THE CONCEPT OF STRATEGY
Strategic management can be traced back to earliest civilisation where people began to organise themselves socially, politically and commercially.
The term strategy is derived from the Greek ‘stratos – army ; agein – to lead’ where it was used to describe the preparation and conduct of military campaigns.
There are numerous examples of great strategic leaders throughout history who won military campaigns based upon good strategic decisions. An army’s strategies are patterns of actions in which it engages. This also applies to business organisations.
Until the advent of WW11 commerce was intrinsically linked to military/state power. Following WW11 many of the strategic thinking employed in the battlefield was used independently in the business environment to maintain or overcome competition.
There is currently much debate among academics as to the relevance of planning in strategic management however it should be noted that strategic management is not a science but an art. There is rarely one right way, strategic management is about selecting the optimal solution for a particular situation.
Strategy: A Definition
Strategy: 1. a plan designed to achieve a particular long-term aim, 2. the skill of planning the movements of armies in a battle or war, Oxford Dictionary (2010).
Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its configuration of resources within a changing environment, to meet the needs of markets and to fulfil stakeholders’ expectations, Johnson & Scholes (2005).
In other words, strategy is about:
- Where is the business trying to get to in the long-term (direction)
- Which markets should a business compete in and what kind of activities are involved in such markets? (markets; scope)
- How can the business perform better than the competition in those markets? (advantage)?
- What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete? (resources)?
- What external, environmental factors affect the businesses’ ability to compete? (environment)?
- What are the values and expectations of those who have power in and around the business? (stakeholders)
What is Strategic Management?
“A unique value activity that is not easily copied” Michael E Porter, Harvard Business review (1996).
“Strategic Management is the set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit between the organisation and its environment so as to achieve organisational goals, ” Richard L Daft, The New Era of Management (2006).
Progressive organisations will wish to pursue a strategy that will give the organisation a competitive advantage. A competitive advantage is the search for a favourable competitive position in an industry, the fundamental arena in which competition occurs. M Porter, (1985).
The Need for Strategy
Objectives and policies are formalised within the framework of a corporate strategy. Without a statement of strategy it becomes more difficult for expanding organisations to reconcile co-ordinated action with entrepreneurial effort.
A strategy for the business is necessary for the following reasons:
- There is a need for people to co-operate together in order to achieve business benefits.
- There are the effects of changing environmental conditions.
The absence of an explicit concept of strategy may result in the members working at cross purposes
“Outlines the organisations goals and the means for obtaining these goals” (Robbins 1998). For example it may direct the company towards any of the following,
- Reducing costs,
- Improving customer care, Expanding market share,
- Improving quality, etc.
Top executives use strategic management to define the overall direction for the organisation which is the firm’s grand strategy
Grand strategies fall into 3 general categories: Growth, Stability and Retrenchment.
Growth can be promoted internally by investing in expansion or externally by acquiring additional business divisions. Internal (organic) growth can occur through new product development or enhancements to existing products.
Stability sometimes referred to as pause strategy is where the organisation remains the same size or grows slowly in a controlled way.
Retrenchment is where the company goes through a period of forced decline by downsizing business units or liquidating entire businesses. This approach is normally taken following a drop in demand for business.
In addition to the above 3 categories companies may pursue a separate grand strategy as the focus of a global business. In today’s global organisations managers attempt to develop coherent strategies to provide synergy among worldwide operations for the purpose of achieving goals.
When a company chooses a strategy of globalisation it means that its product design and advertising strategies are standardised throughout the world.
The globalisation theory is that people want to buy the same products and services and this benefits the organisation in greater efficiencies e.g. Ford uses single suppliers in its global operation.
An organisation that chooses a Multi-domestic Strategy will create products that suit the home market, this may require minor modification to products or services. Whilst with a Transactional Strategy the organisation seeks to achieve global integration in its product ingredients or components, it will also attempt to achieve national competitiveness by tailoring its activities to local tastes.
Level of Strategic Planning
According to Charles Hofer and Dan Schendel in their book Strategy Formulation, strategy exists at three levels in an organisation,
- Corporate strategy – This first level is concerned with the overall scope of the organisation. This can include issues of geographic coverage, product or service diversity and resource utilisation. Strategy at Corporate level is about what business should we be in?
- Business/Competitive strategy – Where corporate level strategy involves decisions about an organisation as a whole, Business level strategy is about which products or services should be produced for which markets. Many organisations separate their commercial efforts into SBU’s (Strategic Business Units) this concentrates effort and the optimum resources on specific markets. Ultimately Business strategy is “how to establish competitive advantage” and how do we compete.
- Operational level strategies are important in terms of how to deploy resources processes, systems and people.
Setting Mission, Aims, Goals and Objectives
Mission, Goals and Objectives are often confused and, although many academics and practitioners discount their importance, there is a need for organisations to consider the overall drive behind their strategic thinking.
Organisation Mission Statement:
This is an organisation’s most generalised statement of purpose and can be thought of as an expression of its raison d’etre (Johnson & Scholes).
Mission describes the organisation’s basic function in society in terms of products and services for its clients or customers. (Henry Mintzberg). Missions describe the organisation’s values, aspirations…(Richard Daft).
Mission Statements therefore provide an organisation with,
- a sense of direction
- reason for existence
- aspiration and motivation
- formalisation of culture
- communication with stakeholders
- a framework for objectives
Google Mission Statement:
“To organise the world’s information and make it universally accessible and useful.”
Kerry Group Mission Statement:
Kerry Group will be:
- a major international specialist food ingredients corporation
- a leading international flavour technology company
- a leading supplier of added value brands and customer branded foods to the Irish and UK markets
Other mission statements might include:
We will be leaders in our selected markets – excelling in product quality, technical and marketing creativity and service to our customers – through the skills and wholehearted commitment of our employees.
We are committed to the highest standards of business and ethical behaviour, to fulfilling our responsibilities to the communities which we serve, and to the creation of long-term value for all stakeholders on a socially and environmentally sustainable basis.
The mission of an organisation provides the context in which intended strategies are formulated.
Johnson and Scholes believe the mission statement should address:-
- The vision of the organisation over the long range.
- The bases of detailed objectives.
- The main purpose of the organisation.
- The main activities of the organisation.
- The key organisation values.
Mission statements provide the cultural glue that enables an organisation to function as a collective unit with a set of values rather than commercial goals.
Goals/Aims are the more finely focused statements of intent directed at those aspects of the organisation’s operations which are critical to success – often described as ‘core business’. Such statements usually encompass market intentions, resourcing (people, plant, materials, funding), the use of technology, quality standards and financial parameters. Such statements usually have a life of between 3-5 years
An Example of a statement of goals is British Airways
- To be a safe and secure airline
- To deliver a strong and consistent financial performance
- Secure a leading share of the air travel business world-wide with a significant presence in all geographical markets.
- To provide overall superior service and good value for money in every market segment.
- To sustain a working environment that attracts, retains and develops committed employees who share in the success of the company.
- To be a good neighbour, concerned for the community and the environment.
Objectives may be categorised as objectives stating the organisation’s purpose and those that state its strategic aims.
Strategic objectives are more meaningful and outline specific details of what is to be achieved.
Strategic objectives may focus on the fundamental purpose of particular parts of the organisation, e.g. Marketing, Operations, IT.
British Airways’ goals could be:
- To achieve within the next financial year a return on capital of 25%
- Gain a market share of 5% on transatlantic routes.
- Reduce overhead costs by 3.5% annually over the next 3 years.
- Achieve 95% customer satisfaction rating.
Characteristics of Objectives:
- Hierarchical – Top Down
- Consistent – Objectives set are internally consistent
- Realistic – Essential to motivate
- Quantitative – Basis for performance measurement
- Time frame – Targets to be achieved within a given time
R ealistic – result oriented
T ime bound
There are two basic types of objectives
- Financial: Outcomes that improve the firm’s financial performance, e.g. Revenue growth, Higher returns on investment, Higher dividends, Stable earnings during recession.
- Strategic: Outcomes that strengthen a firm’s competitiveness and long term market position, e.g. A greater market share, higher product quality, superior customer service, wider geographical coverage.
Clearly communicated objectives provide benefits in,
- Outlining peoples’ role in the organisation
- Consistency in decision making
- Stimulating and motivating staff
- Improving effectiveness and efficiency
- Providing a basis for measurement/control
- Creating an environment for management by objectives (MBO)
- Facilitating performance appraisal
Management by Objectives
The phrase Management By Objectives was coined by Peter Drucker, (The Practice of Management), he viewed the principle of management as harmonising the management goals with those of the organisation.
The MBO system of management should flow logically from the organisation’s strategic plan.
One of the most attractive aspects of MBO for top management is the emphasis on setting standards and specifying results to be achieved. In the past only those managers in areas such as operations and sales were subject to meaningful measurement, now it is possible to quantify/qualify the activities of specialised managers.
- Cascading of organisational goals and objectives.
- Specific objectives for each member.
- Participative decision making.
- Explicit time period.
- Performance evaluation and feedback.
Two distinct advantages emerge for managers employing MBO:
- An ability to analyse a manager’s performance (Performance Review) within their current job and agree objectives with their superiors.
- A potential review based on a manager’s ability to succeed in their next job.
Matching Strategy and Structure
Structure is a pattern of relationships among positions in the organisation and among members of the organisation. It denotes reporting lines, communications and knowledge exchange.
The objectives of structure may be summarised as to provide for
- The economic and efficient performance of the organisation and the level of resource utilisation.
- Monitoring the activities of the organisation.
- Accountability for areas of work undertaken by groups and individual members. Co-ordination of different parts/areas of the organisation
- Flexibility in order to respond to future demands.
Drucker PF, (1968), suggests that the organisation structure should satisfy three Requirements:
- It must be organised for business performance. The more direct and simple it is the more efficient it is.
- The structure should contain the least possible number of management levels, additional levels makes for difficulties in direction and mutual understanding.
- Organisation structure must make possible the training and testing of future top management.
The Importance of Good Structure
The structure of an organisation not only affects productivity and economic efficiency but also the morale and job satisfaction of the workforce.
“Good organisation structure does not by itself produce good performance, but a poor organisational structure makes a good performance impossible”.
The organisation is a social system and people who work in it will establish their own norms of behaviour and social groupings irrespective of those defined in the formal organisation.
Managers need to consider how structural design and methods of work organisation influence the behaviour and performance of members of the organisation.
Structure provides the framework for the activities of the organisation and must harmonise with its goals and objectives.
The nature of the organisation and its strategy will indicate the most appropriate organisational levels for different functions and activities, and the formal relationships between them.
Organisation structure and design will be covered in more detail in section 4.
Ethical Political and Social Considerations
The 21st century perspective of business is demonstrated by some of the following attitudes,
- its policy of openness,
- worth is as important as wealth,
- win-win solutions are better in the long run, giving can be a sign of strength,
- business with a shared purpose.
In the process of Business decision making it is no longer sufficient to stay within the boundaries of the law, organisations must consider the responsibilities involved in decision making and how decisions will be viewed by audiences outside the boundaries of the organisation.
According to Drucker (1989) social responsibility is the remit of the individual manager; it assumes that they are responsible for the public good and that they subordinate their actions to an ethical standard…and restrain self-interest and authority wherever their exercise would infringe on the common good.
Social Responsibility – The stakeholder view
Owners and Managers: Business owners and boards of management make decisions that will impinge on other stakeholders involved with the organisation. Management cannot afford to adopt a purely internal perspective when decision making.
The Employees: Most people spend a significant part of their lives in the workplace. Employees’ expectations of work are changing in particular areas such as quality of worklife, equity in treatment, and work-life balance.
Suppliers: The cut and thrust of modern business practices has implications for the supply sector business.
For instance, an EU regulation regarding the enforcement of free and fair competition rules led to the passing of the Competition Act 1991. This Act covers mergers, sale of business agreements between suppliers and resellers, refusal to supply and cartels. The Act provides guidance on how not to act and also give protection against the behaviour of large business.
Consumers: When purchasing goods and services consumers have intrinsic rights, these include the right to buy goods which are fairly priced, safe, perform to a reasonable standard and sufficient information provided for the consumer to make an informed choice…
Government: Almost all decisions made at government level have ethical dimensions e.g.
social welfare, trade wages, taxation etc.
Non Governmental Organisations (NGO’s): NGO’s are organisations that represent or campaign on behalf of a broad range of issues and agendas. The current challenge for managers is to determine if the NGO is an adversary or a business partner, as many NGOs are powerful with strong mandates they can influence business decisions. Therefore early engagement on the part of the business can offset any future difficulties and influence the overall process.
Communities: The term community has come to represent a grouping of interests between individuals, residents, companies or social groups. Some companies pride themselves on the high level of involvement with the local community and consider this approach an important input to the business strategy.
The following are levels of involvement by business in the community,
- Charitable causes: donations, sponsorship
- Social investment: grants, in-house training.
- Commercial initiatives: sponsorship, cash or in-kind contributions.
What are Ethics?
Ethics have been defined as the discipline dealing with what is good or bad, and with moral duty and obligation. An Ethic is a set of moral principles (O U dictionary)
What are Business Ethics?
“Business ethics involve corporate recognition of – and compliance with – a paradigm that provides common recognition of and the need to practice proper behaviour.” Many other definitions exist e.g. “conforming to professional standards of conduct.”
Business ethics are even more complex, because the consequences of unethical behaviour are sometimes very costly to a business organisation and its human resources.
Companies which hire staff and managers to perform organisational tasks are responsible to ensure that a company is ethical, that it practices a certain level of ethical behaviour, that it maintains certain ethical standards and that it provides for contingencies when those ethical standards are not practised.
Such contingencies could involve embezzlement at line or executive level, discrimination on the basis of sex and/or age, corporate lack of diligence, and so on.
Davis (1997) presents five different ethical perspectives of a modern day organisation:
- The western Christians theological perspective: The Christian view will influence the operations of the business, the principles of justice, respect and reconciliation will influence business decisions.
- The industrial democracy perspective: The separation of ownership and liability under company law has meant that shareholders have no formal responsibility for employees or the community. However the philosophy of corporate governance suggests that business should operate within the framework of democracy.
- The ecosystem perspective: Advances in business through the use of technology have impacted both positively and negatively on our personal and physical environment. Some organisations take a short-term view of the physical environment whereas the physical environment and ecosystem demands a long-term global perspective.
- The Friedman perspective: The economist Milton Friedman published an article “The social responsibility of business is to increase its profit”. In it he compared the responsibility of business with governments, charities and trade associations. The wrong doings of business need to be reviewed by third parties but business is operating correctly if it is making profit. Friedman philosophy suggests that an organisation too focused on ethics will lose sight of its core objectives.
- The virtues perspective: The concept is to focus on the virtues of the individual working in the organisation. Business ethics should focus on character development and how the organisation we are involved in will make us better people over the duration of our working lives.
Business ethics are now a management discipline
Business ethics have come to be considered a management discipline, especially since the birth of the social responsibility movement in the 1960s. In that decade, social awareness movements raised expectations of businesses to use their massive financial and social influence to address social problems such as poverty, crime, environmental protection, equal rights, public health and improving education. An increasing number of people asserted that, because businesses were making a profit from using the nation’s resources, these businesses owed it to the country to work to improve society. Many researchers, business schools and managers have recognised this broader constituency, and in their planning and operations have replaced the word “shareholder” with “stakeholder,” meaning to include employees, customers, suppliers and the wider community.
The emergence of business ethics is similar to other management disciplines. For example, organisations realised that they needed to manage a more positive image to the public and so the recent discipline of public relations was born. Organisations realised they needed to manage better their human resources and so the recent discipline of human resources was born. As commerce became more complicated and dynamic, organisations realised they needed more guidance to ensure their dealings supported the common good and did not harm others — and so business ethics was born.
Proactive organisations are actively drafting policies in relation to business ethics and social responsibilities and engaging stakeholders in the delivery of such policies.
Every business decision taken by individuals or groups has an ethical dimension. There is a distinction between personal values and a code of business behaviour as practiced in the work place.
Johnson and Scholes cite four possible ethical stances:
- Organisations take the view that the only responsibility of the business is in the shortterm interests of the shareholders; i.e. the organisation will meet the rules laid down by the government and no further.
- Organisations which recognise that a well-managed stakeholder relationship can be of long term benefit to the shareholder. Ethical issues are managed with a long-term perspective.
- Organisations take a view that the interests of multiple stakeholders should be explicitly incorporated in the organisation’s purpose and strategy. These organisations offer measures of performance that are wider than the bottom line.
- Finally, organisations that are at the ideological end of the spectrum, are concerned with shaping society and are not overly concerned with the financial consequences of their decisions. This approach is more widely practised in the public sector or in private family owned businesses that are not accountable to external shareholders.
Research by Alderson and Kakabadse (1994) compared ethical attitudes of managers in Ireland, UK and USA. They found that Irish managers placed more emphasis on the influence that increasing public concern about ethical standards has on business behaviour. This may be the result of increasing media attention of the subject over recent years in Ireland.
“W.K. Kellogg believed in doing things the right way and built this company on integrity.” In business for 100 years, Kellogg’s has taken pride in its ethics and compliance programme known as “K Values.” According to Gary H Pilnick, Kellogg’s General Counsel and VP, “It starts with the values, which guide behaviour and ethical choices.”
Founder W.K. Kellogg wanted to do good things for people, starting with nutrition and the environment, and began promoting environmentally-friendly processes by producing the first boxes of cereal in recycled packaging in 1906. Today, Kellogg’s uses 100% recycled packaging. In addition, Kellogg’s created a Social Responsibility Committee in 1979 that now deals with environmental concerns, health & safety, addiction and abuse, and other issues that impact employees and communities.
According to Monks and Minnow (1991)
Corporations determine far more than any other institutions: the air we breathe, the quality of the water we drink even where we live; yet they are not accountable to anyone.
What is corporate governance? It is the system by which businesses are run. This includes the directors’ duty to ensure that the business is properly and honestly managed.
Two significant reports have influenced corporate governance in many countries: the Cadbury report and the Greenbury Report,
The Cadbury Report (Sir Adrian Cadbury) was commissioned by the UK professional accounting bodies and the London stock exchange and was published in 1992. The main recommendations were:,
- The board of directors must meet regularly, retain full control over the company and monitor executive management.
- There should be a clearly accepted division of responsibilities at the head of the company to ensure a balance of power and authority.
- Non-executive directors should be of a high calibre and respected in the field. They should bring independence and judgement in strategy, performance, executive pay, resources and standards of conduct.
- The majority of non-executive directors should be free of business connections with the company. Terms of contract should be specific and not more than three years. Reappointment by shareholder approval only.
- Only non-executive directors should decide executive director’s pay..
The Greenbury report (Sir Richard Greenbury) was published in the UK in 1995 following widespread criticism of the remuneration of the boards of newly established utilities. Greenbury prepared a code of practice that recommended more transparent disclosure of directors’ salaries, benefits in kind, share options and bonuses. It confirmed that remuneration committees should comprise non-executive directors only.
Whistleblowing occurs where an employee informs the public of inappropriate activities going on in the organisation. The whistle blower may be motivated by a feeling of inequity in treatment or the behaviour of the organisation may play on their conscience. The consequences of whistleblowing are often extreme: loss of job, ostracism by peers and the effects of stress.
Strategic Management and Operational Management
Strategic management is the art and science of formulating, implementing and evaluating decisions that will enable an organisation to achieve its objectives, Operations Management concerns the transformation of inputs both tangible and intangible by some conversion process into outputs, thereby achieving the objectives formulated in the strategic management process.
The Role of Operations Managers
Operations managers make decisions regarding the Design, Planning, and Control of the production system or production line.
Design: Design decisions relate to issues of product, production capacity, the location of operations and production layout.
Planning: Planning decisions relate to the rate of production, materials to use, supplier selection and inventory levels.
Control Decisions: These are short term in nature and relate to quality management and the sequencing of work to ensure the greatest level of efficiency.
The Key Elements of Operations Management
Large organisations will have their own research, development and design departments. For smaller organisations design can be contracted out or state agencies may supply design services.
Design proposals, Develop Models, Finished drawings/specifications, Supervision of production start-up.
The R&D/Design department must also work within cost constraints, designers will be guided by the following 3 factors.
- Standardisation – Attempting to standardise components so that they fit a variety of designs. This facilitates stock control, bulk purchasing and supplier selection.
- Simplification – This involves reducing the number of steps in a process. This benefits management, administration costs and stock control.
- Specialisation – This improves efficiencies which give returns in better customer service, economies of scale, and set-up times.
The ability to forecast demand will benefit the organisation by allowing it to plan aspects of the business such as production runs, inventory and resourcing. Forecasting is usually dependent upon good feedback from customers and market analysis.
The design of work should consider the layout of the manufacturing plant/factory.
The following factors should be considered when designing a factory, the current and future expansion size of the factory, single or multi story, access and light and finally local authority planning considerations.
The division of labour to support production and departmental configuration.
Commonly known as work study, it supports aspects of the business such as waste elimination, increased production and cost savings. Method study involves work measurement and developing the best methods of performing tasks.
Factory or facility location is a significant factor as it may affect the operational costs. Costs may vary depending on the following factors:
- Proximity to raw materials
- Proximity to markets
- Government incentives
- Cost of land
- Availability of labour
- Availability of power Transport, Security
- Waste disposal etc.
Purchasing represents a substantial effort on the part of the organisation to ensure adequate stock levels of materials for the production process.
Organisations therefore need to consider the purchasing mix – Quantity, Quality, Price, Delivery.
Inventory Management – Just In Time
3 differing types of inventory: Raw materials, Work in Progress, Finished Goods. Just In Time is a modern method of maintaining minimum stock levels. This is achieved by detailing the production run/schedule very carefully and ensuring that stock levels meet production demand and little more.
Maintenance is a function to ensure optimum availability of plant and machinery for the production of goods.
Types of Maintenance include preventive maintenance, corrective maintenance, breakdown maintenance and running maintenance.
The activity of ensuring the product is “fit for purpose”. This may include: Quality Control – this is checking the product before delivery, Quality Circles are teams organised around quality initiatives and World Class Manufacturing, where quality is everyone’s responsibility.
PERSPECTIVES ON STRATEGY
How is Strategy Formulated?
Strategy formulisation is the analysis of both the internal strengths and weaknesses of an organisation and the external opportunities and threats as well as identifying the strategic options that can be taken by the organisation. Strategic formulisation may occur in a variety of ways.
Planned: Based upon the ‘classical’ management school of logical decision making, it is the analysis and evaluation of strategic alternatives, sometimes referred to as the rational model. It is rare that a planned strategy is realised due to the dynamics of the business environment.
Emergent: Henry Minzberg suggests that good ideas never come from the boardroom, that in fact the excellent companies allow strategy to emerge from its employees. A suggestion box is an example of this at a basic level. The problem with this strategy is how to manage the process so the good ideas emerge.
Opportunistic: Some organisations in a time of boom believe that the environment is changing so fast that there is little point in having a planned strategy. They feel they may have to forgo opportunities if they have a planned strategy. It is clear however that some companies retain a level of flexibility in their planning to allow incremental changes to be made.
Imposed strategy: Some organisations, notably those in the public sector, have such strong external stakeholders that they have limited control over their strategic direction,
THE MARKETING DIMENSION
Marketing is the management process responsible for identifying, anticipating and satisfying consumers’ requirements profitably.
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 goals.
19th century industrial revolution focuses on production/sales rather than marketing.
Post industrial revolution changes,
- Expansion of manufacturing attracted entrepreneurs
- Competition moved from consumers to manufacturers
- Supply of raw materials and power for the production of goods started reaching levels of scarcity, which increased their value and made profit margins tighter.
- Technology improved the means of communication, transport and production enabling manufacturers to sell goods over greater geographical distances.
- Manufacturers began to look at their products in terms of customer needs, i.e. style, value, quality.
The Marketing Function:
The structure of the marketing department and the responsibilities of the marketing director or manager will differ from company to company. Department’s size, organisation influence, and geographical location will depend on the product or service being marketed.
Functions within the Marketing Department:
Market research: Conducts research on behalf of the company in order to improve its prospects of selling its product or service.
Sales: Concerned with personal selling staffed with a sales force.
Promotions: Responsible for advertising and public relations, e.g. trade fairs exhibitions, sponsorship, press conferences, and merchandising.
Distribution: Identifying and selecting the appropriate channels in which to distribute products or services.
An Integrated Marketing Approach
An integrated marketing approach suggests that all personnel and departments are concerned with the identification and satisfaction of customer needs, however this is not always the case individuals within the organisation may be more concerned with whom they know rather than what they know about a particular product or service.
Below are some examples of how the marketing department may have opposing operating desires.
- The R&D department will like to have more time to develop new products; the marketing department will need new products as quickly as possible.
- The Procurement department likes to purchase standard parts at fixed intervals; the marketing department prefers non-standard parts to give the product uniqueness.
- The production department likes long production runs with lead times, ease of assembly etc., the marketing department like short production runs with more complex assembly to improve aesthetics.
- Finance will want strict control on spending, marketing want flexible budgets to cover variable costs.
What must be achieved is a balance between opposing views with the idea of working together to please current and potential customers. If the various departments and company personnel co-operate in satisfying customer needs then the company is said to have an integrated marketing approach.
For a company to remain competitive it must pursue a positive and progressive marketing approach.
A Company may do one of the following:
- Remain passive and inflexible, which will ultimately result in extinction.
- Change in keeping with changes by competitors or purchasing tastes of customers.
- Initiate change and turn change in the environment to its advantage.
Marketing and Society (some considerations)
- Marketing manipulates and exploits people.
- The marketing function is an added cost to the product.
- Marketing encourages the production of products that people don’t need.
- Marketing is only interested in short term gain.
- Marketing causes inflation and unemployment.
Market Segmentation and Target Markets
It is almost impossible to develop a product or service that is equally appealing to all consumers in the market. This is because consumers purchase products or services according to their sex, age group, income, occupation, or even geographical location.
The concept of developing products and services for different groupings is called market segmentation.
Market segmentation is defined as ‘The process of dividing a market into the homogenous segments that collectively constitute the market that is being segmented.’
A specific but large enough group of people showing similar characteristics and expectations may therefore be selected as a target market.
A series of criteria enables a marketing manager to divide the market in to segments; the method contains four main parts,
- Buyer behaviour
Demographic: This method uses a person’s characteristics such as sex, age, income, social class, religion, occupation etc.
A common demographic approach by marketers is to link occupation to income to determine how people may/will behave. This grouping is classed as socio-economic.
Geographic Segmentation: This method uses countries, regions/districts, cities and rural areas etc. Drinking eating and leisure time activities may be affected by geographic location.
Buyer behaviour: This is important in understanding how people behave after purchasing goods.
A number of people from different classes may drive the same make of car and wear the same type of clothes therefore class is becoming less important. In response to this some companies are aiming their promotions across the total market.
Psychographic or personality segmentation: A growing awareness of the need for more explanatory criteria has led to greater use of psychological variables, (personality traits, compulsiveness, ambition, conservation).
This form of segmentation arose as a result of discovering that buyers’ needs may differentiate along lifestyles or personality lines e.g. Provenance in food production, green awareness, or natural resource sustainability.
The reasons the above methods are used are because they can measured and understood.
Segmentation methods are rarely applied in isolation and are combined to overcome the problems of surveying small groups.
The advantages of segmentation are:
- Improved profits through increased sales and avoidance of unprofitable markets.
- Specific customer needs are more easily identified therefore facilitate a more accurate budget for marketing.
- To give the company stronger control of the market and protect itself from competition.
- Identifying new product opportunities.
The requirements for accurate segmentation are:
- Measurability – clearly measured.
- Accessibility – access the company’s resources, production marketing etc.
- Sustainability – segmented markets must be large enough in terms of value as well as volume.
Segmentation represents a commitment to a particular market and involves a selection of the following options.
- Differentiated market: A company may voluntarily or be forced to operate across all segments, they may do this by packaging the products to suit different segments e.g. Coca Cola
- Concentrated market: A company may decide to concentrate its resources and activities in a specific market segment. This suits small companies specialising in specific areas however this strategy carries risk e.g. Cartier for watches or medical; device manufacturers.
- Undifferentiated Market: This involves the introduction of products or services to reach a large number of consumers in most segments. It can be costly as the operation will be geared towards total market coverage e.g. Kelloggs Corn Flakes.
Selecting a marketing strategy:
The type of marketing strategy selected by a business will depend on the following factors,
- Company resources.
- Product homogeneity. Goods that are either physically identical or at least viewed as identical by buyers. Consumers of white sugar or salt are less likely to choose between products as they consider there is little or no difference between producer’s products.
- Stage in the product life style e.g. a new product versus a mature product.
- Market homogeneity. The less obvious the differences within a market the less likely differentiation is to work in manner similar to product homogeneity.
- Competitive marketing strategies; e.g. segmentation by competitors may demand a segmentation policy by the company.
Marketing strategy is dealt with in more detail later in this section.
Running a business without adequate marketing information reduces business decisions to guesswork.
Market research may be defined as: The planned and systematic gathering and collation of data and the analysis of information relating to all aspects of marketing and the final consumption of good or services.
It is common to separate research into two general areas: market research and other market research. In this instance market research is confined to current and potential customers who constitute a market. Other market research may be undertaken by companies to improve marketing decision making.
Marketing research may be further divided into user and consumer markets, where users are considered to use the good or service in the manufacture or provision of a product and consumers are regarded as the final consumer of the good or service.
Marketing Research Information
Facts gathered about a group of people that are under study may simply be referred to as data; it is not until the data is collated into an understandable format such as a graph that it becomes information.
Data collected directly from people through research question or observation is referred to as primary (first hand) data.
When we use data already collected by others for their own purposes we refer to it as secondary (second hand) data.
Both of these sources are important to marketers but obviously a marketer has more confidence in the results of information he/she has collected.
Field and Desk Research
The collection of primary (raw) data involves field research, which is directly undertaken by the organisation or an agency.
The collection of secondary data or information involves desk (secondary) research which is obtaining data or information that is already in existence.
Sources of secondary data or information:
To be cost effective the experienced marketer will start any research by checking what information is available from internal sources.
Conducting Market Research Surveys
When research is undertaken to extract qualitative or quantitative information, regarding a representative sample of people we refer to the study as a survey.
Data obtained through market research may be:
Quantitative – the number of cars passing through a petrol station per week.
Qualitative – This is subjective data, such as an attempt to assess people’s attitude or motivations.
There are four main methods to obtain data from respondents to questions that form part of market research surveys:
- Postal Questionnaires
- Telephone Interviews
- Personal Interviews
The Marketing Mix
All of the above activities may be effectively related to four main areas of marketing responsibility, referred to as the 4 P’s, Product, Price, Place, and Promotion.
- Product includes research and development, package, labelling, and branding
- Price covers pricing, discounts and credit.
- Place would include all distribution activities.
- Promotion includes personal selling, advertising, PR, etc.
It is the role of the marketing director or marketing managers to mix (co-ordinate and control) these activities in such a way to obtain maximum profitability. This is not the same as obtaining maximum sales. High sales revenue at high cost may not mean maximum profits. Therefore the marketing function must attempt to identify, isolate, and service profitable sales and reduce the risk of losses.
The 4P’s fundamentally determine the way potential customers will view the company, its services or products.
The usefulness of the product, how well it has been promoted and the price of the product will influence a customer.
The best promotions in the world cannot sustain a poorly conceived product or service.
At some stage in our lives we have all purchased a product we felt we could improve either in its usefulness or aesthetics. Improvements in product usefulness or aesthetics are what product policy is about.
A company’s product policy will be determined by:
- What a company should produce.
- When new or altered products should be launched.
- In what quantities they should be produced and supplied.
Without a continuing product policy a company will not be sure that it is meeting the needs of new or changing markets. If the company ceases to supply products that are profitable then the company starts to decline; therefore the long medium and short-term growth of a company is affected by the continuing product policy decisions.
Why make changes to existing products?
There are four main reasons why companies modify existing products, introduce new products or withdraw existing ones.
- Due to changes caused by the market, e.g. people tastes change, Coca-Cola is much sweeter today than it was when first produced.
- Changes caused through competitors improving their products in relation to the needs of the market.
- Changes due to cost e.g. the need to change from metal to plastic as steel increases in price.
- Changes to current or new products because a company believes it will increase sales and profits.
Changes a company may make to the product mix
Most changes to the product mix made by a company will fall in to the following categories,
- Addition of new products/services unrelated to the existing ones.
- Extension of related products, e.g. manufacturers introducing new styles etc.
- Differentiation of current product, e.g. additions to an existing product that might appeal to customers in another segment.
- A modification to a current product usually to reduce costs or improve the style or quality.
- Planned or perceived changes possible because of the attitudes of most of us when we consider a purchase, e.g. a manufacturer may produce paint with a strong brand name and also produce paint for a D.I.Y (Do IT Yourself) store.
New Product Development
There are four major processes to consider when developing and launching a new product or making a modification to an existing one.
- The new product development process.
- The adoption process.
- The product life cycle (PLC).
- Pack, Packaging, Branding
New development process: This defines a series of activities that should be undertaken in the development of a new product to the point where it becomes commercially viable, i.e. launched onto the market.
The product development process takes the following stages:
Ideas generation: this is the beginning of the process where the company collects information and ideas in the hope that one of the ideas will become a new product or a modification to an existing one.
Screening: Ideas generated are evaluated with regard to their marketability, the company’s future objectives and resources.
Business analysis: At this stage more detailed and specific consideration is given to costs, potential future sales and profitability.
Product development: Products or services that appear marketable propositions become the responsibility of the research and development department.
Testing in the market
At this stage the chosen product is tested in the market to determine its acceptability by the market before the final launch, ideally a mini launch is a more acceptable way of testing the market.
At this stage it is necessary to consider all aspects of the introduction of the product to the intended market. The marketing mix must be considered in light of the following:
- What form will the final promotion take?
- What is the role of the sales personnel?
- What is the price of the product?
- What means of distribution will the company use?
The Adoption stage
Before a company actually launches a product it must consider the product life cycle (PLC) and the mental stages purchasers go through before they purchase a new product. These mental stages are known as the adoption stages.
Awareness – Before a product is adopted consumers need to be aware of its existence. Interest – The product must be of interest to the individual customer if it is to gain a foothold in the market.
Evaluation – Once the potential customer has obtained information they can compare this to their needs.
Trial – In the case of inexpensive products, sales promotion methods may be used in order to induce trial, e.g. personal selling, in store tasting, small bars of soap etc.
Adoption of the purchase – This relates to the actual purchase and re-purchase of the product.
The majority of manufacturers will wish to establish a long-term relationship with the customer.
Special offers, reminder adverts and product improvements are used to revive interest and achieve loyalty.
Adopter categories: (Everett Rogers 1995 The innovation adoption curve )
Some people readily accept change; others are more slow to respond. According to Rogers these characteristics and readiness to adopt may be categorised into the following five groups:
- Innovators – Representing a small percentage they may treat a new product as a status symbol, respond to new technologies quickly, have personal needs to satisfy, or regard themselves as leaders.
- Early adopters – They normally represent the actual leaders or trend setters, and indicate whether a product will be successful or not.
- Early majority – Early to accept innovations, products are purchased for their usefulness and are long-term repeat purchasers.
- Late majority – Reacting to change slowly, they wait for the product to prove itself and /or prices to come down, they do not follow recommendations by leaders.
- Laggards – Last to respond to new products, they value tradition and dislike change to something well established.
The Product Life Cycle: Products are like people they are born (introduced) grow, mature, and decline and eventually die. The PLC identifies the stage that a product may go through from the moment it is launched.
Introduction: The product is launched, competition tends to be limited or non existent. Growth is usually rapid and profits are non existent.
Growth: Mass market acceptance will take place through early adopters, profits should emerge and initial costs covered.
Maturity: Representing the most competitive stage in the life cycle, early and late majority begin to adopt and competitors introduce counter measures, advertising and promotion campaigns concentrate on reminding consumers and rewarding loyalty for use of products.
Saturation: Many competitors in the market place, profits per unit are in decline and there is no growth in sales.
Decline, slow but accelerated decline in sales and profits, the product may be withdrawn from the market.
Evaluation of the Product Life Cycle:
- Knowledge of the PLC can help us appreciate that,
- Products do not last forever and marketing managers should never assume they will.
- Products need to be supported by other elements and by the marketing mix.
- Products need to respond to changes in the market place.
- Continuous assessment of internal and external factors helps lead to an effective marketing plan.
- Marketing functions may have to be adjusted during the PLC, i.e. advertising etc.
Package, Outer Packaging and Branding
The package, in which the product is contained, often becomes synonymous with the consumer.
The main purpose of the packaging is to protect the product, reduce costs through weight and shape, promote the product and be eye-catching and distinguish the product from others e.g. a box of breakfast cereal.
The outer packaging contains the pack and provides the means by which products are transported, safely and economically. This could be a pallet, container, wrapping etc.
Branding A brand is a name, symbol or sign that is given to products in order to help them establish their own identity, facilitate recognition by consumers and communicate what the product can deliver.
Companies employ one of the following branding polices.
Company brand name, The product is given the company or corporate name e.g., SONY, Hoover, Samsung.
Family brand name, Companies can offer a variety of product line names that are aimed at different target markets often using a naming policy e.g. Indian Auto Manufacturer, Tata Motors, use the Land Rover Range to do this as do BMW with the Mini.
Individual brand name, This policy is used by companies introducing unrelated products to markets by companies that do not have a strong company image. Established companies like Proctor and Gamble may not risk the company’s reputation by putting their name up front and will only strongly relate brand names to the company following full acceptance by the market e.g. Gillette is produced by Proctor and Gamble.
- Pricing Policy
Pricing is a critical aspect of marketing because the price set for a product involves and affects every aspect of the organisation.
What is Pricing? …the process of determining the price that an organisation can ask from purchasers for the product or service it supplies consistent with contribution towards costs
The price is the monetary value attached to the product or service at a particular point in time.
A Company may be able to make a reasonable profit by asking RWF1,000 for its product but if the market is willing to pay more, the company will, in most cases, ask for more.
Identifying how much the market is willing to pay is fundamental to any pricing process and in particular a start up business.
Pricing may be used by a purchaser to indicate a product or services quality, (Just think about those imitation watches for sale in a Kigali market for RWF 100,000).
You may or may not purchase the watch but the fact is that in the minds of most purchasers the price asked would create doubt, worry, dilemma or even suspicion.
Pricing should take into account people’s perception of value and the price asked must closely reflect the perceptions of good value for money held by the target market. Pricing Objectives
Prices may be changed several times by an organisation over time across a whole range of products.
The prime objectives of pricing by commercial organisations will be:
- To maximise profits in the short, medium, and long term.
- To minimise risk of undue losses.
- To enter and control a segment of the market or total market.
- To act as a counter strategy against the pricing or promotional actions of competitors.
- To assist in the product becoming leading brand.
Other objectives can include, reputation building, selling off excess stock, moving the products through the distribution channels or facilitating the sale of other products.
Major Influences on Pricing
As pricing is so vital to the success or failure of the sale of products and services every effort needs to be made to identify and evaluate the major internal and external influences which may affect a product’s current price or the price for a new product.
The right price combined with the right mix of the 4P’s may allow a company to pursue its marketing objectives, marketing objectives can only be reached if the price is right, so the setting of objectives must take into consideration the price that may be asked and the total profit that would result from the various prices.
Costs: It is pointless to set a price for a product without allowing for the direct and indirect costs attributed to the products production and marketing. Profit maximisation in the short term could be classed as a priority but it is sometimes impossible to achieve, some companies will launch a product at an introductory price that will only cover cost until full consumer acceptance has been reached. All companies have to cover total cost, i.e. fixed (rent, rates, fans) and variable costs, (raw materials, labour plus extra electricity, additional labour). Always allow for wastage when calculating cost of production.
Attitude of senior management: The attitude of senior management may be at odds with the marketing manager. The company may be more concerned with the intrinsic value of the product rather than the price the market is willing to pay for the product.
Resources: The price a company can ask for a product is not solely based on the product itself. The price may be determined by after sales service, guarantees, or the speed at which the product can be delivered. The company needs to be able to have the human, physical, and financial resources to support this.
Consumer perceptions and expectations: The product price is a major communicator with the marketing mix. Price will not act by itself. It will need to be supported by other factors, e.g. product usefulness, reputation of the company etc. Advertising campaigns will often be used to justify prices and help communicate value for money etc.
Demand: If demand grows sufficiently the company may experience economies of scale, (as sales grow fixed costs are absorbed by the additional products sold). This can allow the company greater profit margins or sell the product at a lower price. Derived demand may result from the activities of competitors e.g. high car sales means parts producers experience higher demand for their products.
Company reputation: The product may be sold on the strength of a company’s reputation. The price may not reflect the true quality however the extra price may be asked because of the elitist image of the company, e.g. BMW, Rolex.
Seasonal factors, Demand for certain products may be seasonal. During periods of high demand or low supply a higher price may be asked for the product.
Competitor activities: Companies often use the price of their products to gain advantage over their competitors; this may result in a cut in price for the products (price war).
Legal constraints: Government legislation may adversely affect pricing – consider cigarettes, and alcohol. Products which are affected by taxation are said to be in an inelastic demand situation i.e. a small change in demand will result from a significant change in price.
The economy: The state of the economy will affect the amount of money consumers will spend on goods and services.
Incomes: The current and projected incomes will affect the size of the market for products and the amount purchasers can spend.
Having analysed the factors that influence pricing the marketing manager must propose a pricing policy.
Pricing policies adopted by company fall into three categories,
- Market oriented policies based on market conditions.
- Cost oriented policies, related to the cost of the product.
- Competitor based policies relate to competition among buyers, sellers or both.
Market oriented policies
Market penetration/saturation pricing: In this situation the objective is to saturate the market with sales of the product as quickly as possible in order to gain a major foothold in the market or gain brand leadership thus making it difficult for competitors to enter the market.
Once market dominance has been achieved prices may be allowed to creep up.
This policy consumes a large amount of the company’s resources, so it is only used by large organisations.
Short-term profit maximisation pricing: Market skimming pricing, This requires setting the price high in order to maximise profits for reinvestment in the product development or gain sufficient profit before competitors enter the market with a similar version at a lower cost.
Hit and run pricing: Here the policy is to obtain satisfactory profit while there is limited demand for the product. The price will depend on what the supplier believes can be asked. This is not the same as market skimming where the future is not certain and the supplier is aiming at the top end of the market first.
Product line pricing, Popular in the retail trade it involves determining what profit is required from a range of goods and using a lower price for some of the goods to entice customers to purchase other higher-priced goods in the range.
Prestige pricing used by suppliers like Gucci and Cartier. These companies ask high prices for their products to keep the names prestigious.
Discriminatory/differentiated pricing: The next three policies discriminate prices on the basis of time, product place/market.
Variable pricing occurs where the supplier will wish to even out demand for products that are over stretched at particular times, e.g. peak time travelling on trains.
Product differentiated pricing, Here prices are differentiated based upon slight changes to the product e.g. manufacturers making slight embellishes to car can charge a higher price.
Market differentiated pricing – sometimes companies use different prices in different markets because of the level of demand in different markets vary or the level of disposable income.
Cost oriented pricing
Mark up or Cost plus pricing: The cost of each product is determined and a percentage for profit is added. This method of pricing can prove problematic if different retailers expect and apply different mark-ups. Customers may decide to shop at other outlets as a result.
Satisfactory rate of return pricing: Often referred to as target pricing the supplier determines a rate of return on the capital invested over a period of time. The advantage is the company has a target to ensure satisfactory profits.
The popularity of these cost oriented pricing methods exist mainly because,
- They offer simplicity.
- Some jobs are non-routine.
- They guarantee a profit assuming that the price set is competitive.
Competitor Based approaches
The price a company can ask for a product may be strongly affected by the activities of competitors.
Going rate pricing: Where there are a number of competitors in the market and the market is price sensitive a company’s price may have to be set around the going rate. To avoid this as much as possible the company will attempt to amplify the advantages and differences of its products.
Close bid pricing: This is normally found where a company tenders for work in confidence. The price submitted will need to be competitive however sometimes the company may submit a high bid where the company does not want the work, but does not wish to be forgotten when future bids are required.
Open bidding: This kind of bidding is associated with auctioneer acting as agent for the seller. Potential purchasers openly bid against each other.
Negotiated prices: Sometimes a pricing policy cannot be predetermined and so a price has to be negotiated with customers or the price is reached through a form of bargaining. The buyer will want the lowest price in keeping with quality and delivery times; the suppler will want the maximum price but also has to set a competitive price in order to win the business.
Physical distribution is about getting the right product to the right place in the right quantities at the right time.
’All the activities necessary for ensuring the transfer of products and services from the supplier to the place of the purchaser’s choice or to a place where potential purchasers may readily purchase them’.
The letter P for place refers to the market place and therefore indicates that distribution is about delivering products and services to the place where the market exists.
Distribution Channels: a route to a particular destination.
The channels of distribution may be defined as:
‘The network of distributive organisations through which goods or services are transferred from the supplier to a place nominated by the purchaser or a place where they may be readily purchased’
A number of different terms is used to describe individuals or organisations that purchase goods for resale; the most common ones being the middlemen or intermediaries. Generally speaking there are three major types of distributors extensively used in the marketing and distribution of finished products for the consumer markets,
- Agents and brokers
Agents and Brokers: These businesses specialise in and concentrate on negotiating purchases or sales on behalf of a principal. The principal is usually an individual or organisation selling something, but it can be the case that the agent is acting on behalf of the purchaser as in advertising agencies who buy advertising space for their clients. An estate agent may act for the client selling the property and attempt to find a purchaser for the property.
The role of the broker is not as well known as the agent. A Broker acts between a buyer and a seller. We come across them in insurance for example.
Retailers: These are resellers dealing directly with the final consumer. They have established distribution outlets e.g. shops; they can help a manufacturer reach a large number of purchasers who are widely dispersed yet concentrated in areas such as towns and cities.
Wholesalers: Sometimes referred as jobbers are business units which buy resell and deliver to other intermediaries such as small wholesalers or independent dealers but in the main their business is with retailers. They purchase from manufacturers in large quantities and break the quantities down into quantities suitable for retailers. Their activities can reduce the cost of distribution to the consumers. Retailers can approach one wholesaler for several products made by different manufactures and purchase smaller quantities than the manufacturer is willing to package and sell.
Key Ingredients of Distribution
Four ingredients are present for the transfer of goods from the manufacturer’s premises to the consumer.
- The provision of information to the final purchaser.
- The physical delivery of the product to a member of the channel of distribution.
- The payment for the goods.
- The transfer of title.
The provision of information will involve those elements of the promotion mix designed to build awareness of the product. Potential intermediaries, consumers will have to be offered relevant information, which will encourage them to consider the purchase of the product in order to satisfy specific needs. Information will be provided regarding benefits or attributes of the product.
Manufacturers adopt two strategies with their promotional efforts, Sell-in (PUSH), designed to push sales of the good to the final purchaser, and sell-out (PULL) to encourage consumers to ask retailers to supply the product.
- Physical Distribution:
This relates to the actual movement of the goods through the distribution channel.
By reducing the intermediaries significant cost can be saved thus reducing the price to the final purchaser.
Reducing the cost while keeping the price the same allows greater profit to be earned.
Attention to the mode of transport can reduce the costs associated with distribution – road, rail or air
Manufacturers attempt to produce only quantities they can sell quickly therefore stock levels can be kept to a minimum.
When goods have been physically distributed to the final purchaser then payment must take place. Payment may be immediate, e.g. customers paying cash or credit card.or delayed e.g. on credit. Payment and terms are important to the profitability of the company.
- Title of Goods:
This refers to the transfer of ownership, which results from ordering, receiving, accepting and paying for goods.
The Promotion Mix
Advertising is the means used by marketers when you can’t go to see somebody.
The provision of information through promotional methods assumes great importance in the work of the marketing manager. Promotions attempt to persuade people to respond in a manner desirable to the company therefore a wide variety of communications methods is used.
It is the study of the methods of promotion that are available to the marketing manager and the way they are mixed that provides us with the term the promotion mix.
Promotion may be defined as: promotions that encompass all the tools in the marketing mix whose major role is persuasive communications.
Developing products or services that satisfy customer needs and wants is of prime importance but does not automatically lead to sales. The target market has to be informed, encouraged, and motivated to purchase the product through interesting and financially attractive presentations of the product’s benefits and attributes.
To do this we need to decide what the message is and what means we will use to communicate the message.
The following methods of promotion make up the promotion mix,
- Sales promotions and merchandising.
- Public relations.
- Personal (direct) selling.
Other factors that impact on the promotion mix are,
- Determining advertising budgets,
- Advertising and society,
- The promotion mix and plan
Advertising can be defined as, a form of non-personal presentation of ideas, goods or services by a clearly identified promoter.
Advertising will lack the persuasive power of personal selling and is concerned in the main with communicating a one way message to potential customers.
It has however some advantages
- The same promotion message can be communicated to a wide audience.
- Images, drama and atmosphere are useful in promoting the product that may not be possible with other promotion methods.
- Consumers may be persuaded without pressure.
In the case of marketing to consumers advertising is used whereas in marketing to user markets, personal selling is used.
Advertising may be divided into two distinct areas:
- Above the line media/advertising refers to advertising carried out through the use of conventional media. e.g. commercial television, radio, posters, cinema, and the press. The word above has come to indicate that it is an open form of advertising to mass audiences.
Companies that use the services of advertising agencies are generally paid commission by the Media Company unless the amount placed is very low. This kind of advertising to a mass market is sometimes referred to as blanket advertising.
2, Below the line advertising, is a catch all phrase used in advertising to refer to advertising that is not carried out through the use of commercial media but instead through methods by which the company has considerable control; i.e. trade fairs, exhibitions, direct mail, merchandising etc. The word “below” indicates that there is not an independently owned mass media organisation directly involved and not everyone will have the opportunity to see or read the promoter’s message.
Promotional methods in this area are very valuable because the target that needs to be reached is known, e.g. visitors to a motor show. Unlike above the line advertising, if the services of an agency are required they are paid for by the company promoting the product or service.
Objectives of advertising
Many advertising campaigns involve above and below the line advertising, whichever is chosen each will fulfill several or all of the following objectives,
- Reach the target market/audience.
- Develop awareness of the product, service or organisation.
- Increase understanding of the product, service, or organisation.
- Act as a reminder of the product, service or organisation.
- Draw the market to sales places e.g. shop.
- Push the product through the channels of distribution.
- Afford sales people time to contact potential customers.
- Offer reassurance as to the product’s quality, performance, after sales service etc.
Public Relations PR
PR is the deliberate planned and sustained effort to establish and maintain good understanding between an organisation and its public.
Within this definition as applied to a commercial organisation, however is the aim to Enhance the image of the company and its products or services in the eyes of potential customers in order to improve sales.
The company’s public may include government, shareholders, councils, customers etc.
Not all but most PR activities are concerned with favourable presentations of a company’s products and services.
PR activities may include,
- Press releases articles on the organisation or its products.
- Seminars, meetings, visits, such as escorted tours of the company, meetings with company executives, journalists.
- Press conferences, announcing newsworthy events, such as new product launches.
- Local community relations events.
- Donations to charitable causes.
- Testimonials from personalities, for branding purposes or corporate image.
- In house journals, to promote a team spirit and an integrated workforce.
- Sponsorship e.g. of sports occasions.
Publicity may be defined as:
“Any non personal stimulation of demand for a product, service or business by offering commercially significant news about them to the media”.
Much of the work of PR is concerned with publicity and it is publicity that is mainly associated with promotions.
Publicity departments of companies will attempt to ensure that the publicity is favourable by conducting efforts or by employing the services of a PR company.
Publicity efforts will concentrate on,
- Improved company image.
- Improved product line / branding.
- Announcing new product lines.
- Encouraging the purchase of products.
- Adding credibility to a company’s communication.
- Overcoming resistance by a section of the community.
- Develop other aspects of the company such as shareholder interest.
Establishing the size of the advertising budget.
There is no guaranteed system for setting the advertising budget which will be cost effective. The following methods are common in deciding budget allocation,
- Percentage of the previous year’s sales,
- Percentage of future sales,
- Affordable method,
- Competitor parity method,
- Objective and task method. Select the objectives first and then decide the tactics to be employed.
Role of advertising in society
Disadvantages: additional cost to marketing for which the consumer has to pay. Advertising is wasteful as people hear and see the advert but will not make a purchase It stimulates false demand and can create oligopolies or monopolies because large companies have more spending power. Advertising can make the environment ugly and it borders on propaganda.
Advantages: Makes consumers aware of the choices available, allows producers to inform purchasers of their products, subtle differences can be explained, revenue generator for the media, advertising industry employs a large amount of people and advertising can make the environment more colourful.
Promotion Mix and Plan:
Mix: Why, What, Whom, How, When, Where,
Plan: The Plan document clearly outlines the decisions reached on promotions to be used for the achievement of specific objectives.
A service is an intangible product involving a deed, performance, or an effort that cannot be physically possessed.
When we speak of services marketing the dominant component is intangible.
It includes rental of goods, alteration and repair of goods owned by customers, and personal services.
Major differences between goods and services are:
- Inseparability of production and consumption
- Perishability / Inventory
- Intangibility – services are performances; they cannot be seen, touched, tasted, smelt or possessed. They are often difficult for consumers to assess, either before, during or even after purchase.
How to promote and market intangible services
- develop tangible representation of the service, i.e. a credit card serves as the physical product with its own image and benefits.
- develop a brand image. Why do customers seek out DHL as opposed to another courier service?
- cite 3rd party endorsements…you need endorsements from those that have experienced the service and valued it.
- word of mouth – very important. A physical description of a service is almost impossible..
- offer discounts and free samples/service to customers who encourage friends to use the service.
- offer tangible benefits in sales promotions which are consistent with customers’ needs/wants and establish a clear product position, i.e. the place a product offering occupies in a consumer’s mind, the attributes of the service relative to competing offerings.
Intangibility also presents pricing problems. How should a car mechanic charge for his/her services.
Visibility of the service may be a problem. Need to explain the time needed for repair, and functions that were performed if you want the repair to be more tangible. Psychological role of price is magnified since customers must rely on price as the sole indicator of service quality when other quality indicators are absent.
- Inseparability of production and consumption means that services are normally produced at the time they are consumed and this usually involves the presence of the consumer e.g. a doctor doing a medical examination on a patient. In some instances the service is intrinsically linked to an employee.
- Perishability: high perishability means that unused items or capacity in one time period cannot be stockpiled for future time periods. This presents a major problem especially where there are high capital costs involved. Airlines, for instance, need to be operating at near full capacity to be profitable. There is a need to avoid excess unsatisfied demand and excess capacity which leads to unproductive use of resources. , e.g. over/under booking restaurant capacity
- Heterogeneity. Services are labour intensive; people typically perform services and are not always consistent in their performance. This means variation in the quality of service from one employee to another and also from one time to another.
Services are a very diverse group of products, and an organization may provide more than one kind. They can be classified into five different categories:
- Type of market – consumer (e.g. child care) or industrial (e.g. consulting).
- Degree of labour intensiveness – whether it is labour based (e.g. education) or equipment based (e.g. telecommunications).
- Degree of customer contact – high (e.g. health care), or low (e.g. repairs).
- Skill of service provider – professional (e.g. legal advice) or non-professional (e.g.
- Goal of the service provider – Profit (e.g. financial services), or non-profit (e.g.
Marketing by service providers
The use of marketing by service providers has been limited:
- Many service firms stress technical expertise, therefore have lagged in their use of marketing.
- Many service firms are small, marketing expertise cannot be hired.
- Strict licensing/legal restrictions limit competition and increase the need for marketing.
- Service associations have prohibited marketing; for instance, solicitors in Ireland were not permitted to advertise until recently.
- High esteem of professionals do not need marketing. A number of professionals have a dislike for marketing and lack understanding.
- Use of marketing is likely to increase rapidly in the near future due to competition etc.
Marketing of Services The 7 P’s – People, Processes, Physical Evidence, Price, Product,Place and Promotion
This refers to the people involved in the provision of the service. People are critical as the quality of service depends on the capability, commitment and motivation of those who provide it.
Staff must therefore have adequate training and knowledge to provide the service to the standard required. The customer contact is an essential in the provisioning of services and unlike workers in manufacturing, dress code, appearance, attitude and time keeping are just some of the factors that will influence the customers perception of the service.
Process management involves the procedures, task, schedules, mechanisms, activities and routines by which a product or service is delivered to the customer.
Physical evidence relates to the tangible evidence that the organisation is market oriented, e.g. the display of a retail outlet or the livery (paint work) of delivery vehicles.
Service Marketing and Technology
Technology is impacting on all dimensions of service and service delivery. Customers are now interacting more through technology and receive services in a variety of ways e.g. E Business or M Commerce. Increased customer satisfaction and competitive advantage are just two of the main benefits of technology through increased added value services e.g. order taking, package tracking, information storage, billing systems etc.
Through the use of technology customers get a quality service, perhaps any time 24/7, and can customise the service on their own. Limitless possibilities exist in some industries for adding value, both by improving existing service and providing new services to customers. Some other examples of technologies include relationship marketing software, lifetime value of customers (enabling financial accountability for relationship management), data mining and information technologies. These enable companies to get closer to their customers on a one-to-one basis, become more knowledgeable about their attitudes and behaviour, and provide customised solutions.
Market Positioning – Strategy and Statement
A product’s position is the way the product is defined by consumers on important attributes. i.e. the place the product occupies in consumer’s minds relative to competing products. Because consumers cannot re-evaluate products every time they make a buying decision, they “position” products, services, and companies in their minds.
The objective is to create and obtain a distinctive place in a market for a company and/or its products.
Marketers must therefore:
- Plan positions to give their products the greatest advantage in selected target markets.
- Design marketing mixes to create those planned positions.
Positioning Strategy Definition:
“How you differentiate your product or service from that of your competitors and then determine which market niche to fill”.
STEP 1: Identify possible competitive advantages.
- Key to winning and keeping customers is to understand their needs and buying processes better than competitors do and deliver more value.
- Being more competitive is an advantage gained by offering consumers greater value, either through lower prices or by providing more benefits that justify a competitive advantage. Some examples are:
- Product differentiation e.g. features, performance, style and design, or attributes.
- Image differentiation i.e. symbols, atmospheres, events.
- Services differentiation: delivery, installation, repair service, customer training
- Personnel differentiation: Hiring, training better people than competitors do.
STEP 2: Select the right competitive advantage i.e. the criteria for determining which differences to promote.
Find USP (unique selling proposition)
- Important, distinctive, superior, communicable, pre-emptive, affordable, profitable.
STEP 3: Communicate and deliver the chosen position
- Take strong steps to deliver and communicate the desired position to target consumers.
- The marketing mix must support the positioning strategy
- The positioning strategy must be monitored and adapted over time to match changes in consumer needs and competitors strategies.
- The following positioning map is an example of the differing positioning of five different grocery retailers based on price and quality.
A Positioning Statement
A position statement is a written description of the objectives of a positioning strategy.
- how the firm defines its business or how a brand distinguishes itself,
- how the customers will benefit from its features
- how these benefits or aspects will be communicated to the intended
Marketing Strategy – Approaches
Before formulating a marketing strategy, strategist needs to pay explicit attention to a number of factors including the organisation’s objectives and resources, managerial attitudes to risk, the structure of the market, competitors’ strategies and, very importantly, the organistion’s position within the market. The significance of market position and its influence upon the business strategy has led many writers to suggest classifying competitive position along a spectrum from market leader to market nicher’s as outlined below.
- Market Leader
- Market Challengers
- Market Follower
- Market Nicher
- In many industries, one company or organisation is recognised as being ahead of the rest in terms of market share. Its share might only be 20-25 per cent, but that could still give it a dominant position. The market leader tends to determine the pace and ways of competing in the market. It sets the price standard, the promotional intensity, the rate of product change and the quality and quantity of the distribution effort.
- Effectively the market leader provides a benchmark for others to follow or emulate. Sometimes a market leader can have a number of rivals, so the power associated with being a leader may not necessarily be great, especially if markets are defined from, say an East African context rather than a Rwandan domestic perspective.
- Market leadership lends itself to a number of strategic alternatives, none of which is mutually exclusive,
- Expand the total market by creating new uses, new users or more intense use.
- Expand market share via the marketing mix. This assumes share and profit are related.
- Defend position against challengers, through continuous innovation or through for example expanding the range to get more shelf space. This strategy has been seen in many high profile marketing battles between leaders and challengers.
- Seek stability of customer base.
- Seek stability and retention of customer base.
On the next page is a summary of how market leaders protect their market.
- Market challengers are organisations with a smaller market share who are close enough to pose a serious threat to the leader. However, an aggressive strategy can be costly – what is the certainty of winning.
- Before making a concentrated effort to gain market share, the challenger needs to ask whether market share really matters so much, or whether there would be greater benefit from working on getting a good Return On Investment from the existing share.
- Dolan (1981) found that rivalry is greater where there is stagnant demand (i.e. growth can only come from taking share from competitors) or where fixed costs or investment in inventory is high (economies in scale can bring benefits but you need to have a higher market share to achieve them).
There are two questions that need answering if a decision is made to attack:
- where to attack
- what the reaction is likely to be.
There are several options:
- Attack the market leader.
- Attack weaker firms of a similar size.
- Attack firms who are strong but who are very local.
It is never easy to attack leaders. They tend to retaliate through cutting prices or by investing in heavy promotion.
It is therefore a high risk but potentially high return route. The challenger needs a clear competitive advantage to exploit to be able to neutralise the leader. The advice is never enter a fight unless you are really convinced that you can win and are prepared to invest in the battle.
Many organisations favour a less aggressive stance given the resources needed, the threat of retaliation and the uncertainty of winning. There are two types of followers.
Those who lack the resources to mount a serious attack and prefer to remain innovative and forward thinking, without disturbing the overall competitive structure in the market by encouraging open warfare. Often any lead from the market leader is willingly followed. This might mean adopting a me too strategy, thus avoiding direct confrontation and competition.
A me too type of follower is simply not capable of challenging and is content just to survive, offering little competitive advantage.
Hammermerch et al. (1978) and Saunders (1987) found that some market followers seek deliberately to build and maintain that position through a range of strategies, which include careful and narrow segmentation, highly selective R&D and a focus on quality, differentiation and profitability rather than on cost and share gains.
- Some companies, often small, specialise in markets that are too small, too costly or too vulnerable for the larger organisation to contemplate.
- Niching is not necessarily a small organisation strategy, as some larger firms may have divisions that specialise.
- The key to niching is the close matching between the needs of the market and the capabilities and strengths of the company.
- The specialisation offered can relate to product type, customer group, geographic area or any aspect of product/ service differentiation.
- The main difficulty for market nichers is the challenge created if the niche starts to disappear due to innovation and change.The Major Market-challenger Attack Strategies for the achievement of competitive advantage
It is possible to distinguish among five broad attack strategies:
- Guerrilla attack
- Pure Frontal Attack: A challenger contemplating a head-on attack in marketing terms needs to be very well resourced relative to the market leader. A full-scale attack means matching and winning on all the competitive variables such as price, distribution, product features and the rest. A more limited frontal attack may pick off some customer groups who could be more vulnerable to a new offering, for example those who are more service conscious e.g. MTM customer service Versus TIGO customer service. You attack your opponents strengths rather than picking off their weakness.
Many successful attacks occur because the enemy has been outflanked and its strategy has been disrupted. By attacking particular segments, such as product weakness or areas of poor distribution facilities, progress can be made despite the overall strength of the competition. Flank attacks can lead to encirclement if the poorly defended segment is used by the challenger to build an image and reputation in the market in preparation for a further attack in an area of direct concern for the leader.
Encirclement means launching an attack on many fronts with rapidity and force so as to spread panic and overwhelm the opposition.
It is difficult to defend a position with enough concentrated force and effect when faced with an all out attack on all sides. Although the challenger may experience short-term losses, the outcome might be significant advances in market share.
This is where there is no effort made to engage the enemy in direct conflict, but the tactic is to move on and perhaps surround and slowly reduce the power base of the leader.
This strategy offers three lines of approach; diversifying into unrelated products, diversifying into new geographic markets, and leapfrogging into new technologies to supplant existing products.
Guerrilla action is a well-known strategy for a small group operating against a much more powerful force that it dare not meet head-on. In business, the purpose of such a strategy is to make short-term marginal gains that can still be important to the smaller organisation, but the cost to the larger operator is not very significant.
It could mean bursts of activity, perhaps in price promotions, dealer loaders or geographically concentrated campaigns, or even recruiting some of the market leader’s key staff. It is about hitting poorly defended targets hard, and then quickly retreating.
The Marketing Plan
A plan defines where we wish to be at some time in the future and how to get there!
Understanding each of the 4 Ps of the marketing mix and marketing research is essential, but so too is knowing how to blend them together to meet future marketing challenges.
Planning involves analysis of the past and present marketing position and setting measurable and attainable marketing objectives for the future.
Plans may be long term (over five years), medium term (one to five years), and short term (up to one year). Usually marketing plans reflect other plans in the company particularly the company’s strategic plan.
The Contents of a Plan
The plan is a written document containing:
- A statement of the marketing objectives for the forthcoming period, for current as well as new products the company may introduce and for new as well as current markets.
- Details of strategies and tactics to be used to achieve the objectives.
- An operating plan for the period defining the role of each department and major section and activities to be undertaken.
- Details of resources, staff equipment, finances etc.
- A financial budget detailing the monthly cost of achieving each aspect of the plan as well as the normal running costs.
Of course companies are not forced to plan, they may wait for events to unfold in the market place and respond accordingly. This is a reactive approach. However, most companies are proactive in their approach to marketing.
The advantages to planning
Drafting a plan is not simply compiling ideas. A plan calls for logical thinking and evaluation of what can happen and possibly will happen.
The activity of planning:
- Provokes managers to analyse what might happen and what should happen.
- Encourage better management, i.e. setting targets, co-ordinating, controlling etc.
- Cause the company to re-evaluate its policies.
- Help staff to prepare for unexpected change.
- Communicate to staff that the efforts of the company are integrated.
- Enables banks, investors, and shareholders feel confident about the company.
- Allows management to assess if the company will achieve returns on investments.
- Provide senior management with a controlling mechanism.
- Help keep monthly expenditure under control.
As already mentioned planning requires analysis of what occurred internally in the company and externally in the market place.
A Company will conduct an audit of the Micro- (internal environment), Meso- (industry), and Macro- (external environment).
When examining these components of the environment we should concentrate on the internal Strengths and Weaknesses of the company in relation to the market (external) and Opportunities and Threats.
These four components are referred to as SWOT analysis and should relate to each product and market.
Other tools employed to analyse the market are PEST analysis and the BCG matrix (see Glossary).
Assumptions in relation to the future
Having conducted an audit or audits of the market the marketing manager/dept. will have some idea of what is achievable in the future given the strengths and weaknesses.
We can estimate from this information what would happen if changes were made to the current strategies.
To have a starting point from which to make assumptions we need to predict what will happen to the efficiency of our operations which will involve sales forecasting. There are a number of ways in which to achieve this,
Sales force estimations:
This is a forecast based on collated individual estimations of what each sales person hopes to sell.
A sales person will often consult with a customer to determine before submitting their figures.
The estimate put forward will also act as a target figure for the sales person to achieve.
The difficulty with this however is the sales person will underestimate the figure and in some instances will do so purposely. The sales person’s lack of knowledge of the overall market is also a drawback to this method.
Checking buyers’ estimates:
This method involves asking a representative sample of all buyers in the market their estimate for the forthcoming year. The advantages are that the company is not depending solely on the opinion of the sales force. The disadvantages are the collection of opinions has to be well in advance of any planning.
Recent changes cannot be accommodated and buyers will need to be interviewed to ensure claims are not falsified.
The use of time series rests on the relationship between sales and time and requires the application of statistical methods. If we plot sales on a graph for a year and connect up the plottings we made we can draw a straight line and extrapolate a year into the future.
This is another statistical method that determines the degree of relationship between two activities or events.
If there is a strong and useful relationship between a company’s sales and some other activity or event we may be able to forecast future sales. (There is a strong correlation between tourism and cost of flying)
Again this employs statistical methods but allows for the input of variables that are qualitative as well as quantitative. The object is to build a model based on the variables that affect sales such as price, seasonality, previous sales etc. that attempts to simulate the real situation. The advantages are that variables may be altered and what-if exercises carried out and can be instant where computerised.
Combinations of the above:
Each of the above methods has its limitations and so therefore two or more methods may be used.
Having completed a marketing audit, analysed and forecast what will happen if products, markets, and marketing effort does not change we may continue to make assumptions the WHAT IF aspect of planning, e.g. reducing prices of goods etc.
Objectives, Strategies and Tactics
Following assumptions on the market, objectives may be set and strategies for achieving the objectives must be selected.
The objectives will be in relation to the products and markets whereas the strategies will be in relation to the 4P’s and their roles in the strategies.
They must take into account internal strengths and weaknesses and external opportunities and threats.
Whatever strategies are chosen they will have to be capable of being measured.
Tactics represent decisions on the elements of the marketing mix which can best serve the achievement of objectives and strategies selected e.g.,
Objectives – Increase sales by 15%
Strategy – Introduce the company into to two new overseas markets.
Tactics – Intensive advertising, market skimming, Trade promotions, Attractive packaging.
The Marketing Plan
Once the final decision has been made the plan will be written and will include the following,
- A short analysis of the company’s internal strengths and weaknesses in relation to opportunities and threats.
- A preamble to the objectives justifying their selection and the strategies that will be used to achieve them.
- An operations plan defining the role of the department and their activities in fulfilling the strategy.
- Resources that will be needed.
- A financial budget with details of expenditure.
The marketing plan will instigate the development of plans for other departments so that the efforts of the organisation are maximised.