The most common reason for them not increasing the level of business with a particular firm is their lack of knowledge of what it has to offer. Other reasons include changing circumstances and ineffective company communication or poor customer relationship management (CRM).

This reveals the need for an ongoing relationship between buyer and seller that adds value for both parties. Companies are increasingly concerned with maintaining long term customer contact and viewing the customer as a strategic asset to be invested in to generate returns. The current customer base should be rigorously analysed but only those representing real opportunity should be targeted. Equally there will be circumstances (rapid market growth for example) when it makes sense to recruit new customers.




Another analysis is to assess the average customer life of existing customers. If 20% of customers are lost each year, the retention factor is 80%. If a particular strategy increased the retention rate to 90%, it would result in a very positive effect on net profit and cash flow. The challenge is to identify the marketing and sales tactics.

3. New business from new customers - customer acqui sition

The company identifies those non-customer groups who might be persuaded to buy from the company, and establishes an appropriate communication strategy for each group. The sources might be:

• Market expansion resulting from increasing levels of affluence, changes in customer priorities, increases in usage rates - strategy focus will be improving supply and distribution coverage and the extension of awareness through promotion.

• Entering new markets - strategy focus will be awareness creation, distribution coverage and competitive pricing.

• Taking customers from competitors - strategy focus will be competitive pricing (cost leadership) and/or differentiation, probably through superb customer service.

These three sources are not equally important in every circumstance. Where, for example, a company already has a large share of the market, customer acquisition will be difficult and costly. Resources therefore, may be focused on the retention and development of current customers, or the search for new markets. In an area of rapid market growth, the opportunity for acquiring new customers will demand appropriate capability.

Whichever approach is used success will depend upon the ability of the firm to offer and maintain a level of perceived value higher than any actual or potential competitor.

Sources of profit

The four sources of profit include the three above, plus customer divestment.

4. Customer divestment

The customer may always be right, but may not necessarily be the right customer. These are customers whom the company can only satisfy at greater cost than the profit they generate.

The clearing banks are struggling to maintain a branch based banking service throughout the country. There is an emotional engagement with the concept of the ‘local bank’ but in practice fewer customers use their local branches. Many villages and housing estates have no banks or post offices because the customers are the so-called “wrong” customers.




3.3 Strategy for exploiting the opportunities – differentiation, positioning and branding

3.3.1 Competitive strategy The company must choose a competitive stance that will overcome, or at least match, the competition. It must, for example, be able to compete on price in a price sensitive market, and on quality, however customers perceive it, where quality is the key customer concern.

Porter (1985) describes three generic strategies for companies. (See Strategic Business Direction Section 3.) These should not be seen as mutually exclusive for a particular business because it is possible and sometimes necessary to pursue a combination of strategies to compete in different markets.

The marketing issues Porter raises are summarised here.

Overall cost leadership

Cost leadership is used to increase market share. It involves optimising production for scale efficiencies and minimising direct costs and prices. This strategy does not imply poor quality or service, simply that the cost leader is in a better position to defend itself against the competition. Even if competitors force a price war, the cost leader should be in a stronger position to weather it using the cushion provided by its higher margin on the same selling price, or to take an aggressive stance by dropping to a price it knows they cannot sustain.

Differentiation

Differentiation is the process by which the supplier creates a position in the perception of the target customer that their product is more highly valued than that of competitors. The purpose of differentiation is to increase either sales or margin, or both. To achieve differentiation the company must concentrate on being seen to be exclusive so as to gain customer loyalty to the brand or company and make the product less price sensitive. Higher margins provide revenue with which to defend the product’s position.

However, each difference created in the perception of the customer has the potential to create costs as well as customer benefits and has to be managed carefully




Differentiation applies to the company’s total offer, and can come from a number of sources:

Product or service

Features in addition to basic function

Performance

Durability

Reliability

Style, including packaging.

Image

Symbols – logo, letterhead

Communications – advertising.

Point of purchase or delivery, transport, premises.

Customer service

Delivery – availability, accessibility, speed

Installation

Before, during, after-sales

Customer support – advice, training, consultancy

Incentives to purchase, stock

HR – recruitment, training level.

Price

Lower price

Better value.

Table 3.2 Sources of differentiation

Focus

With a focus strategy the company concentrates on meeting the needs of a narrow market rather than trying to appeal to a broad range of customers. This strategy can achieve the aims of one or both of the other two generic strategies, but only for a smaller and more clearly defined market sector.

Focusing on a narrow market means a company can achieve a high share and create cost efficiencies that allow either lower prices or higher margins than the less focused competitors. This should provide a defensible position, though only for the narrow market in which it operates.

Risks of generic strategies

The concept of generic strategies in their pure form may not always be practical for the whole of a company’s portfolio. Markets are dynamic. A company’s product portfolio is a shifting mix of products at different stages of their life cycles, serving markets which may be growing or declining. It may not be possible, practical or sensible to shift from one generic strategy to another if the first is no longer sustainable due to market changes.

Effective competitors will attempt to duplicate the means by which the company achieves its position. The company will have to invest further in the basis of its competitive strategy in order to maintain the gap.

As an extension of differentiation, it is now necessary to consider the idea of redefining the value proposition. Budget airlines were neither better nor merely cheaper than their traditional rivals, they were different, they redefined what air travel means. In so doing they created a new market with new expectations. Some companies have responded by attempting to innovate in ways that change parameters in the market or change the market completely. Their actions, in developing radically innovative products or services, confront the customer with new needs. Instead of competing for a share in a market that seems doomed to ever more damaging price competition they effectively start a new one where price is not the only, or even the most important, competitive tool.




3.3.2 Positioning strategies Who are we and how do they know it’s us?

Positioning is a critical element in marketing strategy. The position a company commands in the perception of the customer is important in forming the likely response of that customer because it is the means by which one offering is compared to another. The perceived differences between one offering and another are the basis upon which the customer makes choices, decides how much to pay and how much trouble to go to. The most successful companies will be those that are perceived by the customer to create the most value and to be most aligned with their needs.

Positioning is:

How an offering is perceived by the target customer & the perceived relationship with competitors.

John Lines (IoD Consultant)

There are three key factors in this definition:

1. A company needs to differentiate a product's position from that of competitors otherwise it will sell on price alone.

2. Position exists in the minds of customers - not in the minds of the supplier's, managers or marketers.

3. Position is about product image rather than the features of a product.

Positioning is regarded as a natural extension of segmentation as it adds a direct comparison with competitors. For example, in the UK Volvo Cars positions itself as associated with family safety and reliability and, to a lesser extent, with prestige and high status. This enables Volvo to appeal to specific market segments and to command a premium price. Volvo Trucks, however, positions itself on quality and support by guaranteeing an engine replacement within 24 hours anywhere in Europe.

The positioning process requires the supplier to:

• Identify the target market

• Determine specific customer wants, needs, benefits desired

• Analyse attributes and perceived images of present and potential competitors

• Compare the product's position and that of competitors on each dimension valued by customers (perceptual mapping)

• Identify a unique position that offers desired benefits to the target market that are not offered by competitors

• Design a marketing programme to communicate these benefits and persuade customers

• Continue to assess present and potential target markets, competitors, and marketing efforts.

The positioning statement then becomes the value proposition.

A number of approaches to positioning by market status have been demonstrated:

• Be the first - the strategy most likely to succeed; Heinz, Kellogg, Coca-Cola were first and remained so.




• Strengthen your own position - promote a particular factor; Avis was number two to Hertz in the US car rental market and adopted the slogan “We’re number 2. We try harder.”

• Search for an unoccupied position - find a gap; ‘first direct’ did this with telephone banking.

• Depose or reposition your competition - a risky head-on assault on a competitor; the Wendy hamburger chain showed TV ads with a customer looking at a named competitor’s burger and asking “Where’s the beef?”

Other commonly used positioning strategies are based on product attributes, price and quality, use or application, product user, product class, competitors, benefits, problem solutions, or basic needs.

Figure 3.1 Perceptual map

A perceptual map illustrates the way customers view a brand against competitors’ brands relative to the main criteria they use to choose between products. Customers normally use a range of criteria but those shown are price and quality. This is a common combination. The products have been mapped onto the diagram with the area of the circle representing the volume of sales.

B is the market leader with the largest share and a middle of the road position. A is a smaller volume product with a high quality, high price position. C is the economy supplier with lower quality and price. D’s position of low quality and high price is untenable in the long run.

In the 1990s UK car market A could have been Mercedes, B Ford, C Skoda and D Jaguar. In 2003 both Skoda and Jaguar held their prices but shifted significantly upwards by raising quality. Both ran into perception difficulties and Skoda took this problem head-on by focusing its advertising on it. One TV campaign showed a trainee in a car plant carefully aligning and sticking Skoda badges on bonnets of small cars. When some luxury saloons came down the line he stopped work to let them pass. The production line was then stopped and the cars backed up to get their Skoda badges.

For a marketing strategist there are three basic alternative positioning strategies:

1. Defend and strengthen strong attributes.

2. Seek unfilled positions (perhaps with different combinations of attributes).

3. Reposition, alter the emphasis of the offering in terms of the attributes or create new attributes.

P e rc e p tu a l M a p p in g

H ig h Q u a li ty

L o w Q u a li ty

H ig h P r ic eL o w P r ic e

A

B

C D

N e w e n tra n t

?




Positioning is not only significant in the external market; it also has great importance inside the organisation. The positioning strategy has to be understood and supported by those responsible for delivering customer value if it is to be effectively communicated to customers. It will form the basis upon which the marketing strategy is implemented and will largely determine promotional strategy, pricing, product/service quality, processes, people, and distribution.

3.3.3 Branding Branding is a particular marketing strategy designed to increase the value of the offer in a way that will endure in the perception of the customer.

A brand is an identifiable product or service presented in such a way that the buyer perceives relevant unique added value. The success of the brand results from its being able to sustain the perceived added values in the face of competition and over an extended period of time. This ability to sustain the position of the brand is often referred as the brand equity, or power in the market place. Brand equity can lead to a price premium, together with extra volume, and an increase in the amount a company is worth over book value.

The brand should have an identity that appeals to the customer and a simple, distinctive and communicable name that suggests the product qualities and benefits.

The value of brands is increasingly recognised and companies are making every effort to exploit this valuable asset. The success of internet trading has made brands even more valuable as they facilitate a reduced-risk purchase by the customer.

Benefits and risks

The benefits associated with successful branding include:

• Simpler customer decision-making, lower transaction costs, higher levels of loyalty

• Increased profits from the added margin over generic alternatives

• Protection from competitors

• Enhanced corporate image and value

• Legal brand protection against copying

• Greater control over the marketing mix.

To achieve these advantages the company must commit itself to rigorous quality control and invest long-term in appropriate updating and repositioning as required.

The potential risks lie in failing to achieve the consistent high quality performance required for long-term success, particularly in the context of the umbrella brand. One example is the domino effect if the reputation of the brand suffers and the damage spreads throughout the range.

Management complacency may arise where the power of the brand is taken for granted and insufficient investment is made in maintenance and improvement.

The successful brand is:

an identifiable product, service, person or place augmented in such a way that the buyer or user perceives relevant unique added values which match their needs most closely. Furthermore, its success results from being able to sustain these added values in the face of competition.”

de Chernatony (1996)




3.3.3.1 Branding decisions

The first branding decision a board has to make is whether to brand the products, the company, both, or nothing.

Procter and Gamble has a multibranding strategy and has created a different brand for each of its products, even those in the same product category. For example:

Baby Care – Charmin, Children's Pepto, Dreft, Luvs, Pampers, Pampers Kandoo

Hair Care – Aussie, Head & Shoulders, Herbal Essences, Infusium 23, Pantene, Physique

Household Cleaners – Bounty. Mr. Clean, Mr. Clean AutoDry Carwash, Scentstories by Febreze, Swiffer

Shaving Care – Braun, Gillette Fusion, Gillette M3 Power, Gillette Satin Care

www.pg.com (2006)

By contrast Virgin has taken the umbrella branding route, created the company itself as the brand and has the following subsidiaries:

Virgin Active, Virgin Atlantic, Virgin Atlantic Cargo, Virgin Balloon Flights, Virgin Blue, Virgin Books, Virgin Brides, Virgin Comics, Virgin Cosmetics, Virgin Credit Card, Virgin Digital UK, Virgin Drinks, Virgin Experience Days, Virgin Express, Virgin Galactic, Virgin Games, Virgin Holidays, Virgin Jewellery, Virgin Limited Edition, Virgin Limobike, Virgin Megastores (UK), Virgin Mobile, Virgin Money, Virgin Radio, Virgin Trains, Virgin Unite, Virgin Ware (UK), Virgin Wines, Virgin.com and Virgin.net.

www.virgin.com (2006)

There are also eight unbranded companies in the Virgin UK stable but these are charities or small specialist firms for which the brand has no value.

In July 2006 NTL acquired Virgin Mobile and paid £926 million, a substantial amount of which was for the use of the brand over the next 25 years. The cable operator re-launched itself and Telewest as Virgin Media, a very good indication of the financial value a brand can represent.

In 2003 Coca-Cola was widely regarded as a joint company-product brand but its top five brands were Coca-Cola, diet Coke, Fanta, Schweppes and Sprite. Of its 29 other products on sale in Europe, only five carried a Coke-related brand name:

Alive, Aquana, Aquarius, Bonaqua, Burn, caffeine free Coca-Cola, caffeine free Coke light, caffeine free diet Coke, Canada Dry, Cherry Coke, Coca-Cola Light with Lemon, Cresta, diet Fanta, diet Coke with Lemon, diet Sprite, Dr Pepper and diet Dr Pepper, Fanta light, Five Alive, Frutonic, Hawaii, Kia-Ora, Kinley, Lilt and diet Lilt, Malvern, Minute Maid juices and juice drinks, Oasis, POWERade, Roses, Sprite light

www.coca-cola.com (2003)

In 2006 Coca-Cola listed on its website 372 different worldwide brands but only 13 were Coca-Cola drinks. In 2003 Coca-Cola was reported to be investigating the production of a milk beverage to add to its range. In 2005 it had become a supplier of flavoured milk drinks by making a distribution deal with Bravo! Foods that included the opportunity to take a minority shareholding in the producer.

Dell traded on its brand for many years but changed its marketing strategy by entering the white box market to increase production efficiency. The brand value continued to grow, so the company changed its marketing strategy again in 2006:




Dell boxes

Dell built its PC business by creating a brand of the surname of the owner, Michael Dell, that was synonymous with service, quality and the cost advantage of direct marketing, initially by mail and telephone order and subsequently via the internet. In 2002, it began to supply unbranded PCs to IT consultancies that worked with SMEs in an effort to capture part of the so-called 'white box' PC market previously dominated by IBM and HP. Dell's initial target was 1% of its turnover but worldwide 58% of all PCs sold in 2001 were white boxes. Dell's unbranded strategy is designed to enable the company to increase volume and, thus, production efficiency. In 2004 it became the leading US PC supplier and in 2006 abandoned the white box market as its brand equity had risen strongly and become a major sales element.

3.3.3.2 Levels of branding

Branding applies to both consumer and business products and the successful brand satisfies both the rational and the non-rational, or emotional, needs of its target.

The balance of these needs favours the emotional in consumer branding and the rational in industrial branding, but the difference is not as clear-cut as it might seem. Purchasing decisions in industrial markets are made by people. Their individual motivation in choosing one brand of, say, office furniture may be strongly driven by their personal need for credibility amongst their peer group, or career advancement. These needs make them susceptible to the emotional appeal of one brand over another.

Just as happens with many products, a brand can operate at four levels:

1. Tangible product with the expected minimum purchase conditions.

2. Basic brand with the expected features, design, quality and pack associated with the brand name.

3. Augmented brand with its unique values for the target customer and associated service, credit, terms and guarantees.

4. Potential brand with the extra benefits offered to differentiate them from their competitors.

The potential level often comes when competition is fierce and brand leaders are forced to offer these extra benefits. Kitchen suppliers offer a design service. Food manufacturers offer a shelf space planning service to their retailers. Sometimes this can be used positively to win high market penetration. Mars offered retailers Mars-branded freezers to display their newly launched ice cream and secured a huge share of the market before competitors had time to react.

Companies may progress through the levels over time as competition increases. A safer and more professional approach, however, is to predict a brand’s life cycle and plan the actions accordingly over a longer period. This becomes strategic brand planning.

3.3.3.3 Functions of the brand

At the generic level, it is very easy for competitors to copy a company’s offer. When the offer is more sophisticated, it is more difficult for competitors to copy it effectively and to steal market share. As the added value attached to the brand increases, the importance of price as a buying decision factor decreases. Branding can, therefore, become an effective protector both of market share and of margin.




The brand can differentiate a product or service from other, similar ones. A well-supported brand will be able to communicate in its name a set of values that would otherwise take too long to explain to the potential buyer.

In this sense brands are risk-reducers: customers will buy a well-known brand because they feel that their money is unlikely to be wasted on a sub-standard product. One example is IBM computers in the business-to-business market: other computers offer better facilities at a lower price, but the phrase ‘nobody ever got fired for buying an IBM’ seems to have proved an effective promotional tool. IBM maintained brand leadership over many years but has sold its PC interests to Lenovo, a Chinese company.

Brands can represent functional messages such as ‘technically advanced’, ‘reliable’ or ‘value for money’ which would otherwise be cumbersome to repeat. They can also provide a badge value, enhancing their image in the customers’ eyes, for example as:

• Fashion-conscious – brand names on clothes

• Independent-thinking – choice of newspaper

• Fun-loving – particular drinks, perfumes

In markets where there is little difference between products, the brand can become a symbolic device, communicating strongly the emotional aspects of the products to establish consumer preferences. Clearly, this is a more effective tool in consumer markets than in industrial markets, where a higher proportion of the influences on decision-making are rational.

Finally, the brand can be a legal device, protecting the company through effective trademark registration.

All these brand functions are, however, only useful if the brand is seen as a central factor in the company’s strategy. The successful company will carry out brand planning alongside marketing planning and brand building to ensure that their resources are used in the most cost-effective way to achieve well-defined objectives.

To be effective, brand planning should receive input from all levels of the organisation. There should be clear and quantifiable objectives for each brand and actions defined to achieve those objectives. Clear responsibilities and timings must be added, so that results can be monitored.

3.3.3.4 Business-to-business branding

Although the emphasis is different, it is important for brands in this type of market to establish their own personality and to communicate these effectively. Messages may be more concerned with corporate identity than in consumer markets and the brand will often be the selling company’s name. The principles of branding remain the same.

However, effective B2B branding is very important because it is about communicating the benefits and value a business, service or product provides to customers.

It has to become a company-wide management strategy, not merely part of the marketing effort. It should be supported by research among clients on their perceptions of the brand and by brand building activities within the company. The research may produce unexpected results. For example, it is often assumed that purchasing managers have a detailed technical knowledge of the products they buy and can think in reference numbers.

IBM created the 'eServers' and 'eSolutions' brands to make it easier for their business clients to understand the products and services. Although the rebranding effort cost $75m it helped IBM to beat Sun Microsystems in 2000 to the top place for worldwide server revenue and to outsell Hewlett-Packard for the first time in the UNIX server market.




Companies need to develop strong relationships with partners, customers and suppliers in order to gain trust, relevance and value within a category. An example of collaboration as a feature of a B2B brand is Sun Microsystems' establishment of Java as an essential element of internet technology. Sun has excellent relationships with developers. It offers training and programming advice, gives easy access to developments in the language and works very closely with all parties involved with its technology, including hardware engineers, chip designers, and software developers. The brand power of Java is so embedded in the web industry, that it is almost inconceivable that the programming language could ever be displaced as the de facto standard for Internet application development.

Technical innovation is another feature of a B2B brand. In the late 1990s the airline industry saw a major shift away from the Boeing 747 derivatives towards the Airbus series designed and built by a European consortium. A critical factor for airlines is fuel efficiency which the Airbus delivers as a result of the innovative use of strong but lightweight materials. In 2006 a two year delay in delivery of the 600+ seater A380 caused enormous damage.

Underlying all B2B brand qualities, and closely associated with them, must be consistency of the personal relationship and a strong partnership between supplier and purchaser. Researchers at Cornell University found that trust and effective communication were particularly important to food-service purchasing agents. Turnover in supplier representatives was one of the most troublesome challenges facing purchasers.

3.3.3.5 Managing brands over the product life cycle

Products, markets and brands all have life cycles.

The management of a brand and the expected returns vary over its life cycle. The stage of the market’s life cycle will also be a deciding factor in the type of marketing activity needed. A brand may have a different lifecycle from a product even if branding is at the product level e.g. the Mini or the Ford Focus. 40 years after its launch as a cheap runabout, BMW has moved the Mini up-market and strengthened the brand.

All products and services tend to go through a life cycle, even though the length of this cycle varies from one product to another. The shape of the classic life cycle is illustrated in Figure 3.2. This shape can be determined and thus altered by a company's strategy or by the conditions in the market that are driven by the strategy of stronger players. However, the cycle is dependent on investment in marketing by organisations and their respective industries.




S A L E S

In tro d u c t io n G ro w th M a tu r i t y /S a tu ra t io n

D e c l in e

T IM E

Figure 3.2 Product Life Cycle

At its launch a brand has no personality of its own. An established company name or related brands may provide an umbrella, but the brand will still need to establish its own identity to achieve customer acceptance. The speed with which the company can achieve this acceptance will depend on a number of factors in an effective and well-planned marketing strategy.

A new brand in a young market will need to focus on its practical or functional advantages over the competition. As the market matures and functional differences between brands become fewer, the brand will need to rely increasingly on its symbolic advantages to appeal to the non-rational side of the customer’s decision-making process.

In modern and especially in high-tech markets, the product life cycle is very short and competitors are extremely quick to launch me-too products. Effective brand support is essential, as the cost of delays in launching products can be very high. The brand lifecycle may actually be significantly longer than the product lifecycle. So, advertising campaigns that may seem vastly expensive can often be justified by their role in establishing, strengthening or maintaining the brand.

Being first with a successful brand can carry a high premium in profit potential. With effective marketing support, a brand that gains an early competitive advantage may be hard to displace. The company reaps the benefits of economies of scale, as well as the experience effect (where each doubling of output produces a finite saving in costs).

In addition, it becomes easier to achieve and maintain brand leadership, as buyers see the brand name almost as a generic term for the product. Examples of this are common in the pharmaceuticals market, where GPs tend to prescribe branded drugs rather than the generic equivalents. Apple computers dominate the graphics business even though the same software is now available as a cheaper total offering on IBM-compatibles. On the other hand, there is a risk. Jeep, Hoover and, in France, Frigidaire or 'le frigo' are now generic terms and have lost their associations with the brand.

The pioneer of a product can expect to gain a higher percentage return on investment than early followers, with the percentage return for late entrants being even lower. As the relative investment needed tends to decrease over the life of the product, this difference will probably be even greater in monetary value than in percentage terms.




During the growth phase of a market, an established brand will need to reinforce its positioning with communications reaching both target and non-target groups. Distribution networks and sales channels can also be used to present the brand to its target audience and to discourage non-targets in such a way that the target is less likely to switch to incoming me-too brands. For example, a designer clothes range may be limited in distribution to a few carefully chosen designer shops, with both supplier and stockist agreeing to a degree of exclusivity. The supplier could agree not to offer the range to any other outlets within a certain geographical range; the shop could agree not to stock certain rival labels.

As the market reaches its mature phase, the brand will be under considerable pressure from competitors. There are a number of options, including:

• extending the brand name to related products; ICI added wall coverings to its Dulux paint range

• reinforcing promotional messages to focus on one aspect of the brand; Black & Decker made DIY easier with high-powered tools and Gucci focused on the chic sophistication of their clothes.

Once the decline begins, it may be best to remove a brand if it is likely to damage the rest of the company’s portfolio. It may die slowly if it can provide a worthwhile return on a low investment. On the other hand, it may be possible to recycle a brand, as achieved with Guinness being re-launched to appeal to a younger market.

Such a re-launch is only possible if the core values of the brand have been maintained and the consumer response to the brand name has not been irretrievably damaged. Repositioning may be possible even if the brand is tarnished or old fashioned, but it is expensive. Lucozade, for example, was removed from its hospital pick-me-up context and re-launched as a sports and energy drink.




3.4 The product/ market matrix A simple Ansoff matrix is a useful tool for choosing, summarising and presenting marketing options in terms of products and markets. It summarises the options in a visual way and can help in the assessment of the risks and costs inherent in a particular course of action. It can be particularly helpful when converting the results of the SWOT and DCA analyses into marketing strategies.

Ansoff shows the four possible marketing options open to the company:

1. Market penetration - selling existing products to existing markets.

2. Product development - selling new products to existing markets.

3. Market development - selling existing products to new markets.

4. Diversification - selling new products to new markets.

The key to successful marketing (and business) strategy is an understanding of the relationship between products/services and markets. Having determined the target markets, it is important to identify which products and/or services will be offered to each. One useful outcome of this exercise is a matrix bringing together market segments on one axis, and product/service offerings on the other. Each cell represents a particular contribution to the overall operation. Each one may have a distinct positioning statement and marketing strategy in terms of price, promotion and distribution.

Segment one Segment two Segment three Product Contribution

Product/service Product/service Product/service Product/service Segment contribution Objective

Table 3.3 Product/market Matrix

As a planning tool the matrix facilitates the process by which the organisation can identify the relationship between markets and offerings and understand the contributions each will make to the achievement of business unit objectives. It will therefore allow for a modification of these relationships in a systematic and organised fashion, and an appreciation of the marketing strategy implications involved.

It is also useful as the basis for a wider strategic analysis designed to include:

1. The marketing strategy inputs (product management, pricing, promotion and delivery/distribution).

2. The capability (resources, systems, structure and culture) required to implement them.

3. The implications for information.

The outcomes (sales, market share etc.) and the inputs (see above) are normally expressed in financial terms. This allows the decision-maker to understand the basis of financial performance and the most appropriate destination for investment in capability, information and strategy.




The approach also has uses for the longer term. The future for most organisations will be defined by the combination of products and markets they manage and how successfully they manage the changes therein. The fundamental matrix above can be used to

1. Attempt to forecast the product/market configurations most likely to occur.

2. The performance necessary from the organisation if it is to achieve its objectives.

3. The level and direction of investment needed to achieve the performance.




3.5 Market entry Entering domestic markets requires detailed analysis of the particular market that the company’s products or services are designed for, and all the information is locally available. The underlying requirements are the same for international markets and, although the details vary, the same pattern can be used for both

In international markets basic market research can avoid the long-term cost of simple mistakes. The fundamental strategic format will remain the same, the identification of target markets, a product/market strategy, positioning and branding strategy, the use of the mix to implement the strategy. However the means by which these things may be undertaken in practice will be influenced by the available infrastructure, trading arrangements etc.

Every country has its own methods of doing business and carrying out business procedures, so nothing should be taken for granted. Trade missions or local agents may provide information on regulatory issues, and political and economic issues.

Many businesses benefit from a presence in the market, either directly through a local office staffed by employees or a local limited liability company, established as a subsidiary. Alternatively, the business may benefit from a link with a local partner, which may be a distributor, a sales agent, or a joint venture with a local business.

In taking the decision the company should ensure in broad terms that it has the capability and the support of its stakeholders prior to any action. It should be aware of the nature of the additional currency, political and interest rate risks involved in international operations.

When determining to enter international markets the company has to make four sets of decisions:

• Markets to enter

• Method of entry

• Marketing programme

• Organising for international marketing.

3.5.1 Markets to enter As with domestic markets the decision concerns the objectives of the business, the capability of the business and the possibilities available in the global market. The following issues should be addressed.

1. International marketing objectives

a. proportion of domestic to foreign sales, costs, and profit.

2. Business capability

a. offering i.e. products and services

b. capacity i.e. resources and systems

c. supply of raw materials, components, energy etc.

d. marketing i.e. information, competitiveness, experience, budget

e. structure i.e. appropriate organisation to manage a global operation

f. culture i.e. ability to adopt an international stance

3. Number of markets to enter




4. Types of market to enter

a. developed

b. developing

c. under developed.

Country attractiveness is influenced by many factors, and they may vary in their level of importance, depending on the circumstances of the business. Ease of entry and ability to service customer requirements will be high on the list of priorities, and these will be influenced by considerations of geographical and cultural proximity (including language).

3.5.2 Methods of entry

Exporting

The lowest level of commitment to international marketing ranges from casual or accidental exporting, which involves little or no specific planning or changes to current activities, to active exporting where the firm seeks opportunities to extend sales by offering its goods in non-domestic markets.

The approaches vary. Export intermediaries might bring together buyers and sellers from different countries and take a commission for arranging the transaction. Export houses and merchants might purchase goods from domestic manufacturers and sell them in foreign markets.

Direct sale to foreign buyers involves the firm in some form of communications activity in order to make the potential customer aware of their existence. This might be advertising in foreign journals, or taking part in trade exhibitions. The use of intermediaries and merchants obviates the need for this direct presence.

Licensing

A company can make a licence agreement with an organisation in another country to manufacture and supply its product or service. As the cost of licensing tends to be low, fees and commissions can be a significant addition to profitability. It is an attractive alternative to direct investment and/or overseas operations as a means of gaining market entry. It is particularly useful for developing a well known brand globally. Franchising, which has a similar effect, is widely used by companies such as McDonalds.

There is a risk that the licensee may become a competitor, particularly where technology transfer has occurred and there is little brand recognition.

Joint ventures

A partnership between a domestic firm and a foreign firm or government may be used to spread the risk where a significant investment is required. Joint ventures are often politically necessary, and can also provide legitimacy for the local customer base and valuable knowledge and experience of the local market.

The joint venture can be difficult to manage, control is often a problem and the partners do not always have the same goals and expectations from the relationship.

Strategic alliances are the latest form of co-operation between companies. They are similar to joint ventures in that they seek to pool resources and know-how in pursuit of a mutually beneficial goal. They suffer from the same problems of control and management. They are different in the sense




that they are normally entered into voluntarily and they are not restricted to one partner always being the representative of the local market. They are, therefore, truly global alliances.

Trading companies

A trading company provides a link between buyer and seller. They normally deal in commodities (e.g. grain, agricultural products etc.) and often operate a quality control mechanism on behalf of the buyer which assists the seller to produce the appropriate offering. They take title to the product and are responsible for all physical transfers. They may also provide a wide range of ancillary services, e.g. consultancy, market research, advertising, insurance, R&D, legal assistance, guaranteed price packages etc.

Direct ownership

The ultimate commitment to international operations is direct ownership brings major advantages; improved control, inward investment incentives, enhanced image in local market through investment, job creation, a better relationship with the local market and greater knowledge of business drivers. These features enhance the competitive advantage through more effective adaptation to local conditions.

In whatever way the firm decides to become involved in an international operation the best tenets of marketing still apply in terms of the need to understand customers and the issues that determine their needs and behaviour.

3.5.3 Marketing programme Before determining how to adapt the traditional marketing mix to international operations the organisation has to develop an appropriate level of knowledge and understanding about the target markets. For example, they need information on the competitive situation, customer perspective and marketing infrastructure for distribution and communications.

Product / Service

The three fundamental alternatives available to the company are:

• Offer the same products/ services as there is no need to change

• Adapt products/ services to meet specific local conditions

• Invent new products/ services specifically for the new market.

The last category may take two directions technologically – forward or backward. It may sometimes be necessary to use earlier forms of technology or earlier versions of the product/service, or to combine old and new technologies (e.g. clockwork radio).

Promotion

The organisation will almost always need to adapt the communication programme in some way to take account of different cultures and languages. Even where language is not a barrier, culture may be, perhaps only in relatively minor ways. The use of the various alternative promotional techniques must be carefully planned, particularly the combination of personal and non-personal formats, in order to meet local expectations.

They must also take into account the communications infrastructure. The availability of media and other services cannot be taken for granted in some parts of the world, and in others there are differences of approach.




Price

Price is a particularly sensitive area for the international operator due to fluctuating currency values and interest rates. Generally the company must take account of local market rates, the risk factors, the perceived value of the brand, the response of competitors and the cost implications of selling in the particular market when setting the price. They should also be aware of the quality and expectations of the distribution method or channel they have selected and of the influence it might have over the final price charged.

In addition, it is vital to consider the policies of the national governments on price controls and levels of taxation.

Distribution

The distribution element has two major facets:

1. Channels between nations, which are concerned with managing intermediaries, logistics, finance and risk.

2. Channels within nations, which are concerned with managing the process by which the goods are distributed from point of entry to the customer.

Distribution infrastructure varies considerably in terms of the level and complexity of the process. It is, however, a key element in determining the customer satisfaction and obtaining payment. Control or influence over distribution is often thought of as a critical success factor in international operations.

It is important to be aware of the impact of political instability on distribution infrastructure and to make appropriate provision to avoid loss, through insurance etc.

3.5.4 Organising for international marketing The level of dedicated resource the organisation requires will depend on the nature and extent of the involvement in international markets.

A full-scale international marketing operation with overseas subsidiaries and so on will require extensive and specific resources, structures and systems to deliver the marketing strategy. There will also be cultural issues that the organisation must take into account when deciding how best to manage such an international operation. It is not sufficient to assume that the methods and values that work in the domestic operation can easily be transferred.

Many organisations, however, may only need a modest team to deal with the intermediaries acting on the company's behalf if they enter a limited number of markets.




Section 4

Marketing tactics




Learning Objectives

Section 4 - Marketing Tactics


• Compare and contrast service and product marketing and specify the role of the seven mix elements

• Specify the essential ingredients of a customer focused organisation

• Show how Information Technology changes how marketing strategy can be created implemented

• Use an objective and systematic approach to monitoring and controlling the marketing effort.




4.1 Overview of tactics and impact of IT

4.1.1 The marketing mix The role of the board is to manage the relationship between the strategic requirements of the firm and investment in its long term marketing capability.

Marketing tactics are normally described as the ‘marketing mix’, generally thought to consist of the elements below. They were originally known as the ‘4Ps’ but, as marketing concepts changed, three further elements were added making ‘7Ps’ in the mix. In recent years an eighth element has been proposed that might lead to a marketing mix of ‘8Ps’.

Directors must ensure that each of the elements is satisfied.

1. The Product mix

The product mix is the set of all product lines and items offered for sale to buyers. It includes the basic product lines and variations that provide depth of coverage. The mix is determined by:

• Customer and market needs and opportunities, together with the anticipated changes in these areas

• Organisation objectives, growth, profitability

• Current organisation capability, including innovatory skills, access to supplies and distribution

• Actual and anticipated competitor activity, particularly technological or service innovation.

• Broad-scale issues such as economy, regulation, technology.

The function of the product mix is to satisfy the needs of targeted customers and segments at a profit. The objectives are to maintain the effectiveness of the current mix and extend it by developing new products to satisfy customer needs in the future.

The justification for adding or deleting products from the mix depends on changes in:

• The profit contribution of a product or line to the overall profit target

• The extent to which the organisation can vary its strategy to maximise the opportunities offered by different segments.

• Anticipated changes in customer requirements.

• Sensitivity to time related variables such as seasonality.

• The level of marketing support available for the product

• The interdependency of sales between products in the mix

• The impact of competitors on product decisions and of product decisions on competitors

• The performance of a modified or improved product.

Continuous emphasis on creativity, innovation and new product development depend on the effective management of six fundamental steps:

1. Idea generation using a variety of in-house and external sources and techniques




2. Screening to eliminate the unlikely ideas

3. Business analysis to estimate the likely future costs, revenues, profits and cash flows

4. Concept testing among the likely target customers

5. Product development of the physical product or tangible service

6. Product testing to discover the level of acceptability of the product to the target customer and test marketing of reactions to the anticipated marketing programme.

Developments to products vary from minor modifications to major changes - from new improved versions to extensive technological breakthroughs. A systematic and continuous approach to NPD helps to ensure a constant supply of new offerings. This protects the organisation from pressure on margins, reinforces consistent differentiation and contributes to a viable competitive position.

2. Pricing policies

Pricing policies reflect the joint requirement to provide competitive value for customers and an appropriate return for the shareholder.

This may involve broader decisions about investment in cost management and/or the withdrawal from markets where the balance between customer value and shareholder value cannot be maintained.

The company’s revenue from a product is a function of price times volume. Its profit is the result of revenue minus the costs associated with producing and marketing the product. The overall pricing strategy must be consistent with both the generation of revenue and the recovery of the costs involved.

When an organisation offers several products in a variety of markets their pricing strategy will vary according to the conditions prevailing in each market. Each product/market combination will have a different configuration of price and cost and will make a different contribution to the profitability of the organisation. The organisation has to manage the mix of contributions to achieve its overall strategic objective.

To reflect the notion of value, price has been defined as:

The monetary summation of the conditions that give value to a product or service

W M Lazer (1983)

"The conditions that give value" are different for the seller (profit, survival, cost coverage etc.) and the buyer (value for money, satisfaction, uniqueness etc.). As they vary also for different customers and consumers of the organisation’s offering, the company must pay close attention to the customer in the price setting process.

Price is not defined entirely in financial terms. The ‘whole price’ is the financial, physical and psychological effort that the customer must expend to obtain the product. Potential customers who have the money may fail to buy because they do not feel they have the physical or psychological access they need. The pricing process has to acknowledge this factor.

Although it may not be the primary purchase driver, the price has to be right. The process of setting it has to take into account

• The company’s objectives in setting a specific price

• The basic cost structure

• Overall level of demand in the market




• Competitive environment (number, position and respective power)

• The average market price

• The relationship between price and benefits

• The opportunity for differentiation

• The perceived use value of the product to the customer

• Role and power of channels of distribution

• The marketing activities.

Alternative pricing policies include:

• Promotional pricing - a medium term move starting with a low price to attract business and the longer-term aim to raise the price once a significant market share has been established

• Penetration pricing - the reduction of prices by a sizeable amount for a pre-agreed period in support of promotional activity

• Target return pricing - target return price = unit cost + desired return x investment capital unit sales return

• Break-even pricing - breakeven volume = fixed cost price – variable cost

• Perceived value pricing – the reflection of the real value to the customer with price premiums linked to tangible benefits

• Sealed bid or competitive pricing – the response to a detailed specification so the price incorporates the notion of ‘expected value’ and real value

• Market skimming pricing – the premium commanded by a high price for a new product when it is first in the market and there is no immediate competition.

3. Place

Place is concerned with the means by which customers gain access to the product or service offered by the seller.

Place, delivery or distribution systems aim to achieve an appropriate level of customer service at an acceptable cost. The ability to offer availability, fast service, just-in-time delivery and materials handling is often the determinant in the purchase decision.

The marketing channel

The supplier may deliver the product directly but it is more common to use independent distributors, collectively called the ‘marketing channel’. The board must decide whether to undertake or outsource the distribution processes that may include:

• transportation

• traffic management

• storage

• materials handling,

• order processing

• bulk breaking and reassembly




• inventory management

• packaging & labelling

• pricing

• promotion

• production scheduling

• information management

• overall channel management.

Because distribution is expensive, efficiency is an important competitive element. Efficient channel management depends on a detailed understanding of the means by which all members of the channel create value for their customers, a willingness to improve systems and collaborate with channel partners, and a continuous search for innovation.

Channel power such as that exercised by supermarket buyers must also be managed.

4. Promotion

Promotion, or marketing communications, can be used to create and maintain a corporate image, or promote a particular product, or create an internal climate for success.

The funding for communication and promotion of the product has to be sufficient to support the strategic promotional campaigns to achieve the necessary levels of awareness, interest and action over the long term.

‘Pull’ promotional activity, such as price cutting, is directed at the final customer and aims to increase demand and pull the product through the distribution channel. ‘Push’ promotions are aimed at the intermediary to persuade middlemen to carry and push the product to the final or next customer in the supply chain.

Traditional communications media have different qualities. Some, for example broadcast media advertising, can only send messages one way even though they may be complex and creatively rich. Others, for example direct mail and POS, offer simple response systems. Modern IT systems enable more sophisticated responses. Only face-to-face personal selling offers the complete, two-way, interactive, real time, communications package.

Most promotional activities use a combination of advertising, sales promotion, personal selling and public relations. Their effectiveness is extremely difficult to measure.

A distinction is still drawn between ‘above the line’ promotion that involves the purchase of space or time in the media and ‘below the line’ does not, although it may involve expenditure on incentives and/or attention seeking devices.

Worldwide web

IT and the internet have produced a radical shift in the traditional assumptions about promotion and communication. The board has to review its use of established communication media to determine how to create and use a presence on the web. So-called 24/7 worldwide access enables the company to promote itself to potential customers and enable them to buy directly. The company can target small and detailed segments of customers and send them messages precisely tailored to their interests and check that the message arrived.

Web enabled marketing channels are re-shaping the way businesses communicate and trade with their customers:




• Viral marketing (where customers do the work and pass on the message on the organisation’s behalf to their contacts) becomes dramatically more effective via the internet

• Blogs create a new route for ‘honest and authentic’ opinions of products, services and situations

• On-line trading has created entire new enterprises as well as new income streams for established firms

• ‘Cost per click’ changes the way that advertisers can use a more results oriented arrangement to pay for customer exposure.

In addition, digital media channels enable sharper targeting. Direct response marketing mechanisms work in parallel with direct delivery of products. Their auto responders suggest other possible purchases to customers based on automated analyses of their profiles.

No one is certain what the ultimate evolution of marketing will be as a result of the use of information and communications technology. People are generally confident that it will involve fundamental business re-modelling and not just traditional marketing processes being made quicker.

The board in every company needs up-to-date knowledge and skills in judging which of these might be appropriate for their business.

Other elements

These four elements combine to satisfy customer needs for physical products and for services. The board needs to ensure that three further elements essential to a marketing strategy, especially for services, are in place. Directors may find a fourth on the horizon.

5. People

People strategies enable the staff to make significant contributions to the success of the organisation’s marketing strategy.

The company creates value for its customers through excellent customer service, efficiency, innovation and so on, and people are sometimes the only tangible element of the service transaction, and more often than not a critical factor in the creation of quality.

6. Processes

There are processes that support and enable the implementation of the marketing strategy.

Effective and efficient process management is vital for both products and services, it is important to note however that process failure in the pure service context may mean failure of the service itself, particularly where the outcome is time sensitive. A service cannot be stored.

7. Physical evidence

The physical evidence supports both the internal and external positioning strategy.

This evidence is the literature, premises, uniforms etc. that are associated with the offering of the company in all its forms.

8. ‘Personalisation’

‘Personalisation’, ‘individualisation’ or ‘mass-customisation’ have been variously proposed as the eighth element in the marketing mix. Some companies are basing their relationships with customers on customising or tailoring goods and services to the individual needs and wants of




each consumer. One-size-fits-all is no longer the offer. Every Dell PC is made from standard components to a customer’s specification. The motor and clothing industries are taking the same route.

Implications

The mix has both strategic and tactical implications, in the longer term the organisation is attempting to create advantageous positions in its various markets taking into account the need to generate returns for stakeholders, the impact of broad-scale elements as well as the strategic intentions of competitors. In the short term the elements will be used to respond to detailed movements in the market such as changing customer needs, competitor activities etc. and to gain tactical advantage. For example:

Mix Element Tactical Issues Strategic Issues

Product/service Detailed modifications New product development

Price Minor adjustments Shareholder value

Promotion Positioning/branding Brand building

Distribution Channel management Logistics and channel strategy

People Day to day management Recruitment and training

Processes Process management Systems development

Physical evidence Attention to detail, e.g. cleanliness

Design and control of overall physical appearance

Table 4.1 Marketing mix – tactical and strategic is sues

The allocation of resources to the mix elements should be determined by the contribution that each element is expected to make to the achievement of marketing objectives. In practical terms, this is difficult to calculate. Decision makers must analyse the requirements of customers, their propensity to respond to different mix elements, and the activity of competitors. The examples below illustrate the point.

1. Customers expressing a dominant preference for availability and convenience are likely to respond favourably to improved distribution and access. Investment in this area is likely to reap greater returns than if it were used for promotion for example.

2. Customers concerned for quality will respond favourably to investment in good quality products and services rather than discounts. (quality must be defined in terms that the customer can understand, this may not be the same definition as that used by the maker.)

3. Other customers may express a preference for price competitiveness and therefore investment in cost management, efficiency etc. is likely to pay dividends in the market.

4. Customers concerned primarily with image may respond investment in to sophisticated and well managed promotional activity.

These examples are not intended to be definitive. Nor would they be necessarily mutually exclusive in the case of a single product or service, customers may, and often do, want a combination of all the qualities mentioned above. Even though they may prioritise them differently there are minimum performance standards, common to the market, below which the seller cannot fall.

Each element of the mix can be judged in terms of its performance against its own objectives (for example advertising may have an output in terms of the creation of awareness and a budget to




achieve this). The objectives for each element should have been set in terms of the role of that element in achieving the overall plan. It is important that the contribution of the elements, acting in concert, is assessed. Control should be exercised in terms of the balance of investment between the different mix elements.

4.1.2 The impact of IT Information technology (IT) and the internet are having a profound effect on businesses and the way marketing is implemented. The internet can be used as a tool for research, promotion, selling, procurement and distribution (place). Additionally, the increasing availability of Customer Relationship Management (CRM) software to help automate marketing, sales and customer service functions is providing opportunities to increase marketing efficiency and effectiveness. It is also creating possible pitfalls for the unwary.

Through the use of IT and the internet, changes are taking place in a number of aspects of trading. These include:

• New products and services such as online selling, publishing, and click-through commission payments.

• New methods of distribution such as software and music downloads over the internet and so-called 'clicks-and-mortar' purchase online for pick-up at a local store.

• New pricing mechanisms such as online auctions, real time stock and foreign exchange pricing, discounted last minute sales for travel and entertainment services.

• New promotional methods and media such as text messages promoting specific restaurants in the local vicinity and information to a user's WAP phone while passing through the cell area.

Directors need to develop their knowledge of how the combined power of computing and electronic communication can contribute to their business.

The features they should consider include:

• Serving customers - adopting new tools to help better understand customers and new ways to work with customers.

• Creating new value - using research information to create added or new value at premium prices.

• Co-operating with new partners – contracting out the security of the transaction function to ‘infomediaries’ or gaining rapid access to new markets through complementary partners.

• Delivering on commitments - ensuring back office systems and delivery networks integrate well with the new e-sales front office.

• Charging - taking advantage of transparent charging in e-sales to link prices directly to the value offered.

• New competition - building into the business model a response to lower costs of market entry allowing competitors with a powerful existing brand to target a slice of the action.

• Culture - integrating traditional channels with e-business options, and developing the correct mix of people skills in the organisation to deliver these new options.

• Cost - increasing efficiency in all internal procedures.




E-marketing

Every business needs now to compile an e-plan for marketing, which would include:

• Competitive advantage - gaining a real understanding of what rivals are doing and applying this knowledge to devise the e-advantage.

• Channels - using communication channels such as web sites, interactive digital TV, bulletin boards, e-mailshots, e-newsletters, banner advertising, together with service delivery conduits through the web.

• Product - applying technology to accelerate new product development and improvement.

• Profitability - developing management information on the profitability of individual customers and products.

• Brand protection - making new alliances aimed at accelerating access to the market to enhance brand value.

4.1.2.1 IT and the marketing mix

The basic marketing mix is composed of the product or service, price, promotion and distribution (place). All of these elements have been and will continue to be influenced by the developments in information technology:

• The product can be more accurately tailored to the precise requirements of the customer and brought to market in a shorter time frame than hitherto.

• The price, or at least the costs that form one of the inputs to its calculation, can be reduced and controlled more effectively with the assistance of information technology. Particular contributions come from supplier exchanges, improvements in cash flow, logistics management, efficient partnerships and collaboration.

• Promotion is made more effective by the improvements facilitated by the internet that make it possible to achieve both richness and reach in communication. The availability of more robust customer information improves both media efficiency and copy effectiveness.

• Distribution has been improved significantly by the use of electronic data interchange (EDI) systems and satellite tracking which improve the efficiency of channel flows (information, value, cash, ownership). IT has also enabled the efficient outsourcing of channels to market.

One feature of the internet is that all the facilities available to businesses are also available in a variety of ways to consumers. As a result the knowledge they bring to any possible purchase and the demands they make on any supplier are increasing. This impacts on the design and functions of corporate websites.

Web sites can fulfil a number of marketing related functions for an organisation including:

• Electronic promotion - a tool containing information for current and prospective customers, shareholders, employees, investors and other stakeholders. The information needs to be presented so that it is attractive and useful to potential users and so that the site users can easily navigate to the information they want.

• E-commerce - taking orders and/or distributing products. Many software and market research companies provide means for users to place orders and download applications and publications from their web sites.

• Customer information - gathering information explicitly through surveys or implicitly through an analysis of web statistics to understand how customers interact with the web site.




• Customer service – dealing with technical problems, frequently asked questions (FAQs), order tracking etc.

• Commercial exchange – buying-supplying exchanges set up by industries like the car manufacturers to ensure they get the best possible prices from their suppliers. It is also a potentially powerful means (as demonstrated by Dell) of by-passing certain elements of the supply chain and dealing directly with customers. Where the intermediary cannot add value to the activities of the manufacturer for example their survival must be in question.

• Extranet access – providing secure information to business partners and passing leads to channel partners or distributors.

Before making significant investments it is important to establish realistic expectations of the value a web site can bring and define the purpose and objectives for the site.




4.2 Service and product marketing Generally speaking, physical products are high in ‘search qualities’; that is, they have attributes that the customer can determine prior to a purchase when comparing the offerings on the market. Pure services in contrast are high in qualities that can only be sampled through experience. A train journey's attributes include punctuality, comfort, cleanliness, facilities, refreshments and, for many passengers, an area free from mobile phones. The customer cannot know about these qualities until they have purchased and used them.

With some products and services it is difficult for customers to evaluate their quality even after experiencing them. Few people possess the skills and knowledge to evaluate a hip replacement or legal conveyancing. These products are high in credence qualities. In other words customers buy them on the basis that they trust the supplier sufficiently to buy.

The distinction between a ‘pure’ product or a ‘pure’ service is somewhat artificial. A product is bought for what it does, not what it is, so often comes with a package of guarantees and service agreements. Equally, most services contain tangible elements. The situation is further confused by the immense variety of services on offer. However, services in general are characterised by the following issues and implications:

Issue Implications

Tangibility: no physical manifestation therefore the service is difficult to evaluate before and after purchase

Create effective physical evidence – people, premises, equipment, communications material, symbols,

Inseparability: offering experienced during the transaction, production and consumption are simultaneous

Manage people to ensure right first-time outcomes, clear understanding of perceptions, attitudes, response tendencies of customers and contact staff. Constant monitoring and analysis of customer behaviour and satisfaction. Ensure that the processes associated with the creation and delivery of service are effective and efficient

Heterogeneity: the nature of a service depends on who is providing it and when it is being provided, so it may be hard to control the standard. Significant qualitative elements, difficult to manage variability

Careful people recruitment, effective training and supervision, measurement and reward systems geared to consistent performance within clear boundaries (variability is controlled and matched to customer requirements)

Perishability: service cannot be stored

Encourage off peak usage & customer participation, alternative methods at peak times

Ownership: customer has access to service but cannot own it

Create a memorable experience to own and provide physical evidence of the experience where possible e.g. a glossy theatre programme

Table 4.2 Service issues and implications

Directors of service organisations need to identify what has been described as the essential evidence, something fundamental to the service offer. Ideally, if they can identify all aspects relating to physical evidence that convey a positive and distinctive impression, they will have a better chance of securing business from that customer or groups of customers.




4.3 A customer-focused organisation

4.3.1 A customer-centred outlook A customer centred outlook implies an external focus for the operation. This means that all activities must be defined in terms of their ability to contribute towards the creation of customer value and the achievement of customer satisfaction. There will be implications for the utilisation of resources, organisation structure, systems and culture.

The board should identify leaders in the organisation to initiate and support the changes involved and act as a focus and information co-ordinator of the following issues.

1. Understand the customer

Identify customer needs and problem-solving behaviour and use this information to identify the operational priorities involved in meeting these needs and behavioural characteristics. This will involve gathering information from customers and customer facing staff. It need not be completely formalised and should contain elements of both formal research and a continuous process of listening and reporting by a wide variety of employees. It will reveal both the quantity of service required and the desired quality of the service delivery.

2. Understand the process

Examine and make explicit all aspects of the means by which the organisation attempts to achieve customer satisfaction now. This has two fundamental dimensions:

• Getting things right first time (processes involved)

• Effective customer contact management (processes involved)

3. Compare customer needs, behaviour and expectatio ns

In the two areas above, examine the discrepancies and opportunities for improvement in the process by which customer satisfaction is achieved now. The differences between service offered and service received can be characterised as the five service gaps (Parusaman 1985).

• The service actually expected by the customer and the organisation's perception of that expectation. (Actual expectation is for a warm friendly approach, perceived expectation is for an efficient approach).

• The organisation's perception of service quality and the service quality specification. (The organisation's perception of service is that it is warm and friendly but the specification makes no mention of these qualities).

• The specification of service quality and the service that is actually delivered. (The specification includes the dimensions of warmth and friendliness but the delivered service is coldly efficient).

• The service delivered and the service that was promised to the customer. (The service delivered is coldly efficient; the service promised was warm and friendly).

• The service actually expected and that actually perceived by the customer. (The service expected is warm and friendly, The service perceived by the customer is coldly efficient).




4. Design new processes to eliminate the gaps.

5. Inform everyone of the needs and perceptions of customers

This involves sharing the customer and process information with everyone in the organisation and giving them the opportunity to comment and make suggestions. Clear, concise communication of the intentions and activities of, and feedback from, customers is therefore essential. It must be sustained and consistent.

6. Design measurement and reward systems to reflect the satisfaction of customer needs

People take notice of what the organisation takes the time and trouble to measure. They respond to that which leads to a reward (in whatever form reward comes). Mechanisms are needed to measure and reward customer satisfaction (output) and the behaviour that generates it (input).

7. Begin the process of benchmarking

That is the identification of performance standards, which are measured through time and compared as tangible evidence of progress or otherwise. The comparisons should be both internal i.e. where the organisation monitors its own performance change and external performance vis-à-vis competitors. Much can be learned from the search for excellence. For example, where particular units perform well in comparison to others their methods should be analysed and, where appropriate, copied. This principle should also be applied to competitors.

8. Adjust the organisation to enable everyone to gi ve of their best

Commitment to personal performance should be sought, noted and followed up. This will almost always involve the reallocation of some responsibility and power to enable those charged with providing customer care for example to take the decisions they need to take in order to respond to customer needs quickly (structural adjustment). There may be a need to make some adjustment to the culture of the organisation to make it consistent with a customer centred outlook and enable the commitment to be realised in operational terms. It should be possible to use the information gathered above to demonstrate the necessity of a changed outlook in terms that have real meaning for those involved and which offer them tangible benefits.

9. Provide clear leadership from the top of the org anisation

This should be demonstrated in terms of a willingness to listen to ideas, take action to remove obstacles, however well entrenched, and to trust people to get on with the job, particularly where that involves making decisions which may exceed old authority levels in the interest of customer satisfaction.

10. Provide the appropriate training

Training and development are necessary for everyone in the organisation. For example:

• All employees - communication skills

• Team leaders - leadership, communication, coaching, process management.

Exhortation and gimmickry are not enough. Although they have their place, they must be seen as evidence of real change not as a substitute for it.

While the business culture cannot be imposed, it can be encouraged, supported and nurtured by the board. They need to assess the related core strengths and competences of every link against globally competitive standards and benchmarks. This may lead them to increase their focus on




key, high added-value products and technologies, or alternatively the low-margin fast turnaround sector. In either case they must broaden the total service spectrum within which these are brought to market.

4.3.1.1 Customer Relationship Management (CRM)

A customer focused organisation needs to have systematic processes for building and maintaining its customer relationships. Customer relationship management (CRM) has developed into a major set of management tools and its CRM software offshoot has almost become a separate industry.

The focus of CRM remains, however, to:

1. Identify what exactly every customer wants and needs

2. Determine how the organisation can meet these needs

3. Create positive, long-term relationships between the customer and the organisation.

Clearly, CRM software can be very effective in reporting customers' purchasing habits, opinions and preferences and in profiling individuals and groups. It can also improve customer service and specifically targeted promotions. It does not, however, change the internal processes of the organisation.

In theory, a CRM system provides a single company view of a customer to anyone who needs to use it. This may be any customer-facing staff inside the organisation, or a distribution partner or outsourced call centre. It may be face-to-face, or via a website, mail, email, fax, or phone. It may include information about the customer’s past, present and potential interactions with the organisation and embraces marketing, sales and customer services interactions.

In practice this ideal, holistic approach depends on totally integrated databases and is rarely practicable. Most organisations have several unrelated databases containing customer information and they use discrete applications such as:

• Sales force automation - often based on customer contact management

• Marketing campaign management – automation of mailing list selection

• Database marketing – using customer and/or prospect databases to select target audiences for mailing and direct marketing

• Call or contact centres

• Data mining – using customer and other company databases to develop business intelligence

• Customer profiling – identifying potential target customers from analysis of existing customers

• Content management and distribution - web sites, presentations, marketing letters

• Product encyclopaedias – product descriptions, prices and status for use with automated ordering and manufacturing systems.

• Contract management – tools to use data regarding contract length, scope and terms and conditions, often associated with service contracts

• Customer surveys – software to administer surveys and collate the information.

CRM implementations have had a notoriously low success rate. The main problems are not technical but human, organisational and cultural. Directors should give consideration to:




• people - the practical needs of users, their ways of working and gaining their active support in using the system

• business processes - the need to change ways of working to accurately reflect customer and business needs

• commitment - the need for board and management buy-in and tie-in to business strategy.

The Four Perils of CRM

Based on an article by Rigby D.K., .Reichheld F.F, & Schefter P. (2002)

1. Implementing CRM before creating a customer stra tegy

Strategies for effective customer management are based on:

• Clear segmentation analysis which provides targets and priorities.

• Understanding customer needs and behaviour, which forms the basis of the contact and communications strategy.

• Understanding how value is created for customers in practical terms which is the basis upon which the product, service and distribution is based.

• Having a pricing policy which is perceived by the customer to reflect value and which provides profit for the company.

These things should be in place before the CRM technology goes live. CRM systems and software must be strategy led not the other way around.

2. Rolling out CRM before changing the organisation to match

The organisation must be customer focused before the implementation of CRM technology.

This means that systems and procedures, structure and culture, measurement and reward are already geared to customer management. The focus must be applied not only to customer facing areas but to all aspects of the business. CRM technology then enables the business to operate its customer focussed activities more effectively.

3. Assuming more CRM technology is better

CRM is not necessarily technology intensive. The segmentation analysis may reveal different preferences for technology based relationship management within the customer base. Key clients may demand and expect a more personal touch to contact. Some very effective customer relationships are managed using very low tech solutions.

4. Stalking not wooing customers

Overwhelming customers with contact is not good CRM. It is easy to give the impression that the customer merely exists for the company to sell things to and no opportunity will be lost to do so. This will have the opposite effect to that which is desired for some customers.

Good results can be achieved with CRM technologies when carefully implemented in manageable chunks, but simply buying in more technology is wasteful at best and possibly damaging to an organisation.




4.3.1.2 Direct marketing

Direct marketing is an interactive system of marketing designed to sell directly to the end user. It uses one or more advertising medium to effect a measurable response and/or transaction at any location. The major tools are catalogue marketing, direct-mail marketing, telemarketing, television direct - response marketing; radio, magazine and newspaper direct response; electronic shopping; kiosk shopping (customer order placing machines). Research suggests that an integrated campaign can increase the response from the market place and in so doing, improve the productivity of marketing expenditure.

Direct marketing may be used to generate leads, to sell products and services and to retain customer contact or deliver service. There is a close relationship between direct marketing techniques and customer relationship management techniques. Market segmentation in both business-to-business and business-to-consumer markets is used to gain a more accurate identification of the target market.

When the board is considering a direct marketing strategy it has to take a range of factors into account. These include:

• Can the company break the conventional mould and market power in order to do business in a new way?

• Does the company have all the technical support, trained staff and facilities it needs to manage direct marketing effectively?

• Can it access targeted market segments efficiently?

• Can it access all the required parts of the market segment?

• Can it represent the brand or intellectual property rights correctly?

• Does it enable accurate feedback from customers?

• Can it manage the direct ownership of customers?

• Can it manage an accurate database of customer contacts and account information?

• Can it benefit from e-marketing or permission marketing by using email lists of opted-in addressees?

• Can it use the AIDA (awareness, interest, desire, action) model with the target customers in its market to create sales?

Care needs to be taken to meet the provisions of the Data Protection Act (1998) and requirements of European legislation.

There has been a growth in outsourcing marketing services to call centres and fulfilment houses. The advantages are using the most efficient providers of direct marketing skills and moving the fixed cost of non-core competency to a variable cost on a 'pay as you use it' approach. Call centres handle all customer contacts and business transactions while fulfilment houses offer logistics, warehouse and shipping facilities.

4.3.1.3 The marketing and sales budget

Within the marketing planning process, managers must calculate the expenditure required to fund all the actions to be carried out. The result is the marketing budget.

Companies planning to enter a market often try to find out the marketing budget-to-sales ratio of their competitors. They may then set their marketing budget at a particular percentage of sales.




This can be the result of a strategic decision to try to win a high share of the market within a short period, or it may simply be used as a guide in budget-setting.

In judging their success, companies often analyse the marketing input required to achieve a particular sales or profit level, and compare their own results with those of their competitors, if they are accessible. Another approach is to set a percentage of turnover for the marketing budget and benchmark this, if possible, against relevant competitors

In any case marketing is a cost that has to be allowed for in any forthcoming financial year, so the budgeting process for marketing has to conform to the normal company budgeting processes. These might be:

• Historic - the traditional method of determining what to ask for next year is still to look at the current and previous years and extrapolate, factoring in plus or minus an amount to deal with any major differences.

• Zero-based - this challenging approach requires managers to cost everything they intend to carry out and bid for the finance.

• Activity-based - this approach is rather a rule of thumb assumption of a percentage of income for identified contributory activities.

4.3.2 Achieving ownership of the marketing strategy It is important to ensure that there is commitment to, and ownership of, marketing strategy inside the organisation. In order to communicate the essentials of the strategy it is possible to utilise a normal marketing approach. It will not differ in principle from that used in the external context.

Just as in the external context, it is important to undertake segmentation of the audience and carry out research within the organisation to improve understanding of the different characteristics, aspirations, expectations, decision-making process, motivation etc.

The separate elements of the internal marketing mix will need to be defined according to the nature of the market they address.

• Positioning - The positioning or branding of the organisation must be completely understood by all the staff. In particular it is critical everyone understands how the strategy will be delivered and the part that they, the employees, will play in it.

• Product - The product in this context is the marketing strategy itself; it must be defined in internal customer terms, taking into account their needs and the benefits they are likely to be seeking from it.

• Price - The price the internal customer perceives they have to pay may be couched in a variety of terms, for example financial (threats to earning capacity), security (threat to employment), confidence (ability to cope with change). Account will need to be taken of the willingness of the customers - here the staff - to pay the price and the means by which they may be assisted.

• Promotion or distribution - Promotion and distribution are the means by which the product, and any messages associated with it, reaches or is communicated to the customers. The process will need to take into account the twin concerns of channel/media efficiency (the means by which the message reaches the target audience, when and how often), and copy effectiveness (the way the message is presented so as to be meaningful to the target audience). It will also need to consider the use of opinion leaders in the process i.e. the use of a two-step communication strategy.




Just as in the external context, the task of the marketing strategist within the organisation is to have sufficient information about their customers to identify the mix element that will be most likely to succeed in their case, and then allocate expenditure to achieve the best combination.

4.3.3 Organisational implications How will the marketing strategy become and remain effective? The simple answer to this question is:

‘by ensuring that the whole company is customer-focused and that a marketing orientation permeates the organisation throughout every level and function’.

Kotler (1991)

It is important that company structures are designed to support a strong marketing orientation throughout. The board must understand marketing principles and must be visible and vocal in their support of marketing strategy creation and implementation. Marketing should be fully understood at every level of the company. Training programmes should be implemented to ensure that this is the case. All functions and all levels should be involved in the marketing planning and implementation process. Departmental structures that encourage territorialism and poor communications should be avoided. Reward systems can be constructive or destructive, and constructive ones can support marketing orientation.

Internal conflict can arise from badly thought-out structures. Separating sales and marketing into two departments can sometimes create conflict as their objectives are different. Some cost allocation structures can have a destructive effect and cause inter-department conflict between, for example, marketing and finance, or production and sales.

The organisational skills required

The board must ensure that managers expected to implement the strategy have:

• the motivation to help achieve the company’s goals

• the skills to do so

• recognition and reward for their achievements when they succeed.

Kotler (1991) refers to marketing implementation skills as:

• Allocating skills – used in budgeting resources including time, money and personnel.

• Monitoring skills – used in evaluating results and exercising controls over the process.

• Organising skills – used in creating both formal and informal organisation structures to make strategy implementation possible.

• Interacting skills – used to motivate others both inside and outside the company, whose input is needed to make implementation happen.

Imaginative use of reward systems is the most visible aspect of a company’s recognition of the achievements of its human resources. Others factors, such as training, add significant value.




Contingency planning

Contingency planning is designed to prepare the company for situations where events differ from their predicted course. It attempts to answer the ‘what if...?’ questions which are most likely to affect the company. A thorough marketing audit should highlight the key areas of uncertainty, and these will often have been addressed by identifying the most likely course of events, expressed as assumptions.

Assumptions refer to factors that are largely out of the company’s control. So, the contingency plan should identify the variations to the company’s strategy that would become necessary if the true course of events did not match the assumptions. For example, if the strategy is based on the assumption that interest rates will rise by 2% over the planning period, contingency plans may be needed for a 3%, 1% or nil rise, and a 1% fall in rates. Other contingencies might be required to cope with a merger between two competitors, a cold winter or a change of government




4.4 Resources - monitoring and control Marketing is only successful if it generates more cash than it uses. It will only gain credibility in the organisation if it can demonstrate its ability to do this consistently. In order to ensure that “everything counts” it is important to monitor the use of resources very closely.

In order to make sure the marketing strategy is being implemented successfully, directors must put checking systems in place. The purpose of monitoring and controlling marketing strategy is simply to check the results regularly and to make adjustments to the activities to bring the results in line with the outcomes required by the strategy. The systems do not take a view of the strategy itself: they just ensure the business is on track to achieve it.

Effective monitoring and control systems are organisational functions and need clear lines of responsibility and reporting. Broadly speaking:

• The board and senior management have responsibility for systems concerned with ‘effectiveness – doing the right thing’.

• Line management and staff have responsibility for monitoring, controlling and reporting on ‘efficiency – doing it right’ factors.

4.4.1 Evaluating marketing strategy The evaluation of the relatively short-term marketing strategy tells directors whether the strategy is achieving its overall purpose or not. If it is, they can continue with the existing activities: if it is not, they can make changes. The data provided by the objective monitoring and controlling procedures are the raw materials for this judgemental process. Marketing strategy can be evaluated by carrying out marketing audits of the relevant components of three perspectives:

1. Outputs - performance

2. Inputs - people, resources and R&D

3. Process - communication and commitment

In general terms, evaluation is applying cost-benefit analyses to each of the factors in these three interacting areas. Suppose, for example, that market share had been set at 10%. If the monitoring procedure showed that sales were steady but the share was falling in a growing market, the controlling actions should have increased sales effort to maintain the market share. The evaluation would then enable a judgement to be made as to whether maintaining market share was strategically important enough to justify the additional marginal cost. If not, the strategy could be adjusted.

1. Outputs

The result of marketing effort.

• Sales performance in terms of volume and price, customer usage patterns, proportion of repeat business, new business, growth, etc The analysis will be shown in terms of products, channels and markets, (this data will facilitate a customer sales value analysis)

• Profitability by product, customer and market, channel, order size, etc

• Market share showing the performance of the company with reference to the overall market and key competitors for all the markets in which it competes




• Target market awareness, interest and desire. Target market perception of and attitude to the company and its offering

• Customer satisfaction, customer referrals, enquiries generated, leads generated, lost customers

• Contribution to group performance (for the strategic business unit)

• Credit performance - cash flow

2. Inputs

The investment in marketing effort designed to achieve the outputs above and the basis of the marketing budget. The elements include:

• Sales acquisition

• Sales force effort

• Entertainment, advertising, sales promotion, discounts, PR, distribution investment, product development investment, CRM investment (systems, training etc.)

• Sales processing

• Order processing

• Billing

• Credit control

3. Efficiency of the process

The relationship between inputs and outputs has the following dimensions:

• Sales - conversion of enquiries, leads and visits to sales; expenses to sales, average cost per sales call etc

• Advertising - cost per thousand impressions, cost per enquiry

• Promotion - display costs per sale, sales per special deal etc

• Distribution - cost per delivered item, service levels achieved

• Product management - investment in new products: new product sales

• Pricing - investment in price promotions: sales

• Credit control - cash flow.

4.4.2 Strategic evaluation

The purpose of strategic evaluation

Strategic evaluation is the longer-term and corporate-wide evaluation of marketing. Its purpose is to enable the board to:

• Consider how effectively the marketing strategy fits and contributes to the organisation's corporate strategy

• Make any changes needed to improve the strategy implementation processes

• Assess the effectiveness of the marketing strategy




• Establish priority points for action in the marketing strategy

• Identify and answer any likely stakeholder questions.

This is not a one-off activity that takes place at the end of the period in question simply to measure the outcomes. Just as strategies evolve in the light of continuous feedback, so evaluation needs to take place on a continuous basis alongside it. Emerging corporate strategy is approved by the board but implemented through functional management heads. An important aspect of evaluation is to ensure that the functional parts continue to match each other as the strategies change. The risk is that each function drifts away from the corporate path and becomes an autonomous group working to its own agenda.

Trends in evaluation methods

Evaluation that occurs right through the strategy lifecycle can be focused on different aspects:

• Formative evaluation may be undertaken early in the strategy period to ensure that it is being developed and implemented in the best possible way.

• Process evaluation may be used to document and describe the integration of the corporate and functional elements of the strategy process.

• Outcome evaluation may be used at the end of a strategy period to measure the outcomes.

Formative evaluation

The purpose of formative evaluation is to provide answers to the question, “What can the directors and management learn from this?” The formative evaluation process may include any of the following mechanisms, depending on the size, complexity and geographical distribution of the organisation:

• Regular meetings of directors or designers of the corporate strategy with representatives from marketing and other functions who are responsible for implementing the strategies.

• Regular electronic networking between meetings; an intranet or email may be used for these.

• A non-executive director as a helpful independent facilitator for this formative purpose.

Topics on the agenda should include a review of common and departmental strategic objectives, corporate-functional relationships and co-ordination, clarification of procedures, the need for any supporting projects, funding of the discrete elements of the corporate strategy.

Process evaluation

The purpose of process evaluation is to provide answers to the question, “What changes should the directors and management make to the steps taken in formulating and implementing the marketing strategy?” Process evaluation is partly formative in effect. However, its focus is on documenting and describing what was actually happening during the development, integration and implementation of the corporate and functional elements of the strategy.

It can be very helpful in communicating best practice to others. In a group there may be other subsidiaries whose learning curves may be considerably flattened if they have access to detailed information on what was done, what problems arose and what solutions were adopted.

A second use of process evaluation is seen during the interpretation of outcome evaluation results. For example, a marketing strategy may not have proved successful on outcome evaluation. However, the process evaluation may reveal that the negative outcome was a result of specific,




unforeseen events that derailed the strategy. This may indicate that many elements of the strategy, if implemented in another situation, could be effective.

A third use of process evaluation is to examine the initial context of the strategy and the decision-making process that led to its adoption. For example, the initial strategy may have been ill-defined in the early decision-making phase. This may have led to aims being set that were easy to achieve rather than others which were 'outside the box' and more difficult to achieve but which could have been more successful for the company.

Outcome evaluation

The purpose of outcome evaluation is to provide answers to the question, “What changes should the directors and management make to the systems in place to evaluate the outcomes of marketing strategy?” Outcome, or summative, evaluation looks at whether a strategy has achieved the outcomes it is seeking. It should assess the outcomes and include both positive and negative results.

To assess success in the much longer term, a series of desired outcomes could be set that are the milestones for eventual success. These could be measured at the immediate, intermediate, short-term and long-term stages.

Much of the measurement of success in achieving targets is clearly quantitative. However, qualitative indicators are highly important. All this information can be very useful for all stakeholders, especially if it compares outcomes with other strategies that might have been adopted. It may help the organisation improve its corporate strategy planning and implementation.




Appendix 1 Typical sources of external information

Traditionally, good reference libraries provide a huge raft of directories, market reports, trade and consumer publications, statistics and much more.

Trade and professional associations (including the IoD) often provide research facilities for their members.

Governments collect and publish market data (see its British Business; Guide to Government Statistics). For the UK, go to the Office for National Statistic www.statistics.gov.uk and outside the UK, go to the Department of Trade and Industry www.dti.gov.uk, the government of the country concerned or its embassy in the UK.

There are also specific analysts for various industries. For instance, in the IT industry there are organisations such as Gartner (CRM specialists), IDC, Forester Research and others who regularly publish industry analyses and can provide current data by subscription services of many types.

Other data sources include:

• Profound - a global intelligence resource which includes information under the headings of Researchline, Newsline, Wireline, Companyline, Brokerline, Countryline, Briefings.

• D&B (formerly Dun & Bradstreet) - credit checks and risk assessment information

• Trade Journals

• Anbar

• UN Statistical Year Book

• The Economist publications for international information

• FT Profile

• FAME

• Mintel

• Keynote reports

• Euromonitor

• ICC

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