Marketing Managemrnt

MARKETING MANAGEMENT
(FOR PRIVATE CIRCULATION ONLY)

2019
PROGRAMME COORDINATOR
Dr. Padmpriya Irabatti
COURSE DESIGN AND REVIEW COMMITTEE

Mr. Ajay Nagare Prof. Anita Patankar
Dr. Mr. Rajesh Panda Dr. Rashmi Hebbalkar
Dr. Narendra Purchure Dr. Shubhangi P Walvekar
Prof. Pradeep Datar Dr. Suhas B Joshi
Abhijeet Ranade
COURSE WRITER
Ms. Nandita Dalal
EDITOR
Ms. Neha Mule
Published by Symbiosis Centre for Distance Learning (SCDL), Pune

2001 (Revision 04, 2015)
Copyright © 2019 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.
Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
PREFACE
A question that is often the subject of much debate is “since the world has changed so radically, why
doesn’t marketing change?” There are, after all, a number of new elements in the marketplace. The
Internet has multiplied the number of ways consumers buy and companies sell their products and
carry on their businesses. Cellular phones, internet blogs and chat rooms have revolutionised the way
customers communicate with each other and with companies. Companies face competition from a
growing number of countries, who offer lower prices and equal quality for their products and services.
All industries are facing hyper-competition and the power is increasingly shifting to consumers who
are telling companies what features they want, what communication they will tolerate, what incentives
they need and what price they will pay. And as markets change, so must marketing.
However, the old adage “the more things change, the more they remain the same” has never been
more accurate. Sure, the business environment has radically changed, but superior marketing is and
has always been built around four pillars: Analysing your customers and the business environment;
identifying key opportunities to better and more profitably meet customer needs, figuring out how to
act on those opportunities and then finally implementing your plan.
Theodore Levitt, legendary Professor of Marketing at Harvard Business School wrote the article
“Marketing Myopia,” first published in Harvard Business Review (HBR) in 1960 in which he argued
that companies and entire industries declined because management defined their businesses too
narrowly. More than 40 years later, more than 8,50,000 reprints have been sold, making the article
one of the best-selling articles of all time. The article written 40 years back has never been more
relevant than it is today.
The basic concepts of Marketing do not need to change; what changes though is the way we apply
them. What has also changed and will continue to change is the context in which we apply these
concepts. Marketing, as an activity, is no longer restricted to the marketing department alone; entire
organisations must practice marketing. It must drive the vision, mission and the company’s entire
strategic planning exercise; only then can organisations survive the hyper-competitive era.
As managers, you must learn to adapt to the changing environment and learn, unlearn and then
relearn the old lessons. This SLM is intended to give you a foundation course in the basic concepts
of Marketing, cast in a more contemporary mould of today’s business environment. I owe gratitude
to a number of authors, especially Philip Kotler, Lamb, Hair, McDaniel, Schiffman, Kanuk for their
wonderfully simple diagrams compiled in this SLM. I leave you with a quote from Ted Levitt to
whom I respectfully dedicate our learning of Marketing: “The future belongs to people who see
possibilities before they become obvious.”
Ms. Nandita Dalal
iii
ABOUT THE AUTHOR
Ms. Nandita Dalal is a commerce graduate and a postgraduate in Marketing and Brand Management
with over 15 years of industry experience in Marketing in diverse service and product organisations.
She has been a visiting faculty in Marketing and Brand Management at the Symbiosis Institute of
International Business for the past 5 years.
iv
CONTENTS
Unit No. TITLE Page No.

1 Basic Concepts of Marketing 1-22
1.1 Introduction
1.2 Meaning and Definition of Marketing
1.3 Philosophies guiding a Company’s Marketing Efforts
1.3.1 The Production Concept
1.3.2 The Product Concept
1.3.3 The Selling Concept
1.3.4 The Marketing Concept
1.3.5 The Customer Concept
1.3.6 The Social Marketing Concept
1.4 Customer Value and Customer Satisfaction
1.4.1 Customer Value
1.4.2 Customer Satisfaction
1.5 Misconceptions about Marketing
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 The Marketing Environment 23-48
2.1 Introduction
2.2 Understanding the External Environment
2.3 Identifying Major Macro Environment Forces
2.3.1 Socio-Cultural Factors
2.3.2 Demographic Factors
2.3.3 Technological Factors
2.3.4 Political and Legal Factors
2.3.5 Economic Factors
2.3.6 Natural Environment Factors
2.4 Changes in Business and Marketing
2.4.1 E-Commerce
2.4.2 Web Sites
2.5 Macro Environmental Changes and the New Indian Consumer
Summary
Keywords
Suggested Reading
v
3 Market-Oriented Strategic Planning 49-82
3.1 Introduction
3.2 The Nature of Strategic Planning
3.3 Step I: Business Mission Statement
3.4 Step II: Strategic Analysis
3.5 Step III: SWOT Analysis
3.6 Step IV: Strategy Identification and Selection
3.7 Step V: Prepare Operating Plans for each Functional Area
3.8 Step VI: Implementation, Evaluation and Control of the Plan
Summary
Keywords
Suggested Reading
Appendix
4 Competition and Competitive Strategy 83-118
4.1 Introduction
4.2 Identifying Competitors
4.2.1 Customer Perspective
4.2.2 Industry Perspective
4.3 Structural Analysis of the Industry
4.4 Competitor Analysis
4.5 Setting up a Competitive Intelligence System
4.6 Generic Competitive Strategies
4.6.1 Cost Leadership
4.6.2 Differentiation
4.6.3 Focus
4.7 Designing Competitive Strategies
4.7.1 Market Leader
4.7.2 Market Challenger
4.7.3 Market Follower
4.7.4 Market Nicher
4.8 Balancing Customer and Competitor Orientations
Summary
Keywords
Suggested Reading
vi
5 Market Research and Demand Forecasting 119-146
5.1 Introduction
5.2 Market Research: Meaning and Definition
5.3 The Market Research Process
5.3.1 Step 1: Problem Definition
5.3.2 Step 2: Development of an Approach to the Problem
5.3.3 Step 3: Research Design Formulation
5.3.4 Step 4: Fieldwork or Data Collection
5.3.5 Step 5: Data Preparation and Analysis
5.3.6 Step 6: Report Preparation and Presentation
5.4 Marketing Decision Support Systems
5.5 Forecasting and Demand Measurement
5.5.1 Market Demand, Market Potential and Market Penetration
5.5.2 Company Demand, Sales Forecast and Sales Potential
5.5.3 Estimating Current Demand
5.5.4 Estimating Future Demand
Summary
Keywords
Suggested Reading
6 Consumer Behaviour 147-176
6.1 Introduction
6.2 Simplified Model of Consumer Decision-Making
6.3 Consumer as an Individual
6.3.1 Motivation
6.3.2 Perception
6.3.3 Learning
6.3.4 Personality
6.3.5 Personal Factors
6.4 Consumers in their Socio-Cultural Settings
6.4.1 Culture
6.4.2 Subculture
6.4.3 Reference Groups
6.5 Types of Decisions and Buyer Behaviour
6.5.1 Buying Roles
6.5.2 Types of Decisions
6.5.3 The Level of Involvement
6.5.4 Differences between Brands
6.5.5 Types of Buying Behaviour
6.6 The Decision-Making Process
6.6.1 Need Recognition
6.6.2 Pre-Purchase Search
6.6.3 Evaluation of Alternatives
6.7 The Purchase Decision
6.8 Relationship Marketing and Brand Loyalty
Summary
Keywords
Suggested Reading
vii
7 Market Segmentation and Selecting Target Markets 177-204
7.1 Introduction
7.2 Market Segmentation
7.2.1 Segmentation-Targeting-Positioning
7.2.2 Facts about Market Segmentation
7.2.3 Niche Marketing
7.2.4 Market Segmentation in Different Industries
7.3 Bases for Segmentation
7.3.1 Geographic Segmentation
7.3.2 Demographic Segmentation
7.3.3 Psychological Segmentation
7.3.4 Psychographic Segmentation
7.3.5 Socio-Cultural Segmentation
7.3.6 Use-related Segmentation
7.3.7 Usage Situation Segmentation
7.3.8 Benefit Segmentation
7.3.9 Hybrid Segmentation
7.4 Criteria for Effective Market Segmentation
7.5 The Market Segmentation Process
7.6 Market Targeting
Summary
Keywords
Suggested Reading
8 Positioning 205-226
8.1 Introduction
8.2 Positioning
8.2.1 Definition of Positioning
8.2.2 Importance of Positioning
8.3 The Positioning Concept
8.3.1 The A – The Target Audience
8.3.2 The B – The Benefit
8.3.3 The C – The Compelling Reason
8.4 The Process of developing a Position
8.5 Positioning Strategies
8.6 Repositioning
Summary
Keywords
Suggested Reading
viii
9 Product Concepts 227-274
9.1 Introduction
9.2 Product Differentiation
9.2.1 Differentiation Tools
9.3 Product Classifications
9.3.1 Product Mix and Product Lines
9.4 Brand Decisions
9.4.1 Brand
9.4.2 Brand Equity
9.4.3 Branding Decisions
9.5 Product Innovation
9.5.1 Organising for New Product Development
9.5.2 The Consumer Adoption Process
9.6 The Product Life Cycle (PLC) Concept
9.6.1 PLC Stages and Strategies in Different Phases
Summary
Keywords
Suggested Reading
10 Distribution Channels and Marketing of Services 275-312
10.1 Introduction
10.2 Role of Marketing Channels
10.3 Channel Structure
10.4 Channel Design
10.5 Managing Channel Relationships
10.6 Channel and Distribution Decisions for Services
10.7 Service Marketing
10.8 Marketing Mix for Service Firms
10.9 Managing Service Quality
10.10 Role of Self-Service Technologies
10.11 Differentiation of Services
10.12 Managing Product Support Services
Summary
Keywords
Suggested Reading
ix
11 Strategic Pricing 313-354
11.1 Introduction
11.2 Costs: Impact on Pricing
11.3 Customer Value and Price Sensitivity
11.3.1 Nagle and Holden’s Nine Factors that influence Price
Sensitivity
11.3.2 Market Segmentation using Price-Value Perceptions
11.3.3 Effect of the Internet on Price Sensitivity
11.4 Pricing Strategy and the Product Life Cycle
11.5 Understanding the Pricing Game
11.5.1 Price Competitiveness
11.5.2 Reacting to Competition with Price
11.6 Pricing: Key Tool of a Company’s Growth Strategy
11.6.1 Role of the Distribution Channel in Setting Prices
11.6.2 Product Line Pricing
11.6.3 Pricing Tactics
11.6.4 The Pricing Process
Summary
Keywords
Suggested Reading
12 Integrated Marketing Communications (IMC) 355-390
12.1 Introduction
12.2 Concept of IMC
12.3 The Communications Process
12.3.1 The AIDA Concept
12.4 The Communications Mix
12.4.1 Advertising
12.4.2 Sales Promotion
12.4.3 Public Relations and Publicity
12.4.4 Personal Selling
12.4.5 Direct Marketing
12.4.6 Internet as a Communication Tool
12.5 Factors affecting the Communications Mix
12.6 The Media Mix
12.6.1 Factors affecting Media Selection
12.6.2 Characteristics of Different Media
12.7 Planning Communications Campaign
12.8 Budgeting for Marketing Communications
Summary
Keywords
Suggested Reading
x
Basic Concepts of Marketing
UNIT
1
Structure:
1.1 Introduction
1.2 Meaning and Definition of Marketing
1.3 Philosophies guiding a Company’s Marketing Efforts
1.3.1 The Production Concept
1.3.4 The Marketing Concept
1.4 Customer Value and Customer Satisfaction
1.4.2 Customer Satisfaction
1.5 Misconceptions about Marketing
Summary
Keywords
Suggested Reading
Basic Concepts of Marketing 1

Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain what is marketing
----------------------
• Describe essential philosophies guiding a company’s marketing
---------------------- efforts
• Discuss the concepts of customer satisfaction, customer loyalty and
----------------------
customer value
---------------------- • Elaborate on the core concepts of marketing
---------------------- • Clarify misconceptions that exist about marketing
----------------------
1.1 INTRODUCTION
----------------------
Marketing is the business function that identifies unfulfilled needs and
---------------------- wants, defines and measures their magnitude, determines which target market
the organisation can best serve, decides on the appropriate products, pricing and
---------------------- promotion and distribution programs to serve these markets to develop a market
---------------------- orientation. From a societal point of view, marketing is the link between a
society’s material requirements and its economic patterns of response. Marketing
---------------------- satisfy these needs and wants through exchange processes and building long-
term relationships. It is the process of communicating the value of a product
---------------------- or service through positioning to customers. Marketing can be looked at as
---------------------- an organisational function and a set of processes for creating, delivering and
communicating value to customers, and managing customer relationships in
---------------------- ways that benefit the organisation and its shareholders. Marketing is the science
of choosing target markets through market analysis and market segmentation,
---------------------- as well as understanding consumer buying behavior and providing superior
---------------------- customer value.
---------------------- 1.2 MEANING AND DEFINITION OF MARKETING

---------------------- The American Marketing Association (AMA) offers a very comprehensive
definition of marketing as “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”.
---------------------- To fully understand this definition, we must break it up into its key
components:
---------------------- 1. “Create exchanges that satisfy individual and organisational goals.”
---------------------- The individual here is the customer. The customer can be either an
individual or a group of individuals or another business enterprise. (For the sake
---------------------- of simplicity, we will refer to all these entities as “the customer” throughout this
---------------------- book.)
2 Marketing Management
An organisation exists because a customer’s need exists. The next step is Notes
to create something of value to meet that need, for which the customer is willing
to pay. This results in an exchange between the organisation and its customer. ----------------------
In satisfying the customer needs and creating exchanges, an organisation ----------------------
must satisfy its own goals. The goal of all business organisations is to deliver
return to its shareholders. Unless this objective is achieved, the organisation ----------------------
Does this mean that marketing is relevant only to commercial ----------------------
organisations? What about the numerous non-profit organisations?
----------------------
Marketing is equally relevant to them. The only difference here is that,
organisational goals are not defined in terms of return to shareholders. Such ----------------------
social organisations exist to create awareness and to change behaviour on social
and health related issues. An organisation that works towards creating awareness ----------------------
about AIDS also aims to bring about a change in behaviour of individuals. All
----------------------
the individuals would in this case be its customers and the organisational goals
would be measured in terms of awareness created or behavioural change ----------------------
2. Ideas, goods and services.” ----------------------
It is not only physical products that satisfy customer needs. As per Phillip
Kotler, marketing people are involved in marketing ten types of entities: ----------------------
• Goods – (motorcycle, ice-cream) ----------------------

• Services – (beautician, lawyer, education) ----------------------
• Experiences – (amusement parks, trekking expedition to Ladakh)
----------------------
• Events – (a cricket match, Olympics)
----------------------
• Persons – (all celebrities need marketing)
• Places – (marketing Kerala as a holiday destination, marketing Tamil ----------------------
Nadu as an ideal location to set up a new industry) ----------------------
• Properties – both moveable (mutual funds, equities, bonds) and
----------------------
immoveable (real estate)
• Organisations – ( the companies themselves, UNICEF, CRY) ----------------------
• Information – (news magazines, websites etc.) ----------------------
• Ideas – (Political parties need to market their ideologies). ----------------------
3. “Planning and executing the conception, pricing, promotion and
distribution of ideas, goods and services.” ----------------------
No exchange can be created between an organisation and a customer unless ----------------------

a product (whether tangible or intangible) is created to satisfy the customer
need. The product has to be priced, communicated to the customer and made ----------------------
available to him. All this requires careful analysis, planning and execution of ----------------------
programs.
----------------------
----------------------

Notes 1.3 PHILOSOPHIES GUIDING A COMPANY’S
MARKETING EFFORTS
----------------------
All marketing activities have to be carried out under well thought out
---------------------- business philosophies. There are essentially six philosophies, which guide the
company’s marketing activities:
----------------------
• The Production Concept
----------------------
• The Product Concept
---------------------- • The Selling Concept
---------------------- • The Marketing Concept
---------------------- • The Customer Concept
• The Societal Marketing Concept
----------------------
These philosophies have evolved over time. The production concept
---------------------- and product concepts were prevalent and relevant during the early to mid 20th
---------------------- century. Towards the later part of the 20th century, organisations adopted the
marketing concept. The customer concept and societal marketing are prevailing
---------------------- philosophies of doing business today.
---------------------- 1.3.1 The Production Concept

This is the earliest philosophy of doing business. This concept states that
----------------------
customers want basic products that are mass produced, widely available and at
---------------------- the lowest price. The belief is that “one size fits all”.
Companies that follow this philosophy believe that:
----------------------
• Companies must create standard products, which can be mass-produced.
----------------------
• Companies need to emphasise production efficiency and achieving
---------------------- economies of scale.
---------------------- • Mass distribution of products is the key to success.

This philosophy, though not popular today, would still be relevant for
---------------------- very basic commodities such as salt, public utilities such as water and electricity
---------------------- and mass urban transportation. This orientation is still relevant in developing
economies, where standard of living is lower, and large population are first
---------------------- time consumers of even basic products like soaps, toothpaste etc. The vast rural
economy in India would be one such market.
----------------------
----------------------
Companies guided by this philosophy believe that:
---------------------- • Customers favour products that are highly engineered.
---------------------- • Customers favour products that are of the highest quality.
---------------------- • Customers are interested in innovative products.

Whilst on the face of it, there appears to be nothing amiss with this
----------------------
philosophy, companies solely guided by this philosophy may end up creating
fantastic products that offer no real utility to customers. Such organisations Notes
often become inward looking, fall in love with their products and fail to look at
----------------------
Companies that are guided by this concept believe that: ----------------------
• Customers if left alone, exhibit buying inertia. ----------------------
• Customers have to be coaxed and cajoled into buying products. ----------------------
• Companies must invest heavily in aggressive selling and promotion.
----------------------
Often the selling concept, production or even product concepts co-exist in
organisations. Companies that have built up huge capacities to derive economies ----------------------
of scale, face over-capacities when the markets slow down. To continue selling
the huge volumes they produce, they have resort to selling concept. Likewise, ----------------------
companies that follow the product concept, invest heavily in their highly ----------------------
sophisticated products. When they find a no takers for such products, they often
have to resort to hard selling tactics. ----------------------
Marketing Myopia ----------------------
The term marketing myopia means biased or prejudiced mind or narrow
----------------------
mindelness.
Theodore Levitt (the legendary professor of Marketing at Harvard) stated ----------------------
in his landmark research paper, that companies that follow the production ----------------------
concept, product concept and selling concept inevitably become myopic or
shortsighted and end up losing their businesses altogether. ----------------------
His research was based on several industries, which, at that time (1960’s), ----------------------
were facing bankruptcy. The Railroads were facing intense competition from
other industries such as airline travel, cars and buses. Hollywood barely escaped ----------------------
being totally ravaged by television, although many studios simply disappeared.
----------------------
In this landmark research paper, which holds great value especially today,
Ted Levitt stated that myopia can acquire several forms and manifests itself in ----------------------
organisations through the following symptoms:
----------------------
• Narrow Definition of Business
----------------------
Companies define their businesses in terms of products rather than in
terms of customer needs, because of which they become either product or ----------------------
selling oriented.
----------------------
Levitt stated: “customers buy ¼” holes and not ¼” drill bits”.
What this means is that customers primarily buy a drill bit as it serves the ----------------------
need to make a hole. Hence, the customer need is to make a ¼” hole in the ----------------------
wall, and not the drill bit. Further analysis would reveal that the customer
probably wants to make a hole in the wall, as he desires to either hang or ----------------------
fix something on the wall. So the real need is not even to make the hole,
but to hang or fix something on the wall. Now, if a better solution comes ----------------------
along, which would serve the need of hanging or fixing something on ----------------------

Notes the wall in a better way, the customer would switch to buying the better
alternative. For instance, a very strong adhesive capable of handling great
---------------------- loads may eliminate the necessity to even make a hole in the wall, yet
serve the customer’s need in a far more convenient way.
----------------------
Companies must understand the real needs of customers that they are
---------------------- attempting to satisfy, and must define their businesses in terms of those
needs. Cinema producers must define their businesses as that of providing
----------------------
entertainment and not just in terms of making movies. Customers have
---------------------- several entertainment options such as sitting at home and watching his
favorite serial on Television, going out for a meal with friends or going to
---------------------- the movies etc. Hence, in a sense the movie industry is actually competing
with all forms of entertainment.
----------------------
Bharat Petroleum, a leading petroleum company, now defines its business
---------------------- as that of providing energy and fuel solutions to its customers. As fossil
fuels are increasingly replaced by other greener energy and fuel options
----------------------
over this century, customer will switch from petrol and diesel to these
---------------------- newer energy solutions. The company provides its corporate clients entire
fuel management systems, energy audits and technical consultation.
---------------------- Bharti Televentures does not define its business as that selling cellular or
landline services, but as that of marketing communication technologies.
----------------------
• Pre-occupation with Product or Technology
----------------------
Companies become product features or technology oriented rather
---------------------- solution oriented.
---------------------- Companies that become excessively obsessed with their products or

technologies, fail to realise that both products and technologies are the
---------------------- means to an end. Customers do not buy the technology per se, what
they buy is a better solution to their problems, which is a result of that
---------------------- technology. If a technology fails to provide a better solution to problems,
---------------------- customers will reject it.
• The belief that a product is forever and has no substitute
----------------------
Companies believe in the unchallenged superiority of their product,
---------------------- and, that there can be no effective substitute for it. Post and Telegraph
utilities were for long considered as one of those “forever products”. Yet
----------------------
P&T organisations, all over the world, have lost their business to e-mail
---------------------- and telephone. The Indian P&T department is currently undergoing a
transformation so as to survive in an era dominated by e-mail.
----------------------
• Over Obsession with Mass Production
---------------------- Companies that become over obsessed with mass production lose sight of
---------------------- changing customer needs, and end up being selling oriented. This concept
may hold well in industries, which supply the basic essentials of living or
---------------------- for developing, subsistence economies.
----------------------
• Over optimism about growing markets Notes
A growing economy and growing markets are a source of optimism for
----------------------
all companies. Levitt explains that this can result in complacency and a
false sense of security. “There are only growth companies, no growth ----------------------
industries” he states. Only those companies that can leverage growth
opportunities through proper strategic planning and execution will ----------------------
experience growth. And these companies can grow their top-lines even
----------------------
when markets experience a slowdown. In India, there is much euphoria
about the growth of the Information Technology (IT) and Business Process ----------------------
Outsourcing (BPO) sectors. A number of IT companies both large and
small are competing to participate in this success story. However if you ----------------------
look closely, you will realise , it is only those companies, whether large
----------------------
or small, that have appropriate business and revenue models and proper
growth strategies in place, that are successful. The growth of the industry ----------------------
or economy by itself is not a guarantee of success for organisations.
----------------------
To avoid being “myopic”, companies must periodically ask themselves,
during their strategic planning exercises: ----------------------
• What business are we in?
----------------------
• Do we understand the nature of our business?
----------------------
• What customer needs does our product satisfy and how are those needs
changing? ----------------------
• Which products are we really competing with to satisfy our customer ----------------------
needs?
----------------------
• How can and must we adapt to the changing business environment?
As Charles Batchelor once said, “Businesses which take marketing ----------------------
seriously often face painful choices. They may have to give up a cherished
----------------------
product to move into a more promising area. But the alternative to making what
your customers want, would be making and selling nothing at all.” ----------------------
1.3.4 The Marketing Concept ----------------------
The marketing concept states that only those companies, which are more
effective than competitors in creating, delivering and communicating superior ----------------------
customer value to its chosen target markets, will be successful in meeting their ----------------------
Theodore Levitt explains the contrast between the selling and
marketing concepts as follows: ----------------------
“Selling focuses on the needs of the seller; marketing on the needs of the ----------------------
buyer. Selling is preoccupied with the seller’s need to convert his product into
----------------------
cash; marketing with idea of satisfying the needs of the customer by means
of the product and the whole cluster of things associated with creating and ----------------------
delivering and finally consuming it.”
----------------------
----------------------

Notes
---------------------- Starting point Focus Means Ends
----------------------
Factory Products Selling and Profits through
---------------------- promoting sales volume
---------------------- (a) The selling concept
----------------------
----------------------
---------------------- Target Customer Integrated Profit through

market needs marketing customer satisfaction
----------------------
(b) The marketing concept
----------------------
----------------------
Fig. 1.1: Selling and Marketing Concept
----------------------
The marketing concept of doing business rests on five pillars:
---------------------- a) Target markets
---------------------- b) Understanding customer needs
---------------------- c) Creating products to satisfy those needs

d) Integrated marketing to deliver those products to customers
----------------------
e) Profitability through customer satisfaction
----------------------
These concepts will be briefly introduced in this unit and will be explained
---------------------- in detail later in the SLM.
a) Target Markets
----------------------
A company can rarely satisfy everyone in the market. Not everyone likes
---------------------- the same car, two wheeler, soap, shampoo, mobile phone and movies. Even those
companies that practice the production concept (mass production therefore mass
----------------------
marketing) are able to truly satisfy only a small part of their markets. Marketers
---------------------- must begin by dividing the markets into smaller groups of customers by looking
for people who share homogenous needs. These groups are then identified using
---------------------- variables such as age, income, gender, education, lifestyle, values and attitudes
to name a few. This process is known as market segmentation. (This concept is
----------------------
dealt with in detail in further unit). The marketer than decides which segment
---------------------- presents greater opportunity and the chosen segment then becomes the target
market.
----------------------
----------------------
----------------------
Notes
----------------------
----------------------
Self-Actualisation
(Self-fulfillment)
----------------------
Ego Needs ----------------------

(Prestige, Stratus, Self-esteem)
----------------------
Social Needs ----------------------

(Affection, Friendship, Belonging)
----------------------
----------------------
Safety and Security Needs
(Protection, Order, Stability)
----------------------
----------------------
Physiological Needs
(Food, Water, Air, Shelter, Sex) ----------------------
----------------------
Fig. 1.2: Maslow’s hierarchy of Needs
----------------------
b) Understanding Customer Needs
----------------------
Marketers try to understand not only customer needs and wants but also
whether the customers have the purchasing power and willingness to pay for ----------------------
their wants.
----------------------
Understanding customers’ needs and wants is not a simple task. Other
than the most obvious needs of hunger and thirst, there are several needs that ----------------------
the consumer may not be fully aware of, or that he may not be able to express
those needs. This is because every need that a customer’s experiences has a ----------------------
functional, emotional and social dimension to it. ----------------------
Consider a customer who is a first time buyer of an accommodation.
----------------------
At a functional level: He is trying to satisfy his security needs of a
permanent place of dwelling. ----------------------
The emotional dimension: Since he is a first time buyer, he wants ----------------------
assistance in transaction, as he is unlikely to be aware about the various
formalities involved in the transaction. He is anxious about the purchase and ----------------------
also seeks reassurance in making the deal.
----------------------
The social dimension: He wants to be seen a savvy consumer by his friends
and family. He is also making a statement about his social status and financial ----------------------
independence through this purchase.
----------------------
In this case, the customer would only be able to articulate the need at
the functional level – of wanting to buy a flat. Responding only to the stated ----------------------

Notes or functional needs, leaves the customer feeling shortchanged and therefore
dissatisfied. Successful marketers attempt to uncover the other unstated
---------------------- dimensions to the needs and to create products that fulfill these needs.
---------------------- Companies use various quantitative and qualitative techniques to uncover
needs and wants and estimate demand (Unit5).
----------------------
c) Creating products to satisfy needs
---------------------- Creating a good product is the key element of the marketing concept.
According to Peter Drucker, “Physical products are what companies produce in
----------------------
factories, solutions are what customers buy”.
---------------------- Let us take the example of a refrigerator:
---------------------- The physical elements of the product would be the steel, plastic, Freon
gas, design, internal storage space, etc. These elements would only provide the
---------------------- functional solution of cooling, storage and retaining the freshness of food for a
---------------------- longer period. These elements alone do not constitute the product.
The customer wants timely and convenient availability of the product,
---------------------- assistance – both advice and financial assistance – in purchase of the product.
---------------------- Delivery, installation, after sales service, assurance of performance, aesthetic
appeal, color choices, adjustable storage space are just some of the factors
---------------------- which are a part of the total solution that a customer is buying. Ultimately, what
the customer is also buying is peace of mind and pride of ownership. All these
---------------------- tangible and intangible elements are a part of the product or the value proposition
---------------------- that customer buys. This concept of a product applies to every product, be it
an industrial product, packaged goods, financial services, education or even
---------------------- entertainment.
---------------------- Market leaders do not just satisfy customer needs; rather they surprise
and delight their customers. Customer delight is a strategy of continually and
---------------------- consistently exceeding customer expectations.
---------------------- d) Integrated Marketing to deliver those products to customers :
---------------------- When the company’s various departments work together to serve customer
needs, the result is integrated marketing.
---------------------- Integrated marketing works at two levels:
---------------------- One, at the level of the marketing function itself- various marketing
activates like market research, brand management, sales and distribution and
---------------------- marketing communications must work together to achieve common goals.
---------------------- Two, at the level of the entire organisations, wherein the marketing
concept is imbibed by the entire organisation. The focus of every function of
----------------------
every department is to serve customer needs in a better way. Managers are
---------------------- trained to “wear the customer hat” and to think in terms of how their activities
affect the customer. Donald Peterson, former chairman of the Ford Motor Co.,
---------------------- once remarked, “If we are not customer driven, our cars won’t be either”
---------------------- To foster customer orientation within their organisations, companies
zealously practice both external and internal marketing. External Marketing Notes
is directed towards customers and other stakeholders outside the organisation.
Internal Marketing efforts are directed towards all the employees of the ----------------------
organisation. Companies today hire employees not just for their job skills,
qualifications or experience. They critically look for people who have the right ----------------------
attitudes and want to serve customers. Efforts are then made to provide the right ----------------------
training motivation to enable and empower these employees to perform their
roles. ----------------------
(a) Traditional organization chart (b) Modern customer-oriented organization chart ----------------------
Customers ----------------------
Top
manage- C ----------------------
C u
ment u Front-line people
----------------------
s
s
Middle management
t ----------------------
t
Middle management
o
o
m ----------------------
Top man-
m
Front-line people agement
e ----------------------
e
r
Customers
s r ----------------------
s
----------------------
Fig. 1.3: Organisational Charts
----------------------
e) Profitability through customer satisfaction
The ultimate purpose of any business entity is to earn returns for its ----------------------
shareholders. In the case of non-profit or social organisations, return could be ----------------------
viewed as the ability to attract funds to run their programs and achievement of
the targets set in terms of the mission of the organisation. ----------------------
It is well-established fact the world over, that companies that have ----------------------
embraced the marketing concept have achieved higher returns than their peers.
Indian companies like Mahindra & Mahindra, Bajaj Auto, Maruti Udyog, Jet ----------------------
Airways are just some examples.
----------------------
Companies the world over have realised, that to remain competitive in a
globalised world, and India is fast becoming a part of that world; they will have ----------------------
to embrace the marketing concept.
----------------------
----------------------
Today many companies are moving beyond the marketing concept to the
customer concept. The customer concept, which is essentially a refinement of ----------------------
the market concept, additionally recognises the following changes that have
occurred in many parts of the developed world. ----------------------
• Knowledgeable and sophisticated customers today have h i g h l y ----------------------
individualised wants and want customised solutions.
----------------------

Notes • Wide penetration of broadband connectivity and access to the internet
through a variety of handheld devices.
----------------------
• Advent of electronic payment mechanisms to support the financial
---------------------- transactions.
• The Internet and CRM technologies have enabled companies to capture
----------------------
real time data about individual customers and to track their preferences,
---------------------- purchases and usage patterns over time.
In an attempt to build customer loyalty and recognising the power of
----------------------
customer lifetime value, companies are now practicing mass customisation or
---------------------- “marketing to the segment of one”. (Mass customisation is explained in greater
detail in Unit 7 on Marketing Segmentation).
----------------------
---------------------- As per the McKinsey Quarterly, “The role of and behavior of big
---------------------- businesses will come under increasingly sharp scrutiny. As companies expand
their global reach, and as the economic demands on the environment intensify,
---------------------- the level of societal suspicion about big business is likely to increase. The tenets
of current global business ideology- for example, shareholder value, free trade,
---------------------- intellectual property rights and profit repatriation are not understood, let alone
---------------------- accepted, in many parts of the world.”
Big companies, especially Multinational Corporations will never be loved.
---------------------- But they can be more appreciated if they demonstrate purposefully that they
---------------------- have a conscience. They must balance and juggle conflicting interests of what
is good for their customers and shareholders with what is ethical and in public
---------------------- interest. Corporations like Sony and Microsoft, leaders in gaming industry,
have come under severe criticism, as it is believed that their very popular games
---------------------- glorify and promote violence.
---------------------- Companies that practice the societal marketing concept take their
Corporate Social Responsibility very seriously to prove their good corporate
----------------------
citizenship. The result is a vast reservoir of goodwill.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Notes
Check your Progress 1
----------------------
Multiple Choice Single Response
----------------------
1. ___________states that customers want basic products that are mass
produced, widely available and at the lowest price. The belief is that ----------------------
“one size fits all”.
----------------------
i. The Production Concept
----------------------
ii. The Product Concept
iii. The Marketing Concept ----------------------
iv. The Selling Concept ----------------------
2. What do you understand by Marketing Concept? ----------------------
i. This concept states that only those companies, which are
more effective than competitors in creating, delivering and ----------------------
communicating superior customer value to its chosen target ----------------------
markets, will be successful in meeting their organisational
----------------------
ii. This concept states that customers want basic products that are
mass produced, widely available and at the lowest price. The ----------------------
belief is that “one size fits all”.
----------------------
iii. Companies that practice this concept take their Corporate Social
Responsibility very seriously to prove their good corporate ----------------------
citizenship. The result is a vast reservoir of goodwill.
----------------------
iv. Companies that are guided by this concept believe that:
Customers if left alone, exhibit buying inertia; Customers have ----------------------
to be coaxed and cajoled into buying products; & Companies
must invest heavily in aggressive selling and promotion. ----------------------
----------------------
Activity 1 ----------------------
1. Can you identify examples of companies practicing the production ----------------------

concept, product concept and selling concept of marketing?
----------------------
2. Visit the websites of Bharat Petroleum and Bharti Televentures. The
corporate mission statements of these organisations will tell you how ----------------------
these companies define their businesses. Note how the products they ----------------------
offer their customers are guided by these philosophies.
----------------------
1.4 CUSTOMER VALUE AND CUSTOMER SATISFACTION ----------------------
----------------------
In this extremely competitive world, companies must have and maintain
focus on customer if they want to be the winner. The importance of customer ----------------------

Notes value and customer satisfaction must be understood and then processes should
be built around them. A satisfied customer proves a loyal customer.
----------------------
---------------------- Customer Value is defined as the ratio between the benefits the customer
receives and the costs he has to incur in order to acquire the benefits.
----------------------
Value = Functional Benefits + Emotional Benefits
---------------------- Costs = Monetary + Time + Energy + Psychic
---------------------- Value is derived by the customer when the ratio of benefits to costs is
higher.
---------------------- Costs
---------------------- Monetary costs include the purchase cost or price paid to acquire
something as well the operating and maintenance costs of using the product or
---------------------- service. Customers also have to invest considerable time and energy to acquire
---------------------- certain benefits. There is considerable emotional and social risk that customers
perceive in making any decision, referred to as Psychic Costs. All these costs
---------------------- together are referred to as total perceived costs. Marketers must consider the
total perceived costs that a customer incurs in evaluating, obtaining, using and
---------------------- even disposing off the product, the emotional and social risk perceived and
---------------------- tradeoffs that a customer makes.
Benefits
----------------------
As explained earlier, customers seek not just functional performance, but
---------------------- certain emotional and psychological benefits as well. Marketers must consider
the Total Perceived Benefits that a customer seeks.
----------------------
Value is better understood if it is defined as ‘A value proposition is total
---------------------- perceived benefits.’
---------------------- Total Perceived Costs
---------------------- Customers are “value maximisers”, within the boundaries of limited

knowledge, time, money and mobility. All marketing efforts are therefore
---------------------- directed towards enhancing value to the customer.
---------------------- How can companies increase value to the customer?

The most obvious answer that comes to mind is to reduce prices. Whilst
----------------------
this is certainly a very compelling way of creating value, it is often not
---------------------- sustainable, most easily imitated and has a very short-term effect. Companies
are continually looking for more sustainable ways of creating long-term value
---------------------- for the customer in ways, which are profitable for the organisations as well.
---------------------- The different sources of value could be:
1. Quality Improvements: Customers define quality in fundamentally
----------------------
different way from the way companies view quality. To the customer
---------------------- quality is better performance in relation to the intended purpose. To
companies quality is defects per million, specifications and tolerances
---------------------- of the various components and materials. Not all these, no doubt, are
very essential to the performance of the product, but they must be viewed Notes
as the means to the end. Unless these improvements result in enhanced
performance, customers will not derive value. The “intended purpose” of ----------------------
the product is a very important part of this quality definition. It is important
to understand the buyer’s expectations in terms of product performance, ----------------------
as customer value quality only in relation to their expectations. ----------------------
2. Add Attributes or Features that enhance Performance: Customers
----------------------
value only those product features that enhance performance. All other
product features are viewed as distracters or irritants and only add to the ----------------------
cost of the product without adding any value to the customers.
----------------------
In the HBR article “Discovers your product’s Hidden Potential” the
authors, identified ways in which company’s can find a better fit between their ----------------------
products and customer needs, thereby creating value for the customer.
----------------------
The first step is to observe how customer buy, use and dispose of the
product. This is a very simple yet very important rule of marketing. Then map ----------------------
the entire process to uncover salient attributes that are important to customers.
Companies can uncover these attributes in four ways. ----------------------
• Identify parallel needs: Usually numerous needs are being satisfied in ----------------------
parallel to the most obvious one. For a person who just wants a cup of coffee
at home, the taste, aroma and temperature would be sufficient attributes to ----------------------
create value. However, the same person, ordering coffee at a coffee shop ----------------------
is also trying to satisfy parallel needs of socialising and entertainment.
The value derived in both cases is different and consequently so will the ----------------------
price that the customer is willing to pay.
----------------------
• Identify purchase patterns: Observe quantity and pack sizes preferred
by customers. Observe also the time and occasion of use. Aerated beverage ----------------------
companies initially offered their products in glass bottles in standard sizes
of 250 ml. They observed that most customers were unable to consume ----------------------
entire 250 ml on a single occasion, and because of the glass packaging, ----------------------
were not able to store for later use. This resulted in substantial wastage,
which “pinched” the customer and often resulted in postponement of ----------------------
purchase. The companies responded by offering larger quantities as
“multiple serve pack” in Plastic PET bottles, so the beverage could be ----------------------
consumed at will and at the same time offered a “single serve pack” in a ----------------------
glass bottle at Rs. 5.00.
• Observe how customers actually use the product: Marico Industries ----------------------
gained valuable insight from simply observing customers use the ----------------------
product. In the winter months, coconut hair oil solidifies, making it very
cumbersome to use. For their Parachute hair oil brand, they created wide, ----------------------
open mouth tin cans, as opposed to the glass and plastic bottles in which
hair oil is traditionally sold. This made the product easily usable in the ----------------------
winter months, creating tremendous value to the customer. ----------------------
----------------------

Notes • Identify customers’ perceptions of risk
Customers’ perceptions of risk explicitly address ways to reduce the risk
----------------------
customers perceive in purchasing a product becomes an important way of
---------------------- creating value.
Companies can reduce the buyer’s costs and risks by:
----------------------
• Reducing the operating and maintenance costs
----------------------
• Reducing cost of installation
---------------------- • Arranging financing Assistance and
---------------------- • advice in product purchase especially for high end durables
---------------------- 3. Reduce risk of product failure
Buyers operate under several constraints. Companies must understand
----------------------
these constraints; hence, the concept of customer perceived value is a very
---------------------- useful framework that applies to almost all product categories and situations.
Companies must assess the total customer benefits and customer costs associated
---------------------- with product offer. This defines the total value proposition. Finally, look at the
different ways in which the customer’s total experience of using the product can
----------------------
be enhanced.
---------------------- 1.4.2 Customer Satisfaction
---------------------- Customer satisfaction is defined as “A person’s feelings of pleasure or
disappointment resulting from comparing a product’s perceived performance
---------------------- in relation to his expectations from that product”. If performance falls short
---------------------- of expectations, customers are dissatisfied and may switch to competitors. If
performance matches expectations, customers are satisfied. If performance
---------------------- exceeds expectations, customers are delighted.
---------------------- It is generally believed that satisfied customers will be loyal to the company.
However, that is not true because the link between customer satisfaction and
---------------------- customer loyalty is not proportional. Even satisfied customers may switch to a
competitor, simply because the competitor is able to exceed their expectations.
---------------------- Thus, companies have learnt that in competitive environments, Customer
---------------------- loyalty can only be gained by consistently delivering product performance that
exceeds expectations. A customer’s decision to be loyal or to switch is based on
---------------------- the entire experience with the product and the company.
---------------------- But why is Customer Loyalty the focus of all companies today?
Here are some interesting facts bearing on the need to build customer loyalty:
----------------------
• Acquiring new customers can cost companies five times more than the
---------------------- costs involved in satisfying and retaining current customers.
---------------------- • An average company loses at least 10% of its customers every year. In
some industries this “customer churn” rate maybe even higher.
----------------------
• A 5% reduction in the customer defection rate can increase profits by 25%
---------------------- to 85% depending on the industry.
• The customer profit tends to increase over the life of the retained customer. Notes
[Source: Fredrick Freichheld, The Loyalty Effect, HBS Press 1966]
----------------------
A loyal customer not only buys product every time, but buys more as the
companies introduce new products and product upgrades. He talks favorably ----------------------
about the company and its products, thus spreading positive word of mouth.
----------------------
Customer Loyalty is not just the result of producing good products, but
also a matter of building and maintaining a long-term relationship with the ----------------------
customer. Companies that both understand and value customer loyalty practice
----------------------
Customer Relationship Marketing (CRM).
CRM is essentially the marketing concept of doing business with an ----------------------
additional emphasis on the following customer strategies: ----------------------
• Reduce the rate of customer defection
----------------------
• Increase the longevity of the customer relationship
----------------------
• Enhance the growth potential of each customer, through “share of wallet”,
cross selling and upgrading. ----------------------
• Making low profit customers profitable or even terminating them.
----------------------
[Source: Peppers and Rogers: One-to-One Future]
----------------------
Companies that practice CRM invest heavily in Identifying and knowing
their customer, capturing vast amounts of information and data at every customer ----------------------
contact point. The data captured is collected and stored in a data warehouse.
Through data mining, the statisticians sift through the data to identify purchasing ----------------------
patterns and market segments. Developing value propositions for specific ----------------------
customer groups closely tailored to their needs.
----------------------
----------------------
Multiple Choice Single Response ----------------------
1. is defined as the ratio between the benefits the
----------------------
customer receives and the costs he has to incur in order to acquire the
i. Customer Value ----------------------
ii. Value ----------------------
iii. Costs ----------------------
iv. Customer Satisfaction
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Activity 2
----------------------
Have you ever experienced “Customer Delight”, when a product or
----------------------
service performance exceeded your expectations? What was your initial
---------------------- reaction? Does the product continue to live up to your expectations or were
you disappointed with future purchases? Examine the reasons.
----------------------
---------------------- 1.5 MISCONCEPTIONS ABOUT MARKETING

----------------------
There are several misconceptions that people have about the marketing
---------------------- function. We will clarify the more important ones.
1. Marketing is considered synonymous with advertising and promotion.
----------------------
Every organisation, be it a tractor manufacturer, a soap manufacturer, an
---------------------- IT company or even a hospital, needs to communicate with its customers.
---------------------- However, every organisation does not need to advertise. Advertising is
just one tool or method of communication, appropriate for certain type
---------------------- of messages to be communicated. Similarly, just because a company
advertises heavily, it does not therefore imply that it is marketing its
---------------------- products well. We have seen earlier, in the marketing concept of business,
---------------------- that marketing in fact involves a number of other activities. Integrated
Communications is just one of them. Can you recall the others?
---------------------- 2. Marketing is only for consumer product companies.
---------------------- An organisation exists because customers exist. Every organisation, be it
an industrial chemicals manufacturer or an auto components manufacture,
---------------------- whose customers would be other organisations, needs to market its
---------------------- products and services. This misconception exists because marketing
activities of such organisations are not visible to individuals; hence, it is
---------------------- believed that such organisations do not need the marketing.
---------------------- 3. Marketing is a cost, not an investment.
If an organisation is spending money on marketing at random, without a
----------------------
clear objective or strategy in place, then it is probably an expense and not
---------------------- generating any returns. Well-conceived and well-executed marketing plans
generate long-term returns, which can be quantified. Many organisations
---------------------- make the mistake of emulating a strategy just because it was successful
for another company and then expect similar results and returns.
----------------------
----------------------
----------------------
----------------------
----------------------
Notes
----------------------
Multiple Choice Multiple Response
----------------------
1. What are the misconceptions about marketing? Choose the correct
options from the choices given below. ----------------------
i. Marketing is considered synonymous with advertising and ----------------------
promotion
----------------------
ii. Marketing is only for consumer product companies
iii. Marketing is a cost, not an investment ----------------------
iv. Marketing is only a concept and not effective in real world ----------------------
----------------------
Activity 3
----------------------
Marketing is selling or selling is marketing. What do you think? Is it the ----------------------
same? (Remember the difference between selling and marketing.)
----------------------
Summary ----------------------
• The ultimate goal of all marketing activity is to facilitate mutually satisfying ----------------------
exchanges between parties. The activities include the conception, pricing,
----------------------
promotion and distribution of ideas, goods and services.
• The role of marketing and character of marketing activities within an ----------------------
organisation are strongly influenced and guided by the organisations ----------------------
philosophy and orientation. There are six philosophies under which
companies carry out marketing activities. ----------------------
• The Production, product and selling concepts of doing business are no ----------------------
longer considered relevant (with exceptions of course), as they fail to
focus on customer needs. ----------------------
• Companies that do not define their businesses in terms of customer needs ----------------------
suffer from Marketing Myopia and may end up losing their markets
----------------------
• The marketing concept of business is the most relevant philosophy today.
This philosophy rests on five key pillars of identifying target markets, ----------------------
understanding customer needs, creating products to satisfy those needs,
integrated marketing to deliver products and services and that long-term ----------------------
profitability can only be earned through customer satisfaction.
----------------------
• The customer concept and societal marketing concept are refinements of
the marketing concept of doing business. These concepts recognise the ----------------------
importance of customer lifetime value and that organisations should be
----------------------
responsible and good citizens of the countries they operate in.
----------------------

Notes • Customer Loyalty is a key issue in most organisations. Companies must
balance new customer acquisition with customer retention. Customer
---------------------- Loyalty can only be created by consistently delivering value to the
customer in excess of his expectations.
----------------------
• There are several sources of value to a customer, price being only one of
---------------------- them. Companies must look at the several ways in which it can create and
consistently deliver long-term sustainable value to its customers.
----------------------
---------------------- Keywords
---------------------- • Customer Value: It is defined as the difference between what a customer
gets from a product and what he or she has to give in order to get it
----------------------
• Customer Satisfaction: The degree of satisfaction provided by the goods
---------------------- or services of a company as measured by the number of repeat customers
----------------------
----------------------
1. Discuss the differences between the sales and marketing orientations.
----------------------
2 Answer the questions below for each of the products mentioned: a search
---------------------- engine (e.g. Google, A9 etc.), packaged tea, an automobile.
---------------------- a. State the core benefit or solution.
---------------------- b. State the basic product and what are the buyer’s minimal expectations
today.
----------------------
c. Find out how some companies have found ways of augmenting the
---------------------- product for different target markets.
d. What are the potential products that companies are working on?
----------------------
How is the product likely to be in future?
---------------------- 3 Explain why reducing price is not the only way of creating value. What
are the different sources of value to a customer? What are the ways in
----------------------
which company’s can create value? Give some examples of your own.
---------------------- 4 Why is customer loyalty so important to companies today? Explain why
---------------------- it makes business sense to make efforts to retain customers.
---------------------- Answers to Check your Progress

---------------------- Check your Progress 1
---------------------- Multiple Choice Single Response
---------------------- 1. states that customers want basic products that are mass
produced, widely available and at the lowest price. The belief is that “one
---------------------- size fits all”.
---------------------- i. The Production Concept
2. What do you understand by Marketing Concept? Notes
i. This concept states that only those companies, which are more
----------------------
effective than competitors in creating, delivering and communicating
superior customer value to its chosen target markets, will be ----------------------
successful in meeting their organisational goals.
----------------------
1. is defined as the ratio between the benefits the ----------------------
customer receives and the costs he has to incur in order to acquire the
benefits. ----------------------
i. Customer Value ----------------------

Check your Progress 3 ----------------------
----------------------
1. What are the misconceptions about marketing? Choose the correct options
from the choices given below. ----------------------
i. Marketing is considered synonymous with advertising and ----------------------
promotion
----------------------
ii. Marketing is only for consumer product companies
iii. Marketing is a cost, not an investment ----------------------
----------------------
Suggested Reading
----------------------
1. Dillon, William R., Thomas J. Madden and Neil H. Firtle. Marketing ----------------------
Research in a Marketing Environment. St Louis: Time Mirror/Mosby
College Publishing. ----------------------
2. Ramaswamy, V.S. and S. Namakumari 2002. Marketing Management - ----------------------
Planning, Implementation and Control (Global Perspective). New Delhi:
Macmillan India Ltd. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
The Marketing Environment
UNIT
2
Structure:
2.1 Introduction
2.2 Understanding the External Environment
2.3 Identifying Major Macro Environment Forces
2.3.1 Socio-Cultural Factors
2.3.2 Demographic Factors
2.3.4 Political and legal Factors
2.3.5 Economic Factors
2.3.6 Natural Environment Factors
2.4 Changes in Business and Marketing
2.4.1 E-Commerce
2.4.2 Web Sites
2.5 Macro Environmental Changes and the New Indian Consumer
Summary
Keywords
Suggested Reading
The Marketing Environment 23

Notes
Objectives
----------------------
----------------------
• Explain the importance of scanning the external environment
----------------------
• Specify the macro environmental forces that affect industries and
---------------------- organisations
• Identify macro-environment elements
----------------------
• Assess how business and marketing have changed over the years
----------------------
• Explain the macro environmental changes in India post de-regulation
---------------------- and its impact on the Indian consumer
----------------------
2.1 INTRODUCTION
----------------------
There are many variables that operate within an organisations environment
---------------------- that have a direct or indirect influence on its strategy. A successful organisation
is one which understands and can anticipate and take advantage of changes
---------------------- within their environment.
---------------------- An organisations operating environment can be analyzed by looking at:
---------------------- • External forces (those factors that an organisation has no control over),
• Internal forces (factors that an organisation has direct control over)
----------------------
An organisation’s macro environment consists of external factors in the
---------------------- organisation’s surroundings that have the potential to affect the organisation’s
strategies. Unless marketing managers understand the external environment,
----------------------
the firm cannot intelligently plan for the future. Many organisations put together
---------------------- teams of specialists to continuously put collect and evaluate information,
a process known as environmental scanning. This task usually falls upon
---------------------- marketers, as, more than any other group within the organisation; marketing
managers need to be able to track trends and opportunities.
----------------------
---------------------- 2.2 UNDERSTANDING THE EXTERNAL ENVIRONMENT

---------------------- Macro environmental variables include socio-cultural, technological,
political-legal, economic, and ecological factors. The goal of environmental
----------------------
scanning is to better understand the threats and opportunities created by the
---------------------- variables and how strategic plans need to be adjusted so the firm can obtain and
retain competitive advantage. Many, once successful businesses have ceased
---------------------- to exist today, simply because they failed to monitor changes in their external
environment and to adapt their business models to the new realities of the
----------------------
markets.
---------------------- It’s an old adage that “the only thing constant is change”, and yet many
companies fail to see change as an opportunity; they ignore or resist change
----------------------
until it is too late. Organisations as mighty as General Motors and IBM have Notes
passed through though times because they were slow to respond to major
environmental shifts. ----------------------
The macro environment consists of forces that originate outside of an ----------------------
organisation and generally cannot be altered by actions of the organisation.
In other words, a firm is influenced by changes within this element of its ----------------------
environment, but cannot itself influence the environment. Figure 1 indicates the
----------------------
indirect influence of the environment on the organisation.
----------------------
Sociocultural ----------------------
Legal-Political
Elements
Elements ----------------------
Organisation ----------------------
Technological Economic
Elements Elements ----------------------
----------------------
Ecological
Elements ----------------------
----------------------
Fig. 2.1: Indirect Influence of the Environment on the Organisation
----------------------
Elements of the Macro environment
----------------------
There are lots of little changes taking place in our environment and one of
the most difficult tasks is to ascertain their impact. Each change, when viewed ----------------------
in isolation, could easily be rejected as insignificant. But over a period, when
taken together can result in a paradigm shift in an industry. ----------------------
When Napster first launched free music downloads on the net, there was a ----------------------
huge hue and cry the world over and they were hailed as “music pirates”, by
the entire music industry. However the “Napster movement” has significantly ----------------------
changed forever the way people will buy and listen to music in future. Amongst ----------------------
those companies who saw this as mega opportunity, was Apple Computers,
who have now virtually created a new digital music industry with the launch ----------------------
of their hugely successful products - the iPod (compact digital music player)
and iTunes (the online music store). Apple is now set to change the entire ----------------------
entertainment industry with its video iPod. ----------------------
Phillip Kotler identifies three types of changes in the macro environment: ----------------------
fads, trends and mega trends. A fad is an unpredictable, short lived change that
has no social, economic or political significance. Pokemon and Beyblades are ----------------------
recent examples of fads and although they represented commercial success for
----------------------
their companies, it was more a matter of good luck and timing than anything else.
Fads represent short term commercial success and are extremely unpredictable; ----------------------
hence companies need to be very prudent about investments being made in such
opportunities. ----------------------

Notes Trends on the other hand, are more predictable and durable changes, as
they reveal the shape of the future. Companies need to recognise these trends
---------------------- and assess their impact on their industries. The popularity of spirituality as an
anchor or support for the fast paced modern lifestyles explains the popularity
---------------------- of Art of Living programs and TV channels like Aastha; the tendency for older
---------------------- people to act and feel younger than their age, has ‘created’ lucrative markets
for products like hair color, anti ageing cosmetics and cosmetic surgery. Trends
---------------------- merit close attention as marketers need to adapt their products and marketing
programs to these trends, rather than ignoring them. Not all trends represent
---------------------- business opportunities, even though it may be technically feasible to leverage
---------------------- the opportunities. In depth market research is essential to determine the
commercial potential of each trend.
----------------------
John Naisbitt, in his book ‘Mega trends 2000’ identified mega trends as
---------------------- socio-economic, political and technological changes that are slow to form, but
once in place, the influence lasts for a long time. Naisbitt identified Global
---------------------- Lifestyles and Cultural Nationalism as some of these mega trends. Since mega
trends have far reaching impact on every aspect of their businesses, marketers
----------------------
need to pay close attention to how these mega trends will unfold and their
---------------------- impact on business.
One mega trend of the last several years has been globalisation – the
----------------------
exponential growth of truly global organisations. The key benefit of global
---------------------- organisations is the ability to exploit regional differences in needs (customers)
and production capabilities (worker expertise, costs, government aid, etc.). In
---------------------- addition, the markets in many countries have become largely saturated for many
products. Increased globalisation has had a number of effects. In combination
----------------------
with changing demographics, globalisation is causing a rapid increase in
---------------------- diversity in both the marketplace and the workplace. More than ever, people
have to interact with and coordinate with people from diverse economic
---------------------- backgrounds and cultures. This in turn has meant that employees need new
relational skills to succeed.
----------------------
Another effect of globalisation is increased competition. Back when
---------------------- national borders effectively sealed off national economies, the major competitors
for any given company were usually local. For example, in the car industry,
----------------------
each industrialised country might have 3 or 4 major auto makers, of which one
---------------------- was usually dominant. Splitting up a market among 3 or 4 players, some of
whom could be quite weak, was often a less than challenging affair; but once
---------------------- globalisation made it possible for companies all over the world to compete,
the number of players went up radically, and more importantly, the number of
----------------------
really good competitors (the top players in each national market) went up as
---------------------- well.
---------------------- IBM released a landmark study revealing the key trends and innovations
that will define the global banking industry in 2015.
----------------------
The study “Banking 2015: Defining the Future of Banking”
---------------------- (available at www.ibm.com/services/us/index.wss/ibvstudy/imc/a1022912)
forecasts trends in banking to produce a unique insight into the competitive Notes
forces that will face bankers in the next 10 years. The study also spotlights the
----------------------
emerging business and technology innovations and societal trends that will
propel and shape the industry’s transformation. ----------------------
The survey by IBM’s market research unit, The Institute for Business Value,
----------------------
comes at time of rapid change fuelled by new information technology, global
regulations and emerging markets in Asia, Eastern Europe and South America. ----------------------
Worldwide, total financial services revenue is forecast to experience compound
annual growth of 7.1 percent between 2000 and 2015, from US $2 trillion to ----------------------
US $5.6 trillion. In the Asia-Pacific region, IBM predicts a growth rate of
----------------------
about 7.6 percent.
IBM found five key trends will determine market success in 2015 : ----------------------
1) The powerful customer. Customers will be smart, informed and ----------------------
savvy users of financial services. They will only be interested in service
providers that can meet their very specific individual needs. ----------------------
2) Specialised niche competitors. Market consolidation will continue, ----------------------

making the mega banks even bigger. But they will face swarms
of nimble competitors including community banks, industry specialists ----------------------
and non-bank banks that specialise in providing specific services. ----------------------
Partner- competitor relationships will arise.
3) A new workforce. The need for productivity and efficiency will create ----------------------
new sources labor and work practices. But there will also be intense ----------------------
competition to attract and retain talent.
----------------------
4) Regulated transparency. The need to comply with globally enforced
standards of transparency and accountability will force the adoption by ----------------------
banks of integrated, enterprise-wide systems and processes.
----------------------
5) Sharply focused technology. The enabler of all this change will be
technology that supports rapid, accurate decision making and greater ----------------------
operational flexibility and efficiency. The successful specialists will be
those who can track and analyze specific customer needs and speedily ----------------------
meet them with profitable, reliable products.
----------------------
IBM’s General Manager for Global Banking, Mark Greene, says the
study shows what banks must do now in order to stay competitive over the ----------------------
next ten years. “By 2015, we will live in an intensely customer-centric market
----------------------
that is dominated by global mega banks and densely populated by specialist
financial services providers. Fierce competition, global regulation and ----------------------
technology will reshape bank and non-bank structures.
----------------------
“Technology will also drive fundamental changes in workforce
disposition, which will have substantial follow-on effects for productivity, ----------------------
efficiency and profitability,” Greene says. “These trends are already
evident but, as they become entrenched, there will be profound changes to the ----------------------
competitive drivers of global banking.” ----------------------

Notes
----------------------
----------------------
1. What are the elements of macro environment?
----------------------
i. Economical Elements
---------------------- ii. Technological Elements
iii. Ecological Elements
----------------------
iv. Micro Elements
----------------------
---------------------- Activity 1
---------------------- Like some of the trends indicated above, can you name some other trends
---------------------- that have had a similar impact?
----------------------
2.3 IDENTIFYING MAJOR MACRO ENVIRONMENT FORCES
----------------------
The external environment of an organisation can be analyzed by
---------------------- conducting a P.E.S.T analysis (also referred to as STEP analysis). This is a
simple analysis of the Political, Economical, Social and Technological factors.
----------------------
In recent times the PEST analysis has expanded to include various other factors
---------------------- like ecological and even international factors within the macro environment
which are important for a particular industry. The influence of these factors will
---------------------- greatly vary from industry to industry.
---------------------- 2.3.1 Socio-Cultural Factors
---------------------- The socio-cultural dimensions of the environment consist of attitudes,

customs, lifestyles, and values that characterise the society in which the firm
---------------------- operates. Sociocultural factors include anything within the context of society
that has the potential to affect an organisation. Social changes are the most
---------------------- difficult external variables in terms of truly understanding their impact on
---------------------- society.
Norms (standard accepted forms of behavior) and values (attitudes
---------------------- toward right and wrong), differ across time and between geographical areas.
---------------------- Lifestyles differ as well among different ethnic groups. Between different
countries, sometimes even within a country, there are substantial differences in
---------------------- attitudes, beliefs, motivation, morality, superstition, and perception, as well as
other characteristics.
----------------------
Geert Hofstede, a renowned Dutch sociologist, developed a model
---------------------- in which worldwide differences in culture are categorised according to five
dimensions.
----------------------
----------------------
These dimensions include: Notes
• Power distance—the degree of inequality among people which the
----------------------
population of a country considers normal.
• Individualism vs. collectivism—the degrees to which people in a country ----------------------
prefer to act as individuals or as members of a group.
----------------------
• Masculinity vs. femininity—the degree to which values like assertiveness,
performance, success, and competitiveness are used to guide decisions ----------------------
versus values like the quality of life, warm personal relationships, service,
----------------------
and solidarity.
• Uncertainty avoidance—the degree to which citizens of a country ----------------------
prefer structured over unstructured situations, rigidity of procedures, or ----------------------
willingness to accept risk and potential failure.
• Time orientation—the extents to which decisions are based on long- ----------------------
term orientation versus short-term orientation, past versus present versus ----------------------
future, and punctuality.
This worldwide study conducted by Geert Hofstede, has important ----------------------
implications for the way companies will conduct business in different markets. ----------------------
In this study Indian society scores very high on power distance and uncertainty
avoidance, but low on time orientation. The US was found to be a highly ----------------------
individualistic society as opposed to Japan which scores very high on collective
style of functioning and decision making. ----------------------
2.3.2 Demographic Factors ----------------------

Demography is a study of the country or regions population statistics such ----------------------
as size, growth rate, age distribution, geographical distribution, ethnic mix,
educational levels, household patterns, regional characteristics amongst others. ----------------------
1. Population age mix ----------------------
A change in the age mix of the population has many potential consequences ----------------------
for organisations. As the age mix changes, the demand for products and services
also changes. For instance, The US, Japan and many countries of Europe ----------------------
are seen as ageing countries because the sharp decline in the birthrate and
improvement in health care have contributed to an increase in the average age ----------------------
of the population in the United States. ----------------------
It is estimated that by 2015 more than 35% of the population of these
countries will be over 65 years of age. India, Brazil, Mexico in contrast are ----------------------
‘Young” countries: A third of India’s population was below 15 years of age in ----------------------
2000. In 2020, the average Indian will be only 29 years old, compared with 37
in China and the United States, 45 in Western Europe, and 48 in Japan. ----------------------
Many firms that traditionally targeted their products toward youth ----------------------
are developing product lines that appeal to an older market. Clothing from
Levi Strauss & Co. was traditionally popular among young adults. While its ----------------------
popularity in this market has waned, the firm has been able to develop a strong
----------------------
following in the adult market with its Dockers label.

Notes Other firms are developing strategies that will allow them to capitalise on
the aging population. Firms in the health-care industry are expected to do well,
---------------------- given the increasing age of the U.S. population. They are projected as a growth
segment of U.S. industry simply because of the population demographics.
----------------------
2. Education Levels
----------------------
Rising educational levels have a major impact on organisations. Higher
---------------------- educational levels allow people to earn higher incomes than would have
been possible otherwise. The increase in income has created opportunities to
---------------------- purchase additional goods and services, and to raise the overall standard of
living of a large segment of the population. Educational levels of the target
----------------------
markets directly determine their knowledge and awareness of products.
---------------------- When Washing machines were first introduced to the Indian markets,
companies had to educate the customers about the utility of the product as there
----------------------
was limited awareness. One manufacturer advertised the benefits as “it washes,
---------------------- rinses and even dries your clothes; in just a few minutes you are ready for the
show.”
----------------------
Increased educational level has also led to increased expectations of
---------------------- employees, and has increased job mobility. Employees are less accepting of
undesirable working conditions than were employees a generation ago. Better
---------------------- working conditions, stable employment, and opportunities for training and
---------------------- development are a few of the demands businesses confront more frequently as
the result of a more educated workforce.
---------------------- 3. Ethnic markets and subcultures
---------------------- Countries and regions vary in their ethnic characteristics. The United
States is considered a multicultural society, where people come from virtually
---------------------- all nations. Although initially The US was considered as a large ‘melting pot’
---------------------- in which the different national identities would blend and assume one national
identity; this did not happen as people of different nationalities retained their
---------------------- cultural roots. The US is now considered a ‘salad bowl society’, with different
nationalities retaining their strong ethnic roots.
----------------------
India is another interesting case of no single Pan Indian identity.
---------------------- Different subcultures and languages make up the 1.2 billion population and
each subculture has very distinct attitudes and lifestyles. This has enormous
----------------------
implications for marketing programs. In India, it is not uncommon to find
---------------------- marketing communications created specifically for regions.
----------------------
Every new technology is a force for “Creative Destruction”. Companies
---------------------- that fail to embrace newer technologies will inevitably see their businesses
---------------------- decline.
Changing technology may affect the demand for a firm’s products and
---------------------- services, its production processes, and raw materials. Technological changes
---------------------- may create new opportunities for the firm, or threaten the survival of a product,
firm, or industry. Technological innovations continue to move at an increasingly Notes
rapid rate.
----------------------
Technology can change the lifestyle and buying patterns of consumers.
Recent developments in the field of microcomputers have dramatically expanded ----------------------
the potential customer base and created innumerable opportunities for businesses
to engage in business via Internet. Whereas computers were traditionally used ----------------------
only by large organisations to handle data processing needs, personal computers
----------------------
are commonly used by smaller firms and individuals for uses not even imagined
fifteen years ago. Similarly, new developments in technology led to a reduction ----------------------
in prices for computers and expanded the potential market.
----------------------
Technology also changes production processes. The introduction of
products based on new technology often requires new production techniques. ----------------------
New production technology may alter production processes. Robotics represents
one of the most visible challenges to existing production methods. Robots may ----------------------
be used in positions considered hazardous for people or that require repetitive,
----------------------
detailed activities.
In some industries, use of robots during the early 2000s increased ----------------------
production and efficiency but resulted in significant numbers of job losses.
----------------------
However, technological innovation can also result in increased job growth. For
example, Ford Motor Company’s $375-million technology update to its Norfolk ----------------------
assembly plant resulted in the ability to build more models on its assembly line
and consequently created about 270 new jobs. ----------------------
There is little doubt that technology represents both potential threats ----------------------
and potential opportunities for established products. Products with relatively
complex or new technology are often introduced while the technology is being ----------------------
refined, making it hard for firms to assess their market potential. When ballpoint ----------------------
pens were first introduced, they leaked, skipped, and left large blotches of
ink on the writing surface. Fountain pen manufacturers believed that the new ----------------------
technology was not a threat to existing products and did not attempt to produce
ball-point pens until substantial market share had been lost. ----------------------
Another technology, the electric razor, has yet to totally replace the blade ----------------------
for shaving purposes. This could be because manufacturers of blades have
innovated by adding new features to retain customers. Manufacturers of fountain ----------------------
pens did not attempt to innovate until the ballpoint pen was well established. ----------------------
It is quite difficult to predict the impact of a new technology on an existing
product. Still, the need to monitor the environment for new technological ----------------------
developments is obvious. ----------------------
Attention must also be given to developments in industries that are not
----------------------
direct competitors, since new technology developed in one industry may impact
companies and organisations in others. ----------------------
2.3.4 Political and Legal Factors
----------------------
The legal environment facing organisations is becoming more complex
and affecting businesses more directly. It has become increasingly difficult ----------------------

Notes for businesses to take action without encountering a law, regulation, or legal
problem.
----------------------
1. Attitudes towards business
---------------------- The political-legal dimension of the general environment also affects
business activity. The philosophy of the political parties in power
----------------------
influences business practices and determines the risks of doing business
---------------------- in a particular country or region. Political stability is a key factor in
determining attractiveness of markets and for setting up of businesses.
---------------------- The legal environment serves to define what organisations can and cannot
do at a particular point in time. A pro-business attitude on the part of
----------------------
government enables firms to enter into arrangements that would not be
---------------------- allowed under a more anti-business philosophy.
2. Legislation regulating business
----------------------
Regulations concerning many business practices differ between states.
---------------------- Tax rates vary widely, with multiple levels of taxation. Local governments
have the potential to affect business practices significantly. Some local
----------------------
governments may be willing to provide incentives to attract business to
---------------------- the area by build industrial parks, service roads, tax holidays, connectivity
to ports, railheads and airports to encourage a desirable business to move
---------------------- into the community.
---------------------- Regulatory measures such as building codes and zoning requirements
differ significantly between communities. Infrastructure such as
---------------------- electricity, telecommunications, educational facilities, and sewage
treatment capabilities may not be able to accommodate the increased
---------------------- demand associated with certain industries, making that locale unsuitable
---------------------- for establishing some businesses.
3. Special Interest groups
----------------------
Most companies are now come under increased public scrutiny. Consumer
---------------------- activism is on the rise, due to the growth of a number of special interest
groups, fighting for the right of consumers. In response, Companies have
---------------------- realised the need to adopt a more sensitive stand towards these issues and
---------------------- have established special consumer affairs cells to help formulate policies
and respond to complaints. Customer issues are not taken lightly, as even
---------------------- a very “small” issue can, if not responded to, can snowball into a major
controversy and damage the company’s reputation.
----------------------
In 2004, a customer reported worms in one of Cadburys chocolate
---------------------- bars. The local food authorities immediately swung into action and the media
immediately picked up the story. However Cadbury’s officials were extremely
---------------------- proactive in taking corrective action even though it was later proved that the
---------------------- problem had occurred at the retailers end and not during the manufacturing
process. The company launched a huge communication campaign to educate the
---------------------- customer and even redesigned the packaging to ensure that such problems would
not recur. The result was a substantial increase in Cadbury’s market share, as
---------------------- the customer’s faith in the brand was restored.
2.3.5 Economic Factors Notes
Economic factors refer to the nature and health of the economic system
----------------------
within which the firm operates. Economic factors include the state of the
business cycle, the distribution of income within the population, interest rates, ----------------------
savings, debt and credit availability and governmental monetary and fiscal
policies. The impact of these economic factors will differ between industries. ----------------------
1. Business Cycle ----------------------
The business cycle directly influences consumer spending. Purchases
----------------------
of many durable goods (appliances, furniture, and automobiles) can be
postponed during periods of recession and depression, as can purchases ----------------------
of new equipment and plant expansions. Economic downturns result in
lower profits, reductions in hiring, increased borrowing, and decreased ----------------------
productivity for firms adversely affected by the recession. Positive
----------------------
consequences of recessions may include reductions in waste, more
realistic perceptions of working conditions, exit of marginally efficient ----------------------
firms, and a more efficient system.
----------------------
2. Income growth and distribution
The distribution of income may differ between countries. Two countries ----------------------
with the same mean (per capita) income levels may have dramatically ----------------------
different distributions of income. Many developing countries have citizens
who are either extremely wealthy or extremely poor; only a few persons ----------------------
would qualify as middle class. The presence of a very strong and growing
numbers of middle class consumers makes for attractive markets. ----------------------
250 million middle class consumers in India, equal to the entire population ----------------------
of the United States, and the fact that it is growing, is what makes India
an attractive market for many multinationals today. On the other markets ----------------------
are not growing in many countries, due to saturation of markets, leveling ----------------------
off of incomes and shifting of jobs to lower cost economies.
----------------------
3. Savings, debt and Credit Availability
Consumer expenditures are affected by the savings debt and credit ----------------------
availability. The Housing, Automobile and Consumer Durables boom
----------------------
in India over the past decade has been fueled largely by the availability
of credit at attractive rates of interest. The savings as a proportion of ----------------------
income impacts the interest rates at which Banks will lend money to its
customers. A liquidity crunch will lead to spiraling interest rates which ----------------------
are ultimately passed on to the customers. Lower Interest rates also help
----------------------
corporate expand faster.
The impact of interest rates and credit availability is direct in the financial ----------------------
services industry. However for manufacturing or consumer goods, the
----------------------
impact is more on the cost of goods sold.
----------------------
----------------------

Notes 2.3.6 Natural Environment Factors
The deterioration of the natural environment is a major concern globally.
----------------------
Governments are under increased pressure from “watchdog” groups to legislate
---------------------- the growth and functioning of industries which are seen as major contributors
to the deterioration of the natural environment.
----------------------
Of particular concern are the emission of “greenhouse gases”, depletion of
---------------------- fossil fuel resources, and contamination of ground water with hazardous waste
and growing shortages of water. Organisations need to be aware of the threats
---------------------- and opportunities associated with four key factors of the natural environment:
shortage of natural raw materials especially water, increased cost of energy,
----------------------
pollution levels and role of governments.
---------------------- Raw materials can be classified as renewable resources such as timber
or food and nonrenewable resources such as oil, coal, natural gas and iron
----------------------
ore. Organisations dependant on renewable resources need to be conscious of
---------------------- replenishing the natural resources. The Paper and furniture industry for instance
have developed alternative raw materials to reduce their dependence on these
---------------------- natural resources.
---------------------- Industries which are dependent on nonrenewable resources face more
serious problems in terms of rising input costs due to shortages of these natural
---------------------- resources. Depletion of fossil fuels is of serious concern to the automobile
---------------------- industry. Auto majors such as Toyota, Honda and Ford, have developed
hydrogen fuel cars as a product of the near future.
---------------------- The rising prices of oil and Hydro Electric Power have been a major
---------------------- concern for most industries, which are now looking for practical and cheaper
energy alternatives. Solar Energy, Nuclear Power and Wind farming are
---------------------- attracting major investments worldwide. The global demand for wind energy
is growing at 45%, much of it led by the US, China and India and the share
---------------------- of wind energy in the total power generated globally is likely to increase from
---------------------- 0.2%(2002) to 3% by 2030.
This is a major opportunity for companies such as Vestas (Danish company
---------------------- and world’s largest wind turbine producer) and Suzlon (India). The Kyoto
---------------------- Protocol is also forcing firms to invest in cleaner sources of energy especially
in markets like Australia, The EU and South Korea.
----------------------
Industrial activity inevitably damages the natural environment due to
---------------------- the disposal of chemical pollutants and hazardous waste as well as littering
of the environment with bottles, plastics and other packaging materials. Many
---------------------- governments are now forced to play an active role in regulating this pollution by
forcing industry to treat effluents before disposal, as well as to adopt recyclable
----------------------
packaging. Some countries such as Germany are very active in pursuit of
---------------------- its environmental policy; products exported to Germany must be packed in
recyclable packaging or else are denied entry. A market survey revealed that
---------------------- 42% of US consumers are willing to pay higher prices for “green” products.
----------------------
Notes
----------------------
Multiple Coice Single Response
----------------------
1. What does P.E.S.T. analysis stands for?
----------------------
i. Political, Environmental, Standard and Technological
ii. Political, Economical, Social and Technological ----------------------
iii. Power, Education, Savings and Time ----------------------
iv. Population, Ethics, Special interest groups and Time ----------------------
----------------------
Activity 2
----------------------
1. Can you identify some political and legal factors that have affected ----------------------
foreign direct investment in India? Which industry sectors have been
particularly impacted? ----------------------
2. Can you name some special interest groups? Which industries have ----------------------
they been active in?
----------------------
2.4 CHANGES IN BUSINESS AND MARKETING ----------------------
Major macro environmental forces such as technological advances, ----------------------

deregulation and globalisation have created a “new economy”. Traditional ----------------------
business and marketing practices are being challenged by this new economy.
Thomas Freidman in his book The World is Flat identified the four different ----------------------
revolutions that have shaped this new economy.
----------------------
What is this New Economy?
----------------------
Carly Fiorina, former CEO of Hewlett Packard, very aptly described the
new economy as “Digital, Mobile, Virtual and Personal”. The digital revolution ----------------------
means that all analog content, be it data, music, pictures; words can be digitised
and transmitted at high speeds through satellites or fiber optic cables. Anyone, ----------------------
through any device, anywhere in the world can access any information on
----------------------
anything and even more so manage processes and content virtually. This digital
revolution, which many industry experts say has just set in, has unleashed ----------------------
several forces of change.
----------------------
The Knowledge or Information Revolution is a direct result. “The
diffusion of personal computers, fax machines, Windows, and dial up modems ----------------------
connected to a global telephone network all came together in the late80’s and
90’s to create the basic platform that started the global information revolution” ----------------------
says Craig Mundi, Chief Technology Officer, Microsoft. The result: customers
----------------------
have unprecedented and vast amounts of knowledge of every product and
process. ----------------------

Notes During the dotcom boom, telecom companies in the Western World
invested close to $ 1 trillion laying undersea fiber optic cable and wiring the world.
---------------------- These massive investments in connectivity around the world, falling prices of
computers, explosion of software and search engines and proprietary software
---------------------- that can chop up any piece of work and send it for development anywhere in the
---------------------- world, created the platform for the Global outsourcing revolution.
Most of the leading business companies of the world are adopting BPO as
----------------------
a strategic business solution. The BPO industry is very diverse, with several sub-
---------------------- segments, each displaying its own unique characteristics. According to Gartner,
a market research firm, the size of the global BPO market by 2007 would be
---------------------- $173bn, of which $24.23bn would be outsourced to offshore contractors. Of
this, India has the potential to generate $13.8bn in revenue.
----------------------
The technology revolution and the amount of time that people now spend
---------------------- with digital devices has changed the way people communicate, work and even
form relationships. More than 12% of all newlyweds in the US met online. One
----------------------
billion searches per day by people looking for just about anything long lost
---------------------- family members to lost pets to the latest techniques in eye surgery, are being
conducted on Google every day. History or Geography is no longer a constraint
---------------------- for any social or economic activity. This can best be described perhaps as a
Lifestyle Revolution.
----------------------
Gartner’s “Four key emerging technology trends for the next decade.”
----------------------
 Customer Self Service: By 2005, more than 70 percent of customer service
---------------------- interaction for information and remote transactions will be automated.
“A range of technologies are improving customers’ ability to complete
----------------------
increasingly complex informational and service-based transactions
---------------------- without the need for human assistance.” “The non-technology factors
driving this increased automation include strong return on investment,
---------------------- better customer reach, and improved service quality. This will ultimately
result in increased competitiveness, and in savings that can be passed on
----------------------
to the customer.”
----------------------  Web Services: By packaging business processes as software components,
Web services will drive much of the still-to-be-developed
----------------------
e-business landscape. “Web services will facilitate much faster software
---------------------- development and integration. They will also enable businesses to
become more agile, and help them focus on their core
----------------------
 Wearable Computers: By 2007, more than 60 percent of the U.S.
---------------------- population age 15 to 50 will carry or wear a wireless computing and
communications device at least six hours a day.
----------------------
“Widespread adoption of wireless, wearable computing will
---------------------- provide constantly connected employees and consumers with access to
communities, information, and other services as they go about their
---------------------- business in the real world. The prevalence of ‘wearables’ will lead to
----------------------
commerce and service opportunities as significant as those resulting Notes
from the wired Web.”
----------------------
 Tagging the world (RFID): By 2008, at least $90 billion worth
of business-to-consumer (B2C) purchase decisions—and $350 billion ----------------------
worth of business-to-business (B2B) purchase decisions—will be based
on “tags,” (RFID technology) which contain information and opinions ----------------------
about the item being bought. “The flood of information, products, and ----------------------
services available to today’s consumers and businesses is spurring a
focus on organising and labeling choices in a way that supports a person’s ----------------------
ability to find, prioritise, and select items,”. “The tagging industry will
modify consumer buying behavior and drive new industries focused on ----------------------
advisory and market research services.” ----------------------
Source : Gartner Research
----------------------
Changes in technology and the rise of new economy have created a new ----------------------
set of beliefs and business practices. We will take a look here at some of the key
changes in business practice that have occurred over the years and explore them ----------------------
in greater detail throughout this book as we go along.
----------------------
Some of the important changes that have occurred over the last decade are
the exponential growth of e-commerce and the emergence of the website as an ----------------------
important communication tool.
----------------------
2.4.1 E-Commerce
Globally e-commerce takes place over four major internet domains: ----------------------
• B2C (business to consumer) ----------------------
• B2B (business to business)
----------------------
• C2C (consumers to consumers)
• C2B (consumers to business) ----------------------
Each of these domains is significant to the growth of e-commerce.
----------------------
1. B2C (business to Consumer)
----------------------
According to AC Nielsen’s research, more than 627 million people
have shopped online. The most popular items purchased on the Internet ----------------------
are Books (34%), followed by Videos/ DVDs/Games (22%), Airline
Tickets/Reservations (21%) and Clothing/Accessories/Shoes (20%). Not ----------------------
surprisingly, Europe and North America display the highest incidence of
----------------------
online shoppers, with Germany, Austria and the UK topping the list, with
at least 95 percent of Internet users having purchased online. ----------------------
In Asia Pacific, South Korea and Taiwan rank highest, with at least 90
percent of respondents claiming to have ever made a purchase online, at ----------------------
least six in 10 of whom have done so within the last month. While there ----------------------
is growth in nearly all global markets, the lesser developed markets are
maturing faster than many of their more developed counterparts. “It will ----------------------
not be long before we have a nearly level playing field across the globe.”
----------------------
India’s online population is still a small proportion of its population, PC

Notes penetration is still 7.2 per thousand with 16.6 million internet users; but it
represents a set of affluent consumers, willing to adopt technology faster.
----------------------
According AC Nielsen research, “With the additional attribute of
---------------------- willingness to shop online – they will increasingly be too tempting to
ignore”.
----------------------
Online shopping in India is poised for greater acceleration as more
---------------------- manufacturers and providers integrate the internet into their sales model.
As PC and internet penetration grows, the key to increasing online
---------------------- purchases will remain in the hands of marketers by instituting online
mechanisms for sales and service and giving incentives to consumers by
----------------------
passing on the benefits of lower transaction costs to them”.
---------------------- 2. B2B (Business to Business)
---------------------- B2B is defined as exchanging of structured messages with other business
partners over private networks or Internet to create and transform business
---------------------- relationships. B2B e-commerce is companies buying from and selling to
---------------------- each other online. Today B2B has evolved to encompass supply chain
management as more companies outsource parts of their supply chain to
---------------------- their trading partners. B2B applications aim at improving and simplifying
the various business processes within a company and increasing efficiency
---------------------- of transactions among companies that have business relations. The
---------------------- companies use B2B in order to achieve faster and error-free transactions,
control and maintain limited inventory, efficient product reorders.
---------------------- While business-to-business e-commerce takes place all over the globe,
---------------------- the North American market currently dominates. The $700 billion North
American market is twice the size of B2B e-commerce in the rest of
---------------------- the world combined ($330 billion). One-fourth of all US business-to-
business purchasing will be done online by the year 2003, according to
---------------------- a study by the Boston Consulting Group (BCG). The research estimates
---------------------- that between 1998 and 2003, US business-to-business e-commerce will
grow by 33 percent each year and reach $2.8 trillion in transaction value.
---------------------- 3. C2C (Consumer to Consumer)
---------------------- C2C is the Internet equivalent of the traditional classified advertising
market. You put up an ad on the Internet for other consumers to respond
----------------------
to (similar to a newspaper classified ad). The Internet makes the process
---------------------- of placing an ad cheaper, faster and easier. There is considerable C2C
communication on the web on a range of subjects.
----------------------
C2C is commonly used by people to sell or auction items when
---------------------- they don’t want to involve another group to broker the transaction. A
popular example is eBay (www.ebay.com), an online auction site which
---------------------- has grown to sell just about anything imaginable and permissible. In
C2C e-commerce, online transactions occur between two consumers.
----------------------
Sites, such as the auction based eBay, bring buyers and sellers together,
---------------------- and earn commissions from their transactions. E-Bay gets nearly five
billion page views per month. This is considerably higher than other top Notes
internet brands. The eBay community is made up of individual buyers
and sellers who come to the site to do more than just buy or sell-they have ----------------------
fun, shop around, and get to know each other, for example, by chatting
on the eBay discussion boards. Through the discussion boards, members ----------------------
meet and get to know each other, discuss topics of mutual interest, and ----------------------
help each other to learn all about eBay. These discussion boards are
public forums that encourage open communication between users. eBay ----------------------
has become a part of members’ lifestyles. Many members have created
second businesses, or left day jobs altogether, by selling items on eBay. ----------------------
For hundreds of thousands of others, eBay is the place to share a passion ----------------------
for items that are special.
----------------------
4. C2B (Consumer to Business)
C2B is a rather peculiar Internet phenomenon. An example of C2B ----------------------
e-commerce could be the following. A student wants to fly from Mumbai
----------------------
to New York, but has only Rs. 30,000 in the bank to pay for this round trip.
He puts up an ad in an Internet C2B site, seeking airlines that are willing ----------------------
to offer the transatlantic round trip for Rs. 30,000 or less. The Internet
brings together a large number of customers to create a marketplace that a ----------------------
number of airlines (that will have to otherwise fly with empty seats) will
----------------------
be interested in.
5. Other domains ----------------------
Consumer-to-government (C2G) e-commerce, Business-to-government ----------------------
(B2G) e-commerce and m-Commerce (Mobile commerce) are other
options that are gaining importance today. ----------------------
2.4.2 Web Sites ----------------------

The company’s web site is not only support e-commerce but is regarded ----------------------
as an important tool of direct communication with all of the company’s
stakeholders. A website allows for a two way communication between the ----------------------
company and its stakeholders, something which was almost impossible with
other communication tools other than personal selling. Both, customers and ----------------------
companies are benefiting enormously from this direct dialogue. ----------------------
For consumer product companies this is especially important. Large
----------------------
consumer markets have long distribution channels and as there is great al
distance between the company and its customer. Hitherto there was virtually no ----------------------
direct contact between the company and its customers. Companies got sporadic
feed back through market research, as and when such studies were conducted. ----------------------
Today companies are able to get direct and continuous feedback on an ongoing
----------------------
basis. The key characteristics of the web and its communication tools are dealt
with in detail in further units. ----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. In E-Commerce, what does B2C stands for?
----------------------
i. Business to Consumer
---------------------- ii. Consumer to Business
---------------------- iii. Business to Commodity
---------------------- iv. Business to Capital
----------------------
Activity 3
----------------------
1. List the popular B2C e-commerce sites in India. Find out how their
----------------------
sales turnover has grown over the years. Find out the most popular
---------------------- categories on these sites.
2. eBay has taken over bazee.com to get a presence in India. Compare
----------------------
the working of eBay with bazee.com.
---------------------- 3. What are the popular C2B sites in India?

----------------------
---------------------- 2.5 MACRO ENVIRONMENTAL CHANGES AND THE

NEW INDIAN CONSUMER
----------------------
Independent India’s economic development program was based on the
----------------------
objectives of self-reliance and social equity. Till the eighties, India’s industrial
---------------------- policy created India’s industrial base under a system of licensing, strict foreign
exchange controls and excessive protection from imports, which protected even
---------------------- inefficient and internationally non-competitive enterprises.
---------------------- In 1991 the Central Government embarked on a program of economic
liberalisation. This included, among others removal of governmental
---------------------- control, rationalisation of regulation and attracting Foreign Investment. The
government identified the infrastructure sector (Power, Telecommunications,
----------------------
and Transportation) as a key target for deregulation and took steps to attract
---------------------- investments in the area. The reforms process which has continued since has
resulted in dramatic growth over the last decade. Since 1991, India’s economy
---------------------- has grown on an average by 6% per year. Prior to 1990, the economy grew at
3% considered as the “Hindu rate of growth”.
----------------------
India’s present economic status reveals the following profile:
----------------------
• A Gross Domestic Product (nominal terms) of $ 692 billion
----------------------
----------------------
• The 4th largest economy in terms of Purchasing Power Parity (PPP). Notes
• Second fastest growing economy, projected to be 7-15% larger than
----------------------
Japan’s by 2010
• A strong agriculture sector accounting for 21.2% of GDP, with self ----------------------
sufficiency in all important crops except oilseeds
----------------------
• A strong and diverse sector industrial, at 27% of GDP and growing at
7.7% annually. Self reliance in all core industries and a wide range of ----------------------
engineering products.
----------------------
• A robust services sector accounting for 51.8% of GDP and growing at
8.9% annually ----------------------
• Mature financial sector and capital market with over 9000 listed companies ----------------------
and market capitalisation equivalent to Rs. 29.11 trillion (Rs. 29,11,000
crore March 2006) with the Banking and Finance sector growing by 7.5% ----------------------
(Source: World Bank, 2004) ----------------------

The Changing Face of the Economy ----------------------
(Source: NCAER, Business World Marketing White book and Mc Kinsey)
----------------------
1. Income growth
----------------------
According to NCAER, between 1996-97 and 2000-01, per capita income
on an aggregate basis grew by an annual rate of 3.2%. Higher Income households ----------------------
grew much faster, by about 20% each year between 95 and ’99.These numbers
however do not reveal the complete story. ----------------------
By putting the economy on the growth track, the reforms process has ----------------------
unlocked the tremendous untapped potential of the Indian market. According
to Mckinsey, India’s growing market for consumer goods (Already in the top ----------------------
ten) could reach $400 billion, making it one of the five largest in the world. ----------------------
Whilst there are opportunities aplenty in almost all industries, marketers need to
understand the diverse nature of the markets and develop appropriate products. ----------------------
A detailed macro environmental analysis is the first step in developing a strategic
plan. ----------------------
Let us take a look at some of the important changes that have taken place ----------------------
in the country.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Household Real annual Segment Size Common Assets owned
income household (million Occupations
---------------------- classes income households)
(average size
of household
---------------------- = 5.4)
---------------------- ‘Global India’ > $ 10,000 1.2  Business people  1-2 bedroom house
in small to mid  Colour TV, mobile
---------------------- size enterprises phone, refrigerator,
Growing @ 20% p.a.  Corporate/govt. washing machine
employees  Car worth
----------------------  Rich farmers $ 5,000-10,000
---------------------- ‘Aspiring India’ $ 4,000-$10,000 40  Salaried employees  Colour TV,
 New Services  Refrigerator,
---------------------- (eg. IT, Media) Telephone

 Shopkeeper  Scooter, Motor Cycle,
Expected to be 65 mn by 2010
Small car worth
---------------------- < $ 4,000
---------------------- ‘Struggting $ 1,500 -$ 4,000 110  Shopkeepers  Bicycle
India’  Service workers  Radio Black
---------------------- (eg. drivers, maids) white TV

 Farmers
---------------------- ‘Destitute < $ 1,500 40  Subsistence farmers  Watch

India’  Farm workers
----------------------
Source : NCAER (Fy 2004).
----------------------
Fig. 2.2: The Range of Spending Power
----------------------
A McKinsey study (Fig. 2.2) reveals: “There are several India’s each
---------------------- moving at a different pace”. The real drivers of the fast growing consumer goods
market are these 40 million middle class households (250 million consumers).
---------------------- This “aspiring India, growing by about 10% per year, is expected to comprise
---------------------- of 65 million households by year 2010. The growing purchasing power of this
consuming class is signaled by the growth of passenger car sales which crossed
---------------------- the 1 million mark in 2005.
---------------------- There are more than 50,000 families in India with a net worth of US$1
million or more and their numbers are rising. In just one year, 2003, assets under
---------------------- management jumped 14.3 percent - to US$30.3 billion - over the previous year.
However, only about 30 percent of this market has been tapped by international
----------------------
or private banks.
---------------------- On the other hand, 150 million households at the “bottom of the pyramid”
tell a different story, still struggling to make ends meet. Out of these 40 million
----------------------
households cannot even afford the basic necessities. Whilst these markets have
---------------------- huge untapped potential, tapping these markets has meant that companies have
had to develop completely different products, price points, and payment and
---------------------- distribution options for these markets.
---------------------- 2. Income distribution
---------------------- The typical bottom heavy triangle of income distribution, with most
people in the lower income group, typical of under developed economies, has Notes
given way to a new “triangle” with a “bulge” in the middle. It is this segment
which is driving the consumption growth in the economy today. Experts say ----------------------
that for any economy to grow, the presence of a strong middle class is vital.
----------------------
Rural India, with reduced dependence on agriculture, has created a
different kind of rural market today. It is estimated that by 2007, 4.6 million ----------------------
high income households and 13 million middle income households will be
----------------------
added. Given the growing media exposure of the higher end of rural society
through television, these markets are beginning to resemble urban markets in ----------------------
their mindset and consumption patterns. This has already happened in the more
developed higher income states of Punjab, Haryana, Gujarat, Maharashtra, ----------------------
Karnataka and Kerala.
----------------------
India has more working women than any other country in the world. This
includes female workers at all skill levels – from the surgeon and the airline pilot ----------------------
to bus conductors and menial labourers. Today approximately 23% of Indian
----------------------
households have working wives (the proportion reduces as incomes increase).
India has the world’s largest number of professionally qualified women, more ----------------------
female doctors, surgeons, scientists and professors than the United States. These
dual incomes have increased purchasing power of households further fuelling ----------------------
the consumption boom.
----------------------
3. Population Demographics
----------------------
India’s population at1.1 billion and growing at an average of 1.6% over
the past 5 years, is still the fastest growing population in the world. Median age ----------------------
of the population being 24.4 years makes India a “young” country. Today, it
has some 485 million people in its working-age population and almost as many ----------------------
-463 million - under the age of 20. By 2020, the young people will have moved ----------------------
into the workforce, but only about 160 million of the working-age Indians will
have retired. That means the number of potential workers will have increased ----------------------
by 300 million which is roughly the population of America and more. Literacy
rate has gone up to 59.5% of the population; however gender wise literacy rates ----------------------
still show a wide gap; 70.2% for men and 48.3% for women. Urban population ----------------------
as a % of total population now stands at 29%.
4. Change in Consumption Patterns ----------------------
The way consumers are spending their money on various items has ----------------------
changed dramatically over the last few years.
----------------------
The average Indian spent Rs. 5,745.18 (92-93); by ’02-03 this figure had
reached Rs. 15,082 – a CAGR at current prices of 10%. ----------------------
The share being spent by urban India on basics (food and beverages) has ----------------------
fallen from 54.07 % (92-93) to 44.8 % (02-03). On the other hand, medical and
healthcare spending has increased from 3.50% to 8.06% of total expenditure ----------------------
over the same periods. Spending on transport and communication has grown
----------------------
at 13.2%.
----------------------

Notes 5. Attitudes towards Consumption
Most recent studies have conclusively proved that Consumer India is
----------------------
spending more on “life quality improvement” products and services. The three
---------------------- top priorities are education, healthcare and transportation and communication.
Housing, apparel and entertainment are next in order of priority.
----------------------
Most Indian consumers, whether rich or poor want to get ahead in a hurry.
---------------------- From being “destiny” driven and resigned to their fates, they are striving harder
than before to grasp the opportunities to make a better life for themselves. The
---------------------- mindset of this class of consumers, labeled as “Global” India and “aspiring”
India by McKinsey, has changed from that of demanding social justice to that
----------------------
of grabbing economic opportunity.
---------------------- It is no surprise that Indian consumers give the highest priority to giving
their children the education and skills considered as the passport to success.
----------------------
300,000 students appeared for IIT-JEE in April 2006, competing for a mere
---------------------- 4000 odd seats. Indian families are spending much more money and effort on
securing the right schools and educational institutions, tutoring for the various
---------------------- competitive exams, investment in nutrition, computers and books.
---------------------- Preventive healthcare is an area of priority, because ill health adversely
impacts earning ability. At the “bottom of the pyramid” the opportunity
---------------------- is especially greater in terms of providing nutrition and health building at
---------------------- affordable prices, to prevent ill health.
Although there has been a huge consumption rush, Indian consumers are
---------------------- still pragmatic in their approach. Household budgets are still modest as close
---------------------- to 48% is still being spent on the basics, and although this percentage is falling
every year it is still high enough to make the Indian consumer price sensitive.
---------------------- Indian consumers are extremely conscious of value for money and are not
beguiled by brands which are high on image and low on functionality.
----------------------
6. Availability of Credit and Indian consumers’ attitude towards Credit
----------------------
Prior to 1990’s the average Indian was extremely credit averse; taking a
---------------------- loan for purchase of any assets was even considered irresponsible, and the only
sources of personal credit were small time money lenders or personal sources.
---------------------- The availability of credit at attractive rates of interest, fuelled by aspirations
to improve one’s standard of living has changed dramatically, the consumers’
----------------------
attitude towards credit.
---------------------- Indian consumers today want better houses, new cars, access to credit
cards and consumer loans - and they are increasingly prefer to borrow now
----------------------
rather than save and buy. Between 1999 and 2004, the total Indian retail lending
---------------------- market has had a CAGR of 30.5 percent, from US$9.7 billion to US$36.7 billion,
according to Merrill Lynch. That increase includes CAGR of 35.1 percent for
---------------------- mortgages, 33.4 percent for credit cards, 21.9 percent for automobile loans and
27.4 percent for other consumer loans.
----------------------
In 1995, just 2.6 million urban households in India could afford a housing
---------------------- mortgage. The market is expected to grow by 30-45 percent to a total value of
up to US$77 billion by 2008, according to analysis by the IBM Institute for Notes
Business Value.
----------------------
The picture is much the same for vehicle financing: as the economy
grows, transport becomes ever more vital. Indeed, vehicle sales growth is ----------------------
outstripping already positive forecasts. For example, car sales were forecast
in 2003 by ICICI Securities to rise from 570,000 in 2001 to over 950,000 by ----------------------
2007. In fact, by October 2004, annual sales passed the one million mark. (An
----------------------
estimated US$440 billion will be spent on Indian infrastructure development
between 2005 and 2010.) ----------------------
Indian consumers are taking loans for higher education, other consumer
----------------------
durables, holidays abroad and even personal loans to invest in equity markets.
However India’s total consumer borrowing represents just 2 percent of total ----------------------
household income in 2002, according to the Reserve Bank. It is considered
as one of the most under penetrated retail lending markets in the Asia-Pacific. ----------------------
The comparable figures for other Asian Tiger economies provide evidence of
----------------------
the room for growth: in Singapore, consumer borrowing was 176 percent of
household wealth in 2002; in Malaysia, 75 percent; and in Thailand, 39 percent. ----------------------
7. Effects of Deregulation
----------------------
Privatisation has sparked growth in many sectors. The telecom, airline and
life insurance industries all boomed after being unshackled from government ----------------------
control. ----------------------
Life Insurance which was de-regulated in 1999 saw 13 new players enter
the market. The industry has since grown at an exponential rate: premium ----------------------
collected in 00-01: Rs. 34,898 crore grew to Rs. 66,287 crore in 03-04, which ----------------------
is nearly double the industry size in just three years. The number of telephones
in the country increased tenfold in the decade after the telecom industry was ----------------------
deregulated.
----------------------
Something similar transpired in the airline industry. In 1992, Indian
Airlines, the country’s domestic national carrier, flew 8 million passengers. ----------------------
Two years later, a private carrier called Jet Airways started operating. Today,
it’s considered the best airline in the country and, some people would say, ----------------------
the world. And the Indian airline industry as a whole now carries 20 million ----------------------
domestic passengers and is expected to grow to 50 million over the next 5 years
----------------------
Summary ----------------------
• Successful companies realise that any strategic planning exercise must be ----------------------
preceded by a macro environmental scanning exercise.
• The firms’ macro environment presents a never ending series of ----------------------
opportunities and threats. Many opportunities are found by identifying
----------------------
trends and mega trends that are likely to have a deep impact on consumers
and industry. ----------------------
• With a rapidly changing global economy, companies must monitor six
major environmental forces: Political-legal, Economic, Socio-cultural, ----------------------

Notes Demographic, Technological and Ecological. This is also referred to as
the expanded PEST analysis.
----------------------
• Within Political-legal environment, companies need to fully understand
---------------------- the political climate of the country and the impact of laws regulating their
industries.
----------------------
• Economic factors which marketers need to focus on are income
---------------------- distribution, income growth, levels of savings and credit availability.
• The socio-cultural dimensions of the environment consist of attitudes,
----------------------
customs, lifestyles, and values that characterise the society in which the
---------------------- firm operates.
---------------------- • Demographic characteristics of the population such as Age mix, Income

distribution, education levels, and ethnic markets and subcultures are
---------------------- particularly important.
---------------------- • Technology is force for “creative destruction”. Changing technologies

affect lifestyles and buying patterns of customers and consequently
---------------------- the demand for a firm’s products. Technology also impacts production
processes and raw materials.
----------------------
• The Ecological or Natural Environment is a major global concern as
---------------------- governments get active in regulating businesses. Companies need to be
conscious of rising energy costs, pollution levels as well as raw material
---------------------- shortages as a result of the heightened consciousness of the natural
---------------------- environment.
• Technological advances, deregulation and globalisation have created
----------------------
a “new global economy”. This new economy is described as “Digital,
---------------------- Mobile, Virtual and Personal”.
----------------------
Keywords
----------------------
• Demography: The study of the characteristics of human populations,
---------------------- such as size, growth, density, distribution and vital statistics
---------------------- • E-commerce: The buying and selling of goods and services on the
Internet especially the World Wide Web
----------------------
---------------------- Self-Assessment Questions

---------------------- 1. Why is environmental scanning important?
---------------------- 2. Which macro factors must an organisation monitor? List the factors and
for each factor elaborate its impact on the organisation.
---------------------- 3. How has e-commerce changed the way companies do business?
---------------------- 4. Summarise the key macro environmental changes in the Indian Economy
post deregulation?
----------------------
5. Have these macro factors had an impact on the attitudes and values of Notes
Indian consumers?
----------------------
Answers to Check your Progress ----------------------
----------------------
1. What are the elements of macro environment?
----------------------
i. Economical Elements
ii. Technological Elements ----------------------
iii. Ecological Elements ----------------------
----------------------
1. What does P.E.S.T. analysis stands for?
----------------------
ii. Political, Economical, Social and Technological
1. In E-Commerce, what does B2C stands for? ----------------------
i. Business to Consumer
----------------------
Suggested Reading ----------------------
Research in a Marketing Environment. St Louis: Time Mirror/Mosby ----------------------
College Publishing.
Planning, Implementation and Control (Global Perspective). New Delhi: ----------------------
Macmillan India Ltd.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Market-Oriented Strategic Planning
UNIT
3
Structure:
3.1 Introduction
3.2 The Nature of Strategic Planning
3.3 Step I: Business Mission Statement
3.4 Step II: Strategic Analysis
3.5 Step III: SWOT Analysis
3.6 Step IV: Strategy Identification and Selection
3.7 Step V: Prepare Operating Plans for each Functional Area
3.8 Step VI: Implementation, Evaluation and Control of the Plan
Summary
Keywords
Suggested Reading
Appendix
Market-Oriented Strategic Planning 49

Notes
Objectives
----------------------
----------------------
• Recognise the objectives and nature of strategic planning and gain an
---------------------- overview of the planning process
---------------------- • Explain the components of external and internal analysis and identify
sources of competitive advantage
----------------------
• Identify strategic alternatives and describe tools used to select
---------------------- alternatives
---------------------- • Describe the elements of the marketing mix and understand their role
in the strategic plan
---------------------- • Discuss the basic outline of a marketing plan
---------------------- • Use techniques and tools that make strategic planning effective
----------------------
3.1 INTRODUCTION
----------------------
The fortunes of all companies, depends in a large measure on their ability
---------------------- to analyse their environmental and competitive context and make sound strategic
---------------------- decisions. This book is intended to provide you with the concepts, methods and
procedures by which the quality of strategic decision-making can be improved;
---------------------- this unit introduces you to many of these concepts, which you will understand
better as you progress through the book.
----------------------
---------------------- 3.2 THE NATURE OF STRATEGIC PLANNING

---------------------- Strategic Planning and business Strategy
---------------------- Strategic Planning is the managerial process of creating a business

strategy to obtain a fit between the organisations resources and objectives and
---------------------- evolving market opportunities.
The goal of all business strategy is to achieve:
----------------------
1. Long term profitability
---------------------- 2. Sustainable growth for the organisation
---------------------- Before discussing the process of developing sound business strategies, it
might be pertinent to ask what a business strategy is in the first place. Business
---------------------- strategy, alternatively referred to as competitive strategy or just strategy, refers
to taking decisions on the six key areas:
----------------------
1. The product markets in which the business is to compete
---------------------- 2. The level of investment
---------------------- 3. Functional strategies required to compete in the selected product-markets
---------------------- 4. Developing suitable and sustainable competitive advantages
5. Allocating resources over several business units Notes
6. Developing synergies between the different business units
----------------------
Companies are making hundreds of decisions at various levels of the
hierarchy everyday, which will in some way impact profitability. But we cannot ----------------------
term these as business strategy decisions. For instance, a decision to offer a
sales promotion offer on a particular product, or the decision to introduce a ----------------------
new pack variant or even a decision to appoint a new distributor for a certain
----------------------
territory, will in some ways impact the profitability of the organisation.
But these decisions are operational decisions, which will not have a ----------------------
significant impact on the long run profitability or growth of the company.
----------------------
Rather these decisions are directed at achieving the current business objectives.
This difference between Strategic decisions and Operating decisions must be ----------------------
clearly understood.
----------------------
An overview of the planning process
Figure 3.1 gives an overview of the planning process, which is explained below ----------------------
step by step. ----------------------
External environment
(opportunity & threat
analysis)
----------------------
Business Goal formu-
lation
Strategy Program
formulation
Implementation
Feedback
and control
----------------------
mission formulation
Internal environment ----------------------

(strengths/weaknesses
analysis)
----------------------
----------------------
Fig. 3.1: The Business Strategic-Planning Process
----------------------

1. What is the correct order of Business Strategic Planning Process? ----------------------
i. Business Mission  SWOT Analysis  Feedback and Control
----------------------
 Goal Formulation  Strategy Formulation  Program
Formulation  Implementation ----------------------
ii. Business Mission  SWOT Analysis  Goal Formulation
----------------------
 Strategy Formulation  Program Formulation
 Implementation  Feedback and Control ----------------------
iii. Business Mission  Strategy Formulation  SWOT Analysis
----------------------
 Feedback and Control  Goal Formulation  Program
Formulation  Implementation ----------------------
iv. Business Mission  SWOT Analysis  Feedback and ----------------------
Control  Strategy Formulation  Program Formulation 
Implementation  Goal Formulation ----------------------


Notes 3.3 STEP I: BUSINESS MISSION STATEMENT
---------------------- An organisation’s mission statement answers the fundamental question:
What business are we in, where are we going and how do we want to get there?
---------------------- The mission statement, profoundly affects the organisations long-term resource
---------------------- allocation, profitability and survival. The last part of the mission statement also
has a bearing on the values and culture that will direct the achievement of its
---------------------- goals.
---------------------- The mission statement must focus on customer needs, which the
organisation wants to serve rather than on products and services. This we
---------------------- have understood in Unit 1, when we learnt the concept of marketing myopia.
Sometimes organisations state their mission statements too broadly as “To
---------------------- provide products of superior quality and value, with the best customer service,
---------------------- so as to improve the lives of our customers and to make profits for the company”.
Such a mission statement is meaningless, as it says nothing about:
---------------------- 1. The business the company is in
---------------------- 2. The customer needs the company wants to serve
3. How it intends to serve those needs
----------------------
A clearly defined mission statement is essential as it lays the foundation
---------------------- for a company’s business strategy and operating plans.
---------------------- For large companies and conglomerates, which are diversified into several
businesses, a mission statement for each such Strategic Business Unit (SBU)
---------------------- would be essential.
---------------------- Companies go through major strategic planning exercise at predetermined
time intervals – say two years – more or less depending on the dynamics of the
---------------------- industry they are in. However, the mission statement does not change every
time; it is however reviewed and may be appropriately modified, in case of
----------------------
major changes in the firm’s external environment.
----------------------
Activity 1
----------------------
---------------------- 1. Collect the following information for an organisation of your choice:

a. Find out the mission statement. Is it stated in terms of customer
----------------------
needs?
---------------------- b. What has been the firm’s growth path in the past 5 years?
---------------------- c. What new products or markets has the firm entered?
---------------------- d. What major strategic moves has the company made in the past 5
years?
---------------------- e. Are these congruent with their mission statement?
---------------------- 2. Can you cite some real examples of inadequately framed mission
statements? What do you think is lacking?
----------------------
3.4 STEP II: STRATEGIC ANALYSIS Notes
Strategic Analyses is a very detailed analyses focused on identifying ----------------------
opportunities, threats, trends, strategic uncertainties or any factor which has the
potential to affect business strategy. The strategic analyses have two distinct ----------------------
parts: External Analysis of the firm’s external environment and an Internal
----------------------
Analysis of the organisation’s performance, assets, resources and capabilities.
A strategic analysis can be a very lengthy and endless exercise, at considerable ----------------------
expenditure. Hence, companies must take a decision on the scope and depth of
the external analyses that they want to pursue. ----------------------
The External Analysis is divided into four components: ----------------------
1. Customer Analysis – Needs, motivations and market segments. ----------------------
2. Competitor Analysis – Strategic groups, objectives, strategies, culture,
----------------------
cost structure, strengths and weaknesses.
3. Industry and Market Analysis – Size, projected growth, profitability, entry ----------------------
barriers, cost structures, distribution systems and critical success factors.
----------------------
4. Macro environmental Analysis – Political-legal, Socio-cultural,
Demographic, Economic, Technological and Ecological factors of the ----------------------
firm’s external environment.
----------------------
Note: Marketing people are involved in a significant way in each area of
external analyses, since it directly impacts the marketing plan. We will explore ----------------------
each area of analyses in depth in the upcoming units. ----------------------
Internal Analysis aims to provide a detailed understanding of the
strategically important aspects of the organisation and covers performance ----------------------
analyses, strengths, weaknesses, competitive advantages and core competencies ----------------------
and assets, which may be significant.
Performance Analysis is an evaluation of the past strategies of the firm, ----------------------
the post mortem of successes and failures. It would also include a detailed ----------------------
operational review of each functional area.
----------------------
A number of financial and non-financial performance metrics need to
be considered to give a measure of the health of the business. Some of these ----------------------
metrics are:
----------------------
1. Return on Investment (ROI) as compared to the cost of capital, to indicate
if the business is adding value to its owners (shareholders) ----------------------
2. Customer Satisfaction Measures
----------------------
3. Brand Equity/Brand Health measures – loyalty, associations, image etc.
----------------------
4. Cost Structure relative to competitors
----------------------
5. New Products pipeline – are there sufficient new products in different
stages of development? ----------------------
----------------------

Notes 6. Product Portfolio analysis – market performance measures as well as
strength of the entire portfolio
----------------------
7. Manpower capabilities and performance as well as employee attrition
---------------------- rates
8. Financial resources available cost of funds as well financial constraints.
----------------------
The BCG matrix and GE matrix (Annexure A) are strategic tools used to
---------------------- conduct a performance analysis of product lines or strategic business units.
----------------------
----------------------
----------------------
1. What are the components of Strategic External Analysis?
----------------------
i. Customer Analysis
---------------------- ii. Competitor Analysis
---------------------- iii. Industry and Market Analysis
---------------------- iv. Performance Analysis
----------------------
3.5 STEP III: SWOT ANALYSIS
----------------------
A detailed performance analyses sets the stage for conducting a SWOT
---------------------- analysis. SWOT is an abbreviation for Strengths, Weaknesses, Opportunities
---------------------- and Threats. SWOT analysis is an important tool for auditing the overall
strategic position of a business and its environment. Once key strategic issues
---------------------- have been identified, they feed into business objectives, particularly marketing
objectives. SWOT analysis can be used in conjunction with other tools for audit
---------------------- and analysis, such as PEST analysis (Unit 2) and Porter’s Five-Force analysis
---------------------- (Unit 5).
Strengths and weaknesses are internal factors. For example, strength
----------------------
could be a firm’s specialist marketing expertise. A weakness could be the lack
---------------------- of a new product.
---------------------- Opportunities and threats are external factors. For example, an

opportunity could be a developing distribution channel such as the Internet, or
---------------------- changing consumer lifestyles that potentially increase demand for a company’s
products. A threat could be a new competitor in an important existing market or
----------------------
a technological change that makes existing products potentially obsolete.
---------------------- The external environment; be it the macro environment, customer or
---------------------- competitor groups; is constantly in a state of flux. A change by itself is neither
an opportunity nor a threat. It only becomes so, in relation to an organisations
---------------------- strengths or weaknesses. What may represent an opportunity for a particular
firm, may in fact pose a serious threat to the survival of yet another firm in the
---------------------- industry. For instance, deregulation of the telecom industry was an opportunity
for private sector firms, which had the monetary and managerial resources to Notes
leverage this opportunity. Existing public sector units saw this as threat, as it
meant the end of their protected monopolies. ----------------------
SWOT analysis can be very subjective - two people rarely come-up with ----------------------
the same version of a SWOT analysis even when given the same information
about the same business and its environment. Accordingly, SWOT analysis is ----------------------
best used as a guide and not a prescription. Adding and weighing criteria to each
----------------------
factor increases the validity of the analysis.
Areas to Consider ----------------------
Strengths ----------------------
Technical Skills, Strong brands, distribution channels, customer loyalty, ----------------------
high customer retention, scale, organisation work culture, employee satisfaction
and retention. ----------------------
Weaknesses ----------------------
Absence of skills critical to the industry, weak brands, weak access to ----------------------
distribution channels, low customer retention are just some of them.
----------------------
We have listed just some of the areas as an example. A SWOT analyses
exercise is very organisation specific exercise and must be done in detail. ----------------------
Take a look at the following factors: ----------------------
1. Changing customer tastes
----------------------
2. Market/Industry de-regulation
----------------------
3. Technological advancement
----------------------
4. Lower indirect taxes
5. Advent of new distribution channels ----------------------
These factors could represent opportunities for a firm that has the strengths ----------------------
to use these changes to their advantage. The same could pose threats to firms,
----------------------
which have inherent weaknesses that prevent them from taking advantage of
the changed situation. ----------------------
SWOT Analysis : Apple ----------------------
Strengths ----------------------
 Apple is a very successful company. The ipod, which has sold more
----------------------
than 42 million units, has revitalised the Apple brand.The favourable
brand perception had also increased sales of Macintosh computers. ----------------------
The iPod gives the company access to a whole new series of segments
that buy into other parts of the Apple brand. Sales of its notebooks ----------------------
products are also very strong, and represent a huge contribution to
----------------------
income for Apple.
----------------------

Notes  Apple is one of the most established and healthy almost “cult” IT
brands in the world, and has a very loyal set of enthusiastic customers
----------------------
that advocate the brand. Such a powerful loyalty helps acquire new
---------------------- customers as well as retains them i.e. they come back for more products
and services from Apple.
---------------------- Weaknesses
----------------------  Quality has been a concern with Apple products from the very beginning,
as they require frequent repair. It is reported that the Apple iPod Nano
---------------------- may have a faulty screen. The company has commented that a batch
of its product has screens that break under impact, and the company is
----------------------
replacing all faulty items. This is in addition to problems with early
---------------------- iPods that had faulty batteries, whereby the company offered customers
free battery cases
----------------------  There is pressure on Apple to increase the price of its music download
---------------------- file, from the music industry itself. Many of these companies make
more money from iTunes (i.e. downloadable music files) than from their
---------------------- original CD sales. Apple has sold about 22 million iPod digital music
players and more than 500 million songs though its iTunes music store.
---------------------- It accounts for 82% of all legally downloaded music in the US.
----------------------  Early in 2005 Apple announced that it was to end its long-standing
relationship with IBM as a chip supplier, and that it was about to
---------------------- switch to Intel. Some industry specialists commented that the swap could
confuse Apple’s consumers.
----------------------
Opportunities
----------------------  Apple has the opportunity to develop its iTunes and music player technology
---------------------- into a mobile phone format. Sony already has a successful walkman
phone as does Nokia and almost all other mobile phone manufacturers.
---------------------- A version of Apple’s iTunes music store has been developed for the
phone so users can manage the tracks they store on it. Downloads are
---------------------- available via a USB cable, and software on the handset pauses music if
---------------------- a phone call comes in. New technologies and strategic alliances offer
opportunities for Apple.
----------------------  Podcasts are downloadable radio shows that can be downloaded
from the Internet, and then played back on iPods and other MP3
----------------------
devices at the convenience of the listener. The listener can subscribe
---------------------- to Podcasts for free, and ultimately revenue could be generated from
paid for subscription or through revenue generated from sales of other
---------------------- downloads.
---------------------- Threats
 The biggest threat to IT companies such as Apple is the very high
---------------------- level of competition in the technology markets and short lifecycles of
technologies. Being successful attracts competition, and Apple works
----------------------
very hard on research and development and marketing in order to retain
---------------------- its competitive position.
 There is also a high product substitution effect in the innovative and Notes
fast moving IT consumables market. So iPod and MP3 rule today, but
----------------------
only yesterday it was CD and cassettes. Tomorrow’s technology
might be completely different. Wireless technologies could replace the ----------------------
need for a physical music player.
----------------------
 In 2005 Apple won a legal case that forced Bloggers to name the sources
of information that pre-empted the launch of new Apple products. It was ----------------------
suspect that Apple’s own employees had leaked confidential information
about their new Asteroid product. The three individuals prosecuted, ----------------------
all owned Apple tribute sites, and were big fans of the company’s ----------------------
products. The blogs had appeared on their sites, and they were forced to
reveal their source. The ruling saw commercial confidentiality as more ----------------------
important as the right to speech of individuals. Apple are vulnerable to
leaks that could cost them profits. ----------------------
----------------------
The result of detailed strengths, weakness and constraints analysis would
reveal the market opportunities that a firm is able to leverage because of its ----------------------
strengths: or environmental factors which may pose a serious threat because
of its inherent weaknesses. More importantly, a SWOT analyses, allows a ----------------------
company to identify its competitive advantages. ----------------------
Michael Porter, renowned Harvard Professor and an authority on
competitive strategy suggested that companies need to adopt one of four ----------------------
“generic” business strategies in order to gain competitive advantage. The four ----------------------
strategies relate to the extent to which the scope of businesses’ activities are
narrow versus broad and the extent to which a business seeks to differentiate its ----------------------
products. These generic strategies are explained in detail in Unit 4.
----------------------
A competitive advantage (CA) or sustainable competitive advantage
(SCA) as it is referred to very often, is essentially a position of superiority ----------------------
that a firm enjoys, in some function, process or activity, in relation to its
competitors. A company can be said to have a competitive advantage if it ----------------------
possesses a technology, assets or a functional excellence, which its competitors ----------------------
do not enjoy. A competitive advantage gives a company a very strong base on
which to compete and is hence a very critical element in a company’s business ----------------------
strategy. Building a CA is a conscious choice that a firm makes, at a substantial
investment over a long term. To keep it sustainable also requires considerable ----------------------
effort and resources. ----------------------
A competitive advantage can only be considered so if it is:
----------------------
1. Substantial enough to make a difference: A modest edge over a competitor
may not provide a substantial advantage in the market place. Nokia, ----------------------
the world’s leading mobile handset manufacturer, possesses a CA in
----------------------
developing new product technologies, which results in a continuous stream
of innovative, superior quality handsets using the latest technologies. In ----------------------
this case, an ability to produce a marginally superior mobile handset, on
one particular model cannot be termed as a CA. ----------------------

Notes 2. Valued by the customer: The CA must enhance the products value to the
customer and the company. This gives the company great leverage in
---------------------- pricing its products, either by way of price premiums over competitors, or
by way of maintaining price parity with competitors but achieving greater
---------------------- product sales.
---------------------- 3. Sustainable in the face of environmental changes and competitor actions:
In some markets where technology lifecycles are very short or where the
----------------------
technology can be easily replicated, possessing a certain technology itself
---------------------- would not be a sustainable CA. In the computer servers markets, major
players have sought to build CA’s other than product technology, which
---------------------- has eroded as the products have become more commoditised.
---------------------- 4. Leveraged: When possible into visible attributes of the organisation, that
will influence customers.
----------------------
Sources of competitive advantage could be several, as the examples below
---------------------- will clarify.
---------------------- 1. Lowest cost of inputs: HDFC bank’s SCA is that it has the lowest cost
of funds in the banking and financial services, which is why the bank
---------------------- rates very high on profitability, amongst a host of other factors. (Source:
Business Today survey on the best Banks in India)
----------------------
2. Lowest Cost Producer: Reliance is the lowest cost producer of Polyester
---------------------- Filament Yarn in the world. Bajaj is the lowest cost scooter manufacturer
in the world.
---------------------- 3. Production Systems: Toshiba’s flexible manufacturing systems– variety,
---------------------- speed and quicker response to market demand- allows the company to
make profits on short volume runs.
---------------------- 4. Supply Chain Expertise: The e-choupal project of ITC Foods allows
the firm to source agricultural commodities at lower costs, with timely
----------------------
supplies and consistent quality. This CA has placed the company in a
---------------------- market leadership position in the packaged foods industry.
5. Quality of Manpower Resources: In the knowledge-based industry, such
---------------------- as the IT software services industry, the ability to attract, train and retain
---------------------- the best talent is a very critical CA.
Important note for students
----------------------
A CA is a critical element of a firm’s competitive strategy, product
---------------------- differentiation and product positioning strategy. You must study this concept
carefully as we will be referring to this concept throughout this course.
----------------------
An important distinction needs to be made between a CA and other
---------------------- strengths that an organisation enjoys. All organisational strengths do not
---------------------- automatically translate into a firm’s competitive advantages. Only a strength that
is superior, sustainable and distinctive relative to competition can be considered
---------------------- as a CA and is a result of a sustained effort on part of the organisation. Strengths
and weaknesses are usually based on assets such as a brand name, organisation
---------------------- culture.
The Core Competence of a Corporation Notes
Through the 80’s, world renowned management thinkers C.K. Prahalad
----------------------
and Gary Hamel studied a number of successful global corporations like Canon,
Honda, 3M, and Sony. These companies seemed to preside over highly diversified ----------------------
businesses, unrelated in terms of customer needs, distribution channels and
communications. The key reason for the success of these companies was not ----------------------
that they were diversified, as that would be an over simplification. Underlying
----------------------
these seemingly disparate businesses was a very clear “Core Competency”
which seemed to drive the long-term sustainable growth and competitiveness ----------------------
of these corporations.
----------------------
In the 1990 article in Harvard Business Review, “Core Competence of a
Corporation”, Hamel and Prahalad defined this core competence as “an area ----------------------
of specialised expertise that is the result of harmonising complex streams of
technology and work activity”. ----------------------
As an example, they gave Honda’s expertise in engines and power trains, ----------------------
which gives the company a distinct advantage in all the businesses that Honda
participates in. Honda was able to exploit this core competency to develop a ----------------------
variety of quality products from lawn mowers, generators, snow blowers to
----------------------
marine motors and engines, trucks and automobiles.
Similarly 3M’s vast research and knowledge of substrates, coatings and ----------------------
adhesives and the knowledge of combining them in various ways has resulted ----------------------
in an extremely diversified portfolio of businesses as diverse as “Post it” notes,
magnetic tapes, fabric coatings, photographic film, coated abrasives, pressure ----------------------
sensitive tapes to name a few.
----------------------
The critical issue facing most companies today is to create unbeatable
products with irresistible functionality. One constantly hears the refrain that ----------------------
companies need to be innovative and create products that customer need but
have not yet imagined. But this is a deceptively simple task. ----------------------
According to Hamel and Prahalad, companies can create world class, ----------------------
unbeatable, irresistible products only if they view themselves as “a portfolio of
competencies rather than as a portfolio of businesses”. ----------------------
In the short run, a company’s competitiveness derives from the price/ ----------------------
performance attributes of its current products. In the long run, competitiveness
----------------------
derives from an ability to build, at lower cost and more speedily than competitors,
the core competencies that a spawn unanticipated products .The real sources of ----------------------
advantages are to be found in management’s ability to consolidate “corporate
wide technologies and production skills into competencies that empower ----------------------
individuals businesses to adapt quickly to changing opportunities.” It is to this
----------------------
ability, the success of Sony, Canon, Matsushita, Komatsu and now Samsung,
can be attributed to. ----------------------
Core competencies are the collective learning in the organisation, on how
----------------------
to co-ordinate diverse production skills and integrate multiple streams of
technologies. ----------------------

Notes Core competence is not a technology, a raw material, resource or
functional excellence. It is an organisational ability to harmonise different
---------------------- streams of technology, skills and knowledge. It is an ability to organise teams
of diverse individuals to apply their collective knowledge in non- traditional
---------------------- ways. There has to be a shared understanding of customer needs and of
---------------------- technological possibilities. Developing a core competence is also about
communication, involvement, and a deep commitment to working across
---------------------- organisational boundaries. What this concept also implies is the need to build
an organisational culture where knowledge and capabilities are shared across
---------------------- structures, departments and hierarchies.
---------------------- Core competence does not diminish with use. Unlike physical assets,
which deteriorate over time, competencies are enhanced as they are applied and
----------------------
shared. But competencies need to be nurtured and protected; knowledge fades
---------------------- if it is not used
Developing a Core Competence requires sustained efforts over decades.
----------------------
It will not result from merely outspending rivals on research and development.
---------------------- It is also not about sharing costs, as in when two or more SBU’s use a common
facility or share a common component.
----------------------
How do companies identify if they possess a core competency?
---------------------- Firstly, a core competence provides potential access to a wide variety of
---------------------- product-markets. Competence in computer peripherals and an understanding
of how customers work, play and interact with their computers has enabled
---------------------- Logitech to develop a wide variety of products.
---------------------- Second, a core competence should make a significant contribution to the

perceived customer benefits of the end product. Honda’s expertise with engines
---------------------- significantly improves the performance of the end products.
---------------------- Finally, a core competence should be difficult to imitate. And it is difficult
to imitate because it is a complex harmonisation of individual technologies and
---------------------- production skills. A rival can acquire some of the technologies that comprise the
core competence, but will find it more difficult to duplicate the comprehensive
---------------------- pattern of internal coordination and learning.
---------------------- Black and Decker’s core technological competency is in 200 to 600 W electric
motors. All their products are modifications of this basic technology (with the
----------------------
exception of their work benches, flash lights, battery charging systems, toaster
---------------------- ovens, and coffee percolators).
---------------------- They produce products for three markets :

 The home workshop market - small electric motors are used to produce
---------------------- drills, circular saws, sanders, routers, rotary tools, polishers, and drivers.
----------------------  The home cleaning and maintenance market - small electric motors
are used to produce dust busters, etc.
----------------------
 The kitchen appliance market - small electric motors are used to produce
---------------------- can openers, food processors, blenders, bread makers, and fans.
Notes
Activity 2
----------------------
If you are presently working in an organisation, you could attempt a SWOT
----------------------
analysis of your company. Alternatively chose any one company and start
by putting down the firms’ mission statement first. You can do this exercise ----------------------
for a competitor in the same industry, and compare opportunities and threats.
----------------------
3.6 STEP IV: STRATEGY IDENTIFICATION AND ----------------------
SELECTION
----------------------
A) Identifying Strategic Alternatives
----------------------
The purpose of external and internal analysis is to help generate
strategy alternatives and to provide the criteria for selecting among them. ----------------------
Strategies alternatives can be generated in many different ways for ----------------------
different companies and essentially depend on three critical key factors
----------------------
1. Resources available for investment in growth.
2. Skills, Core Competencies and Assets that can be leveraged. ----------------------
3. “Appetite” for growth. ----------------------

These three factors together determine the first level of strategic alternatives ----------------------
for a firm to consider.
----------------------
1. Intensive Growth – growth within the same industry
Organic route - means achieving growth of revenues in existing products ----------------------
and product lines or adding new product lines. ----------------------
Inorganic route - acquire brands or competitor companies within existing
businesses. Jet Airways proposed acquisition of Air Sahara is the inorganic ----------------------
route to strengthening its position in the airline industry. ----------------------
2. Diversification growth – look at growth outside the present business/
industry ----------------------
Companies could consider getting into new businesses or product areas, ----------------------
which may be related to, or unrelated to present businesses. Company’s
----------------------
choosing to diversify their businesses may adopt the organic route by
setting up the business themselves and growing it; or take the inorganic ----------------------
route of making acquisitions of other companies within the industry they
have chosen to diversify into. ----------------------
3. Integrative growth -through vertical integration ----------------------
This means performing or having control over the performance of many
----------------------
more activities related to an existing product, in-house.
In the Petroleum business, Reliance Petroleum is into the refining, ----------------------
marketing and retailing of petroleum products. Getting into oil exploration and ----------------------

Notes drilling as well, makes it the only other vertically integrated company (the other
being ONGC) in this industry. The other oil majors are into refining, marketing
---------------------- and now retailing.
---------------------- In the textiles business, Reliance not only manufactures the Polyester
Filament Yarn, but also the key raw materials and fabric and retails it through
---------------------- Vimal and Harmony outlets.
---------------------- Integrative growth is not only aimed at growing the top lines (sales
revenues), but growing bottom lines (better margins and profitability) as well.
----------------------
Companies that have a large “appetite” or ambition for growth, the access
----------------------
to resources to fund growth as well as the skills and competencies to manage the
---------------------- growth, will naturally look at all the three growth directions. More conservative
organisations, which possess the resources and skills but lack the appetite, may
---------------------- map out a different growth route.
---------------------- Having determined a certain growth direction, companies need to chart
out more specific growth strategies. The Ansoff Product Market Growth Matrix
---------------------- (also known as product –market expansion grid, or just Ansoff ’s matrix) provides
---------------------- yet another perspective on developing strategic alternatives. Ansoff ’s matrix
suggests that an organisation can pursue growth of its business in essentially
---------------------- four different ways depending on whether it markets new or existing products
in new or existing markets.
----------------------
Products
---------------------- Present New
----------------------
Market Product
---------------------- Present
Penetration Development
----------------------
Markets
----------------------
----------------------
---------------------- Market
New Diversification
Development
----------------------
----------------------
Fig. 3.2: The Ansoff Product Market Growth Matrix
----------------------
1. Market Penetration
----------------------
This is the growth strategy where the business focuses on selling more of
---------------------- the existing products into existing markets. Market penetration seeks to achieve
four main objectives:
----------------------
----------------------
a) Maintain or increase the market share of current products: Notes
A company can increase its market share by:
----------------------
1. Converting prospective non-users to users.
----------------------
2. Convert the occasional user to a regular user.
3.
Induce competitors’ customers to switch by using aggressive pricing ----------------------
communications and sales promotion. ----------------------
To maintain and increase market share companies need to build a big brand
presence, through extensive communication and aggressive distribution. ----------------------
Secure dominance of growth markets by developing full product lines ----------------------

that cater to all the different usage segments in existing markets.
----------------------
b) Restructure a mature market by driving out competitors; this would
require a much more aggressive promotional campaign, supported by a ----------------------
pricing strategy designed to make the market unattractive for competitors
----------------------
c) Increase usage by existing customers –by developing new or multiple
occasions of usage, developing new variants or recommending a greater ----------------------
usage quantity per occasion of use. This strategy is more appropriate to
----------------------
consumer products.
Amul used this growth strategy effectively for several products like ----------------------
butter and cheese. For quite awhile, the company’s efforts were directed ----------------------
at increasing market penetration of the product and creating a national
footprint for the brand, by entering new geographic territories. But then ----------------------
the sales of butter stagnated for quite awhile and the reason was that until
then eating butter was still largely associated with eating bread, a largely ----------------------
western concept. At the same time, Indian families were used to eating ----------------------
homemade butter with a variety of other foods.
Amul used this customer knowledge to communicate that Amul butter ----------------------
could be eaten with a variety of Indian foods, such as Pav Bhaji, Dosas ----------------------
and Parathas. The growth strategy paid off as not only did the sales of the
category go up, but Amul’s market share too increased substantially. ----------------------
d) Drive Replacement Demand or get customer to trade up to higher value ----------------------
products or to trade- in to the latest models. For categories such as
consumer durable products, marketers try to drive replacement demand, ----------------------
by facilitating the consumers’ trade-in of the old product for a newer
model or upgrade. ----------------------
Maruti’s “True Value” service assists customers in disposal of their ----------------------

“pre owned” cars at a fair price, enabling purchase of newer models.
----------------------
Leasing schemes and exchange offers have reduced the time gap between
purchases of most durable products. ----------------------
2. Market development
----------------------
Market development is the growth strategy where the business seeks to
sell its existing products into new markets. ----------------------

Notes In marketing management, the term “markets” is used to describe market
segments as well as geographic markets or territories. Hence the many possible
---------------------- ways of approaching this strategy, would include:
---------------------- a) New geographical markets: for example exporting the product to a new
country, or entering into a new region within the country. MTR foods
---------------------- have found a very lucrative market of NRI diasporas all over the world,
homesick for Indian food, to whom it markets a variety of ready to eat
----------------------
Indian meals.
---------------------- b) Enter new market segments currently not targeted. The recent introduction
---------------------- of fairness creams for men has helped companies like Emami and HLL
enter a large and profitable market segment.
----------------------
c) New product dimensions or packaging: for example, almost all products
---------------------- from shampoos to shoe polish are marketed in sachet single serve packs.
This new pack size format has helped companies enter new un-penetrated
---------------------- markets.
---------------------- d) New distribution channels: companies use innovative distribution
channels to tap new market segment opportunities. Impulse products
----------------------
like beverages and candies have benefited enormously from the vending
---------------------- machines, as a majority of the consumption happens outside home. Vending
machines have opened new sales opportunities for these categories. In
---------------------- rural India, HLL through its Project Shakti initiative sells convenience
products through unemployed women thereby securing their financial
----------------------
independence and at the time giving the company access to unreachable
---------------------- markets.
---------------------- Market development implies that when a company enters a new market,
it has to “develop” the market first through customer education about the utility
---------------------- and usage of the product. Market development time varies according the stage
of development of the market, and can take decades of sustained efforts.
----------------------
3. Product development
----------------------
Product development is growth strategy where a business aims to introduce
---------------------- new products into existing markets. This strategy may require the development
of new competencies and requires the business to develop products, which can
---------------------- appeal to its existing markets. “New” products, in this case, does not only imply
---------------------- products, which are new to the world or new product inventions, but could also
be product categories which are new to the company’s product portfolio only.
---------------------- In this growth strategy, companies get into product areas, which are related
---------------------- to or complementary to existing product areas, to offer the customer a range of
solutions. The way customers view product categories, is fundamentally from
---------------------- the way, companies tend to categorise products. For the customer, a product
category is a range of solutions to a given problem or need, irrespective of its
---------------------- physical form or manufacturing process or distribution channels. For instance,
---------------------- a customer seeking information on “The Indus Valley Civilisation” would
consider encyclopedias, internet resources and CD ROMs as all part of the Notes
same category, as they all satisfy the same need.
----------------------
Companies tend to categorise products by physical form, manufacturing
process or by distribution channels and fail to detect growth opportunities in ----------------------
offering a range of solutions. The Gillette Company (now a part of P&G) at
first developed a range of shaving products for men. For several years, product ----------------------
innovations and upgrades drove the sales rapidly. However the realisation that
----------------------
the real need that they satisfy is grooming, of which shaving is just a part, led
to the expansion their shaving products line to include a number of grooming ----------------------
products like, deodorants, gels, after shave lotions and bathing products.
----------------------
Logitech, one of the world’s leading companies in computer peripherals
for years, now offers a range of peripherals for all types of communications and ----------------------
entertainment devices. Their latest product offering is a set of iPod and other
MP3 accessories. New Product development for existing markets has been at ----------------------
the forefront of the company’s growth strategy, even as the company has entered
----------------------
new market segments.
From the above examples, it would also be evident that companies do not ----------------------
pursue a single growth direction only, during a given plan period. As much as it
----------------------
makes efforts to increase market penetration in a given market, a company also
has to make inroads into new markets, as well as seize opportunities to develop ----------------------
products for its existing markets. However, prioritisation of growth strategies
is essential for proper allocation of resources and for balancing short-term and ----------------------
long-term growth. As such, Market Penetration, Market Development and New
----------------------
Product Development are related growth strategies.
4. Diversification ----------------------
Diversification is the growth strategy where a business markets entirely ----------------------

new products (new to the company) in new markets. Diversification can be
related or unrelated diversification. ----------------------
Related diversification means an entry into product markets, where there ----------------------
are synergies with existing businesses such as distribution channels or raw
materials. Over the years Amul has diversified into products which are milk ----------------------
based, milk being the most important ingredient, leveraging the vast cold chain ----------------------
distribution network that they had set as well as the distribution points set up.
----------------------
Unrelated diversification would be represented by a move into a product
market, which has no synergy with existing businesses. The recent setting up ----------------------
of agribusiness and retail ventures by the Reliance and Bharti group could be
an example of an unrelated diversification. An unrelated diversification is an ----------------------
ambitious move and would be under taken by cash rich aggressive business
----------------------
houses, with management competencies to handle diverse projects. For a
business to adopt a diversification strategy, therefore, it must have a clear idea ----------------------
about what it expects to gain from the strategy and an honest assessment of the
risks. ----------------------
TheAnsoff ’s Matrix is a very important concept in Marketing Management. ----------------------

Notes It is advised that you carefully study this matrix and be able to recall the matrix
at all times during this course.
----------------------
b) Selecting Strategic Alternatives
---------------------- A summary of the criteria useful for selecting alternatives:
---------------------- 1. Identify future scenarios by looking at strategic uncertainties and
environmental threats and opportunities. The strategic options must be
---------------------- evaluated in the context of the future scenarios of the industry.
---------------------- 2. Whether the strategy leverages an Existing SCA. Unless the business unit
has or can develop a real competitive advantage that is sustainable over a
---------------------- long term in the face of competitor reaction, it is unlikely that the business
---------------------- strategy will pay-off.
3. Be consistent with organisation’s vision.
----------------------
4. Be feasible – should be within the resources of the organisation and
---------------------- internally consistent with the structure, systems, people and culture.
----------------------
----------------------
Fill in the blanks.
----------------------
1. Ansoff ’s matrix suggests that an organisation can pursue growth of
---------------------- its business in essentially four different ways, which are ,
, and .
----------------------
----------------------
Activity 3
----------------------
1. Go through recent news reports of inorganic and integrative growth.
---------------------- Try to identify the reasons for these growth strategies.
---------------------- 2. Draw Ansoff ’s matrix. Select any company from any industry and
obtain information on the past growth strategies of that company. Do
---------------------- they fit in to growth directions stated in the matrix?
----------------------
---------------------- 3.7 STEP V: PREPARE OPERATING PLANS FOR EACH

FUNCTIONAL AREA
----------------------
Once the business growth strategy have been selected and finalised,
---------------------- operating plans and strategies for each functional area i.e. marketing, finance,
Human resources, administration and so on must now be prepared.
----------------------
Whilst explaining the Ansoff ’s matrix, we stated a number of marketing
---------------------- actions that helped achieve the desired growth strategy. These marketing actions
---------------------- are the marketing strategies, which are necessary to achieve a firm’s growth
objectives. A firm’s marketing plan or for that matter, the HR or financial plans
----------------------
derive essentially from the growth strategies of the firm, as stated in the Ansoff ’s Notes
matrix.
----------------------
Since business strategy essentially revolves around a company’s products,
the Marketing Plan is the most critical to achieving the company’s strategic ----------------------
goals. The marketing plan describes the marketing strategy necessary to achieve
the businesses’ strategic objectives. ----------------------
A general outline of a Marketing plan is given in Annexure B. Do ----------------------
remember that it is almost impossible to prescribe a template, which can be
used by every organisation. The structure of the plan would vary considerably ----------------------
from one industry and organisation to another. Some elements however are
----------------------
constant, which are highlighted as follows.
Elements of the Marketing Plan ----------------------
1. Marketing Objectives ----------------------
The growth strategies that a firm has decided upon more or less become ----------------------
the marketing objectives for the firm, since marketing has the lead role in
achieving those growth objectives. The marketing Plan must begin with a ----------------------
detailed statement of the growth objectives for the plan period.
----------------------
2. Market Segmentation and Targeting
----------------------
A market segment is a group of individuals or organisations that primarily
share a homogeneous need as well as other common characteristics such ----------------------
as age, gender, income lifestyles or values. These common variables can
run into hundreds and because of shared needs and characteristics, it ----------------------
likely that such individuals will have relatively similar product needs.
----------------------
A marketing plan begins by identifying the various market segments
in a given market. The next step is to conduct a segment attractiveness ----------------------
analysis depending on the size, sales potential and competitive factors.
----------------------
The firm now decides selects one or more segments that it chooses to
target with its marketing strategy. A fundamental rule of marketing is that ----------------------
“if you are not thinking of your marketing in terms of target markets, you
are thinking nothing”. ----------------------
The concept of consumer behavior, market segmentation and selecting ----------------------
target markets is examined in detail in Units 6 and 7.
----------------------
3. The Marketing Mix
The selected target markets are targeted with a marketing mix which ----------------------
is a unique blend of product, pricing, distribution and communication ----------------------
strategies, created to produce mutually satisfying exchanges with a
target market. Distribution is referred to as place and communication as ----------------------
promotion, thus giving us the four P’s of Marketing of the marketing mix:
product, place, price, promotion. Over the years several more P’s have ----------------------
been added to the marketing mix such as Positioning, Packaging, People ----------------------
and Process.
----------------------

Notes The strategies for each of these components cannot be decided upon
independently. The strategies must complement each other and blend very well
---------------------- for the marketing plan to be successful. The best promotion strategy and lowest
price cannot save a bad product. So also, the best product will not sell unless
---------------------- there is an appropriate distribution and communication strategy in place.
---------------------- a) Product Strategies
---------------------- The product strategies are the heart of the marketing strategy and include
aspects such as quality, product features and attributes, performance
---------------------- variables, physical appearance and aesthetics, brand name, brand image,
product variants and many other factors. Products are a combination of
----------------------
tangible and intangible factors. Everything that has to be marketed: be it
---------------------- medical care, a holiday or even a trip to the moon: has to be thought of in
terms of a “product”. Product decisions are covered in Units 9 and 10.
----------------------
b) Place (Distribution) Strategies
---------------------- Distribution strategies are concerned with making the product available
---------------------- when and where customers want the product. The “right” place and time
varies from product to product and depends entirely on how the target
---------------------- customers shop for the product. Frequently bought products require
extensive and intensive distribution networks. The distribution decisions
---------------------- include the type of channels, stock and replenishment levels, shelf space
---------------------- and visibility at the retail outlet and are dependant entirely on the target
markets shopping style and habits.
---------------------- Distribution strategies also involve other business activities concerned
---------------------- with transportation, storage, inventory control, commonly referred to as
logistics. The goal of logistics and distribution management is to ensure
---------------------- that the products arrive at their destination in the right condition and at the
right time. Distribution strategies are covered in Unit 11.
----------------------
c) Pricing Strategies
----------------------
Price is a very visible and critical element of the marketing mix. Pricing
---------------------- strategies are very critical as they directly affect the company’s top line
and bottom line. Pricing decisions are also very complex as they have to
---------------------- factor in a number of factors such as target customer’ability and propensity
to pay, competitors prices, margins for distribution channel members,
----------------------
taxes, transportation costs, profit margins for the company amongst a
---------------------- host of other factors. Price is also the prime weapon in an organisations’
competitive strategy. Because of the complex and critical nature of the
---------------------- pricing decision, it is actively involves several other functions namely the
finance function. Pricing issues relevant to marketing are covered in Unit
----------------------
13 and 14.
---------------------- d) Promotion (Communication) Strategies
---------------------- The goal of a firm’s promotional strategy is to inform, educate, inform,
persuade and remind the target customers about the benefits of the
----------------------
organisation’s products. There several ways of communicating with Notes
target markets using different media options. The different elements
of communication like advertising, sales promotion, public relations, ----------------------
publicity and personal selling must be coordinated together to create
an effective communication strategy. These integrated communications ----------------------
strategies are described at Unit 14. A detailed format of a Marketing Plan ----------------------
is in Annexure B.
----------------------
----------------------
1. The selected target markets are targeted with a ,
----------------------
which is a unique blend of product, pricing, distribution and
communication strategies, created to produce mutually satisfying ----------------------
exchanges with a target market.
----------------------
i. Marketing Objectives
ii. Market Segmentation ----------------------
iii. Market Targeting ----------------------

iv. Marketing Mix ----------------------
----------------------
3.8 STEP VI: IMPLEMENTATION, EVALUATION AND
CONTROL OF THE PLAN ----------------------
Implementation ----------------------
Implementation is the process that turns marketing plans into action ----------------------
plans and ensures that the plans are executed in the way that accomplishes the
objectives. Implementation activities involve creating detailed job assignments, ----------------------
activity and process descriptions, timelines, budgets and extensive internal ----------------------
communications within the organisation. Although implementation of plans
sounds very simple, many organisations fail to implement plans effectively. ----------------------
The best marketing plans are doomed to fail if not properly executed. To ensure
effective implementation, regular reviews and evaluation is necessary. ----------------------
Evaluation and Control ----------------------

Evaluation of the plan is done by conducting reviews at regular intervals ----------------------
to evaluate the extent to which the marketing objectives are being met in the
specified time. The most common reasons why plans fail are: ----------------------
1. Unrealistic objectives ----------------------
2. Lack of resources or inefficient use of resources ----------------------
3. Inappropriate marketing strategies
----------------------
4. Poor implementation
----------------------

Notes 5. Failure to adapt to changes in the environment
Some firms employ external agencies to conduct a Marketing Audit,
----------------------
which much like the financial audit, is a thorough, systematic of the goals,
---------------------- strategies, structure and performance of the marketing organisation.
---------------------- Summary
---------------------- • Strategic Planning is the managerial process of creating a business
---------------------- strategy to obtain a fit between the organisations resources and objectives
and evolving market opportunities.
----------------------
• The first step in developing a strategic plan is defining the business
---------------------- mission. The mission statement must focus on customer needs, which the
organisation wants to serve rather than on products and services.
----------------------
• The next step is to conduct strategic analyses to identify factors, which
---------------------- have the potential to affect business strategy. A strategic analysis has two
distinct parts: External analysis and internal analysis.
----------------------
• External analysis consists of customer, competitor, industry and market
---------------------- analysis and a macro environmental analysis.
---------------------- • Internal analysis is an analysis of the firm’s performance, strengths and

weaknesses.
---------------------- • A competitive advantage is essentially a position of superiority that a firm
---------------------- enjoys, in some function, process or activity, in relation to its competitors.
• A company’s core competence is its ability to consolidate corporate wide
---------------------- technologies and production skills and to adapt that knowledge to create
---------------------- a variety of products across industries.
• Ansoff ’s matrix suggests that an organisation can pursue growth of
----------------------
its business in essentially four different ways depending on whether it
---------------------- markets new or existing products in new or existing markets.
• The four broad alternatives that emerge from this are Market Penetration,
----------------------
Market Development, New Product Development and Related or
---------------------- Unrelated Diversification.
---------------------- • A Marketing Plan is a written document that details all marketing activity
that a firm will carry out in the planning period to achieve the business
---------------------- objectives.
---------------------- • The key elements of a marketing plan are marketing objectives, target
markets, product strategies, pricing strategies, distribution strategies and
---------------------- communication strategies.
---------------------- • Some firms employ external agencies to conduct a Marketing Audit,

which much like the financial audit is a thorough, systematic of the goals,
---------------------- generally conducted by an external agency.
----------------------
Keywords Notes
----------------------
• Strategic planning: An organisation’s process of defining its strategy or
direction and making decisions on allocating its resources to pursue this ----------------------
strategy
----------------------
• Mission Statement: A summary of the aims and values of a company,
organisation or individual ----------------------
• Strategic analysis: The process of developing strategy for a business by
----------------------
researching the business and the environment in which it operates
----------------------
Self-Assessment Questions ----------------------
1. What is business strategy and what are its main goals? ----------------------
2. What is the difference between business strategy decisions and operational
----------------------
decisions? Can you cite some examples?
3. Why is the Mission Statement important to strategic planning? What ----------------------
points should be kept in mind while drafting a mission statement?
----------------------
4. What is an internal analysis? Why should a company conduct an internal
analysis? ----------------------
5. Describe a SWOT analysis. Explain how opportunities for one company ----------------------
may be threats for another company.
----------------------
6. What is a competitive advantage? How is it different from other strengths
that a company may possess? ----------------------
7. What is meant by core competence of a firm? What is the difference ----------------------
between a competitive advantage and a company’s core competence?
----------------------
8. Explain the following terminology:
a) Intensive Growth ----------------------
b) Diversification Growth ----------------------
c) Integrative Growth ----------------------
d) Organic vs. Inorganic Growth
----------------------
9. Explain Ansoffs Matrix. Cite two examples for each quadrant.
----------------------
10. State the different ways in which a company can increase market
penetration of its products. ----------------------
11. What key factors determine the selection of strategic growth alternatives? ----------------------
12. What is a marketing plan? What are the key elements of a marketing
plan? ----------------------
13. The best made plans can go amiss because of flawed execution. Explain ----------------------
this statement.
----------------------

Notes Answers to Check your Progress

1. What is the correct order of Business Strategic Planning Process?
----------------------
ii. Business Mission  SWOT Analysis  Goal Formulation 
----------------------
Strategy Formulation  Program Formulation  Implementation
----------------------  Feedback and Control
---------------------- Multiple Choice Multiple Response

1. What are the components of Strategic External Analysis?
----------------------
i. Customer Analysis
----------------------
ii. Competitor Analysis
---------------------- iii. Industry and Market Analysis
---------------------- Fill in the blanks.

1. Ansoff ’s matrix suggests that an organisation can pursue growth of its
----------------------
business in essentially four different ways, which are Market penetration,
---------------------- Market development, Product development and Diversification.
----------------------
----------------------
1. The selected target markets are targeted with a ,
---------------------- which is a unique blend of product, pricing, distribution and communication
strategies, created to produce mutually satisfying exchanges with a target
---------------------- market.
---------------------- iv. Marketing Mix
----------------------
Suggested Reading
----------------------
1. Dillon, William R., Thomas J. Madden and Neil H. Firtle. Marketing
---------------------- Research in a Marketing Environment. St Louis: Time Mirror/Mosby
College Publishing.
----------------------
2. Ramaswamy, V.S. and S. Namakumari 2002. Marketing Management -
---------------------- Planning, Implementation and Control (Global Perspective). New Delhi:
---------------------- Macmillan India Ltd.
----------------------
----------------------
APPENDIX I Notes
Portfolio Matrices ----------------------
1) BCG – Growth Share Matrix ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
• The Vertical Axis represents the Market Growth rate. ----------------------
• The Horizontal axis represents the firm’s market share relative to its ----------------------
competitors.
• Hence, 10x represents that firms share is 10 times that of its nearest ----------------------
competitor; 0.1x relative market share means that the firms share is 10% ----------------------
of that of the largest competitor.
----------------------
• Size of the circle represents the absolute revenues generated. Hence,
larger circles represent larger revenues. ----------------------
Characteristics of each quadrant
----------------------
1. Stars
----------------------
• Market Leaders in high growth markets
• Yield profits but not necessarily positive cash flows, because ----------------------
investment is greater than revenues. ----------------------
• Require a lot of investment to build or even maintain market share
----------------------
and to ward off competitor attack
• Critical to the company’s portfolio, hence companies will invest in ----------------------
growth
----------------------
Strategy: Protect Market Share - Build Market Share – Invest Heavily.
Companies need stars in their product portfolios ----------------------
----------------------

Notes 2. Cash Cows
• Hold dominant market shares in markets where the growth rate has
----------------------
declined.
---------------------- • Businesses which were once stars have the potential to become cash
cows when the market growth rate declines, if the business has been
----------------------
able to retain market share
---------------------- • Cash Cows yield profits and positive cash flows
---------------------- • Companies need to protect market share of cash cows and protect
market leadership
----------------------
• Maintenance support is usually in terms of product improvements,
---------------------- product re-engineering to reduce costs, reminder communication to
maintain brand recall and strong distribution support. Companies
---------------------- will use competitive weapons to ward off competitor attack, but
---------------------- maintaining margins is key
Strategy: Hold and selectively invest in strong cash cows, Harvest weaker cash
---------------------- cows
---------------------- 3. Problem Child/Question Marks
---------------------- • Low market share businesses in high growth markets
---------------------- • Could be ex- stars that have lost market share or may be new
businesses that have yet to build market share
---------------------- • Question marks do not yield profitability nor cash flows
---------------------- • Companies need to selectively take a call on persisting with these
businesses: Those with some potential to become future stars or
---------------------- those businesses where there is an SCA that can be built or leveraged
---------------------- – Invest and build market share Those that do not have any future
potential of SCA – Divest Companies may sometimes retain a
---------------------- question mark in the portfolio, as it plays a tactical role other than
that of generating profits.
----------------------
4. Dogs
----------------------
• Low market share businesses in low growth markets
---------------------- • Dogs are usually ex cash cows that have lost market share or even
question mark businesses that a company may have persisted with
----------------------
and where market growth rates have declined
---------------------- • Yield nothing and have no future
---------------------- • Companies have to take a call on whether there is any other reason
to hold on to these businesses.
----------------------
Strategy: Usually divest the business. Companies need a balance of Stars,
---------------------- Cash Cows and even Problem Children
----------------------
• Stars are necessary for the market leadership of the organisation – but too Notes
many stars will create a strain on the cash resources of the company.
----------------------
• Cash Cows generate cash resources and fund investments in other
businesses – but too many cash cows and the future of the company is ----------------------
under threat. Companies need sufficient presence in future growth markets
and need to reduce presence in low growth or stagnant markets. ----------------------
• Problem children are also a presence in a high growth market. Businesses ----------------------
that are relatively new and have yet to build market share are likely to be
problem children. With good management and a SCA have the potential ----------------------
to become future stars.
----------------------
Critique of the bCg matrix
----------------------
The matrix does not take into account a number of other market realities
like competitive pressures, role of the business in the portfolio, and can lead to ----------------------
the neglect of some businesses. Market Growth rate is not the only factor to be
considered to determine the future growth potential of the business. ----------------------
2) GE Multifactor Portfolio Matrix ----------------------

GE pioneered the multifactor portfolio matrix, to include several other ----------------------
factors not previously considered by the BCG matrix.
----------------------
The vertical axis represents market attractiveness and horizontal axis
represents business strength. The circles represent the different SBU”S and the ----------------------
size of the SBU represents the sales revenues.
----------------------
The premise of this matrix is that any business is successful to the extent
that the company enters attractive markets and possesses the business strengths ----------------------
to succeed. Market growth rate, though key, is not the only factor that determines
the long-term attractiveness of a market. ----------------------
Market attractiveness is determined by additional factors such as market ----------------------
size, competitive intensity, government legislation, technological requirements,
vulnerability to economic cycles, raw material availability among other factors. ----------------------
Business Strengths would include core competencies, competitive advantages, ----------------------
market share and share growth, product quality, brand reputation, distribution
networks, production capacities and efficiencies, R&D, Managerial personnel ----------------------
amongst others.
----------------------
Managers first have to assign weights to each in accordance with its
relative importance. Hence, in the table attached, managers have assigned 20% ----------------------
weight age to overall market size and competitive intensity, which reflects that
mangers considered these most important. The next step is to rate each business ----------------------
or product area on each factor, ranging from 1(least attractive) to 5 (very ----------------------
attractive).The ratings are then multiplied by the weights to arrive at the values
for each division. The value indicates the point at which the SBU is placed on the ----------------------
matrix, which is a graphical representation of the attractiveness of each business.
----------------------
The matrix is divided into 9 cells, which in turn fall into 3 zones.
----------------------

Notes Zone 1: In these three cells, the company’s business strength and market
attractiveness ranges from medium to high. Businesses that fall into these cells
---------------------- need to be protected and defended and require resource allocation to build
selectively.
----------------------
Zone 2: For the 3 cells in this zone, if one factor is weak the other is very
---------------------- strong.
---------------------- Zone 3: For the 3 cells both business strength and market attractiveness
range from medium to low. Businesses that fall within these cells need selective
---------------------- investments, to maintain current earnings.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- A Critique of the GE model
---------------------- Although the GE model considers several market realities, its biggest
drawback is that the weightages and ratings are assigned by managers and may
---------------------- not always be very objective.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
APPENDIX II Notes
Marketing Plan Outline ----------------------
1. Business Mission ----------------------
What is the mission of the firm? What business is it in? How well is its
mission understood throughout the organisation? Five years from now, ----------------------
what business does it wish to be in? ----------------------
Does the firm define its business its terms of benefits its customers want
----------------------
rather than in terms of goods and services?
2. Objectives ----------------------
Is the firm’s mission statement able to be translate into operational terms ----------------------
regarding the firm’s objectives?
----------------------
What are the stated objectives of the organisation? Are they formally
written down? Do they lead logically to clearly stated marketing ----------------------
objectives? Are objectives based on sales, profits or customers?
----------------------
Are the organisation’s marketing objectives stated in hierarchical order?
Are they specific so that progress towards achievement can be measured? ----------------------
Are the objectives reasonable in light of the organisation’s resources? Are
the objectives ambiguous? Do the objectives specify a time frame? ----------------------
Is the firm’s main goal to maximise customer satisfaction or to get as ----------------------

many customers as possible?
----------------------
3. Situation Analysis (SwOT Analysis)
----------------------
Has one or more competitive advantages been identified in the SWOT
analysis? Are these advantages sustainable against the competition? ----------------------
A. Internal Strengths and weaknesses
----------------------
a) What is the history of the firm, including sales, profits and
organisational philosophies? ----------------------
b) What is the nature of the firm’s current situation? ----------------------

c) What resources does the firm have (financial, human, time, ----------------------
experience, asset, skill)?
----------------------
d) What policies inhibit the achievement of the firm’s objectives with
respect to organisation, resource allocation, operations, hiring, ----------------------
training, and so on?
----------------------
B. External Opportunities and Threats
a) Social: What major social and lifestyle trends will have an impact ----------------------
on the firm? What action has the firm been taking in response to ----------------------
these trends?
b) Demographics: What impact will forecasted trends in the size, age, ----------------------
profile and distribution of population have on the firm? How will ----------------------
the changing nature of the family, the increase in the proportion of

Notes women in the workforce and changes in the ethnic composition of
the population affect the firm? What action has the firm taken in
---------------------- response to these developments and trends? Has the firm revaluated
its traditional products and expanded the range of specialised
---------------------- offerings to respond to these changes?
---------------------- c) Economic: What major trends in taxation and income sources
will have an impact on the firm? What action has the firm taken in
----------------------
response to these trends?
---------------------- d) Political, Legal and Financial: What laws are now being proposed
at international, federal, state and local levels that could affect
----------------------
marketing strategy and tactics? What recent changes in regulations
---------------------- and court decisions affect the firm? What political changes are
taking place at each government level? What action has the firm
---------------------- taken in response to these legal and political changes?
---------------------- e) Competition: Which organisations are competing with the firm
directly by offering a similar product? Which organisations are
---------------------- competing with the firm indirectly by securing its prime prospect’s
time, money, energy or commitment? What new competitive trends
----------------------
seem likely to emerge? How effective is the competition? What
---------------------- benefits do competitors offer that the firm does not? Is it appropriate
for the firm to compete?
----------------------
f) Technological: What major technological changes are occurring
---------------------- that may affect the firm?
---------------------- g) Ecological: What is the outlook for the cost and availability of
natural resources and energy needed by the firm? Are the firm’s
---------------------- products, services and operations environmentally friendly?
---------------------- 4. Marketing Strategy
A. Target Market Strategy
----------------------
• Are the members of each market homogeneous or heterogeneous
---------------------- with respect to geographic, sociodemographic and behavioral
characteristics?
----------------------
• What are the size, growth rate and national and regional trends in
---------------------- each of the organisation’s market segments?
---------------------- • Is the size of each market segment sufficiently large or important to
warrant a unique marketing mix?
---------------------- • Are market segments measurable and accessible to distribution and
communication efforts?
----------------------
• Which are the high-or low-opportunity segments?
---------------------- • What are the evolving needs and satisfactions being sought by
target markets?
----------------------
• What benefits does the organisation offer to each segment? How do
---------------------- these benefits compare with benefits offered by competitors?
• Is the firm positioning itself with a unique product? Is the product Notes
needed?
• How much of the firm’s business is repeat versus new business? ----------------------
What percentage of the public can be classified as nonusers, light ----------------------
users or heavy users?
• How do current target markets rate the firm and its competitors with ----------------------
respect to reputation, quality and price? What is the firm’s image
----------------------
with the specific market segments it seeks to serve?
• Does the firm try to direct its products only to specific groups of ----------------------
people or to everybody?
----------------------
• Who buys the firm’s products? How does a potential customer find
out about the organisation? When and how does a person become a ----------------------
customer?
----------------------
• What are the major objections given by potential customers as to
why they do not buy the firm’s products? ----------------------
• How do customers find out about and decide to purchase the
----------------------
product? When and where?
• Should the firm seek to expand, contract or change the emphasis of ----------------------
its selected target markets? If so, in which target markets and how
----------------------
vigorously?
• Could the firm more usefully withdraw from some areas where ----------------------
there are alternative suppliers and use its resources to serve new,
----------------------
customer groups?
• What publics other than target markets (financial, media, government, ----------------------
citizen, local, general and internal) represent opportunities or
problems for the firm? ----------------------
B. Marketing Mix ----------------------

• Does the firm seek to achieve its goal chiefly through coordinated ----------------------
use of marketing activities (product, distribution, promotion and
pricing) or only through intensive promotion? ----------------------
• Are the objectives and roles of each element of the marketing mix ----------------------
clearly specified?
----------------------
1. Product
i. What are the major product/service offering of the firm? Do they ----------------------
complement each other, or is there unnecessary duplication? ----------------------
ii. What are the features and benefits of each product offering?
----------------------
iii. Where are the firm and each major product in the life cycle?
----------------------
iv. What are the pressures among various target markets to increase or
decrease the range and quality of products? ----------------------
----------------------

Notes v. What are the major weaknesses in each product area?
vi. What are the major complaints? What goes wrong most often?
----------------------
vii. Is the product name easy to pronounce? Spell? Recall? Is it
---------------------- descriptive, and does it communicate the benefits the product offers?
Does the name distinguish the firm or product from all others?
----------------------
viii. What warranties are offered with the product? Are there other ways
---------------------- to guarantee customer satisfaction?
ix. Does the product offer good customer value?
----------------------
x. How is customer service handled? How is service quality assessed?
----------------------
2. Place / Distribution
---------------------- i. Should the firm try to deliver its offerings directly to customers or can
it better deliver selected offerings by involving other organisations?
----------------------
What channel(s) should be used in distributing product offerings?
---------------------- ii. What physical distribution facilities should be used? Where should
they be located? What should be their major characteristics?
----------------------
iii. Are members of the target market willing and able to travel some
---------------------- distance to buy the product?
---------------------- iv. How good is access to facilities? Can access be improved? Which
facilities need priority attention in these areas?
----------------------
v. How are facility locations chosen? Is the site accessible to the target
---------------------- markets? Is it visible to the target markets?
vi. What are the location and atmosphere of retail establishments? Do
---------------------- these retailers satisfy customers?
---------------------- vii. When are products made available to users (season of year, day of
week, time of day)? Are these times most appropriate?
----------------------
3. Promotion
----------------------
i. How does a typical customer find out about the firm’s products?
---------------------- ii. Does the message the firm delivers gain the attention of the intended
target audience? Does it address the wants and needs of the target
---------------------- market, and does it suggest benefits or a means for satisfying these
---------------------- wants? Is the message appropriately positioned?
iii. Does the promotion effort effectively inform, persuade educate, and
---------------------- remind customers about the firm’s products?
---------------------- iv. Does the firm establish budgets and measure effectiveness of
promotional efforts?
----------------------
a. Advertising
---------------------- • Which media are currently being used? Has the firm chosen the
---------------------- types of media that will reach its target markets?
• Are the types of media used the most cost-effective, and do they
---------------------- contribute positively to the firm’s image?
• Are the dates and times the ads will appear the most appropriate? Notes
Has the firm prepared several versions of its advertisements?
----------------------
• Does the organisation use an outside advertising agency? What
functions does the ad agency perform for the organisation? ----------------------
• What system is used to handle customer inquiries resulting from
----------------------
advertising and promotions? What follow-up is done?
b. Public Relations ----------------------
• Is there a well-conceived public relations and publicity program? ----------------------
Does the program have the ability to respond to bad publicity?
----------------------
• How is public relations normally handled by the firm? By whom?
Have those responsible nurtured working relationships with media ----------------------
outlets?
----------------------
• Is the firm using all available public relations avenues? Is an effort
made to understand each of the publicity outlet’s needs and to ----------------------
provide each with story types that will appeal to its audience in
readily usable forms? ----------------------
• What does the annual report say about the firm and its products? ----------------------
Who is being effectively reached by this vehicle? Does the benefit
----------------------
of the publication justify the cost?
c. Personal Selling ----------------------
• How much of a typical salesperson’s time is spent soliciting new ----------------------
customers as compared to serving existing customers?
----------------------
• How does the sales force determine which prospect will be called
on and by whom? How is the frequency of contact determined? ----------------------
• How is the sales force compensated? Are there incentives for ----------------------
encouraging more business?
----------------------
• How is the sales force organised and managed?
• Has the sales force prepared an approach tailored to each prospect? ----------------------
• Has the firm matched sales personnel with the target market ----------------------
characteristics?
----------------------
• Is there appropriate follow-up to the initial personal selling effort?
Are customers made to feel appreciated? ----------------------
• Can database or direct marketing be used to replace or supplement ----------------------
the sales force?
d. Sales Promotion ----------------------
• What is the specific purpose of each sales promotion activity? Why ----------------------
is it offered? What does it try to achieve?
----------------------
• What categories of sales promotion are being used? Is sales
promotion directed to the trade, the final consumer or both? ----------------------

Notes • Is the effort directed at all the firm’s key publics or restricted to only
potential customers?
----------------------
4. Price
---------------------- i. What levels of pricing and specific prices should be used?
---------------------- ii. What mechanisms does the firm have to ensure that the prices
charged are acceptable to customers?
----------------------
iii. How price sensitive are customers?
---------------------- iv. If a price change is put into effect, how will the number of customers
---------------------- change? Will total revenue increase or decrease?
v. Which method is used for establishing a price: going rate, demand
---------------------- oriented or cost based?
---------------------- vi. What discounts are offered, and with what rationale?
---------------------- vii.
Has the firm considered the psychological dimensions of price?
---------------------- viii. Have price increases kept pace with cost increases, inflation or
competitive levels?
---------------------- ix. How are price promotions used?
---------------------- x. Do interested prospects have opportunities to sample products at an
introductory price?
----------------------
xi. What methods of payment are accepted? Is it in the firm’s best
---------------------- interest to use these various payment methods?
---------------------- 5. Implementation, Evaluation and Control
a) Is the marketing organisation structured appropriately to implement
----------------------
the marketing plan?
---------------------- b) What specific activities must take place? Who is responsible for
---------------------- these activities?
c) What is the implementation timetable?
----------------------
d) What other marketing research is necessary?
----------------------
e) What will be the financial impact of this plan on a one-year
---------------------- projected income statement? How does projected income compare
with expected revenue if the plan is not implemented?
----------------------
f) What are the performance standards?
---------------------- g) What monitoring procedures (audits) will take place and when?
---------------------- h) Does the firm seem to be trying to do too much or not enough?
---------------------- i) Are the core marketing strategies for achieving objectives sound?
j) Are the objectives being met, and are the objectives appropriate?
----------------------
k) Are enough resources (or too many resources) budgeted to
---------------------- accomplish the marketing objectives?
Competition and Competitive Strategy
UNIT
4
Structure:
4.1 Introduction
4.2 Identifying Competitors
4.2.2 Industry Perspective
4.3 Structural Analysis of the Industry
4.4 Competitor Analysis
4.5 Setting up a Competitive Intelligence System
4.6 Generic Competitive Strategies
4.6.1 Cost Leadership
4.6.2 Differentiation
4.6.3 Focus
4.7 Designing Competitive Strategies
4.7.1 Market Leader
4.7.2 Market Challenger
4.7.3 Market Follower
4.7.4 Market Nicher
4.8 Balancing Customer and Competitor Orientations
Summary
Keywords
Suggested Reading
Competition and Competitive Strategy 83

Notes
Objectives
----------------------
----------------------
• Identify competitors from the customer and industry point of view
----------------------
• Conduct an industry, market and competitor analyses
---------------------- • Describe the importance of a competitive intelligence system
---------------------- • Choose a generic strategy for your company
---------------------- • Design competitive strategies based on the generic strategy
• Balance both customer and competitor orientations
----------------------
---------------------- 4.1 INTRODUCTION

---------------------- The fundamental purpose of a business unit is to create value for
---------------------- its customers and capture value for its owners. A firm’s understanding of the
structure of an industry and the competition within will reflect in its business
---------------------- strategies. Competitive forces within the industry determine the appropriateness
of a firm’s strategies and its ability to capture value for itself as competitive
---------------------- strategy is essentially a search for a viable position in the industry. Many
---------------------- companies fail to establish a viable position, simply because they fail to truly
understand the competition within their industries and performance factors
---------------------- critical to success, in a given industry. Consequently, their competitive strategy
is inadequate to achieving their strategic goals.
----------------------
---------------------- 4.2 IDENTIFYING COMPETITORS

---------------------- For a manager a starting point for any exercise in devising a competitive
strategy would be to ask himself, who are our competitors?
----------------------
For most companies it would seem a simple task to identify its competitors,
---------------------- and it would include all the key companies within that industry. However,
the range of a company’s actual and potential competitors is much broader.
---------------------- Moreover, the way customers would define competition for a product would
---------------------- be very different from the way the company would approach such an exercise.
Companies need to use both the approaches in identifying its competitors.
----------------------
This task has become even more complex due to the convergence of
---------------------- industries. There was a time when industry boundaries were clearly known:
banks competed with other banks, and a mobile handset manufacturer competed
---------------------- with another handset manufacturer. Today banks are competing with mutual
funds, for mobilisation of funds as a customer makes a choice between a bank
----------------------
deposit and investing in a mutual fund. Banks are competing with non-banking
---------------------- finance companies for extending various loan products to their customers;
competing with financial advisors for offering investment advises to their clients.
---------------------- The only home entertainment device in the recent times was the television;
hence, TV manufacturers competed with other TV manufacturers. Today the Notes
personal computer is as much a home entertainment device; hence, a television
manufacturer is also competing with companies from other industries. ----------------------
The business models in most industries have undergone a rapid change as ----------------------
customer priorities change. A strategic challenge facing many firms is to detect,
understand and participate in the new competitive forms as they emerge. TV ----------------------
networks like Star, Sony and Zee compete not just with each other, but also with
----------------------
the internet, the Xbox or Sony Play Station, DVD rentals and shopping malls
for the leisure time of viewers. ----------------------
Companies need to be sensitive to new business forms as they emerge
----------------------
and conduct depth analyses to understand whether they represent a threat or an
opportunity. A correct identification of a firm’s competitors is the first critical ----------------------
step in devising an appropriate competitive strategy.
----------------------
From the customer’s perspective, all products that satisfy the same need ----------------------
are seen as competing with each other. It is very important for managers to ----------------------
consider this perspective, as this fundamentally affects customer choices and
the comparison of value that a customer makes. Hence, competition includes ----------------------
all the actual and potential rival offerings and substitutes that a buyer might
consider. ----------------------
• At Level 1 is Brand competition, which consists of brands that directly ----------------------

compete for the same market segments.
----------------------
• At level 2 is Industry competition, which consists of all firms in a
given industry. Although customers would not consider all offerings ----------------------
in an industry, when making a choice, industry competition has a very
important bearing on the value perception of customer. Prices of the ----------------------
different offerings act as ‘signposts’ of price/value expectations from the ----------------------
offerings under consideration. It is not that customers carry exact prices
in their heads; it is the general price information that acts as a benchmark ----------------------
or comparison point for value.
----------------------
• At Level 3 is Generic competition or all products, which satisfy the same
need. Generic Competitors, also known as substitutes could be products ----------------------
in vastly different physical forms and cuts across industry boundaries.
----------------------
Companies often underestimate generic competition, since it does not
directly appear as a customer choice. ----------------------
Encyclopedia Britannica faced devastating competition not from other
----------------------
encyclopedia but from the CD ROM and the Internet (a giant storehouse
of knowledge). A company is more likely to be hurt by generic competitors ----------------------
and newer technologies, as the impact is not entirely predictable.
Substitutes also influence the customer’s perceptions of value, as customer ----------------------
make tradeoffs amongst substitutes.
----------------------
----------------------

Notes • At Level 4 is Share of Wallet competition, which consists of all product
offerings that compete for the customers “rupee”. There are a wide variety
---------------------- of products and services competing for a limited income. Customers have
to make tradeoffs and priorities for purchase. Share of Wallet competition
---------------------- becomes particularly important during a recessionary cycle.
---------------------- • Yet another perspective is to monitor “share of mind” and share of heart.”
The most commonly used metric to determine a company’s position
----------------------
in an industry is market share. “Share of Mind” is a measure of brand
---------------------- recall, when a potential use situation arises. Customers are more likely to
consider for purchase, the brands that they recall very easily. “Share of
---------------------- Heart” is a measure of the customer’s affinity to or likeability of a brand.
---------------------- Although market share is the most commonly used measure of a brand’s
success, it is not truly indicative of the health of a business. A particular brand
---------------------- may have dominant market share at a point in time, but if its scores on mind
share and heart share are low, shows that a company has probably used very
----------------------
short-term tactics to gain market share. On the other hand, if a brand scores high
---------------------- on mind share and heart share, but currently low on market share, reveals that
a firm is in a good position to regain market share, but may have neglected some
---------------------- current issues.
---------------------- 4.2.2 Industry Perspective
---------------------- An industry is a group of firms that offer similar products and can be
classified according to number of sellers; degree of product differentiation; entry,
---------------------- mobility and exit barriers; cost structure; degree of vertical integration; strategic
groups and degree of globalisation.
----------------------
1. Number of sellers and degree of product differentiation
---------------------- A starting point for defining the industry structure is to specify the
---------------------- number of sellers and the extent to which the product is homogenous
or differentiated. There are four basic types of industry structures:
----------------------
• Pure Monopoly: Only one firm provides the product or service
---------------------- in a country or region. Monopolies exist only in regulated or
protected industries. In the absence of competition, monopolists
---------------------- charge high price and offer minimal service. If substitutes offer
some competition, a monopolist may invest in service and
----------------------
technology. Government owned or public sector monopolies
---------------------- may not charge a high price in public interest, but offer minimal
products. Today monopolistic structure is seen in public utilities
---------------------- (public transportation, water supply) or industries, which crucial to
national security (defense, police).
----------------------
• Oligopoly: A small number of very large firms producing
---------------------- either highly differentiated products (differentiated oligopoly)
or standardised products (pure oligopoly.) Oligopolistic structure
----------------------
is seen in industries where capital investment required to set up
---------------------- a firm is extremely high or where large capacities or scale is
critical. Oil, Steel, Cement, Life Insurance, Airlines are examples Notes
of oligopolistic industries. A variation of an oligopoly is a
duopoly, where the market is divided between two large players, ----------------------
who dominate the entire market.
----------------------
• Monopolistic competition: Is seen in industries where there are
a large number of players with differentiated product offerings. ----------------------
Companies focus on market segments, where they can meet
----------------------
customer needs in a superior way and offer better value. Monopolistic
competition is seen in industries such as FMCG categories. ----------------------
• Pure Competition: Is seen in industries where there are a large
----------------------
number of firms, with competitors offering the same product and
service. Because there is limited scope for differentiation, prices ----------------------
charged are more or less similar. Commodities markets are
examples of pure competition. An industry’s competitive structure ----------------------
changes over time mainly due to macro environmental changes.
----------------------
2. Cost Structure
----------------------
Each industry has its own unique cost structure that shapes its business
strategy. Steel making involves heavy manufacturing and raw material ----------------------
costs; on the other hand, beverages industry involves heavy distribution
and marketing costs. Companies try to reduce their largest costs, to ----------------------
become more efficient and get a greater advantage over other competitors. ----------------------
3. Degree of Vertical Integration
----------------------
In certain industries, companies find it advantageous to integrate
backwards or forward (vertical integration). Vertical integration often ----------------------
gives a firm a cost advantage and a larger share of the value-added
stream. However, specialist activities, which can be done in a better way ----------------------
at a lower cost by other firms, may be outsourced. Outsourcing is not the ----------------------
opposite of vertical integration as is commonly believed. Even vertically
integrated firms may outsource activities such as customer call centre ----------------------
operations to specialist firms.
----------------------
4. Degree of Globalisation
----------------------
In some industries competition is highly localised such as Pest Control;
others are highly globalised (aircraft manufacture, aircraft engines ----------------------
automobile manufacture). In globalised industries, companies need to
compete on a global level and keep up with latest advances in technology ----------------------
worldwide.
----------------------
5. Strategic groups
----------------------
The concept of a strategic group provides a very different approach
towards understanding the competitive structure of an industry. Strategic ----------------------
Groups is a group of firms that
----------------------
• Target the same markets and pursue similar competitive strategies
----------------------

Notes • Have similar characteristics (i.e. size, market reach)
• Have similar assets and competencies.
----------------------
Competition within a strategic group is immediate and direct.
----------------------
6. Entry, Mobility and Exit barriers
---------------------- Entry Barriers are those factors, which make it difficult for a firm to
---------------------- enter an industry. Major entry barriers include high capital requirements,
economies of scale, licensing and other government regulations and scarce
---------------------- resources.
---------------------- Mobility barriers are those that prevent a firm moving from one segment
to other attractive segments. Some mobility barriers are Brand image,
---------------------- distribution networks and technology and service levels.
---------------------- Exit barriers prevent a firm from leaving an industry. Government
regulations, obligations to customers, low asset salvage value are some
---------------------- examples of entry barriers.
---------------------- 7. Potential Competitors
In addition to current competitors, it is important to consider organisations
----------------------
who pose a substantial long-term threat or new market entrants. Potential
---------------------- competition in future can from organisations that are:
---------------------- • Vertically integrating into the present industry

• Increasing economies of scale
----------------------
• Increasing their reach and control over their distribution channels
----------------------
• Increasing control over suppliers
---------------------- • Making high capital investment commitments
---------------------- • Increasing their R&D spends in related categories and substitutes
---------------------- • Global firms entering the country

• Companies extending their product range
----------------------
• Cash rich companies, looking to deploy their cash resources or assets
---------------------- and competencies
---------------------- We have looked at several ways of identifying and defining competition,
both from an industry’s perspective as well as the customer’s perspective.
---------------------- Companies have to guard against defining too broad or too narrow a
competitive set.
----------------------
Monitoring different levels of competition also creates multiple marketing
---------------------- tasks such as:
---------------------- • Convincing your customers that your brand delivers the best
solution, amongst brand and industry competitors.
----------------------
• Convincing your customers that your product offers better value
---------------------- vis-à-vis substitute competitors.
• Convincing your customers that the need you are fulfilling is an Notes
important one.
----------------------

1. From the customer’s perspective, all products that satisfy the same ----------------------
need are seen as competing with each other. For managers to consider
this perspective, as this fundamentally affects customer choices and ----------------------
the comparison of value that a customer makes, what comes at level 1? ----------------------
i. Generic competition
ii. Industry competition ----------------------
iii. Brand competition ----------------------
iv. Share of Wallet
----------------------
2. What do you mean by Pure Competition?
i. Only one firm provides the product or service in a country or ----------------------
region.
----------------------
ii. A small number of very large firms producing either highly
differentiated products or standardised products ----------------------
iii. Is seen in industries where there are a large number of players
----------------------
with differentiated product offerings.
iv. Is seen in industries where there are a large number of firms, with ----------------------
competitors offering the same product and service.
----------------------
----------------------
Activity 1
----------------------
1. For the following product categories, identify the various levels of ----------------------
competition as you have studied: (a) Calculators b) Greeting Cards
2. For any industry of your choice, try to find out information on the ----------------------
following: Basic industry structure (monopoly etc.), the companies ----------------------
that are vertically integrated, the different strategic groups within the
industry, entry barriers and potential new competitors. ----------------------
----------------------
4.3 STRUCTURAL ANALYSIS OF THE INDUSTRY ----------------------
In addition to competitors, whether present or potential, immediate or ----------------------
indirect, there are several competitive forces that determine a company’s search
for a favorable competitive position in an industry. In the book, “Competitive ----------------------
Strategy”, Michael Porter wrote that two central questions underlie the choice
----------------------
of competitive strategy:
----------------------

Notes • The first is the attractiveness of industries for long-term profitability
and the factors that determine it.
----------------------
He identified “Five Forces” as the five factors that determine the
---------------------- profitability attractiveness of an industry. These five forces are explained
in the “Five Forces” model.
----------------------
• The second central question in competitive strategy is the determinants
---------------------- of relative competitive position within an industry.
In most industries, regardless of what the average profitability of an
----------------------
industry is, some firms are simply more profitable than others. A firm in a very
---------------------- attractive industry may still not earn attractive profits, if it has chosen a poor
competitive position. According to Porter, a firm can choose a competitive by
---------------------- following one of the three generic competitive strategies: Cost Leadership,
Differentiation and Focus. These generic strategies help a firm achieve a
----------------------
competitive advantage in an industry.
---------------------- Neither factor by itself is sufficient to guide the choice of competitive
---------------------- strategy. Both questions are dynamic, as industry attractiveness and competitive
positions change. Industries can become more ore less attractive, and competitive
---------------------- position reflects an unending battle among competitors. Ultimately it is a depth
understanding of the industry structure and the ability to influence the structure
---------------------- that determines success or failure in an industry.
---------------------- FIVE FORCES MOdEL
---------------------- (Adapted from Michael Porters ‘Competitive Strategy’, The Free Press,
1980)
----------------------
Five Forces Model
---------------------- (Adapted from Michael Porter’s ‘Competitive Strategy’, The Free Press,
1980) In any industry, the rules of competition are embodied in the five
----------------------
competitive forces:
---------------------- • The Threat of New Entrants
---------------------- • The Threat of Substitutes
---------------------- • The Bargaining Power of Buyers

• The Bargaining Power of Sellers
----------------------
• Internal Rivalry between firms in the industry
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Potential Notes
entrants (Threat
of mobility) ----------------------
Industry com-
----------------------
Suppliers Buyers
(Supplier petitors (Segment (Buyer
power) rivalry) power)
----------------------
----------------------
----------------------
Substitutes
(Threat of ----------------------
substitutes)
----------------------
Fig. 4.1: Five Forces Model
----------------------
Fig. 4.1 highlights all the elements of industry structure that may drive
competition in an industry. In any particular industry, not all the five forces will ----------------------
be equally important. Every industry is unique and has its own unique structure.
----------------------
The collective strength of these forces determines the ability of firms in an
industry to earn, on an average, rates of return on investment in excess of cost of ----------------------
capital. The strength of the five forces varies from industry to industry, and can
change as an industry evolves. The result is that not all industries are alike in ----------------------
terms of inherent profitability. In industries where the five forces are favorable, ----------------------
many competitors earn attractive returns. But industries where pressure from
one or more of the forces is intense, few firms are able to command attractive ----------------------
returns. The five forces determine industry profitability because they influence
the prices, costs, and required investment of firms in an industry, the elements ----------------------
of ROI. ----------------------
This seems to be contradictory to what we have been learning, as it seems
to suggest that no matter what efforts the management puts in, the ROI will ----------------------
depend on the strength of the five competitive forces. Not true, because the real ----------------------
utility of Porters model is the learning that a firm is not a prisoner of the industry
structure or the five forces. Companies can and should shape the structure and ----------------------
can fundamentally change an industry’s attractiveness for better or for worse.
Only those firms that understand the competitive structure of their industries ----------------------
intuitively can shape their future through appropriate business strategies. ----------------------
Each of the five forces and their impact on industry profitability is
explained hereunder. ----------------------
A) Intensity of Rivalry between firms ----------------------

Intensity of rivalry between firms can be characterised as cutthroat, ----------------------
intense, moderate, weak or stable. The intensity of rivalry depends on several
factors: ----------------------
1. Concentration ratio or percentage of market share held: In oligopolistic ----------------------
industries, the concentration ratio is high, because of the presence of a
few firms, each holding a sizeable market share. Competition in such ----------------------

Notes industry is more stable; hence, intensity of rivalry is less. Can you state
why rivalry would be more stable?
----------------------
In industries where there are a large number of competitors, none with
---------------------- significant market share (also known as fragmented markets) competition
is more intense or even cutthroat as each firm tries to improve its market
---------------------- share.
---------------------- 2. Market growth Rates: When market growth rates are high, all firms in
the industry can grow without having to fight for market share. The rate of
---------------------- growth for each firm will of course necessarily depend on their respective
business strategies.
----------------------
When market growth rates slow down, a large part of the firm’s growth
---------------------- now comes from taking market share away from rivals. Hence slow
market growth rates increases intensity of rivalry.
----------------------
3. Overcapacity: When the industry is experiencing growth, most firms are
---------------------- adding production capacity to meet the increased demand expectations.
---------------------- When demand weakens, firms’ struggle with excess capacity puts greater
pressure on margins, which in turn leads to a greater fight for market
---------------------- share and consequently increases intensity of rivalry.
---------------------- 4. higher Fixed Costs: Industries that have a high fixed cost structure
which puts a pressure on the firm to pursue a sales volumes strategy.
---------------------- With all firms pursuing volume, rivalry is likely to be more intense.
Also, industries, which have experienced a slowdown and consequent
---------------------- overcapacity, feel the burden of higher fixed costs, which in turn increases
---------------------- rivalry.
5. Perishable Products: Product perishability is also seen to increase rivalry
---------------------- between firms. A seat on an airline or a hotel room are both ‘perishable’
---------------------- products, hence rivalry to fill seats on a particular route or to sell room
nights is very intense.
----------------------
6. Low levels of Product differentiation: In the industry structure, we
---------------------- learnt earlier that pure competition exists in industries where there are
large number of firms, producing products and services with little or no
---------------------- product differentiation. In such a case, the intensity of rivalry is also likely
to be very high.
----------------------
7. Diversity of Rivals: A large number of companies each pursuing their
---------------------- own goals and coming from different backgrounds bring in diversity into
the industry. This diversity can sometimes increase rivalry as competitors
----------------------
with differing goals run into each other. The courier service industry has a
---------------------- very diverse set of companies participating in the industry and can be said
to have 3 or 4 strategic groups; from local courier operators, to national
---------------------- courier companies, international courier companies and to companies
that provide a variety of logistics support services in addition to courier
----------------------
services.
----------------------
8. Strategic importance of business or market: The more strategicall Notes
important the business or market is to the companies within the industry,
the greater will be the need to gain market share and protect existing ----------------------
share. Intensity of rivalry within such pockets of the industry is more
intense. ----------------------
9. Switching Costs: Switching Costs are described as costs that lock in ----------------------
a customer to a particular brand of the product. Switching costs can
----------------------
be psychological where a customer perceives a high risk in switching
to a rival brand. Switching costs can be financial where a customer is ----------------------
locked into a payment plan for a fixed period and will lose financially
if he switches to a rival brand. Switching costs can also be physical, as ----------------------
customers are locked into the asset bought, until they decide to upgrade
----------------------
or replace it.
In industries where switching costs are low, customers can switch brands ----------------------
relatively easily, and therefore rivalry between firms to retain customers
----------------------
is higher. Industries where switching costs are high for all the reasons stated
earlier, rivalry is likely to be less intense. ----------------------
It important to note that, no single factor can be used to characterise the
----------------------
intensity of rivalry in an industry. All the factors are co-dependant and must be
understood holistically. ----------------------
How does intensity of rivalry affect business strategy? ----------------------
Intensity of rivalry can affect business strategy in several ways:
----------------------
• Greater rivalry puts downward pressure on prices and company margins.
Firms are compelled to provide greater value to customers at better prices ----------------------
at the same time protecting their own margins.
----------------------
• In an industry, firms are not just competing with each other for customers
only, but for resources as well, such as manpower, raw materials ----------------------
and plant locations, funds from money markets and institutional funding.
----------------------
Competition is also for retail shelf space, media space and retail locations.
Intensity of rivalry affects a firm’s ability to gain access to resources as ----------------------
well as raises the cost of competing.
----------------------
B) Threat of Substitutes
In general, the more the substitutes there are for a particular product ----------------------
class, the greater the threat of substitutes. As more substitutes become available, ----------------------
demand becomes more elastic. For instance, retreading of tyres is a substitute for
buying a new tyre; electronic surveillance systems are substitutes for manned ----------------------
surveillance; aluminium and plastic have substituted glass packaging in many
industries and online reservations for airline, railway and hotel reservations ----------------------
have substituted the role of travel agents. ----------------------
The threat of substitutes depends on:
----------------------
1. Customer’s awareness and ability to compare substitutes: the more
----------------------

Notes aware the customer is and the easier it is for him to compare, the greater
is the threat of substitutes.
----------------------
2. Switching Costs: The easier it is for customers to switch to a rival
---------------------- substitute, the greater the threat.
How does the threat of substitutes affect business strategy?
----------------------
As we have learnt earlier, customer choices are not so much between
---------------------- rival brands but more between substitute products. Customer choices will
therefore depend on the relative price vs. performance or the perceived value
----------------------
of the various substitutes. The threat of substitutes affects the pricing strategy of
---------------------- firms’ products, as a firm tries to offer better value than competing substitutes.
---------------------- C) Bargaining Power of Buyers

All firms market their products to a “Chain of Buyers”, the customer being
---------------------- the last buyer in the chain. The various buyers in the chain include all types’ of
---------------------- dealers, agents, distributors and retailers. A firm’s marketing efforts are directed
as much to all participants in the chain, as they are to end customers. Bargaining
---------------------- power of buyers refers to the bargaining power of not just end customers, but to
that of the bargaining power of each participant in the chain.
----------------------
Buyer power is Greater if:
----------------------
i. Buyers are concentrated: defense purchases or OEM customers.
---------------------- ii. Buyers purchase a significant proportion of output and therefore enjoy
greater price leverage: Large retail chains.
----------------------
iii. Buyers pose a significant backward integration threat: many retail chains
---------------------- such as Shoppers Stop, Spencer’s, Big Bazaar and Pantaloons have
---------------------- introduced their own brand of products.
Buyer power is weaker if:
----------------------
1. Buyers are fragmented: many and diverse
----------------------
2. The products are critical or significant to the buyers: medical equipment,
---------------------- semiconductors, aircraft engines and software. In such cases, the power
shifts to the firms supplying the products.
----------------------
3. Products are not standardised and buyers cannot switch to other suppliers
---------------------- easily.
How does buyer power affect business strategy?
----------------------
• Buyers will use their bargaining power to push down prices, improve
---------------------- their own margins and services available to them. The bargaining power
---------------------- of buyers directly influences a firm’s pricing and margin leverage and in
many cases dictates virtually the kind of products and services that a firm
---------------------- will manufacture.
---------------------- • Buyer Power affects product availability at the retail end as well as the
merchandising space available within retail outlets.
----------------------
D) Bargaining Power of Suppliers Notes
A firm deals with a number of suppliers for raw materials, services,
----------------------
components, logistics, even manpower resources can be considered as
suppliers of skills. ----------------------
Suppliers are powerful if:
----------------------
i. Suppliers are concentrated ii. Switching costs are high
----------------------
iii. Supplier’s product is an important input to the company’s final product.
iv. Suppliers present a credible forward integration threat. Pharmaceutical ----------------------
companies such as Wockhardt and Ranbaxy are entering the healthcare
industry and Himalaya is forward integrating into retailing. ----------------------
Firms improve their bargaining power vis-à-vis suppliers through vertical ----------------------
integration or by diversifying supplies.
----------------------
How does supplier power affect business strategy?
----------------------
• Suppliers’ commercial terms directly affect a company’s margins and
pricing strategy. Firms try to maintain a balance of power with buyers and ----------------------
suppliers. If the firm’s position is weak vis-à-vis both, the profit margins
of the company will be under severe pressure. ----------------------
• Suppliers also affect product quality as the quality of their output directly ----------------------
affects product performance and quality.
----------------------
• Logistics suppliers affect product availability or distribution.
• Suppliers like labor unions affect the firm’s production capacities. ----------------------
E) Threat of New Entrants ----------------------

New entrants to an industry are a threat because they bring to the industry, new ----------------------
capacity, an ambition and desire to gain share as well as substantial resources
and skills. Companies that enter an industry, by acquiring an incumbent firm, ----------------------
will inevitably use their resources to cause a shake up in the industry.
----------------------
The threat of new entrants depends on the Entry Barriers to an Industry as well
as the reaction of existing players. If entry barriers are high, then new entrants ----------------------
do not pose a significant threat. Conversely, when entry barriers are low, new
----------------------
entrants pose a significant threat.
The various entry barriers to an Industry are: ----------------------
1. Capital requirements: capital investments, long gestation periods, start up ----------------------
losses
2. Economies of scale in all functions ----------------------
3. Government licensing and regulations ----------------------
4. Patents and proprietary product technology
----------------------
5. Incumbent firm’s favorable access to raw materials
6. Importance of product differentiation to the industry ----------------------
7. Access to distribution channels ----------------------

Notes Certain important aspect of entry barriers are that:
• Entry Barriers change over time: Multinational pharmaceutical companies
----------------------
faced considerable entry barriers in the Indian pharmaceutical industry
---------------------- in the form of, no recognition of their product patents, the drug price
control order, the FERA act amongst others. The situation changed when
---------------------- India became a signatory to the Doha agreement, which enforced the
recognition of product patents from January 2005. Over the years, the
----------------------
Drug Price Control order as well as the FERA act have been dismantled
---------------------- or modified.
• A new entrant can overcome entry barriers: Distribution arrangements and
----------------------
networks in the U.S computer hardware industry were tightly controlled
---------------------- by the major players. Dell computers realised that these distribution
channels were not really adding value to the customers, but were instead
---------------------- pushing prices up due to the margin play. Dell created an alternative
direct to the customer channel of distribution, which allowed customers to
----------------------
customise hardware requirements as per their own needs at the same time
---------------------- getting better value for money. Dell was able to successfully overcome a
substantial entry barrier.
----------------------
• The threat of entry barriers depends as much on the reaction from existing
---------------------- firms.
---------------------- How do entry barriers affect business strategy?

Entry barriers have an indirect impact on the intensity of rivalry within
---------------------- the industry.
---------------------- The five forces model allows managers to see through the complexity
of the industry and pinpoint those factors that are critical to competition in an
---------------------- industry as well as to identify strategic moves that will help a company gain a
---------------------- favorable competitive position in an industry and attain profitability higher than
the industry average.
----------------------
Industry Structure and Customer Needs
---------------------- At this point in your study of marketing, a question that probably has to
come to you mind is that “ If satisfying buyers needs is at the core of marketing
----------------------
strategy, then how does a structural industry analysis relate to marketing in any
---------------------- way?”
---------------------- Recall our earlier definition of marketing – “Meeting Needs Profitably”.

This definition explains that a firm must not only create value for its buyers
---------------------- for also for its owners (shareholders). The value that is created for its buyers
must also be captured by the firm for itself. The industry structure determines
---------------------- whether a firm is able to sufficiently capture the value created or if that value
---------------------- is competed away. The industry structure determines who captures value.
A detailed understanding of the dynamics of each industry is a prerequisite to
---------------------- successful and profitable marketing.
----------------------
Notes
----------------------
State True or False. ----------------------
1. According to Porter, a firm can choose a competitive by following
----------------------
one of the three generic competitive strategies: Cost Leadership,
Differentiation and Focus. ----------------------
----------------------
1. In context of Bargaining Power of Buyers, the buyer power is greater
if: ----------------------
i. Buyers are concentrated. ----------------------
ii. Buyers purchase a significant proportion of output and therefore ----------------------
enjoy greater price leverage.
----------------------
iii. Buyers are fragmented.
iv. The products are critical or significant to the buyers. ----------------------
----------------------
Activity 2 ----------------------
----------------------
1. State two examples of perishable products other than food products.
2. Can you identify two industries that are facing the significant threat ----------------------
of new entrants? What are some of the entry barriers to that industry?
----------------------
How do you think the new entrants will affect the existing companies?
----------------------
4.4 COMPETITOR ANALYSIS ----------------------
The next level of analysis that a company needs to conduct is a detailed ----------------------
competitor analysis to understand competitors, their goals, strengths and ----------------------
weaknesses and reaction patterns.
Firstly, an understanding of the current strengths and weaknesses of ----------------------
competitors can reveal threats and opportunities that merit action from a ----------------------
company. Secondly, it leads to an understanding of the goals and reaction
patterns of competitor firms, which directly determine the outcome of a ----------------------
company’s strategic moves. No business strategy is by itself either a success
or failure. It is the reaction and retaliation or the absence of a reaction, which ----------------------
determines the outcome of a firm’s business strategy. ----------------------
Competitor analysis can be conducted using the following framework:
----------------------
1. Size, Growth and Profitability
----------------------
The size of a company and growth of sales and market share provides
indicators of the health of the business. The maintenance of a strong market ----------------------

Notes position or the achievement of rapid growth usually reflects a strong competitor.
In contrast, a deteriorating market position can signal financial and organisational
---------------------- constraints, so that the firms take immediate action.
---------------------- The size of a competitor by itself is not indicative of the vitality of
competitors business, as newer entrants yet to achieve scale, but pursuing
---------------------- growth aggressively may be a larger threat than an existing large firm, not
proactively growing its business.
----------------------
After size and growth, consider profitability. A profitable business will
---------------------- have access to capital, both internally and externally, for investment in future
growth. A firm that has lost money over an extended period of time or has
----------------------
experienced a sharp erosion of its margins and profitability, will find it difficult
---------------------- to fund future growth.
2. Image
----------------------
A key strength of a company is the associations and image that customers
---------------------- carry about the organisation and its products. Whilst analyzing a competitors
---------------------- image, one must consider not only product related attributes and quality but even
factors such as innovation, social consciousness, personality of the organisation,
---------------------- relationships with stakeholders. Weaknesses of competitors on any of these
elements can present opportunities for a firm to develop an advantage. On the
---------------------- other hand, strengths of competitors on key dimensions represent challenges,
---------------------- which a firm decides to either exceed or flank.
Analysing a competitor’s image requires extensive market research with
---------------------- customers, the “chain” of buyers, as well as other stakeholders. The research
---------------------- approach is to use qualitative methods to find out what the company and its
brands mean to its customers. Consider also the competitors’ mind share and
---------------------- heart share with customers, as these metrics would be strong indicators of the
gains made by a competitor.
----------------------
3. Competitor Objectives and Commitment
----------------------
Knowledge of a competitor’objectives help predict whether a competitor’s
---------------------- present performance is satisfactory or not or whether major changes are likely.
The financial objectives of the firm indicate the company’s willingness to invest
---------------------- in a business. It is also important to know what the competitors objectives are
with respect to market share, sales growth and profitability. Other non-financial
----------------------
objectives are also important. Does the firm want to be a technological leader?
---------------------- Or wants to become a service leader? Or does it want to be an Innovation leader?
These objectives provide a good indication of the competitor’s possible future
---------------------- strategy.
---------------------- The objectives of the competitor’s parent company (if applicable) are
equally relevant. What are the performance levels and objectives of the parent?
---------------------- What is the role of the business unit in the parent’s business portfolio is a key
question.
----------------------
----------------------
4. Current and Past Strategies Notes
The competitors past and current strategies must be studied in depth. In
----------------------
particular, past strategies that have failed should be carefully noted, because
such experiences not only serve as learning but also indicate that the competitor ----------------------
is unlikely to try similar strategies.
----------------------
Knowledge of a competitor’s present strategy indicates future growth
directions. ----------------------
5. Organisation and Culture
----------------------
Knowledge about the background and experience of the competitor’s
top management and key personnel provides insights into future actions. The ----------------------
organisation structure, values, systems and people have a profound influence on ----------------------
strategy. A loosely structured flat organisation that emphasises risk taking may
have difficulty pursuing a cost reduction program. On the other hand, a highly ----------------------
structured organisation that relies on tight controls will find it very difficult to
become innovative or market oriented. ----------------------
6. Cost Structure ----------------------

A competitor’s cost structure is a key indicator of the company’s likely ----------------------
pricing strategy. Detailed information on all cost elements can be obtained from
the financial statements. An analysis of the cost structures will reveal the margin ----------------------
pressures, volume pressures and the strategic leverage that a competitor would
have with its pricing ----------------------
7. Exit barriers ----------------------

Exit barriers are crucial to a firm’s ability to withdraw from a business ----------------------
area and are an indication of commitment.
----------------------
Exit barriers would include:
• Specialised Assets: Plant, equipment or any others, which are ----------------------
difficult to transform or adapt.
----------------------
• Customer Commitments: Long term contracts to customers for
services, parts, product upgrades, training and maintenance. ----------------------
• Relationships with other business units: Synergies or shared facilities
----------------------
like distribution channels, sales force or any other.
• Government Barriers: Commitment to labor force, social ----------------------
development of the region.
----------------------
• Strategic importance of the business and emotional attachment to
the business ----------------------
8. Competitive Advantages ----------------------
A firm’s competitive advantages will be the foundation of a firm’s business
strategy. A detailed competitor analysis must culminate in a detailed Strengths ----------------------
and Weaknesses analysis of key competitors. The SW analysis completes the ----------------------
competitor analysis and provides insights on the competitors.
----------------------

Notes • Ability to pursue various strategies
• Strategic alternatives being considered
----------------------
• Reaction patterns
----------------------
A strength and weakness analysis provides a firm inputs to identify and
---------------------- develop strategic alternatives. Generally, firms would develop a strategy that
would pit their own strengths against a competitor’s weakness. Conversely,
---------------------- knowledge of a competitor’s strength is important to bypass or flank the
competitor.
----------------------
Given below is a checklist of factors to consider while analyzing strengths
---------------------- and weaknesses. This list is only indicative; firms must consider additional
---------------------- factors, which may be important in an industry’s context.
Checklist for strengths and weaknesses analysis
----------------------
a) Innovation
----------------------
• Technical product or service superiority
---------------------- • New product capability
---------------------- • R&D
---------------------- • Technologies
• Patents
----------------------
b) Manufacturing
----------------------
• Cost Structure
---------------------- • Flexible Production operations
---------------------- • Equipment, plant, assets
---------------------- • Access to raw materials

• Labour skill sets, relations with labour unions
----------------------
• Manufacturing or operational capacity
----------------------
c) Finance: Access to Capital
---------------------- • From operations
---------------------- • From financial institutions
---------------------- • From equity markets

• Parent company’s financial backing
----------------------
d) Management
----------------------
• Quality of top and middle management personnel
---------------------- • HR policies, motivation, loyalty and attrition rates
---------------------- • Knowledge of business
---------------------- • Culture

• Strategic goals and plans Notes
• Entrepreneurial drive
----------------------
• Planning and operation systems
----------------------
• Quality of strategic decision making
e) Marketing ----------------------
• Product quality and performance reputation ----------------------

• Product attributes/differentiation ----------------------
• Brand Equity
----------------------
• Breadth and depth of product lines
----------------------
• Customer orientation
• Segmentation ----------------------
• Distribution ----------------------
• Relationship with entities in distribution channel ----------------------
• Advertising/communication skills
----------------------
• Sales force – quality and motivation
----------------------
• Customer service and support
f) Customer base ----------------------
• Size, loyalty, attrition rates ----------------------

• Market share ----------------------
• Growth of target markets served
----------------------
Note: To make the SW analysis more manageable, companies usually group
competitors into strategic groups. ----------------------
A strategic group is a group of firms that: ----------------------
• Pursue a similar strategy. ----------------------
• Have similar characteristics.
----------------------
• Have similar assets and competencies.
----------------------
Grouping competitors into strategic groups also makes sense because
these firms are similarly affected by macro environmental changes and will ----------------------
more or less follow the same future direction.
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. Which is the correct checklist for strengths and weaknesses analysis
----------------------
from the ones given below?
---------------------- i. Innovation, Size, loyalty, attrition rates, Market share, Growth
of target markets served
----------------------
ii. Product quality, performance reputation, Product attributes,
---------------------- Brand Equity
---------------------- iii. Customer orientation, Segmentation, Distribution, Advertising,
communication skills, Customer service and support
----------------------
iv. Innovation, Manufacturing, Finance: Access to Capital,
---------------------- Manage-ment, Marketing and Customer Base
----------------------
---------------------- 4.5 SETTING UP A COMPETITIVE INTELLIGENCE

SYSTEM
----------------------
Competitor analysis is an extensive analysis that needs to be carried out
---------------------- in depth and on a regular ongoing basis. Companies set up formal systems to
---------------------- gather intelligence on competitors. The benefits of setting up a formal system
are timeliness and regularity of information collection and depth of analysis.
----------------------
Step 1: Setting up the system: The first step calls for identifying the
---------------------- different parameters and identifying the best sources of this information. The
next step is to assign formal responsibility to executives. Usually such
---------------------- responsibility resides with the marketing function within the company.
---------------------- Step 2: Collecting the data: Companies must use both formal and
informal sources. Data is collected on a continuous basis from the field:
---------------------- customers, sales force, channels, suppliers, market research firms and trade
associations. Published data from annual reports, trade magazines, chambers
----------------------
of commerce, industry associations, media interviews are rich sources of
---------------------- information. The Internet offers a wealth of information on every aspect of the
competitors business. Blogs posted by individuals are a very powerful source of
---------------------- information
---------------------- Step 3: Evaluating and analyzing the data: All the data collected must
be checked for validity and reliability. The information collected then needs to
---------------------- be interpreted.
---------------------- Step 4: Disseminating information within the organisation: A formal
information dissemination system is required to ensure that decision makers
---------------------- within the organisation receive timely information.
----------------------

4.6 GENERIC COMPETITIVE STRATEGIES Notes
(Adapted from Michael Porter’s ‘Competitive Strategy’, The Free Press, ----------------------
1980) The second central question in developing a competitive strategy is the
----------------------
firm’s competitive position in the industry. The competitive position
that a firm assumes will determine whether its profitability is below or ----------------------
above industry average. A firm may have several strengths and weaknesses
vis-à-vis its competitors but these are not enough to maintain an above average ----------------------
performance in the long run. The fundamental basis for a firm’s above average ----------------------
profitability is a sustainable competitive advantage (explained in Unit 3), which
is the heart of any strategy that is sustainable and profitable. ----------------------
A firm has to make a conscious choice to attain a competitive advantage; ----------------------
it must also make a choice about the type of competitive advantage it wants to
attain and the scope within which it will want to attain it. According Michael ----------------------
Porter, there are three different routes to obtaining a competitive advantage.
These three different routes are known as the three generic competitive ----------------------
strategies, which are: ----------------------
• Cost Leadership
----------------------
• Differentiation
----------------------
• Focus (Focus strategy has two variants: Cost focus and Differentiation
focus) ----------------------
Each of these generic strategies is now explained in detail. ----------------------
A firm must make a choice of generic strategy if it has to obtain a SCA and
attain a favorable competitive position in the industry and earn above average ----------------------
returns. Not having a clear strategy and being “all things to all people” is a sure ----------------------
recipe for mediocrity and below par performance, because it means that a firm
has no competitive advantages at all. ----------------------
4.6.1 Cost Leadership ----------------------
By adopting a cost leadership strategy, a firm sets out to become the lowest-
----------------------
cost producer or operator in its industry. The sources of this cost advantage
are varied and depend on the type and structure of the industry. These sources ----------------------
include:
----------------------
• Efficient Scale Facilities
• Proprietary technology ----------------------
• Preferential Access to Raw Materials ----------------------
• Value Engineering Products ----------------------
• Re-engineering production or operating processes
----------------------
A firm pursuing cost leadership must find and exploit all avenues of
cost advantage. From the above sources of cost advantage, it would become ----------------------
apparent to you that there is great deal of innovation at the heart of this strategy.
----------------------

Notes Re-engineering a product or process is a very creative and innovative
strategy. Merely pursuing cost reductions or keeping a tight control on overheads
---------------------- will not yield cost leadership; it may at best give a firm a temporary advantage
over its competitors, cost leadership is a long-term sustainable strategy.
----------------------
The cost leadership strategy is not to be confused with a “low price
---------------------- strategy”. A cost leader may command prices at or near industry average prices.
However, at equivalent prices, a cost leader commands higher returns than its
----------------------
rivals.
---------------------- Acost leader must maintain parity on product value-additions, performance
and quality with its competitors, even though it relies on its cost leadership
----------------------
for its competitive advantage. If its products are not seen as comparable or
---------------------- acceptable by buyers, a cost leader will be forced to discount its prices well
below its competitors to gain sales. This will completely erode and nullify the
---------------------- benefits of its competitive advantage.
---------------------- This strategy usually requires that the firm be “the” cost leader, and not
one of the many vying for the position. When there is more than aspiring cost
---------------------- leader in the industry, rivalry is usually fierce. Unless one firm can gain the lead
and “persuade” others to back down, the consequences can be disastrous for all.
----------------------
Implementing the cost leadership strategy requires upfront capital
---------------------- investment especially if the source of competitive advantage is scale.
---------------------- Investments are also required in process and product re-engineering. The pay-
offs of this strategy are long term; firms may have to bear the “cost” associated
---------------------- with pursuing a cost leadership strategy in the short term.
---------------------- How does this strategy help a firm in dealing with the “five forces”?
• Cost Leadership gives a firm much greater pricing flexibility than
---------------------- its competitors, without eroding its margins. This is a very formidable
---------------------- defense against rival firms in an industry.
• The Balance of bargaining power vis-à-vis suppliers and buyers tilts
----------------------
towards a firm, which has the absolute cost advantage in the industry.
---------------------- • Cost Leadership is itself a powerful entry barrier, which deters new
entrants.
----------------------
• Places a firm favorably vis-à-vis price performance of substitutes, relative
---------------------- to its competitors.
---------------------- 4.6.2 Differentiation
---------------------- In a differentiation strategy, a firm seeks to be unique along dimensions

that are valued by customers. A firm may select one or more attributes that
---------------------- buyers in an industry perceive as important, and uniquely positions itself to
meet those needs. The firm is rewarded for its uniqueness with a premium price,
---------------------- yielding above average returns for a firm.
---------------------- The sources of differentiation are several and unique to an industry.
----------------------

Differentiation can be based on the product itself, the delivery systems, product Notes
technology, the brand image and a broad range of factors. (Range of factors for
differentiation is explained in detail in Unit 9. ----------------------
A firm must chose variables in which to differentiate itself, that are ----------------------
different from its rivals. If there is more than firm differentiating on the same
attribute, there will be intense rivalry between the respective players and can ----------------------
completely erode the advantages to both the firm, unless one firm backs down
----------------------
or looks for other attributes for differentiation.
A firm that can achieve and sustain differentiation will be an above average ----------------------
performer in its industry, as its premium price exceeds its cost of differentiating
----------------------
the products. A differentiator must therefore seek ways of differentiating that
lead to a price premium greater than the cost of differentiation. This does not ----------------------
mean that a differentiator can afford to ignore costs; this would be disastrous. A
differentiator aims at cost parity relative to its competitors, by reducing costs in ----------------------
all areas that do not affect differentiation.
----------------------
A firm that pursues a differentiation strategy directs its product offerings
to specific target markets that would desire the differentiation and would be ----------------------
willing to pay a premium for it. This builds brand loyalty within the target
----------------------
market segment. A differentiation strategy is often incompatible with high
market share or a volume strategy. ----------------------
How does a differentiation strategy help a firm cope with the “five forces”? ----------------------
• Brand Loyalty is insulation against competitive rivalry.
----------------------
• It also acts as an entry barrier to the particular market segment.
----------------------
• Due to the unique product offering, buyer power is mitigated.
• Lack of comparable alternatives, makes such product offerings better ----------------------
positioned against substitutes.
----------------------
• The uniqueness of the product, as well as better margins also mitigates
supplier power. ----------------------
4.6.3 Focus ----------------------
This strategy is quite different from the other strategies because it rests ----------------------
on the choice of a very narrow competitive role within the industry. The firm
selecting a focus selects a segment or group of segments within the industry and ----------------------
chooses to serve these segments to the exclusion of the others. The firm chooses
to build a competitive advantage to serve the chosen segment only. ----------------------
In the retailing industry, Metro AG focuses only on the wholesale ----------------------

and institutional customer segment. Customer organisations have to become
----------------------
members of the metro club, and have to buy their supplies in bulk.
The focus strategy has two variants; cost focus and differentiation focus. ----------------------
In cost focus, a firm seeks cost leadership within the chosen segment, while
----------------------
in differentiation focus a firm seeks differentiation in the target segment. The
focus strategy works where a particular target segment has vastly different and ----------------------

Notes unusual needs from other segments in the market. If the focuser’s target segment
is not very different from other market segments, this strategy will not work.
----------------------
A focuser achieves a competitive advantage by dedicating itself to the
---------------------- segments exclusively, by creating specialised products or specialised production
and delivery systems that best serve the target segment. If a firm can achieve
---------------------- sustainable cost leadership (cost focus) or differentiation focus in its segment
and the segment is structurally attractive, then the focuser will be an above
----------------------
average performer in its industry. The segment must be structurally attractive,
---------------------- because some segments are much less profitable than others.
Stuck in the Middle
----------------------
A firm that engages in a generic strategy but fails to achieve any of them
---------------------- is “stuck in the middle”, as it possesses no competitive advantage. A firm that
is stuck in the middle will clearly be at a disadvantage vis-à-vis the cost leader,
----------------------
differentiator or focuser who will be better positioned to compete in the market.
---------------------- Firms that are stuck in the middle are sometimes able to get by or survive
---------------------- profitably in the industry because all other firms are also stuck in the middle.
Again, in industries where there is strong demand growth and favorable market
---------------------- conditions, the buoyant conditions tend to lift the performance of even average
companies; and hence firms that are stuck in the middle get by as average
---------------------- performers in the short term. Industry maturity tends to widen the performance
---------------------- differences between firms with a clear generic strategy and those that are stuck
in the middle, because it exposes the ill-conceived strategies that have been
---------------------- carried along by rapid growth.
---------------------- Risks in pursuing the generic strategies

No strategic alternative is fail proof; managers must be aware of the risks
---------------------- attached with each strategic alternative to take more meaningful decisions.
---------------------- The risks in pursuing the generic strategies are two: first, failing to attain or
sustain the strategy; second, the value of the strategic advantage provided by
---------------------- the strategy erodes as the industry structure evolves.
---------------------- Risks of Overall Cost Leadership
Cost leadership imposes severe burdens on the firm to keep up its position,
----------------------
which means reinvesting in modern equipment, ruthlessly scrapping obsolete
---------------------- assets, re-examining operating processes, avoiding product line proliferation
and being alert for technological improvements. Cost declines with cumulative
---------------------- volume are not automatic; neither can economies of scale be achieved without
significant attention and investment.
----------------------
The risks are:
----------------------
• Technological change that nullifies past investments or learning
---------------------- • Low-cost learning by industry newcomers or followers, through imitation
---------------------- or through their ability to invest in state of the art facilities
----------------------

• Inadequate attention given to product and marketing changes due to focus Notes
on achieving cost advantages
----------------------
• Inflation in costs that narrow the firm’s ability to maintain enough of a
price differential to offset competitor’s brand images or other approaches ----------------------
to differentiation
----------------------
An example of the risks of cost leadership as a sole focus is provided by Sharp
in consumer electronics. Sharp, which has long followed a cost leadership ----------------------
strategy, has been forced to begin an aggressive campaign to develop brand
recognition. Its ability to sufficiently undercut Sony’s and Panasonic’s prices ----------------------
was eroded by cost increases and U.S. antidumping legislation, and its strategic
----------------------
position deteriorated through sole concentration on cost leadership.
Risks of Differentiation ----------------------
Differentiation also involves a series of risks: ----------------------
• The cost differential between low-cost competitors and the differentiated ----------------------
firm becomes too great for differentiation to hold brand loyalty. Buyers
thus sacrifice some of the features, services, or image possessed by the ----------------------
differentiated firm for large cost savings;
----------------------
• The differentiating factor becomes a minimum expectation of the
customer. This can occur as buyers become more sophisticated; ----------------------
• Imitation by competitors narrows perceived differentiation, a common ----------------------
occurrence as industries mature.
----------------------
The first risk is of utmost importance and underlines the need for a firm
that follows a differentiated strategy, to maintain a tight control on its costs. If ----------------------
a differentiated firm gets too far behind in cost due to a technological change or
simply inattention, the low cost firm may be in position to make major inroads. ----------------------
For example, Kawasaki and other Japanese motorcycle producers have ----------------------
been able to successfully attack differentiated producers such as Harley-
Davidson and Triumph in large motorcycles by offering major cost savings to ----------------------
buyers. These cost savings were significant enough to cause a major shift in the ----------------------
value perception of the customer.
The second risk emphasises that firms following the differentiated ----------------------
strategy, have to continuously invest in gaining and maintaining differentiators. ----------------------
Value additions made by companies soon become minimum expectations of
buyers, as all firms in the industry try to provide the same value additions. This ----------------------
concept is further explained in Unit 9.
----------------------
Risks of Focus
----------------------
Focus involves yet another set of risks:
• The cost differential between broad-range competitors and the focused ----------------------
firm widens to eliminate the cost advantages of serving a narrow target or
----------------------
to offset the differentiation achieved by focus.
----------------------

Notes • The differences in desired products or services between the strategic
target and the market as a whole narrows.
----------------------
• Competitors find sub-markets within the strategic target and out-focus the
---------------------- focuser.

----------------------
Match the following.
----------------------
i. Cost Leadership a. A firm seeks to be unique along dimensions
---------------------- that are valued by customers.
ii. Differentiation b. A firm sets out to become the lowest-cost
----------------------
producer or operator in its industry.
---------------------- iii. Focus c. A firm chooses to build a competitive
advantage to serve the chosen segment only.
----------------------
----------------------
Activity 3
----------------------
---------------------- Can you cite some examples of firms that have chosen to focus on a
specific segment only in a given industry?
----------------------
---------------------- 4.7 DESIGNING COMPETITIVE STRATEGIES

---------------------- The aim of all business and competitive strategies is to be significant and
---------------------- powerful player in an industry and to be able to dominate markets. To be able to
achieve market status, companies have to assume competitive positions, which
---------------------- can be as a market leader, market challenger, market follower or market nicher.
Firms assume positions in an industry depending on their strengths, weaknesses,
---------------------- assets and competencies, and their business goals. These positions are not static
---------------------- and do change over time as the industry conditions change and firm’s business
goals as well as strengths and weaknesses change.
---------------------- 4.7.1 Market Leader
---------------------- The market leader is the dominant firm in its industry. Market Leadership
has traditionally been defined as the firm, which leads in market share, by
----------------------
volume and or value. For years, it has been believed that a dominant market
---------------------- share is the most profitable strategy for the firm as this was corroborated by the
PIMS (Profit Impact of Market Share) study.
----------------------
The PIMS database is an annual study conducted since 1970 on a database
---------------------- of over 3000 companies in the U.S and amongst other things reveals a co-
relation between market share and profitability. This learning led to a number of
---------------------- organisations, over the years, blindly following the strategy of acquiring market
share, only to see their profitability and consequently shareholder value steadily
----------------------

decline over the years. General Motors is still the world’s largest automobile Notes
company (market share), with accumulated losses of $.1.8 billion.
----------------------
The real understanding of the PIMS study is that whilst there is a co-
relation between market share and profitability, this does not imply that market ----------------------
share automatically causes profitability. In other words, a co-relationship does
not necessarily imply a causal relationship. ----------------------
A more plausible explanation for the co-relation between share and ----------------------
profitability is that both are caused by an underlying sustainable competitive
advantage. When a company has a competitive advantage, it can earn higher ----------------------
margins due to a price premium or a lower cost of production.
----------------------
Market share is not so much the key to profitability, as it is a symptom of a
fundamentally well run company. This is not to say that firms should not aim for ----------------------
dominant for market share, but that market share unjustified by an underlying
----------------------
competitive advantage, will inevitably reduce the company’s profitability, erode
shareholder value and even destabilise an industry. Hence rather than merely ----------------------
dominant market share, companies aim for optimal market share, one that yields
maximum profitability. The PIMS study reveals above all that profitability leads ----------------------
and not follows market share.
----------------------
Firms must therefore choose a leadership position in an industry,
consistent with their competitive advantages. An industry could have a Product ----------------------
Innovation leader, Technology leader, Cost Leader or Service leader; each of ----------------------
these leadership positions is a very viable and profitable position. Market Share
is today one of (and not the only) leadership positions in the market, as many ----------------------
industries do not have a clear market share leader (duopolistic markets).
----------------------
Remaining a market leader or a dominant firm, calls for three key strategic
actions: expand the total market, defend market share and increase sales even ----------------------
when market size remains constant.
----------------------
(You would find many of the following strategies consistent with the
Ansoff ’s matrix. Recall the matrix and try to co-relate these strategies with the ----------------------
relevant quadrants.)
----------------------
Key Strategic Actions:
----------------------
1. Expand the total market
Market expansion is the primary task of the market leader and it usually ----------------------
gains the most when the total market expands. ----------------------
A firm can expand the market by finding:
----------------------
• New users of the product: by following market penetration strategy, new
market segment strategy and geographical market expansion strategy. ----------------------
• New uses of the product
----------------------
• More usage on each use occasion
• More occasions of usage ----------------------
• Generate replacement demand ----------------------

Notes 2. Defend Share
Remaining a market leader calls for action on several fronts. It is an old
----------------------
adage that “A good leader is one who is continuously attacking himself.”
---------------------- According to Sun Tzu, (Art of War) “One does not rely on the enemy not
attacking, but on the fact that he himself is unassailable”.
----------------------
A good leader attacks itself by:
---------------------- • Continuous product innovation: A thumb rule that companies follow in
many industries is the “525” rule. This rule states, “25% of your sales
----------------------
should come from products introduced in the last 5 years, else you are in
---------------------- trouble”.
---------------------- • Improve customer service.

• Product performance and quality upgradation
----------------------
• Improve distribution effectiveness
----------------------
• Improve productivity and reduce costs
---------------------- • Continuous innovation in the Value Chain
---------------------- A good leader must not leave major flanks exposed or weak.
---------------------- Typical examples of flanks exposed are:

• Geographical areas, which are neglected
----------------------
• Inefficient operations – cost structure
----------------------
• Distribution channel unhappy with service levels
---------------------- • Customers unhappy with product performance
---------------------- • After-sales service is neglected
---------------------- At times, defending all market segments and geographical terrains can be
a drain on the firm’s resources without yielding significant gains. Firms must
---------------------- carefully analyze which markets are important to protect at any cost and which
can be surrendered. Clearly, markets (segments and territories) which are
---------------------- profitable and future growth markets would be defended.
---------------------- Firms use a combination of defense strategies to protect market share:
---------------------- • Position (Fortress) defence: Involves building superior brand power,
strong brand portfolios.
----------------------
• Flank defence: Protect weak fronts and strengthen weak areas.
---------------------- Companies launch flanker or fighter brands, to protect flagship brands in
---------------------- case of competitor attack or price war.
• Pre-emptive defence: Pre-empt an attack by attacking first. Dominant
---------------------- firms with resources may chose to entice an opponent into costly wars to
---------------------- wear down the opponent.
• Counter offensive: Wait for the invasion and then launch a counter attack.
----------------------

• Mobile defence: Market is under threat due to macro environmental Notes
changes. Firms chose to broaden the scope of activities by developing
new capabilities and diversifying into other areas. ----------------------
• Contraction defence: Here a firm chooses to entirely exit a market by ----------------------
divesting the business.
----------------------
3. Increase Sales when market size is constant
This is the most challenging task for any firm. “A rising tide raises all the ----------------------
ships in the harbor”. In growth markets, all companies will experience growth;
----------------------
however, to a greater or lesser extent dependant on their strengths and
weaknesses. It is when market growth and demand slows down that the real ----------------------
weaknesses are exposed, usually leading to a shakeout in the industry. It
is clearly survival of the fittest; only those firms that have a competitive ----------------------
advantage will survive profitably. Under such conditions, dominant firms must
----------------------
improve sales and market share and yet maintain profitability.
The strategic options are entirely dependent on the firm’s competitive ----------------------
advantage. Cost leaders, may use pricing tactics to undercut rivals to gain ----------------------
share. This however is a suicidal strategic option if there is no cost advantage
or if the rival can match the price cut, which can lead to an all out price war. ----------------------
Differentiator firms must use product value addition options to provide better-
perceived value to their customers. ----------------------
Market share gains can also be made by improving distribution ----------------------

effectiveness, higher and more effective communication spends and product
innovations. These strategies are dealt with in detail in Unit 9. ----------------------
4.7.2 Market Challenger ----------------------

A market challenger is a firm in a strong, but not dominant position ----------------------
that is following an aggressive strategy of trying to gain market share. It
typically targets the industry leader (for example, Pepsi targets Coke), but it ----------------------
could also target smaller, more vulnerable competitors.
----------------------
The fundamental principles involved here are:
----------------------
• Assess the strength of the target competitor. Consider the amount of
support that the target might muster from allies. ----------------------
• Choose only one target at a time. ----------------------
• Find a weakness in the target’s position. Attack at this point and concentrate
all the resources at this point. Consider how long it will take for the target ----------------------
to realign their resources so as to reinforce this weak spot. ----------------------
• Launch the attack on as narrow a front as possible. Whereas a defender
----------------------
must defend all their borders, an attacker has the advantage of being able
to concentrate their forces at one place. ----------------------
• Launch the attack quickly, and then consolidate.
----------------------
----------------------

Notes Some of the strategic options open to a market challenger are:
• Price discounts or price-cutting
----------------------
• Line extensions
---------------------- • Introduce new products
• Rationalise product quality
----------------------
• Increase product quality
---------------------- • Improve service
---------------------- • Change distribution
• Cost reductions
----------------------
• Intensify promotional activity
---------------------- General attack strategies that a market challenger would use are:
---------------------- • Frontal attack: Match your opponent 3:1 on all fronts
---------------------- • Flank attack: Concentration of strengths against an opponent’s weakness.

A flank attack would be on areas/markets where the opponent is under
---------------------- performing
---------------------- • Encirclement attacks: Surround your opponent and launch an offensive
on all fronts
----------------------
• Bypass attack: Is an indirect assault strategy in which a firm bypasses
---------------------- the other firms and attacks easier markets not served by any of the larger
companies
----------------------
• Guerilla warfare: Waging small intermittent attacks to harass and
---------------------- demoralise the opponent
---------------------- 4.7.3 Market Follower
---------------------- A market follower is a firm in a strong, but not dominant position that is
content to stay at that position. The rationale is that by developing strategies
---------------------- that are parallel to those of the market leader, they will gain much of the market
from the leader while being exposed to very little risk. Theodore Levitt wrote
---------------------- in his article “Innovative Imitation” that a strategy of product imitation can
---------------------- be as profitable as the strategy of product innovation. The innovator bears
the expenses of developing the product, educating the market and bears the
---------------------- risk of product failure. The reward for a pioneer or first mover is usually
market leadership. The firm that follows the pioneers may learn from the
---------------------- pioneer’s mistakes and improve the product. Although it may not get market
---------------------- leadership, it may still occupy a profitable competitive in the industry.
Many firms prefer to follow the leader, as they lack the resources, assets,
----------------------
skills and competencies to challenge the incumbent firms. A follower strategy is
---------------------- also a viable entry strategy for a new firm entering an industry. This is not to
say that a follower lacks strategy; a follower must bring a distinctive advantage
---------------------- to the market. Followers that lack strategy will be unable to occupy any viable
competitive position in the market and will end up being stuck in the middle.
----------------------

There are four broad strategic approaches to a follower strategy: Notes
Counterfeiter, Cloner, Imitator and Adapter.
----------------------
Counterfeiter duplicates the leaders’ brand name, product and packaging
and sells it to the black market or through disreputable dealers. A counterfeiter ----------------------
strategy is clearly an illegal and unethical strategy, and one that can cause
serious harm to consumers and companies alike. A counterfeiter strategy is ----------------------
clearly different from the other follower strategies.
----------------------
Cloner emulates the leader’s product and packaging, with slight variations.
Although the brand name is different, the products look deceptively similar. ----------------------
Anchor toothpaste cloned Colgate Dental cream. A cloner strategy is a short-
----------------------
term strategy at best; and firm that adopts this route to entry, must move up the
value chain and follow other strategic routes if it is to make a viable competitive ----------------------
position for itself in the industry.
----------------------
Imitator may copy the market leader, but maintains some differentiation
in pricing, communication and pricing. Many Korean and Japanese brands ----------------------
entered consumer electronics markets in the early days, imitating the market
leader’s products. ----------------------
Adapter learns from the market leader and adapts and improves the ----------------------
leader’s products. Adaptors are dynamic followers as they leapfrog the leader’s
products with superior product performance, technology, customer service and ----------------------
beat the market leader on value without necessarily challenging the leader. ----------------------
Adapters may in fact become market challengers in future. The Japanese and
Korean firms entered markets as imitators but very soon became adapters and ----------------------
have gone on to challenge established market leaders in the automobiles and
consumer electronics industries. ----------------------
4.7.4 Market Nicher ----------------------

An alternative to being a leader in large market segment is to be a leader ----------------------
in a small market. In a nicher strategy, same as the focus strategy, a firm
concentrates on a select few target markets. The nicher should be large enough ----------------------
to be profitable, but small enough to be ignored by the major industry players.
Profit margins are emphasised rather than revenue or market share. The firm ----------------------
typically looks to gain a competitive advantage through effectiveness rather ----------------------
than efficiency. It is most suitable for relatively small firms and has much in
common with guerrilla marketing warfare strategies. ----------------------
The most successful nichers tend to have the following characteristics: ----------------------
• They tend to be in high value added industries and are able to obtain high
----------------------
margins.
• They tend to be highly focused on a specific market segment. ----------------------
• They tend to market high end products or services, and are able to use a ----------------------
premium pricing strategy.
----------------------
----------------------

Notes
----------------------
---------------------- Match the following.
---------------------- i Frontal attack a. Surrounding the opponent and launch

an offensive on all fronts
---------------------- ii. Flank attack b. Is an indirect assault strategy in which
a firm bypasses the other firms and
----------------------
attacks easier markets not served by
---------------------- any of the larger companies
iii. Encirclement attacks c. Waging small intermittent attacks to
---------------------- harass and demoralise the opponent
---------------------- iv. Bypass attack d. Match your opponent 3:1 on all fronts
v. Guerilla warfare e. Concentration of strengths against an
---------------------- opponent’s weakness
----------------------
---------------------- 4.8 BALANCING CUSTOMER AND COMPETITOR

ORIENTATIONS
----------------------
In this unit, we have emphasised the importance of a detailed structural
---------------------- analysis of an industry and competitors, so that a firm may position itself
---------------------- competitively in an industry and earn higher than average profits. In all this,
we must not however forget the fundamental purpose of a business enterprise,
---------------------- which is “Create value (for customers) and Capture Value (for its owners)”. A
successful business enterprise is one that achieves both purposes, you cannot
---------------------- have one without the other.
---------------------- The firm’s customer orientation will determine how much value it is
able to create for the customer: A customer-centered company will be in
---------------------- good position to identify new opportunities, be more innovative and serve the
---------------------- emerging needs of its customers in better ways. But it may not be able to sustain
this performance if not enough attention is paid to the industry structure and its
---------------------- own ability to capture the value created.
---------------------- The firm’s competitive position in the industry will determine whether
it is able to capture or compete away the value that it creates. In industries,
---------------------- especially where there is fierce internal rivalry, companies tend to develop a
competitor obsession, carefully watching every move made by competitors,
----------------------
analyzing its impact on the company. This forces a company to become too
---------------------- reactive to competitors, forsaking consistency of strategy. Such companies tend
to lose sight of customers and the impact of competition on customers.
----------------------
Typically, firms tend to achieve one at the cost of the other, which in the
---------------------- long run becomes self-defeating. Hence firms have to balance all the fronts, i.e.
customer, competitor and shareholder orientation. Internal checks and balances
----------------------

may warn managers if they are neglecting any of these areas; but there are no Notes
models or structures to ensure that companies are always able to balance these
orientations. Managers should try to develop this mindset. ----------------------
----------------------
Summary
----------------------
• Competitive forces within the industry determine the appropriateness of a
firm’s strategies and its ability to capture value for itself. ----------------------
• Companies must conduct a detailed competitor and industry analysis to ----------------------
understand the dynamics of their industries.
----------------------
• Customers’ perspective of competition is very different from the industry
perspective. Companies must use both approaches to define their ----------------------
competitors.
----------------------
• From the customer’s perspective, all products that satisfy the same need
are seen as competing with each other. It is very important for managers to ----------------------
consider this perspective, as this fundamentally affects customer choices
and the comparison of value that a customer makes. ----------------------
• An industry is a group of firms that offer similar products and can be ----------------------
classified according to number of sellers; degree of product differentiation;
entry, mobility and exit barriers; cost structure; degree of vertical ----------------------
integration; strategic groups, degree of globalisation and potential
----------------------
competitors.
• Firms must conduct a structural analysis of an industry to understand the ----------------------
other competitive forces that determine and the company’s search for a ----------------------
favorable competitive position in an industry.
• Michael Porter identified “Five Forces” as the five factors that determine ----------------------
the profitability attractiveness of an industry. The five forces are threat of ----------------------
new entrants, threat of substitutes, bargaining power of buyers, bargaining
power of sellers and the intensity of rivalry within the industry. ----------------------
• The next level of analysis that a company needs to conduct is a detailed ----------------------
competitor analysis to understand competitors, their goals, strengths and
weaknesses and reaction patterns. ----------------------
• Competitor analysis can be conducted using the following framework: size, ----------------------
growth and profitability, image, competitor objectives and commitment,
current and past strategies, organisations and culture, cost structure, exit ----------------------
barriers and competitive advantages.
----------------------
• According to Porter, a firm can choose a competitive position by following
one of the three Generic Competitive strategies: Cost Leadership, ----------------------
Differentiation and Focus. These generic strategies help a firm achieve a
----------------------
competitive advantage in an industry.
• Companies have to assume competitive positions, which can be as a ----------------------
market leader, market challenger, market follower or market nicher. ----------------------

Notes • A successful business enterprise is one which achieves is able to create
value for its customers as well as capture value for its owners. Firms must
---------------------- guard against being too obsessed with either customers or competitors
and must balance both competitor and customer orientations.
----------------------
---------------------- Keywords
---------------------- • Perspective: A view or vista; a mental view or outlook
---------------------- • Structural Analysis: Examination of the different components or
elements that make up an organisation or system, to discover their
---------------------- interrelationships and relative importance in the realisation of its goals or
purpose
----------------------
• Orientation: The determination of the relative position of something
---------------------- or someone (esp. oneself); the relative physical position or direction of
---------------------- something

----------------------
1. What is the difference between the customer and industry approach to
---------------------- defining competition? Which approach must companies use and why?
---------------------- 2. What are the five forces that determine the profit attractiveness of an
industry? Explain each of the five forces in detail and its impact on a
---------------------- firm’s strategy.
---------------------- 3. What is a strength and weakness analysis? Why is it necessary and what
factors must be considered whilst conducting a SW analysis?
---------------------- 4. What is a competitive intelligence system? Why is it necessary? What are
---------------------- the different sources of information about competitors?
5. Write short notes:
----------------------
a. Cost Leadership
----------------------
b. Differentiation Strategy
---------------------- c. Stuck in the middle
---------------------- d. Market Follower
---------------------- e. Market Nicher
----------------------
----------------------
----------------------
----------------------
----------------------

Answers to Check your Progress Notes
1. From the customer’s perspective, all products that satisfy the same need
are seen as competing with each other. For managers to consider ----------------------
this perspective, as this fundamentally affects customer choices and the ----------------------
comparison of value that a customer makes, what comes at level 1?
----------------------
iii. Brand competition
2. What do you mean by Pure Competition? ----------------------
iv. Is seen in industries where there are a large number of firms, with ----------------------
competitors offering the same product and service.
----------------------
1. True ----------------------
Multiple Choice Multiple Response ----------------------
1. In context of Bargaining Power of Buyers, the buyer power is greater if:
----------------------
i. Buyers are concentrated.
----------------------
ii. Buyers purchase a significant proportion of output and therefore
enjoy greater price leverage. ----------------------
----------------------
1. Which is the correct checklist for strengths and weaknesses analysis from
the ones given below? ----------------------
iv. Innovation, Manufacturing, Finance: Access to Capital, ----------------------
Management, Marketing and Customer Base
----------------------
Match the following. ----------------------
i–b ----------------------
ii – a ----------------------
iii - c
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Check your Progress 5
----------------------
i–d
----------------------
ii – e
---------------------- iii – a
---------------------- iv – b
---------------------- v–c
----------------------
Suggested Reading
----------------------
College Publishing.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Market Research and Demand Forecasting
UNIT
5
Structure:
5.1 Introduction
5.2 Market Research: Meaning and Definition
5.3 The Market Research Process
5.3.5 Step 5: Data Preparation and Analysis
5.3.6 Step 6: Report Preparation and Presentation
5.4 Marketing Decision Support Systems
5.5 Forecasting and Demand Measurement
5.5.3 Estimating Current Demand
Summary
Keywords
Suggested Reading
Market Research and Demand Forecasting 119

Notes
Objectives
----------------------
----------------------
• Explain the concepts of marketing research
----------------------
• Discuss the importance of formal market research
---------------------- • Describe the process by which market research is to be carried out
---------------------- • Assess the marketing decision support system
---------------------- • Evaluate the techniques for measuring demand and forecasting sales
----------------------
----------------------
5.1 INTRODUCTION
----------------------
The emphasis in marketing is on the identification and satisfaction of
---------------------- customer needs. In order to determine customer needs and to implement
marketing strategies and programs aimed at satisfying those needs, marketing
----------------------
managers need information. They need information about customers,
---------------------- competitors and other forces in the market place. In the recent years, many
factors have increased the need for more detailed information.
----------------------
As firms have become national and international in scope, the need for
---------------------- information on larger and more distant markets has increased. As consumers
have become more sophisticated and knowledgeable, managers need better
---------------------- information on how consumers will respond to products and their marketing
programs. As competition becomes more intense, managers need information
----------------------
on the effectiveness of their marketing tools.
---------------------- The task of market research is to assess the information needs and provide
---------------------- management with relevant, accurate, reliable valid and current information.
Today’s competitive marketing environment and ever increasing costs attributed
---------------------- to poor decision making, require that marketing research provide sound
information. Sound decisions are not based on gut feeling, intuition or even
---------------------- pure judgment; they are based facts and sound information.
----------------------
5.2 MARKET RESEARCH: MEANING AND
---------------------- DEFINITION
---------------------- Market Research is the systematic and objective identification, collection,
---------------------- analysis, dissemination and use of information for the purpose of decision-
making and identification and solution to problems.
----------------------
This definition has several noteworthy aspects.
---------------------- First that market research is systematic, therefore systematic planning is
required at all stages of the MR process. MR uses scientific methods for data
----------------------
collection and analysis to test prior notions or hypotheses.

Secondly, MR is objective as it attempts to provide accurate, impartial and Notes
unbiased information that reflects the true state of affairs. Research motivated
by personal or political gain is a breach of professional standards and ethics. ----------------------
Finally, MR involves the identification, collection, analysis, dissemination ----------------------
and use of information.
----------------------
Organisations engage in MR for two primary reasons:
1) To identify problems ----------------------
2) To solve marketing problems ----------------------
Marketing Research ----------------------
----------------------
Problem Identification Problem-Solving ----------------------

Research Research
----------------------
----------------------
 Market Potential Research  Segmentation Research
 Market Share Research  Product Research ----------------------
 Image Research  Pricing Research
----------------------
 Market Characteristics Research  Promotion Research
 Sales Analysis Research  Distribution Research ----------------------
 Forecasting Research
----------------------
 Business Trends Research
----------------------
Fig. 5.1: Market Research
----------------------
Problem identification research is undertaken to help identify problems
that are perhaps not apparent on the surface and yet exist or are likely to arise ----------------------
in future. Research of this type provides information about the marketing
environment and helps diagnose a problem. For example, a problem exists if the ----------------------
market potential is increasing and the firm is losing market share. The firm must ----------------------
then pinpoint the exact causes for loss of market share. Similarly, any changes
in consumer behaviour may point to underlying problems or opportunities. ----------------------
Once the problem or opportunity has been identified, problem-solving ----------------------
research is undertaken to arrive at a solution. The findings of this type of
research are used in decision making to solve specific marketing problems. ----------------------
Table 5.1 shows the different types of problem solving research. ----------------------
----------------------
----------------------
----------------------
----------------------

Notes Table 5.1 Problem Solving Research
Segmentation • Determine segmentation variables
----------------------
Research • Establish market potential and responsiveness for
---------------------- various segments
• Select target markets
---------------------- • Profile market segments in terms of media viewing
habits, lifestyles, demography etc.
----------------------
Product Research • Testing of product concepts
----------------------
• Determine optimal product design
---------------------- • Packaging test
• Product modifications
---------------------- • Brand positioning and repositioning
• Test marketing
----------------------
• Control Store Tests
----------------------
Pricing Research • Importance of price in brand selection
---------------------- • Pricing policies
• Product line pricing
---------------------- • Price elasticity of demand
• Responses to price changes
----------------------
Promotional • Optimal promotional budget
---------------------- Research • Sales promotion effectiveness
---------------------- • Optimal promotional mix
• Copy testing
---------------------- • Media decisions
• Creative testing
---------------------- • Evaluation of campaign effectiveness
---------------------- Distribution • Determine type of distribution
Research • Attitudes of channel members
----------------------
• Intensity of wholesale and retail coverage
---------------------- • Channel margins
• Location of retail outlets
---------------------- • Consumer response to POP effectiveness
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
Fill in the blanks. ----------------------
1. __________ is the systematic and objective identification, collection,
----------------------
analysis, dissemination and use of information for the purpose of
decision-making and identification and solution to problems. ----------------------
2. Organisations engage in MR for two primary reasons: (a) ________
----------------------
and (b) _____________.
3. _____________ research is undertaken to help identify problems ----------------------
that are perhaps not apparent on the surface and yet exist or are likely ----------------------
to arise in future.
4. Once the problem or opportunity has been identified, _____________ ----------------------
research is undertaken to arrive at a solution. ----------------------
----------------------
Activity 1
----------------------
1. Look through recent issues of business magazines and identify three ----------------------
examples each of problem identification research and problem solving
research undertaken by companies. ----------------------
2. Using the Internet, identify the top five market research firms in India. ----------------------
Make a list of specialised services offered by these companies. ----------------------
----------------------
5.3 THE MARKET RESEARCH PROCESS
----------------------
The MR process is a set of six steps, which define the tasks to be
accomplished in conducting a MR study. These include problem definition, ----------------------
developing an approach to the problem, research design formulation, fieldwork
----------------------
and data collection, data preparation and analysis and report preparation and
presentation. Each of these six steps is now explained in further detail. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Define the problem and research objectives
----------------------
Develop the research plan
----------------------
---------------------- Collect the information
----------------------
Analyze the information
----------------------
Present the findings
----------------------
---------------------- Make the decision
----------------------
Fig. 5.2: The MR Process
----------------------
---------------------- The first step in any marketing research project is to define the problem.
Problem definition involves stating the general marketing research problem and
----------------------
identifying its specific components. Of all the tasks in MR, none is more vital to
---------------------- the project than a proper definition of the research problem. Researchers make
two common errors in problem definition. The first arises when the research
---------------------- problem is defined too broadly; for instance improving the competitive position
of the company, increasing market share for the brand or improving brand
----------------------
image is too broad a definition of the problem. The second error is the opposite
---------------------- i.e. too narrow a definition of the problem.
---------------------- Too narrow a focus may preclude consideration of some courses of

action, particularly those that are innovative or not too obvious. The likelihood
---------------------- of committing either error can be reduced by first stating the problem in broad
terms and then identifying its specific components.
----------------------
Example : Good Housekeeping
---------------------- Broad definition :
---------------------- Gathering information about the subscribers of Good Housekeeping
---------------------- Specific components :
Demographic Profile, Psychographic profile, Relationship to the magazine i.e.
----------------------
time spent reading the magazine, how long do they keep it, and do they share
---------------------- it with others?
---------------------- In order to define the MR problem properly, researchers undertake several

tasks to obtain information on the environmental context of the problem and
---------------------- help define the problem. The tasks are:
---------------------- 1. Discussion with the decision makers: Researchers need to understand the
nature of the decision, the management problem and what they hope to
---------------------- learn from the research.

2. Interviews with Industry Experts: Unstructured personal interviews Notes
with industry experts knowledgeable about the firm and industry helps
formulate the research problem. ----------------------
3. Secondary Data Analysis: Secondary data are data collected for some ----------------------
other problem other than the one at hand. Primary data, on the other
hand are collected by the researcher for the specific research problem. ----------------------
Secondary data include information from commercial government
----------------------
sources, commercial databases. Secondary are an economical and quick
source of background information and hence essential to accurate problem ----------------------
definition.
----------------------
4. Qualitative Research: Unstructured and exploratory qualitative research
using focus group interviews, depth interviews or pilot surveys on small ----------------------
samples.
----------------------
Development of an approach to the problem includes formulating an ----------------------
objective or theoretical framework, analytical models, research questions, ----------------------
hypotheses and identifying characteristics or factors that can influence the
research design. ----------------------
In general, any research should be based on objective evidence and ----------------------
guided by theory. The theory guides the researcher on which variables should
be investigated, how they should be operationalised and measured and how ----------------------
the research design and sample should be selected. The theory also serves as a
foundation on which the researcher can organise and interpret the findings. ----------------------
Analytical models, which depict a set of variables and their inter- ----------------------
relationships, can be verbal, graphical or mathematical. They help the researcher
by depicting the research problem in different ways and conceptualising an ----------------------
approach to the problem ----------------------
Research questions are refined statements of the specific components of
----------------------
the problem. Each component of the problem, when broken down into research
questions help the researcher identify specific information required with respect ----------------------
to each component.
----------------------
A hypothesis is an unproven statement or proposition about a factor or
phenomenon that is of interest to the researcher. Hypotheses go beyond research ----------------------
questions because they are statements of relationships or propositions rather
than merely questions to which answers are sought. Unfortunately, it may not ----------------------
be possible to develop hypotheses in all situations, as sufficient information
----------------------
may not be available.
The key question to now ask is given the problem definition, research ----------------------
questions and hypotheses, what additional characteristics or factors should be ----------------------
identified so that a questionnaire can be constructed. The answer to this question
will result in the identification of relevant characteristics. ----------------------
Considering all the above the researcher can now determine what ----------------------

Notes information should be obtained and facilitates the formulation of an appropriate
research design.
----------------------
---------------------- A research design is a blueprint for conducting the market research project.
It details the procedures necessary for obtaining the required information and its
----------------------
purpose is to design a study that will test the hypotheses of interest, determine
---------------------- possible answers to the research questions and provide the information needed
for decision-making. Formulating the research design involves decisions on
---------------------- data sources, designing the research instruments, measurement and scaling
procedures, sampling plan and sample size and contact methods.
----------------------
Research design can be broadly classified as exploratory or conclusive. The
---------------------- basic objective of exploratory research is to provide insights and understanding.
It is used in cases when one needs to define the problem precisely, identify
----------------------
relevant courses of action or gain additional insights before an approach can be
---------------------- developed. The information needed is loosely defined and the research process
adopted is flexible and unstructured. The sample size selected is small and non-
---------------------- representative. Given all these characteristics, the findings or results are at best
tentative.
----------------------
Conclusive research on the other hand is more formal and structured. It
---------------------- is based on large, representative samples and the data obtained are subject to
---------------------- quantitative analyses. Very often, the insights gained from exploratory research
might be verified by conclusive research, as the objective of conclusive research
---------------------- is to test specific hypotheses and examine specific relationships.
---------------------- A) Data Sources

The researcher can gather secondary data, primary data or both.
---------------------- Researchers usually start their investigation by examining secondary data to see
---------------------- whether the problem can be partly or wholly solved without the costly primary
data. Secondary data provides the starting point for the research activity and
---------------------- offers the advantages of low cost and ready availability. If the needed data does
not exist, or is inaccurate or incomplete, researchers will have to gather primary
---------------------- data. Most MR projects involve some primary data collection.
---------------------- B) Research Approaches
---------------------- Primary data can be collected in five ways: through observation, focus
groups, surveys, behavioural data, and experiments.
----------------------
1. Observational research involves data gathering by observing the customers
---------------------- in unobtrusive ways. This type of exploratory research to observe how
customers shop for or use the product can yield useful hypotheses about
---------------------- how customers feel about different brands.
---------------------- 2. Focus group research: A focus group is a gathering of six to ten people
invited to spend a few hours with a skilled moderator to discuss a product,
---------------------- service, organisation or any other issue related to product usage and product
---------------------- preferences. The moderator needs to be objective and knowledgeable on

the issue and skilled in group dynamics. The moderator encourages a Notes
free and frank discussion so that group interaction would reveal deep-
rooted thoughts and feelings. The discussion is recorded and studied ----------------------
subsequently to understand consumer beliefs, attitudes and behaviour.
With the development of the internet, companies now organise online ----------------------
focus groups or participate in chat rooms as surrogates. Focus groups are ----------------------
useful exploratory research and marketers must avoid generalising the
feelings of the focus group participants to the whole market, as sample ----------------------
sizes that can be covered by focus groups are too small.
----------------------
3. Survey research: Is best suited for descriptive conclusive research.
Companies undertake surveys to learn about people’s knowledge and ----------------------
beliefs, preferences and satisfaction and to measure these magnitudes
----------------------
in the general population. Survey research can be carried out on large
sample sizes. ----------------------
4. Behavioural Data: The customers purchasing history is captured by the
----------------------
store databases and credit card billing. Much information can be obtained
from this data, as actual purchases reflect preferences and often are more ----------------------
reliable than statements made by customers.
----------------------
5. Experimental Research is the most scientifically valid research, the purpose
of which is to capture cause and affect relationships, by eliminating the ----------------------
competing explanations of observed findings. Experimental research is
used to test responses to particular price points, pack sizes or a service. ----------------------
C) Research Instruments ----------------------
Market researchers have choices of three main research instruments in ----------------------
collecting primary data. They are questionnaires, psychological tools and
mechanical devices. ----------------------
1. Questionnaires: is a set of questions presented to respondents. Because ----------------------
of its flexibility, the questionnaire is by far the most common instrument
used to collect primary data. Pilot questionnaires are developed and ----------------------
administered on small samples to rectify errors, before they can be
administered on a large scale. In preparing a questionnaire, the researcher ----------------------
carefully chooses the questions, their wording and sequence, as the form ----------------------
of the question influences the responses. There are two types of questions,
open ended and close-ended questions. Close-ended questions specify all ----------------------
the possible answers that are easier to interpret and tabulate. Open-ended
questions allow respondents to answer in their own words and often reveal ----------------------
more than that meets the eye. Such questions are useful in exploratory ----------------------
research, where the researcher is looking for insight into how people think
rather than measuring how many people think in a certain way. Table 5.2 ----------------------
illustrates the different types of close and open-ended questions.
----------------------
2. Psychological tools: researchers can probe the buyer’s deeper feelings
and beliefs using psychological tools such as laddering techniques, depth ----------------------
interviews and Rorschach tests. Laddering techniques involves asking
----------------------

Notes several questions, each question probing the answer to the previous
question until the researcher arrives at the real underlying reason and
---------------------- motivation for purchase. Depth interviewing similarly involves going
deeply into the thoughts that an individual may have about a product
---------------------- or service. There are several psychological tools like creating collages,
---------------------- using metaphors etc to delve into the deeper feelings that consumers have
about products.
----------------------
3. Mechanical devices are also occasionally used in MR. Galvanometers
---------------------- measure the interest or emotions aroused by exposure to a specific ad
or picture. The tachistoscope flashes an ad to a subject with an exposure
---------------------- interval ranging from one hundredth of second to several seconds. After
each exposure, the respondent describes everything he or she recalls. Eye
----------------------
cameras study the respondent’s eye movements to see where their eyes
---------------------- land first and how long they linger on a given item. Meters attached to
television sets in participating homes to record what programs people
---------------------- watch, thus generating data on TRP ratings for different programs.
---------------------- 4. Innovative qualitative tools: Some researchers may innovate qualitative
tools for gauging consumer opinions because responses to questionnaires
---------------------- do not always match actions. Documentary style videos of contest, reality
television style programming and filming consumers at home using
----------------------
the product are some of the techniques used for informal information
---------------------- gathering.
---------------------- Table 5.2: Types of questions

A. Close ended questions
----------------------
Dichotomous A question with two possible answers- Yes/No A
---------------------- Multiple choice question with three or more answers
---------------------- Likert Scale A statement with which the respondent shows the
Semantic Differential amount of agreement or disagreement: strongly
---------------------- disagree, disagree, neither agree nor disagree,
Importance scale agree and strongly agree A scale connecting two
----------------------
Rating Scale bipolar words. The respondent selects the point
---------------------- that represents his or her opinion.
Intention-to-buy scale
---------------------- A scale that rates the importance of some attri-
bute. Respondents rate the attribute as extremely
---------------------- important, very important, somewhat important,
not very important and not at all important.
----------------------
A scale that rates the attribute from “poor” to
---------------------- “excellent”.
---------------------- A scale that describes the respondents intention
to buy as definitely buy, probably buy, not sure,
---------------------- probably not buy and definitely not buy.
----------------------

b. Open Ended Questions Notes
Completely Unstructured A question that respondents can answer in almost
----------------------
Word Association unlimited number of ways.
Sentence Completion Words are presented, one at a time, and respon- ----------------------
Story Completion dents mention whatever comes to mind connected
----------------------
Picture Completion with the given clue.
An incomplete sentence is presented and the ----------------------
respondents complete the sentence
----------------------
An incomplete story is presented and the respon-
dents have to complete the story. ----------------------
A picture of two characters is presented, with one
----------------------
character making a statement. Respondents are
asked to identify with the other character and fill ----------------------
in the other cha racter’s response.
----------------------
Thematic Appreciation Test (TAT): A picture is presented and respondents are
asked to make up a story about what they think is happening or may happen in ----------------------
the picture. Or they may simply give their interpretation of the picture.
----------------------
D) Sampling Plan
After deciding on the research approach and instruments, the researcher ----------------------
must develop a sampling plan. The sampling design process includes the five ----------------------
steps listed below. These steps are closely interrelated to all aspects of
the marketing research project; hence, sampling decisions should be integrated ----------------------
with other decisions in the research project.
----------------------
1. Define the population
----------------------
2. Determine the sampling frame.
3. Select sampling techniques. ----------------------
4. Determine he sample size. ----------------------
5. Execute the sampling process. ----------------------
Sampling design begins by defining the target population for the research.
Suppose Park Avenue wants to assess consumer response to a new line of ----------------------
men’s cologne launched, who should be included in the target population? All ----------------------
men or only those who have used cologne in the last month? Men of which
age group? Also, because women sometimes buy cologne for their husbands, ----------------------
should they too be included? All these questions must be resolved before the
target population can be appropriately defined. ----------------------
A sampling frame is a representation of the elements of the target ----------------------

population. It consists of a list or a set of directions for identifying the target
----------------------
population. Examples of a sampling frame include a telephone directory, an
association directory, a mailing list or a map. ----------------------
Selecting a sampling technique or method of selection of the respondents,
----------------------
is the next decision the researcher must take. The two approaches to sampling

Notes techniques are probability and non-probability sampling techniques. Table 5.3
summarises the different types of probability and non-probability techniques
----------------------
Each method has its merits and applicability. Broadly, probability sampling
---------------------- techniques allow for calculation of confidence limits for sampling error. When
the cost or time involved in probability sampling is too high, market researchers
---------------------- take non-probability samples. Many researchers feel that non-probability
sampling is more useful, although it does not allow for sampling errors to be
----------------------
measured.
---------------------- Table 5.3 Sampling Techniques
---------------------- A. Probability Sample
Simple Random Every member of the population has an equal chance
----------------------
Sample of selection.
---------------------- Stratified Random The population is divided into mutually exclusive
Sample groups (age groups) and random samples are drawn
---------------------- from each.
---------------------- Cluster (area) The population is divided into mutually exclusive
Sample groups (housing societies), and the researcher draws a
---------------------- sample of the groups to interview.
---------------------- B. Non-Probability Sample
---------------------- Convenience Sample The researcher selects the most accessible population
members.
---------------------- Judgement Sample The researcher selects population members who are
good prospects for accurate information.
----------------------
Quota Sample The researcher finds and interviews a prescribed
---------------------- number of people in each of several categories.
---------------------- Sample size refers to how many people should be surveyed. Determining
---------------------- the sample size is complex and involves several qualitative and quantitative
considerations. Important qualitative factors include the importance of the
---------------------- decision, the nature of the research, the number of variables, the nature of
analysis, sample sizes used in similar studies amongst others.
----------------------
Quantitative factors include statistical approaches to sample size
---------------------- determination based on confidence intervals. In general, for more important
decisions, more information is necessary and the information should be obtained
---------------------- precisely. This calls for larger samples, but as the sample size increases, each
---------------------- unit of information is obtained at a greater cost. The nature of research also has
an impact on sample size. For exploratory research, the sample size is typically
---------------------- small; for conclusive research, such as descriptive surveys, larger samples are
required. Finally, the sample size decision should be guided by a consideration
---------------------- of the resource constraints.
---------------------- Finally, the execution of the sampling process requires a detailed
specification of how the sampling design decisions are to be implemented.
----------------------

E) Contact Methods Notes
Once the sampling plan has been determined, the researcher must decide
----------------------
how the subjects are to be contacted: mail, telephone, personal or online
interview. ----------------------
The mail questionnaire is the best way to reach people who would not
----------------------
give personal interviews or whose responses might be biased or distorted by the
interviewers. However, the response rates for this method are rather low and ----------------------
responses require follow up.
----------------------
Telephone interviewing is the best method for gathering information
quickly; the interviewer is also able to clarify the questions if respondents do ----------------------
not understand them. The response rate for telephone interviews is much higher
than mail interviews, but the main drawback is that the interview has to be ----------------------
short and not too personal. Telephone interviewing is difficult also because
----------------------
respondents are suspicious of such methods.
Personal interviewing is the most versatile method, as the interviewer can ----------------------
ask more questions and can observe additional factors about the respondents ----------------------
such as body language. Personal interviewing is the most expensive method
and requires more administrative planning and supervision than the other ----------------------
methods. Personal interviewing can be done in two ways: arranged interviews
where the researcher takes a prior appointment or intercept interviews where ----------------------
the researcher contacts respondents at shopping malls (mall intercept) or other ----------------------
such public places and requests an interview.
Online methods of contacting respondents are becoming increasingly ----------------------
popular these days and expected to grow much faster than traditional contact ----------------------
methods.
Companies often include questionnaire on their websites and offer an ----------------------
incentive to respondents. Alternatively, companies can place banner ad on ----------------------
frequently visited sites such as Yahoo and invite people to participate in the
questionnaire and possibly win a prize. Companies can also enter chat rooms ----------------------
and seek volunteers for a survey or sponsor a chat room and introduce questions
from time to time. Companies also learn about individuals who visit its site ----------------------
by following how they ‘clickstream’ through the website and move to other ----------------------
sites. Computers contain cookies that capture this data and by analysing all this
information, companies gain access to valuable information about consumer ----------------------
behaviour.
----------------------
But not everyone has access to the internet, which is why companies
need to combine numerous contact methods, both online and off-line to contact ----------------------
respondents.
----------------------
----------------------
The data collection phase of the market research is generally the most
expensive and most prone to error. During this phase, field workers make ----------------------
contact with respondents, administer the questionnaires or observation forms,
record the data and submit the completed forms for processing. All fieldwork ----------------------

Notes requires the proper selection, training and supervision of persons who are to
collect the data. Validation of the fieldwork and evaluation of the field workers
---------------------- is also a part of this process.
---------------------- Researchers must develop job specifications taking into account the mode
of data collection, decide the characteristics that field workers must have and
---------------------- recruit appropriate individuals. The interviewers’ background characteristics,
opinions, perceptions, attitudes and body language can affect the quality of
----------------------
responses. Training of fieldworkers is critical to the quality of data collected.
---------------------- Training ensures that all interviewers administer the questionnaire in the same
manner, so as to ensure uniform data collection. The training covers all aspects
---------------------- of the fieldwork such as making the initial contact, asking the questions, probing,
recording the answers and terminating the interview.
----------------------
Supervision of field workers means ensuring that they are following the
---------------------- procedures and techniques in which they were trained. Supervision involves
several aspects such as quality control, sampling control, control of cheating
----------------------
and central office control. Quality control means checking to see if the field
---------------------- procedures are being properly implemented and to detect possible problem
areas in administering the questionnaires, and to identify if additional training
---------------------- is required. An important aspect of supervision is sampling control, which
attempts to ensure that the interviewers are strictly following the sampling
----------------------
plan rather than selecting sampling units based on convenience or accessibility.
---------------------- Interviewers tend to avoid respondents that they perceive to be difficult or
undesirable.
----------------------
Cheating involves falsifying a part of the question or the entire
---------------------- questionnaire. An interviewer may falsify part of an answer to make it acceptable
or may fake answers. Interviewers can also falsify entire questionnaires,
---------------------- by filling in the responses without meeting respondents. Cheating can be
minimised through proper training, supervision and validation of fieldwork.
----------------------
Field supervisors provide regular updates to the head offices on the total progress
---------------------- of the fieldwork as well as on quality and cost control.
---------------------- Validation of fieldwork becomes necessary to ensure that field workers

are submitting authentic interviews. To validate the interviews, supervisors call
---------------------- up at random 15 to 20% of the respondents to inquire whether the field workers
actually conducted the interview. The supervisors make detailed checks about
---------------------- the length and quality of the interview, demographic data submitted and reaction
---------------------- to the interviewer.
Finally, it is important to evaluate field workers and to provide them
---------------------- the feedback on their performance. The evaluation criteria should be clearly
---------------------- communicated to the field workers during their training. The valuation should
be based on the criteria of cost and time, response rates, quality of interviewing
---------------------- and quality of data. Market researchers aim to build teams of high quality field
workers committed to their jobs.
----------------------
----------------------

5.3.5 Step 5: Data Preparation and Analysis Notes
Data preparation is the process of converting the raw data contained in
----------------------
the questionnaires into a form suitable for any type of analysis. The quality of
the statistical analysis depends on the care exercised during the data preparation ----------------------
phase. Data preparation begins with a preliminary check of all questionnaires
for completeness and interview quality, followed by a thorough editing. ----------------------
Editing consists of screening questionnaires to identify illegible, incomplete,
----------------------
inconsistent or ambiguous responses. Such responses can be handled by
returning questionnaires to the files, assigning missing values or discarding the ----------------------
unsatisfactory respondents.
----------------------
The next step is coding. A numeric or alphanumeric code is assigned
to represent a specific response to a specific question, along with the column ----------------------
position it will occupy. It is often helpful to prepare a codebook containing
the coding instructions and the necessary information about the variables in ----------------------
the data set. The coded data are then transcribed onto CD’s or entered into
----------------------
computers through keypunching.
Cleaning the data requires consistency checks and treatment of missing ----------------------
responses that occur because the answers were not properly recorded. Missing
----------------------
responses pose a problem especially if the proportion is more than 10%.
Options available for treating missing responses are substituting a neutral ----------------------
value, typically the mean response to the variable, or substituting an imputed
response. The respondents’ pattern of responses to other questions is used to ----------------------
impute or calculate a suitable to the missing questions.
----------------------
The next step is data analysis, the purpose of which is to produce
information that will help address the problem at hand. Researchers must select ----------------------
a data analysis strategy, considering all the earlier steps in the market research ----------------------
process. Once the data has been prepared for analysis, the researcher should
conduct some basic analysis including frequency distribution, cross tabulation ----------------------
and hypotheses testing. Various statistical techniques are used for data analysis
(summarised in Table 5.4). Researchers must select the appropriate statistical ----------------------
technique, taking into account the properties of the technique, the purpose ----------------------
and underlying assumption. The insights gained from basic analysis are also
invaluable in interpreting the results obtained from more sophisticated statistical ----------------------
techniques.
----------------------
Table 5.4 Statistical Tools
----------------------
Multiple Regression A statistical technique used for estimating a “best
fitting” equation, showing how the value of a ----------------------
dependent variable varies with the changing
values in a number of independent variables. ----------------------
Example: A company can estimate how unit sales
----------------------
are influenced by changing values of advertising
expenditures, price and so on. ----------------------
----------------------

Notes Discriminant Analysis A statistical technique for classifying an object
or persons into two or more categories. Exam-
---------------------- ple: companies can determine the variables that
---------------------- discriminate between successful and unsuccess- ful
store locations.
---------------------- Factor Analysis A technique used to determine the few underlying
dimensions of a larger set of intercorelated variables.
---------------------- For example, a television channel can reduce the
---------------------- large number of television programs down to a few
basic types.
---------------------- Cluster Analysis A statistical technique for separating objects into
specified number of mutually exclusive groups,
----------------------
such that the groups are relatively homogenous.
---------------------- For example, classification of cities into different
categories.
---------------------- Conjoint Analysis A technique by which respondents’ ranked
---------------------- preferences for different offers are decom- posed to
determine the person has inferred utility function
---------------------- for each attribute and the relative importance of
each attribute. Example: An airline can determine
---------------------- the utility of different the utility of different
---------------------- combinations of passenger services.
A variety of techniques for producing perceptual
----------------------
maps of competitive products or brands. Brands
---------------------- are represented as points in a multidi- mensional
space of attributes where their distance from each
---------------------- other is a measure of dissimilarity.
---------------------- 5.3.6 Step 6: Report Preparation and Presentation
---------------------- Report preparation and presentation constitutes the sixth and final step in
the market research process. The report and presentation is the tangible product
---------------------- of the research effort. After the project is complete and the management has
---------------------- made the decisions, there is little documentary evidence of the project other
than the written report. Management decisions are guided by the report and
---------------------- presentation. If the first five steps in the project are carefully conducted, but
inadequate attention is paid to the final sixth step, the value of the project is
---------------------- greatly diminished. The involvement of many marketing managers is limited
---------------------- to the written report and presentation. Hence, the quality of the entire project is
evaluated based upon the quality of the report and presentation.
----------------------
Instead of merely summarising the statistical results, the researcher
---------------------- should present the findings in such a way that they can be used directly as input
into decision-making. Wherever appropriate, conclusions should be drawn and
---------------------- recommendations made. Although researchers differ in the way they prepare a
research report, there are standard guidelines on the format of the report. It must
----------------------
contain the elements listed below.

a. Title Page Notes
b. Letter of Transmittal: Delivers the report to the authorities commissioning
----------------------
the research and summarises the researcher’s overall experience with the
project without mentioning the findings. ----------------------
c. Letter of Authorisation: In case a MR agency is conducting the research,
----------------------
a letter of authorisation is written by the client to the researcher before the
project begins. ----------------------
d. Table of Contents
----------------------
e. Executive Summary: This is an extremely important part of the report and
is often the only portion of the report that executives read. The summary ----------------------
should concisely describe the problem, approach and research design that ----------------------
was adopted. A summary section should be devoted to the major results,
conclusions and recommendations. The executive summary is written ----------------------
after the rest of the report.
----------------------
f. Problem Definition: This section gives the background to the problem,
highlights the discussions with decision makers and industry experts, ----------------------
secondary data analysis. It should contain a clear statement of the
management decision problem and the marketing research problem. ----------------------
g. Approach to the Problem: This section discusses the broad approach ----------------------
adopted in addressing the problem. This section should also contain
a description of the theoretical foundations that guided the research, ----------------------
analytical models formulated, research questions, hypotheses and the ----------------------
factors that influenced the research design.
----------------------
h. Research design: The section on research design should specify the
details of how the research was conducted. This would include the nature ----------------------
of the research design adopted, information needed, data collection,
scaling techniques, questionnaire development and pre testing, sampling ----------------------
techniques and fieldwork.
----------------------
i. data Analysis: This section describes the plan of data analysis and
strategy and techniques used. ----------------------
j. Results: This section is normally the longest part of the report and ----------------------
may comprise several chapters. The presentation of the results should
synchronise with the components of the market research problem and the ----------------------
information need identified. The details should be presented in tables and ----------------------
graphs with the main findings discussed in the text.
k. Limitations and Caveats: All marketing research projects have ----------------------
limitations caused by time, budget and other organisational constraints. ----------------------
Furthermore, the research design adopted may be limited by various types
of errors. This section has to be written carefully, balancing a realistic ----------------------
perspective without eroding the confidence of the management. ----------------------
----------------------

Notes l. Conclusions and Recommendations: The researcher should interpret
the results in light of the problem being addressed to arrive at major
---------------------- conclusions. Based on the results and conclusions the researcher may
make suggestions and recommendations to the decision makers. If
---------------------- recommendations are made, they should be actionable, practical, feasible
---------------------- and directly usable as inputs to managerial decision making.

----------------------
Match the sequence of steps in Market Research Process.
----------------------
i. Step 1 a. Fieldwork or Data Collection
---------------------- ii. Step 2 b. Development of an approach to the problem
---------------------- iii. Step 3 c. Data Preparation and Analysis
iv. Step 4 d. Problem Definition
----------------------
v. Step 5 e. Report Preparation and Presentation
---------------------- vi. Step 6 f. Research Design Formulation

1. Problem definition involves:
----------------------
i. Stating the general marketing research problem and identifying
---------------------- its specific components.
---------------------- ii. Formulating an objective or theoretical framework, analytical
models, research questions, hypotheses and identifying
---------------------- characteristics or factors that can influence the research design.
---------------------- iii. Representation of the elements of the target population. It
consists of a list or a set of directions for identifying the target
---------------------- population.
---------------------- iv. Statistical approaches to sample size determination based on
confidence intervals. In general, for more important decisions,
---------------------- more information is necessary and the information should be
---------------------- obtained precisely.
----------------------
Activity 2
----------------------
---------------------- 1. A leading mutual fund organisation has hired you to identify why sales
of its products in your area are low and to suggest ways in which it
---------------------- can increase sales for its products. How would you define the problem
in more specific terms? What kind of background information would
----------------------
you collect in order to define the problem more specifically?
---------------------- 2. For the problem defined above, what kind of research approaches and
research instruments would you recommend to your client?
----------------------

Notes
3. Locate an internet survey or mail survey; (often included as an
annexure in magazines) examine the contents of the questionnaire. ----------------------
What are the relative advantages and disadvantages of administering
the same survey using a mall-intercept interview? ----------------------
----------------------
5.4 MARKETING DECISION SUPPORT SYSTEMS ----------------------
A Marketing Decision Support System (DSS) is defined as a coordinated ----------------------
collection of data, systems, tools and techniques with supporting software and
hardware by which an organisation gathers and interprets relevant information ----------------------
from business and environment and used as a basis for marketing action.
----------------------
So far, we have looked at market research to gather information, whether
on a periodic or ongoing basis. The research contributes research data to the ----------------------
database. DSS helps analyse this data with the help of mathematical modeling ----------------------
and statistical analytical techniques enabling managers obtain information by
sorting, regrouping and manipulating the data to conduct “what if” analysis. ----------------------
The characteristics of a dSS are: ----------------------
1. Interactivity: Managers give simple instructions and see immediate
results without waiting for scheduled reports. ----------------------
2. Flexibility: A DSS can sort, regroup, total, average and manipulate the ----------------------
data in various ways to suit the requirements of the decision maker.
----------------------
3. discovery oriented: Managers can probe for trends, isolate problems
and ask “what if” questions. ----------------------
4. Accessible: To all levels of decision makers ----------------------
Today all large organisations use some sort of DSS for improved decision- ----------------------
making. One of the fastest growing uses of DSS’s is for database marketing,
which is the creation of a large computerised file of customers’ and potential ----------------------
customers’ profiles and purchase patterns.
----------------------
Federal Express (FedEx) has developed a reputation for being a reliable
express courier service worldwide. It has become a technology leader in a ----------------------
highly competitive market. A major ingredient in the success has been the use
of advanced DSS that provide information on customers and detailed aspects of ----------------------
every shipment including ordering, billing, tracking and tracing. One example ----------------------
of the use of DSS is its highly sophisticated “segment management marketing,
by which the company has developed a “value quotient” formula that allows ----------------------
marketers to analyse individual customers on a case by case analysis. This
value quotient includes weights for the strategic competitive value of customer ----------------------
and profitability through a survey of thirty questions. The company has defined ----------------------
14 highly specific customer segments based on consumer attitudes towards,
pricing, reliability, urgency, content safety, tracking and proof of delivery. The ----------------------
SMM classifications have been expanded over the years to include other factors,
to help the company further understand the customers they serve. ----------------------

Notes
Activity 3
----------------------
---------------------- Using the Internet, identify three examples of decision support systems
being used by organisations for improved decision-making. How do you
---------------------- think the DSS’s have helped the respective organisations?
----------------------
5.5 FORECASTING AND DEMAND MEASUREMENT
----------------------
One major reason for market research is for a company to identify
---------------------- marketing opportunities. Following the completion of research, companies must
---------------------- measure and forecast the size, growth potential and business potential of each
opportunity. Sales Forecasts are used company-wide for production scheduling
---------------------- and planning and allocation of resources.
---------------------- Demand and Sales forecasting are a marketing activity. Inaccurate sales
forecasts can lead to either excess inventory or inventory shortfall, neither of
---------------------- which is good for the organisation. Before we look at forecasting methodologies,
it is important to understand some terminology first.
----------------------
----------------------
Market Demand for a product is the total volume that would be bought
---------------------- by a defined customer group, in a given territory, time period and under certain
environmental conditions and as a result of a given marketing program. This
---------------------- implies that market demand is not in fact a fixed number, but a rather a function
of a number of variables, being the target groups, the companies marketing
----------------------
actions and environmental conditions. Given a change in any of the variables,
---------------------- the demand estimate would also change.
---------------------- Market Demand is often referred to as market demand function and its
levels would vary between the market minimum and market potential. Market
---------------------- minimum is the base level of sales that would take place without any specific
marketing program in place. Creating specific marketing programs to stimulate
---------------------- demand, would increase the sales to higher levels; the initial increases happening
---------------------- at an increasing rate and then beyond a level at a decreasing rate.
Beyond a point, increasing marketing expenditures will not lead to any
---------------------- increase in sales as the market has reached saturation point. This upper limit
---------------------- to the market demand is known as market potential. Between the two levels of
market minimum and market potential exists the opportunity for the company
---------------------- to stimulate the market demand. However not all markets respond to demand
stimulating marketing programs; expansible markets, such as the market for
---------------------- beverages are affected by the total industry wide marketing spends.
---------------------- Non-expansible markets such as the market for home security systems
are not much affected by the level of marketing expenditures, as the potential
----------------------
market for the product category itself is rather limited. In such cases, companies
---------------------- direct their efforts more towards winning larger market shares for their products
and stimulating selective demand for their brands.
Companies compare market penetration figures (actual number of current Notes
users of a category) with market potential to create a market penetration index.
A low market penetration index indicates a larger opportunity and growth ----------------------
potential for all companies. Companies must also compare their current market
shares with their potential market shares. Low share penetration index indicates ----------------------
problem areas or deficiencies in the marketing program. ----------------------
Lastly, it is important to remember that market demand function is not
the market demand over time, but rather the market demand given different ----------------------
levels of marketing expenditures and environmental conditions. The phrase ----------------------
“given environmental conditions” is important, as during a recessionary,
market potential will remain suppressed irrespective of the levels of marketing ----------------------
expenditure. In such cases where market demand is strongly influenced by
environmental factors, companies will try to influence their share of the demand ----------------------
by deciding on their levels of marketing expenditure. ----------------------
----------------------
Company demand is the company’s estimated share of the market
demand, at differing levels of marketing efforts in a given time period. The ----------------------
company’s share of demand will depend on how its products, services, prices and
communications are perceived relative to competitors. Other things being equal, ----------------------
the size and effectiveness of a company’s marketing expenditures relative to its ----------------------
competitors will determine the company’s market share. Several mathematical
sales response models have been created to measure how a company’s sales ----------------------
will be affected by size of marketing spend, marketing mix and effectiveness of
marketing programs. ----------------------
Once the level of company demand has been estimated, marketers have ----------------------
to chose the level of marketing effort that they will make in a given time period.
This chosen level will result will result in a certain level of expected sales. ----------------------
The company sales forecast is the expected level of company sales based on a ----------------------
chosen marketing plan in a given marketing environment.
Hence, the company sales forecast follows the marketing plan. However ----------------------
much too often one hears of managers developing marketing plans ‘based’ on ----------------------
a certain sales forecasts, which is incorrect since the sales forecast is the result
of a given marketing plan. The only exceptions to this would be the case of a ----------------------
non-expansible market.
----------------------
The company sales potential is the sales limit approached by the company
demand, as the company’s marketing effort increases relative to its competitors. ----------------------
Theoretically, the uppermost limit of course is the market potential; but in most
cases company sales potential will be less than the market potential. ----------------------
In relation to company sales forecasts, companies set sales targets and ----------------------
create sales budgets. Sales budgets are realistic, conservative estimates of the
expected volume of sales and are used mainly for resource planning, productions ----------------------
and purchasing scheduling and cash flow planning. Sales targets on the other
----------------------
hand are goals set for managers, product lines and divisions and used mainly
as motivational tools to stretch the managerial effort. Sales targets are usually ----------------------
higher estimates of sales forecasts.
Notes 5.5.3 Estimating Current Demand
Marketing executives first need to estimate the total market potential, area
----------------------
market potential, total industry sales and market shares.
---------------------- Total Market Potential is the maximum amount of sales available
to all firms in an industry during a given time period, marketing effort and
----------------------
environmental conditions. A common way to estimate the total market potential
---------------------- is to estimate the total number of potential buyers (x) average quantity per
buyer (x) price. However, the problem with this method is that it is an
---------------------- oversimplification, as it works with averages. For instance if one were to use
this method to estimate the market potential for nonfiction books, one would
----------------------
have to consider a number of other factors to get a more accurate assessment of
---------------------- market potential.
The chain ratio method would involve multiplying the base population
----------------------
figure with a number of percentages. Total population (x) percentage of
---------------------- population that regularly buys books (x) personal discretionary income per
capita (x) average percentage discretionary income spent on books (x) average
---------------------- percentage of amount spent on books, which would be spent on a nonfiction
book. This method would result in a more realistic estimation of market
----------------------
potential.
---------------------- Area Market Potential: Companies need to assess the market potential
---------------------- of different territories, for optimal allocation of resources to the different
territories. Two major methods available are the market buildup method (used
---------------------- primarily by industrial or business marketers) and multiple factor index method
(used mainly by consumer marketers).
----------------------
The market build up method calls for identifying all potential buyers in
---------------------- each market and estimating their potential purchases. This method produces
results if one has a list of potential buyers and a good estimate of what each
---------------------- one will buy. Unfortunately, this information is not so easy to gather. Moreover,
---------------------- additional information about each market such as extent of market saturation,
number of competitors, market growth rates and average age of existing
---------------------- equipment would also need to be considered.
---------------------- Companies use existing databases from industry associations to generate
a list of prospective companies. Consumer marketers use the multiple factor
---------------------- index method to estimate area potential. Since the number of customers is
too numerous to be listed, a straightforward index method is used to calculate
---------------------- market potential. The factors affecting purchase of the product, such as per
---------------------- capita income, category awareness and so on would be listed and each factor
would be assigned a weight based on its influence on the purchase decision.
----------------------
Thus a multiple factor index is developed, which would serve as an
---------------------- indicator of the potential of a particular territory.
Industry Sales and Market Shares: Besides estimating the total
----------------------
population and area potential, the company also needs information on actual
---------------------- industry sales taking place in its market. This means identifying its competitors

and estimating their sales. Industry associations collect and publish total Notes
industry sales. Companies also buy reports from market research agencies that
audit total sales and brand sales data. AC Nielsen audits retail sales in various ----------------------
product categories and sells this information to interested companies.
----------------------
----------------------
Very few products or services lend themselves to easy forecasting; only
in categories where demand is fairly, competition is nonexistent or oligopolies ----------------------
is forecasting a relatively straight forward exercise. Companies use both “top
down” and “bottom up” approaches to prepare a sales forecast. The top down ----------------------
approach would be done in three stages.
----------------------
The first stage is a macro-economic forecast, which calls for projecting
inflation, interest rates, consumer spending, increases in per capita and ----------------------
disposable income and other economic variables. The impact of these factors
----------------------
on the industry sales and past data is used to arrive at sales forecast for the total
industry. The third step is to develop a company sales forecast, which is usually ----------------------
based on a company’s estimates of the market share that it will retain or gain in
a particular plan period. ----------------------
Additionally companies would use a “bottom-up” approach employing ----------------------
methods such survey’s of buyer intentions, composite of sales force opinions,
expert opinions and statistical analysis of past data to arrive at accurate estimates ----------------------
of future sales. ----------------------
Survey of buyers’ intentions: Companies commission research
organisations to conduct periodic surveys of consumer buying intentions. ----------------------
Composite of Sales Force: Sales representatives in different territories ----------------------

develop estimates of how much each current and prospective customer will
buy of the company’s products. The figures estimated are usually adjusted for ----------------------
the company’s marketing plans in a given territory that could influence sales. ----------------------
Since sales reps have better knowledge of the potential of their territories, such
forecasts can be helpful in developing more accurate estimates of sales. ----------------------
Expert Opinions from industry associations and surveys of dealers, ----------------------
distributors and suppliers are regularly used to forecast short-term demand.
Surveys of dealers, distributors and retailers have their strengths and weaknesses, ----------------------
but can yield rich information on short-term demand within territories.
----------------------
Statistical Analysis of Past Sales Analysis:
----------------------
Time series Analysis consists of breaking down past time series into
four components (trend, cycle, seasonal, and erratic) and projecting these ----------------------
components into the future.
----------------------
Exponential smoothing consists of projecting the next period’s sales by
combining an average of past sales and the most recent sales giving most weight ----------------------
to the latter.
----------------------
----------------------

Notes Statistical Demand Analysis consists of measuring the impact level of
each of a set of causal factors (income, marketing expenditures and price) on
---------------------- the sales level.
---------------------- Finally, Econometric analysis consists of building sets of equations that
describe a system and proceeding to fit the parameters statistically.
----------------------

---------------------- 1. _______________ for a product is the total volume that would be
bought by a defined customer group, in a given territory, time period
---------------------- and under certain environmental conditions, and as a result of a given
---------------------- marketing program.
2. _______________ is the company’s estimated share of the market
---------------------- demand, at differing levels of marketing efforts in a given time period.
---------------------- 3. _______________ is the maximum amount of sales available to all
firms in an industry during a given time period, marketing effort and
----------------------
environmental conditions.
----------------------
---------------------- Summary
----------------------
• Market Research is the systematic and objective identification, collection,
----------------------
• The MR process is a set of six steps, which define the tasks to be
---------------------- accomplished in conducting a MR study. These include problem definition,
developing an approach to the problem, research design formulation,
---------------------- fieldwork and data collection, data preparation and analysis and report
preparation and presentation.
----------------------
• A research design is a blueprint for conducting the market research project.
----------------------
It details the procedures necessary for obtaining the required information.
---------------------- • After deciding on the research approach and instruments, the researcher
---------------------- must develop a sampling plan.
• The data collection phase of the market research is generally the most
---------------------- expensive and most prone to error.
---------------------- • Data preparation is the process of converting the raw data contained in the
---------------------- questionnaires into a form suitable for any type of analysis.
• The next step is data analysis, the purpose of which is to produce
----------------------
information that will help address the problem at hand.
----------------------

• Report preparation and presentation constitutes the sixth and final step in Notes
the market research process.
----------------------
• A Marketing Decision Support System (DSS) is defined as a coordinated
collection of data, systems, tools and techniques with supporting software ----------------------
and hardware by which an organisation gathers and interprets relevant
information from business and environment and used as a basis for ----------------------
marketing action. ----------------------
• The characteristics of a DSS are interactivity, flexibility, discovery
----------------------
oriented, and accessibility.
----------------------
• Following the completion of research, companies must measure
and forecast the size, growth potential and business potential of each ----------------------
opportunity.
----------------------
Keywords ----------------------
• Research design: The plan for collecting and utilising data so that desired ----------------------
information can be obtained
----------------------
• Fieldwork: Practical work conducted by a researcher in the natural
environment, rather than in a laboratory or office ----------------------
• Data analysis: The process of evaluating data using analytical and logical ----------------------
reasoning to examine each component of the data provided
----------------------
Self-Assessment Questions ----------------------
1. Define market research and explain the important aspects of the definition. ----------------------
Why do organisations engage in market research? ----------------------
2. Briefly explain the market research process. ----------------------
3. What does the sampling design process involve? Explain the different
----------------------
steps.
----------------------
4. Why is the data collection phase the most expensive and the most prone
to error? What steps can researchers take to minimise the errors? Why ----------------------
does the data need to be “prepared”? What does data preparation involve?
----------------------
5. Briefly explain the contents of the Market Research Report. Which aspects
must researchers pay attention to? ----------------------
6. What is a Marketing Decision Support System? What are its characteristics? ----------------------
----------------------
----------------------
----------------------


1. Market Research is the systematic and objective identification, collection,
----------------------
2. Organisations engage in MR for two primary reasons: (a) to identify
----------------------
problems and (b) to solve marketing problems.
---------------------- 3. Problem identification research is undertaken to help identify problems
---------------------- that are perhaps not apparent on the surface and yet exist or are likely to
arise in future.
----------------------
4. Once the problem or opportunity has been identified, problem-solving
---------------------- research is undertaken to arrive at a solution.
---------------------- Match the sequence of steps in Market Research Process.
---------------------- i–d
---------------------- ii – b
iii – f
----------------------
iv – a
----------------------
v–c
----------------------
vi - e
----------------------
----------------------
1. Problem definition involves:
----------------------
i. Stating the general marketing research problem and identifying its
---------------------- specific components.
---------------------- 1. Market demand for a product is the total volume that would be bought
by a defined customer group, in a given territory, time period and under
---------------------- certain environmental conditions, and as a result of a given marketing
program.
----------------------
2. Company demand is the company’s estimated share of the market demand,
----------------------
at differing levels of marketing efforts in a given time period.
----------------------

3. Total Market Potential is the maximum amount of sales available to all Notes
firms in an industry during a given time period, marketing effort and
environmental conditions. ----------------------
----------------------
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Notes
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Consumer Behaviour
UNIT
6
Structure:
6.1 Introduction
6.2 Simplified Model of Consumer Decision-Making
6.3 Consumer as an Individual
6.3.1 Motivation
6.3.2 Perception
6.3.3 Learning
6.3.4 Personality
6.3.5 Personal Factors
6.4 Consumers in their Socio-Cultural Settings
6.4.1 Culture
6.4.2 Subculture
6.4.3 Reference Groups
6.5 Types of Decisions and Buyer Behaviour
6.5.1 Buying Roles
6.5.4 Differences between Brands
6.5.5 Types of Buying Behaviour
6.6 The Decision-Making Process
6.6.2 Pre-Purchase Search
6.6.3 Evaluation of Alternatives
6.7 The Purchase Decision
6.8 Relationship Marketing and Brand Loyalty
Summary
Keywords
Suggested Reading
Consumer Behaviour 147

Notes
Objectives
----------------------
----------------------
• Describe key factors that influence consumer behaviour
----------------------
• Explain the characteristics of a consumer as an individual and their
---------------------- socio-cultural settings
• Compare the types of buying behaviour that consumers exhibit
----------------------
• Analyse the stages of the buying process
----------------------
• Assess the role of marketing in influencing behaviour at various
---------------------- stages of decision-making
----------------------
6.1 INTRODUCTION
----------------------
---------------------- The aim of marketing is to meet the needs of target markets profitably.
Consumer behaviour studies how consumers search for, purchase, use, evaluate
---------------------- and dispose of products and services that they expect will satisfy their needs.
---------------------- Consumer behaviour focuses on how individuals make decisions to spend

available resources (time, money and effort) on consumption related products
---------------------- and services.
---------------------- Understanding consumers and “knowing why consumers do what they
do” is very complex. Customers may say one thing and mean another. They may
---------------------- not be aware of their own deepest motivations and may respond to influences
in very impulsive ways. To understand consumers, marketing theorists have
---------------------- borrowed concepts from other scientific disciplines such as psychology (study
---------------------- of an individual), sociology (study of groups), social psychology (study of
how an individual operates in groups), anthropology (influence of society on
---------------------- groups) and economics to form a new marketing discipline known as consumer
behaviour.
----------------------
The field of consumer research has emerged as an important area of
---------------------- marketing research, to enable marketers to predict how consumers will react
to messages and to understand why they make the purchase decisions they do.
----------------------
---------------------- 6.2 SIMPLIFIED MODEL OF CONSUMER

DECISION- MAKING
----------------------
The process of consumer decision-making can be viewed in three distinct
----------------------
but interrelated stages: the input stage, the process stage, and the output stage.
---------------------- These stages are depicted in Figure 6.1.
----------------------
----------------------

External Influences Notes
Firm’s Marketing Efforts Sociocultural Environment ----------------------

1. Product 1. Family
2. Promotion 2. Informal sources ----------------------
Input 3. Price 3. Other non-commercial sources
4. Channels of distribution 4. Social class
----------------------
5. Culture and Subculture
----------------------
Consumer Decision Making

----------------------
----------------------
Need Recognition Psychological Field
----------------------
1. Motivation
2. Perception
----------------------
3. Learning
4. Personality
Process Prepurchase Search ----------------------
5. Attitudes
----------------------
Experience
Evaluation of Alternatives
----------------------
----------------------
Postdecision Behaviour ----------------------
----------------------
Purchase
1. Trial ----------------------
2. Repeat purchase
Output ----------------------
----------------------
Postpurchase Evaluation
----------------------
Fig. 6.1: Stages in Consumer decision-Making ----------------------
The input stage influences the consumer’s recognition of a need and ----------------------
consists of two major sources of information: the firms’ marketing efforts and
the socio-cultural environment within the consumer resides. The cumulative ----------------------
impact of all these factors are all inputs that are likely to impact what consumers ----------------------
purchase and how they use what they buy.
----------------------
The process stage of the model focuses on how consumers make decisions.
The psychological factors inherent in each individual affect how the external ----------------------
inputs from the input stage influence the customer’s recognition of a need
search for information and evaluation of alternatives. The experience gained in ----------------------
turn affects the psychological attributes. This stage of the consumer behaviour
----------------------
is a very dynamic and complex because of the continuous interplay of several
factors. ----------------------

Notes The output stage consists of two important and related post-decision
activities: purchase behaviour and post-purchase evaluation. If he or
---------------------- she is satisfied, it is likely to result in repeat purchase. A consumer gains
experience through post purchase evaluation, which in turn once again affects
---------------------- his information processing stage.
---------------------- The sections that follow will delve into each area depicted in the model
in greater detail.
----------------------

----------------------
Fill in the blanks.
---------------------- 1. The process of_____________________can be viewed in three
---------------------- distinct but interrelated stages: the input stage, the process stage, and
the output stage.
---------------------- 2. The _________ stage of the model focuses on how consumers make
---------------------- decisions.
3. The___________stage of the model focuses on how consumers make
----------------------
stage consists of two important and related post-decision activities.
---------------------- Purchase behaviour and post purchase evaluation.
4. The___________stage influences the consumer’s recognition of a
----------------------
need and consists of two major sources of information: the firms’
---------------------- marketing efforts and the socio-cultural environment within the
consumer resides.
----------------------
---------------------- 6.3 CONSUMERS AS AN INDIVIDUAL

---------------------- Consumer needs are the essence of the marketing concept of doing
---------------------- business. The key to a company’s survival, growth and profitability in a highly
competitive marketplace is its ability to identify and satisfy unfulfilled consumer
---------------------- needs better and sooner than competition.
---------------------- Marketers do not create needs, contrary to what is commonly believed.
Marketers can only make consumers aware of deeply felt latent needs that they
---------------------- are unaware of. We have learnt before that firms must define their business
mission in terms of the needs they aim to satisfy, rather than in terms of products.
----------------------
6.3.1 Motivation
----------------------
Motivation is the driving force within individuals that impels them to
---------------------- action. This driving force is produced by a state of “tension” which exists because
of an unfulfilled need. Individuals strive at both conscious and subconscious
---------------------- levels to reduce this tension, through actions which they believe will fulfill their
needs and thus reduce them of this stress. The specific goals they select and the
----------------------
patterns of action they undertake to achieve their goals are results of individual
---------------------- thinking and learning.

Needs Notes
Every individual has needs: some are innate, others are acquired. Innate
----------------------
needs are biogenic and include the needs for food, water, air, clothing, shelter.
As these needs are essential for survival and to sustain biological life, they ----------------------
are often referred to as primary needs. Acquired needs are needs that needs
that we learn in response to our culture or environment. These include self- ----------------------
esteem, prestige, power, affection, social acceptance. These are referred to as
----------------------
psychogenic or secondary needs.
All humans seek shelter. Thus, finding a place to live fulfills the biogenic ----------------------
need. But the kind of place that a person rents or buys will be the result of his
----------------------
secondary needs. The place that an individual finally selects will be the one that
fulfills both biogenic and psychogenic needs. ----------------------
Several psychologists have developed theories of human motivation. The
----------------------
three best known are Sigmund Freud, Abraham Maslow and Frederick Herzberg,
each with different implications for consumer analysis and marketing strategy. ----------------------
Freud’s theory states that the psychological forces shaping a person’s ----------------------
behaviour are largely unconscious, and that a person cannot fully understand
his or her own motivations. He used the Laddering technique to uncover a ----------------------
person’s deepest motivations. Market researchers use laddering and projective
techniques to uncover the deepest motivations. ----------------------
Maslow’s theory explains why people are driven by particular needs at ----------------------
particular times. Why does one person spend considerable time and energy
on obtaining best value for groceries and another on pursuing what others ----------------------
think of him. Maslow’s explanation was that human needs are arranged in a ----------------------
hierarchy, from the most pressing to the least pressing. In order of importance,
they are: physiological needs, safety needs, social needs, esteem needs and self ----------------------
actualisation needs. People try to satisfy their most pressing needs first and then
the next most important one. Maslow’s theory helps marketers understand how ----------------------
different products fit into the plans goals and lives of different consumers. ----------------------
Herzberg developed a two-factor theory that distinguishes dissatisfiers
(factors that cause dissatisfaction) and satisfiers (factors that cause satisfaction). ----------------------
The absence of dissatisfiers is not enough; satisfiers must be actively present ----------------------
to motivate a purchase. For example, the lack of after-sales service would be a
key dissatisfier with purchase of a laptop. Yet the presence of after-sales service ----------------------
would by itself not act as a satisfier or motivator of purchase, because it is not
the key source of satisfaction with the laptop. Ease of use or lightweight may be ----------------------
more important satisfiers. ----------------------
The implication of this theory is for marketers to first understand whether
----------------------
a particular product attribute is a satisfier or dissatisfier. Whilst firm’s must do
their best to avoid dissatisfiers, they must provide the key satisfiers to motivate ----------------------
a purchase. Companies must differentiate their products on the key satisfiers as
these will determine which brand the customer will buy. ----------------------
----------------------

Notes Dynamics of Motivation
1. Motivation can be positive or negative in direction: Consumers may
----------------------
feel a driving force towards a particular object or a driving force away
---------------------- from a particular object. Psychologists refer to positive drives as needs,
wants or desires; and to negative drives as fears or aversions.
----------------------
These positive or negative drives result in how consumers form goals.
---------------------- A person may include organic foods in his diet as it is healthier way of
eating, as his goal is a healthier life (positive goal). Another person may
---------------------- include the same product in his diet to avoid disease, as the person may
fear ill health (avoidance of a negative goal). This has implications for the
----------------------
way marketing messages must be coded.
---------------------- 2. Needs are never fully satisfied: Most human needs are never fully or
permanently satisfied. For example, at regular intervals throughout the
----------------------
day individuals experience hunger needs that must be satisfied. Most
---------------------- people regularly seek companionship and approval from others to satisfy
their social needs. Even more complex psychological needs are rarely
---------------------- fully satisfied. Individuals continuously strive harder to satisfy their needs
more fully.
----------------------
3. Multiplicity of needs: Consumers try to fulfill more than one need at the
---------------------- same time; recall the earlier example of the house fulfilling both safety
---------------------- as well as esteem needs. Usually, however, there is one overriding or
prepotent need that triggers behaviour.
---------------------- 4. Needs and goals vary among individuals: One cannot accurately infer a
---------------------- person’s real motives from his purchase behaviour. People with different
needs may seek fulfillment through selection of the same goal; people with
---------------------- same need may seek fulfillment through different goals. Five different
people decide to run the “Mumbai Marathon”, each for a different reason.
---------------------- The variety of reasons could be: a test of fitness and stamina, to participate
---------------------- in high profile social event, for a social cause, peer pressure, to name a
few.
---------------------- Hence, five different people may be driven by the same need to seek
---------------------- fulfillment in five different ways. For example, individuals satisfy their esteem
needs either through objects, participation in a political organisation, or social
---------------------- organisations such as clubs or even by working for a cause.
---------------------- These differences between individuals has extremely important
implications for market segmentation.
----------------------
6.3.2 Perception
---------------------- Individuals act and react on the basis of their perceptions, not on the basis
of objective reality. For each person reality is a total personal phenomenon,
----------------------
bases on that person’s needs, wants, values and personal experiences. Hence,
---------------------- to the marketer consumers’ perceptions are much more important than their
knowledge of objective reality. Individuals take decisions and actions based on
---------------------- what they perceive to be their reality; it is important for marketers to understand

this concept of perception to determine what factors influence consumers Notes
tobuy.
----------------------
Perception is defined as the process by which an individual selects,
organises and interprets stimuli into a meaningful and coherent picture of the ----------------------
world. In simple terms, it is how we see the world around us. Two people,
exposed to the same stimuli under the same conditions, will interpret and ----------------------
respond in unique ways based on their needs, values and expectations.
----------------------
Dynamics of Perception
----------------------
1. Selective perception: Human beings are constantly bombarded with
billions of stimuli during every minute of the day. A stimulus is any unit ----------------------
of input to any of the senses (eyes, ears, nose, mouth and skin). Examples
of stimuli include products, packaging, brand names, marketing ----------------------
communications and retail stores. Every element of the marketing mix is
----------------------
a stimulus.
Consumers subconsciously exercise a great deal of selectivity as to which ----------------------
stimuli to receive. A person walking into a retail outlet may be exposed to ----------------------
20,000 products of different colors, sizes shapes and smell;100 people co
shoppers or retail staff; different smells (people, disinfectants, perfumes, ----------------------
fruit); sounds within the shop (conversations, air conditioners, cash
registers, staff at work; sounds outside the store (traffic, honking cars, ----------------------
screeching tyres, car doors slamming and so on. ----------------------
Yet humans manage to complete the task on hand within a reasonable
period of time without losing their sanity. This is possible because a ----------------------
person exercises selective perception (selective attention). People tend to ----------------------
be more attentive to stimuli about things relevant to their needs or wants.
At the same time a stimuli may awaken a latent need, in which case the ----------------------
consumer’s attention is immediately drawn to such stimuli.
----------------------
2. Selective distortion: People “see” what they expect to “see” and this is
usually based on familiarity, experience, and mind set. In the marketing ----------------------
context, people perceive marketing stimuli according to their own
expectations and interpret the information in a way that will into their ----------------------
preconceptions. Subconsciously they screen out stimuli that they find ----------------------
threatening to their values and beliefs.
----------------------
Individuals are subject to a number of influences that tend to distort their
perceptions. People tend to attribute qualities they associate with certain ----------------------
people to other who resemble them, whether or not they consciously
recognise the similarity. For this reason proper selection of models for an ----------------------
advertisement can be a key element in persuasiveness. Advertisers must
----------------------
ensure that there is a rational match between the product advertised and
the attributes of the model used to promote it. ----------------------
3. Selective retention: Due to the overwhelming amount of stimuli that
----------------------
people are exposed to, they forget much of what they would have learnt.
As a mechanism of coping and perceptually managing all the information, ----------------------

Notes people tend to remember what they like and what fits in with values and
beliefs and forget what they dislike or what is contrary to their beliefs.
----------------------
nderstanding consumer behaviour is essentially about understanding
U
---------------------- and managing perceptions. Consumer perceptions impact all aspects of
marketing; products, product positioning, brand image, service levels,
---------------------- prices, communications, quality, retail stores amongst others. A more
detailed explanation of each impact will be covered in the relevant units
----------------------
as we progress in our study of marketing.
---------------------- he important thing to know is that perceptions do change over time. The
T
change at an individual’s level has more to do with ageing, accumulation
----------------------
of experience, exposure to new or different stimuli. Perceptions can thus
---------------------- also be molded or influenced by marketers through repetitive exposure.
6.3.3 Learning
----------------------
Learning is the process by which individuals acquire the purchase and
---------------------- consumption knowledge and experience that they apply to future related
---------------------- behaviour. There are several important points in this definition to be noted.
First that consumer learning is a process; that is, it continually evolves and
---------------------- changes as a result of newly acquired knowledge (which may be gained from
reading, discussions, observation or from thinking) or from actual experience.
---------------------- Both newly acquired knowledge and personal experience serve as feedback to
---------------------- the individual and provide the basis for future behaviour in similar situations.
Most human behaviour is learnt. Learning is a complex interplay of
---------------------- drives, stimuli, cues, responses and reinforcements.
---------------------- A drive is a strong internal stimulus compelling action.
---------------------- A cue is an external stimulus that directs consumer drives towards
specific products, when they are consistent with consumer expectations. How
---------------------- individuals react to a cue or a drive-how they behave-constitutes their response.
Learning takes place even when responses are not overt.
----------------------
Reinforcement increases the likelihood that a specific response will occur
---------------------- in the future as a result of particular cues or stimuli.
---------------------- There are a number of behavioural learning theories explaining how
learning takes place; however, not all are in agreement with each other. How
---------------------- consumers learn about products has very immediate implication for marketing
---------------------- communications.
Beliefs and Attitudes
----------------------
Through learning and doing people acquire attitudes and beliefs which in
---------------------- turn influence buying behaviour.
---------------------- 1. A belief is a descriptive thought that a person holds about something.
Marketers are interested in beliefs, as it influences a person’s buying
---------------------- decisions. Beliefs about products and brands exist in a person’s memory.
Memory is a network of nodes and connecting links. The nodes represent
----------------------
the stored information and the links represent the connection between

nodes. When a particular node is activated, the information is recalled and Notes
further associated information is recalled through the links. Marketers
study memory networks of different consumers regarding a particular ----------------------
brand and map the main associations that are triggered and their relative
strength and frequency. ----------------------
2. Attitudes are as important as beliefs. An attitude is a learned predisposition ----------------------

to behave in a favorable or unfavorable way with respect to a given object.
----------------------
People have attitudes towards almost everything, be it clothes, religion,
music, social issues and food. Attitudes lead people to behave in consistent ----------------------
ways towards objects. Since attitudes are learnt, they can be changed or molded.
----------------------
Marketers must first understand consumer attitudes and either fit products into
existing attitudes or alter attitudes. ----------------------
6.3.4 Personality
----------------------
Personality is defined as the inner psychological characteristics of an
individual that both determine and reflect how a person responds to his or her ----------------------
own environment. It is important to note that personality is an inner characteristic ----------------------
that distinguishes one individual from another. Although two or more people
may share common traits, the personality of each individual is unique to him ----------------------
or her. An individual personality undergoes a change as a process of gradual
maturing or may be accelerated by life altering events such as death of a loved ----------------------
one or divorce. ----------------------
According to Freudian psychoanalytic theory, human drives are largely
unconscious and that consumers are primarily unaware of their true reasons for ----------------------
buying what they buy. According to this theory, consumer purchases are largely ----------------------
a reflection and an extension of the consumers own personality. Personality
traits are studied to gauge parameters such as consumer innovativeness, need ----------------------
for uniqueness and response to different types of promotional messages.
----------------------
For example, it is found that consumers who rely on their inner values
(inner-directed people) in evaluating products are more likely to be product ----------------------
innovators and respond better to marketing communications that stress product
features and personal benefits. Whereas, people who rely more on others ----------------------
for direction, (other-directed) are less likely to be innovators. They respond ----------------------
better to communications that feature an approving social environment or
social acceptances of a particular purchase. Consumers also attribute various ----------------------
descriptive personality-like traits or human characteristics to different brands
in a wide variety of product categories. These “brand personalities” strongly ----------------------
shape consumer responses, preferences and loyalties towards brands. ----------------------
Bharat Petroleum has been promoting motor sports as such events
----------------------
are in congruence with its brand personality – stylish, exciting, cool and highly
reliable besides the fact that the target audience who are interested in motor ----------------------
sports are also the opinion makers and the target audience for our branded
fuel “Speed”. ----------------------
----------------------

Notes “Speed” has, right from its launch, aspired to touch an emotional
chord with its target segment. That probably explains the nature of some of
---------------------- its unconventional as well as innovative brand associations – marketing
---------------------- tie-up with the release of “Die another day” (James Bond), sponsoring
the telecast of the Grand Prix Formula 1 races, owning the “Speed Gun”
---------------------- property in cricket telecasts, organising the Speed Run (the quarter mile drag
race) and the association with the JK Tyre National Go-Karting Championship
---------------------- and Street Racing besides its association with Car manufacturers like General
---------------------- Motors for its Optra mileage advantage rally and Maruti for its Motor cross.
The philosophy clearly is to tap into the passions of the target audience, in a
---------------------- manner, which is in congruence to the brand personality of “Speed” – stylish,
exciting, contemporary, and cool and at the same time, highly reliable.
----------------------
Source: bharatpetroleum.com
---------------------- Emami, the personal and healthcare major, has set an ambitious target
---------------------- of making Navratna a 200-cr brand by December 2006. Navratna Oil today
enjoys the leadership position as an ayurvedic cool oil, which provides relief
---------------------- from stress and its associated symptoms like sleeplessness and headaches,
and is popular for its baseline “Thanda Thanda Cool Cool”.
----------------------
The company has recently launched Navratna Cool Talc - India’s
---------------------- first ever Cool Talc. Navratna Cool Talc will be endorsed by Bollywood star,
Shah Rukh Khan. He joins hands with megastars Amitabh Bachchan and
----------------------
Chiranjeevi as an endorser of Brand Navratna. The company feels that
---------------------- Shahrukh Khan is the right choice as brand ambassador because he has
always been known for his cool and calm personality. The new ad campaign
---------------------- communicates the super cooling properties of Navratna Cool Talc and how
it lives up to its claim of being the smallest AC in the world. So there is great
----------------------
synergy between the brand personality and that of Mr. Khan.
---------------------- Source: agencyfaq’s.com
---------------------- Marketers are interested to understand in-depth personality traits as these
are important market segmentation variables. Furthermore, personality traits
---------------------- will guide product positioning and marketing communications.
---------------------- 6.3.5 Personal Factors
---------------------- There are other personal factors such as age, stage of family life cycle,
economic circumstances, occupation and lifestyle, which also influence
---------------------- consumption behaviour.
---------------------- 1. Age and stage of family cycle: People need different goods and services
over a lifetime. Researchers in the US found nine distinct stages of
---------------------- a personal life cycle which include: bachelor stage (living away from
family home), newly married couples, full nest with infant children,
----------------------
full nest with young children, full nest with older financially dependant
---------------------- children, empty nest and solitary survivor. These stages of family life
cycle are very culture specific. In India where the joint family system
---------------------- predominates, stages of family life cycles would be very different; even
between metro cities and class I towns.
2. Occupation and economic circumstances: Consumption behaviour is Notes
greatly affected by occupation, as many occupations are associated with
very specific personality traits. ----------------------
Marketers are interested in specific economic variables such as disposable ----------------------
income, savings and assets, debts, borrowing power and attitudes towards
saving and spending. These variables influence a customer’s price ----------------------
sensitivity and perception of value.
----------------------
3. Lifestyle: A person’s cultural and social setting and occupation determine
lifestyle. ----------------------
Lifestyle is defined as a pattern of living expressed in activities, interests ----------------------
and opinions (AIO variable). Lifestyle portrays the “whole person” and its
impact on consumption behaviour is difficult to separate from the impact of ----------------------
other factors such as personality traits and beliefs and attitudes.
----------------------
----------------------
Multiple Choice Single Response.
----------------------
1. ____________ is defined as the process by which an individual
selects, organises and interprets stimuli into a meaningful and ----------------------
coherent picture of the world.
----------------------
i. Perception
ii. Motivation ----------------------
iii. Needs ----------------------
iv. Personality ----------------------
2. _____________ is the driving force within individuals that impels
----------------------
them to action.
i. Reinforcement ----------------------
ii. Beliefs and Attitudes ----------------------
iii. Motivation ----------------------
iv. Drive
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Activity 1
----------------------
1. What are the different needs that the following products satisfy?
----------------------
(Remember the multiplicity of needs.)
---------------------- i. A cup of coffee with friends at a restaurant
ii. Buying trendy clothing
----------------------
iii. Drinking a cold aerated beverage
---------------------- iv. Gym membership
---------------------- Could there be different motivations for different people for the
above products? List the different motivations that you can think of
---------------------- and observe the list. Could these different motivations be used to group
---------------------- consumers into a market segment?
2. Examine the impact of personal factors on the demand for the following
---------------------- products:
---------------------- i. Milk in tetra packs
---------------------- ii. Ready-to-eat meals
iii. Online payment of utility bills through your bank account
----------------------
----------------------
6.4 CONSUMERS IN THEIR SOCIO-CULTURAL
---------------------- SETTINGS
---------------------- Most individuals interact with other people: family, colleagues, friends,
---------------------- neighbours, co-workers and other social groups. In a larger context, people live
within a community which has its own character, values, norms and attitudes.
---------------------- These reference groups and their values have a very profound influence on a
person’s values, attitudes, behaviour, customs, rituals, and language and food
---------------------- habits.
---------------------- The various socio-cultural factors that marketers must understand are:
culture, sub-culture, social class, influence of reference groups and influence
----------------------
of family.
---------------------- 6.4.1 Culture
---------------------- Culture is the essential character of a society that distinguishes it from
other cultural groups. Culture is defined as the sum total of learned beliefs,
---------------------- values and customs that serve to direct the consumer behaviour of members of
---------------------- a particular society.
Cultural values and beliefs are so ingrained in individuals that it affects
---------------------- almost everything they do. Culture provides standards and rules about what
---------------------- to eat, how to eat, when to eat, how to dress, and how to speak to elders.
Culture is also associated with what people consider to be a necessity and
---------------------- what is considered as a luxury. Culture dictates norms of marriage, upbringing

of children, gender roles, individual freedom, and attitudes towards charity, Notes
attitudes towards money, humanitarism and almost all other aspects of life.
----------------------
Marketers must understand in depth, the values, language, rituals
and symbols of the culture of their target markets. There are vast differences ----------------------
between different cultures and marketing programs need to be tailored to the
cultures of the different markets. Geert Hofstede, renowned sociologist, has ----------------------
done researched national differences between cultures. Some of these were
----------------------
explained in Unit 3.
An important aspect of a culture study is also to understand how people, ----------------------
when they are transported from one culture to another, adapt to their new
----------------------
cultural environments. These studies are especially important as people become
more geographically mobile to pursue their personal goals and ambitions. ----------------------
For instance, Indian migrants to the US have adapted to the American “way
of life” and yet retained their cultural identities, values, rituals and customs. ----------------------
They maintain a strong connection to their land of birth. Even within these
----------------------
communities, there are differences between first-generation migrants and
second-generation migrants. ----------------------
6.4.2 Subculture
----------------------
Subculture is defined as a distinct cultural group that exists as an
identifiable sub-set within a larger more complex society. Within the broader ----------------------
aspects of Indian society, several regional subcultures exist and exert a very ----------------------
dominant influence on its people.
There are different types of subcultures within a society. Regional, racial, ----------------------
religious, and geographical and age subcultures do exist. Even gender related ----------------------
subcultures do exist, which influence attitudes in important ways. For instance,
a number of studies have divided the urban female population into the following ----------------------
categories; stay-at-home housewives, plan-to-work housewives, just-a-job
working women and career-oriented working women. ----------------------
An understanding of subcultures is important because subcultures are ----------------------

natural market segments that exist. Product characteristics, distribution patterns,
marketing communications must be tailored to these subcultural groups. ----------------------
The advertising world is littered with examples of linguistic cross ----------------------

cultural blunders. Language must also be analyzed for its cultural suitability.
----------------------
For example, the slogan employed by the computer games manufacturer, EA
Sports, “Challenge Everything” raises grumbles of disapproval in religious or ----------------------
hierarchical societies where harmonious relationships are maintained through
the values of respect and non-confrontation. Colours, numbers, symbols and ----------------------
images do not all translate well across cultures. In some cultures there are lucky
----------------------
colours, such as red in China and unlucky colours, such as black in Japan. Some
colours have certain significance; green is considered a special colour in Islam ----------------------
and some colours have tribal associations in parts of Africa. Many hotels in the
----------------------
USA or UK do not have a room 13 or a 13th floor. Similarly, Nippon
Airways in Japan do not have the seat numbers 4 or 9. If there are numbers ----------------------

Notes with negative connotations abroad, presenting or packaging products in those
numbers when advertising should be avoided.Images are also culturally
---------------------- sensitive. Whereas it is common to see pictures of women in bikinis on
advertising posters on the streets of London, such images would cause outrage
---------------------- in the Middle East.
---------------------- Source: sideroad.com
---------------------- 6.4.3 Reference Groups
Reference groups are all the formal and informal groups that have a direct
----------------------
and indirect influence on a person’s behaviour. Reference groups are subsets
---------------------- of our subcultures and have closer relationship with our own set of values and
beliefs. Primary groups such as family, friends, neighbours and co-workers
---------------------- exert a direct influence on a person. Secondary groups such as religious or
professional groups have more indirect influence on a person’s behaviour as the
----------------------
interaction is more formal and not continuous. A new type of reference group
---------------------- that has emerged in today’s digital environment is the virtual group which
brings together people from diverse cultures, but who share a common passion
---------------------- or ideology. As the time that people spend in this digital environment increases,
the closer they are getting to these virtual groups and probably moving further
----------------------
away from their primary groups.
---------------------- A person’s attitude, behaviour, lifestyle and self-concept are strongly
---------------------- influenced by their reference groups. These groups also create pressures for
conformity which may affect actual brand choices.
---------------------- The concept of consumer reference groups has been broadened now to
---------------------- include groups that have no direct face-to-face contact with the person and yet can
influence the person’s behaviour. Celebrities, experts, successful businessmen,
---------------------- political figures can all serve as role models or icons for a particular group of
people and influence their attitudes and opinions in important ways.
----------------------
Actors and industrialists seem to be the hot favourite role models with
---------------------- Indian urban consumers. As per Indicus Consumer Tracker’s latest quarterly
(December-January) survey of over 28,000 urban Indian consumers on their
---------------------- role model for success, veteran actor Amitabh Bachchan continues to be
---------------------- at the top spot. Besides Bachchan, in the descending order, the top 10 list
includes Dhirubhai Ambani, Shahrukh Khan, Bill Gates, Sachin Tendulkar,
---------------------- A P J Abdul Kalam, father, mother, Narayana Murthy and Aishwarya Rai.
Close on their heels were politicians and industrialists such as Azim Premji,
---------------------- Anil Ambani, Sonia Gandhi, LN Mittal, Subroto Roy, Manmohan Singh,
---------------------- Mukesh Ambani, Sourav Ganguly, Jayalalithaa and Vijay Mallya. Indians
mostly figured on the list, with just two foreign nationals claiming the hearts
---------------------- of Indians – Bill Gates at number four and US president George W. Bush at
number 41.Men seemed chauvinistic in their choice of success icons. Other
---------------------- than their own mothers, no woman showed up in their list of top 10. In contrast,
---------------------- on an average, seven men and three women form the top 10 for women.
----------------------

While Bachchan leads the mind-share of all key demographic Notes
consumer segments (age, gender, occupation, city type or region), Dhirubhai
----------------------
Ambani is the number two for most consumer segments, with some exceptions.
For women and housewives, it is Shahrukh Khan; for teenagers, it is the ----------------------
father; and among respondents from the southern region, it is President Kalam.
----------------------
Source: agencyfaqs
----------------------
----------------------
----------------------
i. Culture a. All formal and informal groups that have
a direct and indirect influence on a person’s ----------------------
behaviour. They are subsets of our subcultures
----------------------
and have closer relationship with our own set
of values and beliefs. ----------------------
ii. Reference Group b. It is defined as a distinct cultural group that
exists as an identifiable sub-set within a larger ----------------------
more complex society. ----------------------
iii. Subculture c. It is defined as the sum total of learned beliefs,
values and customs that serve to direct the ----------------------
consumer behaviour of members of a particular
----------------------
society.
iv. Virtual Group d. It is a new type of reference group that has ----------------------
emerged in today’s digital environment which
brings together people from diverse cultures, ----------------------
but who share a common passion or ideology.
----------------------
----------------------
Activity 2
----------------------
1. Visit Geert Hofstede’s website to learn more about culture and its ----------------------
impact on people.
----------------------
2. Much has been written about the problems at Euro Disney, the Walt
Disney Co’s theme park in France. The difficulties were largely ----------------------
attributed to Disney’s lack of understanding of the French culture
----------------------
and the company’s failure to modify its theme park concept to fit the
customs of European visitors. Search the Net and find out: ----------------------
i. What were these cultural differences that the company did not
----------------------
consider at first?
ii. How are theme parks in India different from those in Western ----------------------
countries?
----------------------

Notes 6.5 TYPES OF DECISIONS AND BUYER BEHAVIOUR
---------------------- Everyday each of us makes numerous decisions concerning every aspect
of our daily lives. Some decisions we make in a very routine manner without
---------------------- stopping to think about how we make those decisions. Other decisions require
a great amount of effort and thinking and even perhaps some discomfort.
----------------------
Marketers need to go beyond the various influences on consumers and develop
---------------------- an understanding of:
• Who makes these decisions
----------------------
• Where these decisions are made
----------------------
• The different types of buying decisions
---------------------- All three aspects are extremely important for developing and targeting
---------------------- marketing communications and the type and role of distribution channels.
6.5.1 Buying Roles
----------------------
For some product categories it is simple to identify the decision-maker.
---------------------- Men will choose their shaving equipment and women will chose their personal
hygiene products. However, there are many other decisions where, who makes
---------------------- the decision is not always so clear; and there are several people involved in the
---------------------- decision, each playing a different role.
Through extensive consumer research, marketers must identify the
---------------------- decision- maker, the people involved in the decision and their respective roles.
---------------------- We can find five different roles people play in a buying decision:
---------------------- • Initiator: The person who initiates the idea of a product or service
• Influencers: The persons or person who influence/s the decision.
----------------------
Influence can range from “pester power” to serious advice. Marketers
---------------------- need to identify the “type of influence”.
---------------------- • Decision-maker: The person who decides on any component of the
decision. Every buying decision has four different components: whether
---------------------- to buy, which brand to buy, how to buy (payment mechanism) and where
to buy. It is not uncommon to find different individuals being decision-
---------------------- makers for the different components. Paint manufacturers discovered that
---------------------- the women of the house took decisions on brands and colours; whereas
men took the decisions on whether to paint the house and the payment
---------------------- mechanism. Through consumer research, marketers need to identify the
decision makers and the decision component.
----------------------
• Buyer: The individual who makes the physical effort of the actual
---------------------- purchase.
---------------------- • User: The person/persons who will consume or use the product.
From the above list it would be clear that several different individuals may
---------------------- be involved in a decision, each individually or together, playing different roles.
---------------------- Each individual’s role in the decision mirrors his or her concerns. Marketers
need to address these concerns through their communications.
For instance, the decision about instant snack food for children is made Notes
by both the mother and the child. The decision-maker and buyer may be the
mother, but the influencer and user is the child. The mother is concerned about ----------------------
the nutrition aspect as well as ease of making. The child is concerned with the
taste. Marketers need to address all these concerns through appropriate features ----------------------
and marketing communications. ----------------------
----------------------
Not all consumer decision-making situations require the same degree
of effort. On a continuum of effort ranging from very high to very low, we ----------------------
can distinguish three specific levels of consumer decision-making: extensive
----------------------
problem solving, limited problem solving and routinised response behaviour.
1. Extensive problem solving: This is observed when consumers have ----------------------
no criteria for evaluating a product category or specific brands in that
----------------------
category or have not been able to narrow down the brands to a small
manageable subset, their decision-making efforts can be classified as ----------------------
extensive problem solving. Typically, in product categories that are ‘new’,
consumer exhibit extensive problem solving. At his level consumers ----------------------
need extensive education and assistance in recognising their own needs,
----------------------
establishing criteria as well the evaluation of brands.
2. Limited problem solving: At this level of problem solving, consumers ----------------------
have established their basic criteria for evaluating the product criteria ----------------------
and the various brands in the category. However, as they have not as yet
established brand preferences, their search for additional information is ----------------------
like “fine tuning” their decision. The search is more for brand information
(rather than category information) to discriminate among the various ----------------------
brands. ----------------------
3. Routinised response behaviour: At this level customers have experience
with the product category and have established the basic criteria to evaluate ----------------------
brands. In some situations they may make some effort to evaluate some ----------------------
additional information that may have come their way or to review what
they already know. ----------------------
Henry Assael explored these different decision levels in greater detail and ----------------------
found that consumers exhibit different types of buyer behaviour because of
two key criteria; Level of involvement and the degree of differences between ----------------------
brands. Based on these criteria he distinguished four types of buyer behavior:
complex buying behaviour, dissonance-reducing behaviour, variety seeking ----------------------
behaviour and habitual buying behaviour. ----------------------
----------------------
The level of involvement is the time, energy and effort that is expended
on a purchase decision. Decisions where a large amount of time, energy and ----------------------
effort is expended are high involvement decisions; conversely decisions where
----------------------
minimal energy, effort and time are expended are low involvement decisions.
This now begs the question, what causes consumers to spend more time, energy ----------------------

Notes and effort on some decisions and less on others? The answer it is the perceived
risk that a consumer feels which causes him to be either more involved or less
---------------------- involved in decisions.
---------------------- Perceived risk is “the uncertainty that consumers face when they cannot
foresee the consequences of a purchase decision.”
----------------------
The different types of uncertainties that consumers face are product
---------------------- performance uncertainties, physical harm in case of products, which are
internally consumed, financial risk of having “lost money” on the purchase or
---------------------- of being “cheated” or social risks in terms of loss of face or self-image.
---------------------- The degree of risk that a consumer perceives depends on:
---------------------- • His knowledge of the product category/technology

• Whether the consumer has established criteria for evaluation
----------------------
• The tangibility of the product category − intangibles like service are
---------------------- difficult to evaluate
---------------------- • Individual’s own personality traits such as anxiety levels
• Shopping situation – online shopping increases the risk, as the products
----------------------
cannot be physically examined.
---------------------- Higher perceived risk causes consumers to be more involved in the purchase
---------------------- decision and lower perceived risk causes less involvement in the purchase
decision. The important thing to understand is that the level of perceived risk
---------------------- is not constant; it changes as the consumer’s knowledge about categories and
brands increases. Hence, decisions once categorised as high involvement can
---------------------- become low involvement decisions. Conversely low involvement decisions can
---------------------- also become higher involvement decisions if there is a significant change in the
product category due to technological changes or any other factors.
---------------------- 6.5.4 Differences between Brands
---------------------- This concept needs to be understood at two levels:
---------------------- 1. Actual differences between brands: Whether the brands in the category
are extremely similar or highly differentiated from each other.
----------------------
2. Perceived differences between brands: Whether consumers perceive or
---------------------- understand the differences. Consumers may not be able to discriminate
between brands because of his lack of knowledge, even though actual
---------------------- differences exist.
---------------------- 6.5.5 Types of Buying Behaviour
---------------------- High Involvement Low Involvement

Significant Differences Complex buying Variety-seeking buying
---------------------- between brands behaviour behaviour
---------------------- Few differences Dissonance-reducing Habitual buying

between brands buying behaviour behaviour
----------------------
Fig. 6.2: Types of buying behaviour
A. Complex Buying Behaviour Notes
Complex buying behaviour involves three stages: the first stage when
----------------------
the buyer develops beliefs about the product, second when he develops attitudes
and third when he makes a thoughtful choice. Consumers exhibit complex buying ----------------------
behaviour when:
----------------------
i. They perceive greater risk and hence are more involved in the
purchase. ----------------------
ii. They are “aware” of the differences between brands.
----------------------
The decision-making process under these conditions is fairly lengthy
and complex. Marketers need to understand the consumers’ information ----------------------
gathering, evaluation and decision-making framework. They must develop ----------------------
strategies to help buyers “learn” about brand attributes and at the same time
“reassure” customers. ----------------------
B. Dissonance-Reducing Behaviour ----------------------
Sometimes the buyer is:
----------------------
i. Highly involved in a purchase but
----------------------
ii. “Sees” little differences between brands
The high involvement is on account of high perceived risk. In this case ----------------------
the consumer will “browse” to learn what is available, but because there are ----------------------
no real differences or he does not understand the differences between brands,
he may simply buy on price or convenience. In this case he may settle for a ----------------------
brand with a higher price, as he perceives the price to be a signal of better
quality. After the purchase, he may experience dissonance due to unfavourable ----------------------
performance or hearing favourable things about other brands. He will be alert ----------------------
to information that supports his decision. In this case the consumer first acted,
and then developed beliefs and then attitudes towards brands. ----------------------
Marketing strategies must help consumers develop beliefs and attitudes ----------------------
that support his brand choice.
C. Habitual Buying Behaviour ----------------------
Many products are bought under condition of low involvement because ----------------------
the risk perceived is low or has become low over a period of time and with
----------------------
experience. Salt is the most common example of such a category, as buyers go
to the store and reach out for the same brand out of habit and not out of loyalty. ----------------------
The consumer finds it safer to go with the habit as there are few differences
between brands and he sees no real reason to break his habit. ----------------------
Because this is a low involvement decision, consumers do not pass through ----------------------
the sequence of belief, attitude and behaviour and do not search extensively for
information; they are passive recipients of marketing communication about the ----------------------
products. The repetition of communication helps to develop a brand familiarity
----------------------
which leads to a habit being formed.
----------------------

Notes Sales promotions and price discounts are fairly rampant in such categories
if there are a large number of competing brands. Rampant promotions and price
---------------------- offs tend to degrade brands in the long term and offer no “real value” to the
consumer. Marketers therefore explore opportunities to make a low involvement
---------------------- purchase into a high involvement purchase and can do so by:
---------------------- i. Link the product to an involving issue
ii. Link the product to an involving personal real life situation
----------------------
iii. Tapping into the real needs and emotions related to the product purchase
---------------------- iv. Add an important feature to enhance performance.
---------------------- D. Variety Seeking Behaviour

Some situations are characterised by low involvement but significant
----------------------
differences between brands. If there are a large number of brands, consumers
---------------------- do a lot of brand switching; not because of dissatisfaction but more for the sake
of variety.
----------------------
The market leaders and market challengers will follow different strategies
---------------------- in such situations. Market leaders will encourage habitual behaviour by
introducing variety within their own product lines, by dominating shelf space,
---------------------- by frequent reminder advertising and appealing packaging design changes.
---------------------- Market challengers on the other hand will offer inducements to switch
such as promotional offers, introducing variants not present in the market
---------------------- leaders product line, advertising that presents reasons for trying something new.
---------------------- Many a times a purchase decision is taken at point of purchase, even
though the need has been recognised much earlier, the decision about brands,
---------------------- pack size may be taken at point of purchase. The point where the actual decision
---------------------- is taken is important for marketers as they try to influence consumers at that
moment. Most low involvement categories rely very heavily on point of sale
---------------------- merchandising and shelf space, to influence the consumer’s final decision about
brand and pack size. On the other hand, high involvement decisions are more
---------------------- premeditated and not taken at the point of sale. The point-of-sale merchandising
---------------------- and assistance given to the consumer serves to help the consumers evaluate
brands and “influence” the decision.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
Fill in the blanks.
----------------------
1. On a continuum of effort ranging from very high to very low, we can
distinguish three specific levels of consumer decision-making: ----------------------
________, ________ and ________.
----------------------
2. We can find five different roles people play in a buying decision:
________, ________, ________, ________and ________. ----------------------
3. There are four types of buying behaviour:________ , ________ , ----------------------
and ________.
----------------------
----------------------
Activity 3
----------------------
Children feature in commercials even for insurance and savings plans, ----------------------
mobile services and automobiles. Why do you think this is so?
----------------------
6.6 THE DECISION MAKING PROCESS ----------------------
Need recognition
----------------------
----------------------
Information search ----------------------
Cultural, social,
----------------------
individual, and Evaluation of alternatives
psychological ----------------------
factors affect all
steps Purchase ----------------------
----------------------
Postpurchase behaviour
----------------------
Fig. 6.3: Consumer Decision-Making Process ----------------------
The decision-making process of this model is concerned with how
consumers make decisions. The process consists of three stages: need ----------------------
recognition, prepurchase search and evaluation of alternatives. ----------------------
----------------------
The recognition occurs when a consumer is faced with a ‘problem’. There
are two different need recognition styles: ----------------------
An actual state, when the consumer perceives a problem either because he ----------------------
is out of stock of a product (daily necessities) or because a product has failed or
not performed satisfactorily. ----------------------

Notes A desired state, when the desire for something triggers a latent need and
an aspiration to acquire the product. Self-expressive or image products like
---------------------- personal accessories, clothing, high-end cell phones and other such gadgets
trigger the desired state of need recognition.
----------------------
Not all “problems” are clearly defined or even understood by the consumer.
---------------------- Marketers must make considerable efforts in “educating” the consumer. When
Nike first introduced their range of fitness shoes, they had to exhort potential
----------------------
customers to adopt a lifestyle that focused on staying fit and healthy. For years,
---------------------- Nike’s communication educated the customers about the dangers of obesity and
a sedentary lifestyle. Once the fitness culture had gained ground, market grew
---------------------- rapidly. But these initial market development efforts took time.
---------------------- The marketing tasks related to the need recognition stage vary from
market development and customer education to providing stimuli to trigger the
---------------------- need. Advertising, product displays, product design, packaging, store locations
and attractive store windows all marketers controlled sources of stimuli that
----------------------
trigger a need recognition in the consumer.
---------------------- 6.6.2 Pre-Purchase Search
---------------------- The pre-purchase search begins when the consumer perceives a need
that might be satisfied by the purchase and consumption of a product. When
---------------------- the consumer has some experience with the product, he searches his memory
---------------------- (psychological field of the diagram), before seeking any external sources of
information. On the other hand, if he has no past experience with the product,
---------------------- he has to engage in extensive external search for information. Past experience is
considered as an internal source of information; the greater the past experience
---------------------- with the product, the less is the external search. Most decisions are a combination
---------------------- of internal and external search. High involvement decisions will involve greater
external search due to the high perceived risks. In low involvement decisions
---------------------- consumers may rely much more on the internal sources of information.
---------------------- “Shopping around” is an important way of collecting external information.

According to several studies the amount of time spent on shopping depends on
---------------------- the customer’ knowledge of the product category and the importance of the
product purchase. The less the knowledge and the more important the product
---------------------- purchase, the more time will be invested in shopping. Several consumer
---------------------- studies also reveal major differences between genders in their attitude towards
shopping. Most men do not like to shop; whereas for women shopping is a
---------------------- relaxing, enjoyable leisure time activity.There are differences even in the way
men and women shop and collect information.
----------------------
The Internet has had a great impact on prepurchase search for information.
---------------------- Web- sites provide a wealth of easily accessible information about brands,
product categories; some sites even assist you with evaluation and decision-
---------------------- making criteria.
---------------------- The duration of prepurchase search is dependant primarily on he perceived
risk, differences between brands and the consumers past experience with the
----------------------

product category. There are also certain other factors which increase the time Notes
and effort spent on searching. Consider the factors below:
----------------------
i. Frequent changes in product styling
ii. Frequent price changes ----------------------
iii. Long interval between purchases
----------------------
iv. Major technological changes
v. Purchase is a gift ----------------------
vi. Product is self-expressive, image product ----------------------
vii. Major sources of conflicting information
----------------------
viii. Family members disagree on the evaluation of alternatives
ix. Unsatisfactory past experience ----------------------
Sources of information for prepurchase search are internal and external. ----------------------
Internal sources are, as we have seen earlier, stored information in the
psychological field. External sources of information can be personal or ----------------------
impersonal. Personal sources would include friends, colleagues, neighbors,
relatives, co-workers, dealers and company sales people. Impersonal sources of ----------------------
information include press articles, consumer reports, advertisements, brochures ----------------------
and web sites. Any or all of these sources may be used as apart of the consumer’s
search. ----------------------
The marketing tasks at this stage are to provide relevant information to ----------------------
the customer about the products. Marketers to assist in prepurchase search by
providing information through their websites, advertisements, brochures, retail ----------------------
outlets, sales people, product displays and press articles.
----------------------
Testimonials of past customers also help customers in their prepurchase
search. ----------------------
6.6.3 Evaluation of Alternatives ----------------------
When evaluating alternatives, consumers tend to use two types of ----------------------
information :
1. Potential list of brands being considered ----------------------
2. The criteria to be used for evaluation ----------------------

The Evoked Set or Consideration Set consists of those brands that the ----------------------
customer now considers for further evaluation. Customer’s usually narrow
down to a list of brands to be considered, from a larger list of brands that they ----------------------
are aware of. They exclude brands they consider inferior or about which they
----------------------
may have heard a negative report about.
There could be other brands that a consumer may be neutral or indifferent ----------------------
towards, simply because he has not enough information about these brands to
----------------------
form an image. Such brands also do not make it to the consideration set.
The evoked set essentially consists of brands that the consumer is familiar ----------------------
with and finds acceptable. ----------------------

Notes The criteria used for evaluating brands are usually expressed in terms of
product attributes. Price is also a part of the criteria used, however customers
---------------------- do not use an exact price figure as a criteria; rather they use a price range as
budget for the purchase. Product attributes for color inkjet printers could be
---------------------- output speed, number of ink colours, resolution, length of warranty and USB
---------------------- capability.
Different target segments will use different criteria for evaluating brands.
----------------------
Through consumer research marketers understand the attributes more in terms
---------------------- of benefits sought, and their relative importance. This is critical as consumers
may use several criteria; but clearly some would be more important than others.
----------------------
Marketing tasks at this stage are about helping customers make the
---------------------- evaluation by communicating the product attributes in terms of benefits and by
clearly and credibly stating their brand’s point of differentiation. This not only
---------------------- helps customers make a choice, but even acts as reassurance to the customer.
---------------------- During the evaluation process, customers come across new evaluation
criteria, which can at times increase anxiety levels for customers. Marketers
---------------------- need to be addressing these “new questions” as they come up, through their
communications.
----------------------
At times, customers find it difficult to take a decision on evaluation
---------------------- criteria and what they really want from their products. This is fairly common
---------------------- with “technology products”, as consumers may not understand the benefits that
result form the technology. This can be a daunting task for the consumer, and
---------------------- very often consumers develop a techno phobia. Apple computers demystified
computers with simple, straight forward marketing communications, when they
---------------------- first launched the Macintosh. The language in the advertising copy was not
---------------------- “computer-speak”, but the kind of language that consumers would use.
---------------------- Activity 4
----------------------
Recall a recent low involvement and high involvement decision you made.
---------------------- For each of the decision, can you recall the decision-making process?
How did you evaluate the different options? What sources of information
----------------------
were most credible? What kind of post-purchase evaluation did you do?
----------------------
---------------------- 6.7 THE PURCHASE DECISION

---------------------- The output portion of the consumer decision-making model concerns
two post decision activities: the purchase behaviour or decision itself and post-
----------------------
purchase evaluation.
---------------------- Purchase Behaviour
---------------------- Consumers make three types of purchases: trial purchases, repeat
purchases and long-term commitment purchases. When a consumer purchases
---------------------- a product for the first time and buys a small quantity, this purchase would

be considered a trial. Trial purchases are exploratory purchases as consumers Notes
attempt to evaluate a product through direct use.
----------------------
Repeat purchase behaviour can result from brand loyalty or may be due
to a habit or inertia to try a different brand. Marketers need to be careful to ----------------------
distinguish what is really driving a repeat purchase. Consumers are loyal to
a brand when they believe it is scores the best on their evaluation criteria and ----------------------
when they develop a trust and liking for the brand. Brand loyalty is a measure
----------------------
of the heart share of the consumer.
Trial purchases are not always feasible. For example for durable goods ----------------------
consumers go directly from evaluation to long-term commitment, without an
----------------------
opportunity for trial. Marketers use product demonstrations, test drives for
automobiles, money- back guarantees to help customers in their decision- ----------------------
making for purchases that are long-term commitments.
----------------------
Customers first form a purchase intention about a brand before actually
taking the purchase decision. Exogenous factors can change the purchase ----------------------
intention about a brand. For instance, a bad report about the brand from a
customer or negative publicity in the press can change the purchase intention, ----------------------
and customer goes back to evaluating alternatives. Out of the two factors,
----------------------
negative word of mouth has a very powerful impact on the purchase decisions,
as it is the result of direct experience. A consumer may also decide to modify or ----------------------
postpone the purchase, due to several reasons. A change in one’s own economic
circumstances or news of the launch of newer and better products or because ----------------------
the customer expects a “better deal” by postponing the purchase, are some of
----------------------
the reasons why consumers may modify their decisions.
In making a purchase decision, there are other related decisions to be made ----------------------
especially for long-term commitment purchases; the timing of the purchase, the ----------------------
payment method and the retail outlet.
Marketers need to at this stage: ----------------------
1. Allow trial. ----------------------

2. Understand the reasons for the gap between intention and sale. ----------------------
3. Provide for different payment mechanisms.
Post-purchase Evaluation ----------------------
When consumers use the product, they evaluate its performance in light ----------------------
of their own expectations. There are three possible outcomes that can result
from this: ----------------------
1. Actual performance matches expectations (neutral). ----------------------

2. Performance falls below expectations (dissonance or dissatisfaction). ----------------------
3. Performance exceeds expectations (ranging from satisfaction to delight).
----------------------
As a part of the post-purchase analyses, consumers usually try to reassure
themselves that their choice was the right one. They tend to be receptive to ----------------------
information that corroborates their choice and tend to block out information ----------------------
that causes them to question their choice.

Notes Marketing tasks here are:
1. Marketers must monitor post-purchase usage and satisfaction. The
----------------------
Internet has made it possible for marketers to interact with and keep in
---------------------- touch with customers.
2. Help customers on product usage, through product manuals, usage
----------------------
instructions.
---------------------- 3. Reassure customers by emphasising product performance.
---------------------- 4. Never overstate product claims.
---------------------- 5. Allow for easy and quick redressal of complaints before they get out of hand.
---------------------- 6.8 RELATIONSHIP MARKETING AND BRAND LOYALTY

---------------------- The marketing concept followed by companies today emphasises on
---------------------- retaining customers as opposed to transaction marketing which focused only on
acquiring customers. We have seen in earlier units why it is economically more
---------------------- feasible to retain customers than to acquire new customers. Companies have to
balance both approaches i.e customer acquisition and customer retention. Much
---------------------- of a company’s customer acquisition activities are affected by its customer
---------------------- retention activities. Loyal customers become advocates of the brand and are
powerful influencers.
---------------------- Relationship marketing programmes must have three key elements:
---------------------- 1. An ongoing communication with customers.
---------------------- 2. Encouraging loyalty by building in extras like upgrades or other perks.
3. Create a sense of belonging by creating a community to which customers
----------------------
can belong.
---------------------- A relationship marketing programme uses database marketing tactics; but
---------------------- it is much more than that. A real relationship programme leaves the customer
with the feeling that he or she has received something positive for being a
---------------------- participant in the relationship.
---------------------- Companies have found the internet to be an efficient, interactive and

inexpensive way to extend their customer services. This has resulted in a new
---------------------- phrase “permission marketing” which is the art of asking consumers if they
would like to receive a targeted e-mail ad, promotion or message before it
---------------------- appears in their inbox. The opposite is to send unsolicited e-mails or spam and
---------------------- offering the option of “click here to opt out”. This is not permission marketing
and greatly annoys customers.
---------------------- Relationship marketing has become so important because of the erosion of
---------------------- brand loyalty. Research has shown that there are six key reasons why consumers
have become less brand loyal: (i) abundance of choice, (ii) easy availability of
---------------------- information, (iii) consumers expect more from the companies they interact with,
(iv) commoditisation or lack of real meaningful differentiation, (v) insecurity,
---------------------- and (vi) time scarcity.

Ultimately a relationship marketing program is to the company’s advantage Notes
as it is a more profitable marketing strategy.
----------------------
Summary ----------------------
• Marketers do not create needs. They only make consumers aware of their ----------------------
needs, whether felt needs or latent needs.
• Several psychologists have developed theories of human motivation. The ----------------------
three best known are Sigmund Freud, Abraham Maslow and Frederick ----------------------
Herzberg, each with different implications for consumer analysis and
marketing strategy. ----------------------
• Perception is defined as the process by which an individual selects, ----------------------
organises and interprets stimuli into a meaningful and coherent picture of
the world. ----------------------
• Selective attention, selective retention and selective distortion explain ----------------------
how consumers interpret stimuli.
----------------------
• Learning is the process by which individuals acquire the purchase and
consumption knowledge and experience that they apply to future related ----------------------
behaviour. Learning is a complex interplay of drives, stimuli, cues,
responses and reinforcements. ----------------------
• A belief is a descriptive thought that a person holds about something. ----------------------
• An attitude is a learned predisposition to behave in a favourable or ----------------------
unfavourable way with respect to a given object.
• According to Freudian psychoanalytic theory, consumer purchases are ----------------------
largely a reflection and an extension of the consumer’s own personality. ----------------------
• Personality is defined as the inner psychological characteristics of an
----------------------
individual that both determine and reflect how a person responds to his or
her own environment. ----------------------
• Reference groups are all the formal and informal groups that have a direct
----------------------
and indirect influence on a person’s behaviour. Primary groups such as
family, friends, neighbours and co-workers exert a direct influence on a ----------------------
person. Secondary groups such as religious or professional groups have
more indirect influence. ----------------------
• Decisions can be categorised as extensive problem solving, limited ----------------------
problem solving or routinised response behaviour.
----------------------
• The prepurchase search begins when the consumer perceives a need that
might be satisfied by the purchase and consumption of a product. Sources ----------------------
of information for prepurchase search are internal and external.
----------------------
• The output portion of the consumer decision-making model concerns
two post-decision activities: the purchase behaviour or decision itself and ----------------------
post- purchase evaluation.
----------------------

Notes • Consumers make three types of purchases: trial purchases, repeat purchases
and long-term commitment purchases. When consumers use the product,
---------------------- they evaluate its performance in light of their own expectations.
---------------------- • There are three possible outcomes that can result from post-purchase
analyses: actual performance matches expectations (neutral), performance
---------------------- falls below expectations (dissonance or dissatisfaction), and performance
exceeds expectations (ranging from satisfaction to delight).
----------------------
---------------------- Keywords
---------------------- • Motivation: The driving force within individuals that impels them to
action.
----------------------
• Perception: The process by which an individual selects, organises and
---------------------- interprets stimuli into a meaningful and coherent picture of the world.
---------------------- • Learning: The process by which individuals acquire the purchase and
consumption knowledge and experience that they apply to future related
---------------------- behaviour.
---------------------- • Personality: The inner psychological characteristics of an individual
that both determine and reflect how a person responds to his or her own
----------------------
environment.
---------------------- • Culture: The sum total of learned beliefs, values and customs that serve
to direct the consumer behaviour of members of a particular society.
----------------------
• Subculture: A distinct cultural group that exists as an identifiable subset
---------------------- within a larger more complex society.
---------------------- • Reference groups: The formal and informal groups that have a direct and
indirect influence on a person’s behaviour.
----------------------

---------------------- 1. What is the importance of Freud’s, Maslow’s and Herzberg’s theories in
understanding consumer motivations?
----------------------
2. What is the difference between beliefs and attitudes? Can marketers alter
---------------------- beliefs and attitudes? Give some examples of how beliefs and attitudes
might be altered.
----------------------
3. Explain the importance of culture in consumer behaviour. Give some
---------------------- examples of how the same brand is communicated differently in different
---------------------- countries because of cultural differences.
4. Explain the difference between complex buying behaviour and dissonance-
---------------------- reducing behaviour.
---------------------- 5. What is relationship marketing and why has it gained so much importance?
Give some examples of how companies have made efforts to build long-
---------------------- term relationships with customers.

6. Write short notes on: Notes
a) Brand personality
----------------------
b) Brand loyalty
----------------------
Fill in the blanks.
----------------------
1. The process of consumer decision-making can be viewed in three distinct
but interrelated stages: the input stage, the process stage, and the output ----------------------
stage.
----------------------
2. The process stage of the model focuses on how consumers make decisions.
----------------------
3. The output stage consists of two important and related post-decision
activities. Purchase behaviour and post purchase evaluation. ----------------------
4. The input stage influences the consumer’s recognition of a need and ----------------------
consists of two major sources of information: the firms’ marketing efforts
and the socio-cultural environment within the consumer resides. ----------------------
Multiple Choice Single Response.
----------------------
1. ______________ is defined as the process by which an individual selects,
organises and interprets stimuli into a meaningful and coherent picture of ----------------------
the world. ----------------------
i. Perception
----------------------
2. _____________ is the driving force within individuals that impels them
to action. ----------------------
iii. Motivation ----------------------
----------------------
----------------------
i. – c.
ii. – a. ----------------------
iii. – b. ----------------------
iv. – d. ----------------------
----------------------
----------------------
----------------------
----------------------

Notes Check your Progress 4
Fill in the blanks.
----------------------
1. On a continuum of effort ranging from very high to very low, we can
---------------------- distinguish three specific levels of consumer decision-making: extensive
problem solving, limited problem solving and routinised response
----------------------
behaviour.
---------------------- 2. We can distinguish five different roles people play in a buying decision:
initiator, influencer, decision-maker, buyer and user.
----------------------
3. There are four types of buying behaviour: complex buying behaviour,
---------------------- dissonance-reducing behaviour, habitual buying behaviour, variety-
---------------------- seeking behaviour.
---------------------- Suggested Reading

----------------------
College Publishing.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Market Segmentation and Selecting Target Markets
UNIT
7
Structure:
7.1 Introduction
7.2 Market Segmentation
7.2.1 Segmentation-Targeting-Positioning
7.2.3 Niche Marketing
7.2.4 Market Segmentation in Different Industries
7.3 Bases for Segmentation
7.3.1 Geographic Segmentation
7.3.2 Demographic Segmentation
7.3.4 Psychographic Segmentation
7.3.6 Use-related Segmentation
7.3.7 Usage Situation Segmentation
7.4 Criteria for Effective Market Segmentation
7.5 The Market Segmentation Process
7.6 Market Targeting
Summary
Keywords
Suggested Reading
Market Segmentation and Selecting Target Markets 177

Notes
Objectives
----------------------
----------------------
• Discuss the benefit of market segmentation for companies and
---------------------- consumers
---------------------- • Identify the bases for segmenting markets
• Evaluate criteria for effective market segmentation
----------------------
• Select market coverage strategies
----------------------
• Specify target markets
----------------------
---------------------- 7.1 INTRODUCTION
---------------------- One of the earliest proponents of market segmentation was Alfred P

Sloan, President and chairman of General Motors. He inherited a company that
---------------------- was built through takeovers of small car companies and hence produced many
ill-sorted models unguided by clear business objectives. Sloan re-organised the
----------------------
company and in 1924, articulated the company’s product strategy as “a car for
---------------------- every purse and purpose”.
In the meanwhile, Ford continued to produce the Model T until 1927, as
----------------------
the market continued to grow through mass production and mass marketing,
---------------------- guided by Henry Ford’s philosophy, “consumers can buy any colour, so long
as it is black”. GM, on the other hand, offered a variety of affordable mass
---------------------- produced models from the autocratic Cadillac to the proletarian Chevrolet
and took over a large part of Ford’s market share. Long before the birth of
----------------------
the marketing concept, Alfred Sloan realised that all customers are not created
---------------------- equal and are therefore not alike.
It is said that the forces of globalisation will make the world one
----------------------
large market place with homogenous consumers. While the first part of the
---------------------- statement is certainly true, consumers can never be homogenous. Diversity of
consumers is a reality (as we have seen in the previous unit) and this diversity
---------------------- has become even more apparent today. Market segmentation and diversity are
complementary concepts; without a diverse market place, composed of people
----------------------
of different backgrounds, cultures, needs, wants, perceptions, attitudes, there
---------------------- would be little reason to segment markets. Diversity in the market place makes
market segmentation an attractive, viable and highly profitable strategy.
----------------------
---------------------- 7.2 MARKET SEGMENTATION
---------------------- Market Segmentation can be defined as the process of dividing

(partitioning) a market into distinct subsets of consumers with common needs,
---------------------- goals, characteristics, with the goal of selecting one or more segments to target
with a distinct marketing mix.
----------------------

Before the widespread acceptance of market segmentation, the prevailing Notes
way of doing business with consumers was through mass marketing – offering
the same product and marketing mix to all consumers. This was, of course, ----------------------
before the advent of the marketing concept. The marketing concept gained
acceptance as companies realised that marketing was all about focusing on ----------------------
consumer needs and that because consumers were very diverse, their needs ----------------------
and consumption goals, too, were very diverse. Thus was born the concept of
market segmentation. ----------------------
If all consumers were alike – same needs, wants, backgrounds, ----------------------
personalities, cultures – mass (undifferentiated) marketing would be a very viable
and successful strategy. Its primary advantage is that it costs less: one standard ----------------------
product, one advertisement campaign and only one distribution or packaging
----------------------
strategy. But most marketers see a drawback in this shotgun approach, because
in trying to satisfy everyone with one standard undifferentiated product, they ----------------------
end up satisfying, most customers only partially and none fully.
----------------------
A hot water heater of a standard 20-litre size may be too big for a bachelor
living by himself or a family of two and too small for a family of five. Both ----------------------
sets of customers would be “making do”, which is vastly different from being
satisfied. ----------------------
This not to say that mass marketing is dead; it still has its relevance in ----------------------
certain markets. Underdeveloped economies, where consumers are concerned
only with satisfying basic biogenic needs; developing economies, where ----------------------
consumers are moving towards higher level needs and just becoming aware
----------------------
of different consumption goals and want more than generic products ; certain
product categories like agricultural commodities or basic manufactured goods. ----------------------
Even in such markets, marketers practice a modified version of mass marketing
by focusing on customer needs and adapting products to evolving needs. ----------------------
The strategy of segmentation allows firms to avoid head-on competition in ----------------------
the market place, by differentiating offerings on product attributes, styling, pack
sizes, emotional appeals, services and method of distribution amongst others. ----------------------
Marketers have found that the costs of following a rifle approach (segmented ----------------------
strategy); extensive consumer research, shorter production runs, differentiated
promotional campaigns; are more than offset by increased sales and greater ----------------------
consumer satisfaction. In most cases, consumers are willing to pay that much more
for a product that closely satisfies their specific needs and consumption goals. ----------------------
7.2.1 Segmentation-Targeting-Positioning ----------------------

Segmentation-Targeting-Positioning (STP) is the logical strategic outcome ----------------------
of following a market segmentation strategy. After segmenting the market
into homogenous clusters, the marketer must select one or more segments to ----------------------
target. To accomplish this he must decide on a specific marketing mix – that is
specific product, price, channel (place) and promotional appeal for each distinct ----------------------
segment. The third step is positioning the product in the consumers mind, so ----------------------
that it is perceived by the customer as satisfying his needs better than other
competitive offerings. ----------------------

Notes The STP strategy benefits both consumers and companies alike and is
widely practiced in numerous industries. Consumer goods companies have
---------------------- for long been practitioners of STP; but of late even financial services, banks,
educational institutions, retailers, hospitality industry, pharmaceutical industry,
---------------------- hospitals, media, nonprofit organisations have all adopted a market segmentation
---------------------- approach. Even companies operating in a B2B market place are segmenting
markets.
----------------------
Segmentation studies are designed to discover the needs and wants of
---------------------- specific groups of consumers so that specialised goods and services can be
developed to satisfy their needs. Many new products have been developed to
---------------------- fill gaps in the market place revealed by segmentation research.
---------------------- In addition to filling product gaps or need gaps, segmentation studies are
used to identify the most appropriate media in which to place the advertisements.
---------------------- The media industry uses segmentation research to provide detailed profiles
of their audiences and share their findings with advertisers seeking a similar
----------------------
audience.
---------------------- Segmentation studies are also used to redesign or reposition a product or
even add a new market segment.
----------------------
----------------------
An important distinction needs to be made at this stage between a segment
---------------------- and a sector. The automobile industry in India is divided into A, B, C segment
hatch back sedans, SUV’s and so on. These descriptions do not describe consumer
---------------------- needs, as much as they describe the physical attributes of the automobiles. SUV
---------------------- customers are not a homogenous group, as customers within the group will
differ in terms of attributes they consider important. These divisions therefore
---------------------- represent sectors and not market segments. Sectors exist because partitioning an
industry into sectors only makes the segmentation exercise more manageable.
---------------------- Companies like Mahindra and Mahindra have segmented the SUV market and
---------------------- developed specific products like Scorpio, Bolero, Maxx (all within the SUV
category) for the different market segments.
---------------------- The second important point to note is that marketers do not create market
---------------------- segments simply because marketers do not create needs. The marketers task
is to identify the segments (identify needs) and to decide which one(s) to
---------------------- target. Even within market segments, the concept of perfect homogeneity is
a myth, as no two people can be identical. Individual customisation may not
---------------------- be economically feasible for marketers and customers alike, marketers try to
---------------------- meet an individual’s needs, by offering a basic naked solution containing the
product elements that all customers within the segment value, with a verity of
---------------------- discretionary options that would vary in customer preferences.
---------------------- 7.2.3 Niche Marketing
A niche is a narrowly defined group of customers seeking a highly
----------------------
distinctive and unique solution. Niche segments consist of buyers with high
----------------------

purchasing power, who have unique needs and a strong motivation to fulfill their Notes
needs; hence are willing to pay a premium for a unique solution that satisfies
their needs. Harley Davidson targets bikers who share a “passion” for biking ----------------------
and whose lifestyles revolve around their passion.
----------------------
Bose audio systems, a worldwide pioneer of high performance audio
systems targets the niche market of consumers who share a passion for music ----------------------
and want to “experience” music. Today the company has developed products
for several sectors, such as business and retail solutions, stage performances, ----------------------
aviation and military applications. ----------------------
Later on, in this unit, as you learn about the criteria for effective market
segmentation, you will understand that any small market cannot be termed as a ----------------------
niche, unless it satisfies the other criteria. Small market segments are not viable ----------------------
for any company as they do not justify the investments and may not respond to
specific marketing mixes. Niche markets on the other hand are very profitable ----------------------
market segments, despite their size, as customers place a high value on the
satisfaction of their unique needs. ----------------------
7.2.4 Market Segmentation in different Industries ----------------------

1. Mutual Funds: Different investor groups have different investment ----------------------
goals because of age, financial responsibilities, earning capabilities and
risk taking capabilities. Mutual funds have segmented markets based on ----------------------
investment goals and target these markets with a variety of products like
----------------------
pure equity funds, balance of debt and equity funds, tax savings plans, gilt
funds, young citizens funds and so on. ----------------------
2. Life Insurance: The market is segmented according to various life stages
----------------------
of buyers and includes products such as investment policies, endowment
schemes, term policies, savings or child specific solutions and retirement ----------------------
schemes. The rural market is a vast uninsured market in India; companies
have launched different schemes for these markets. ----------------------
Birla Sun Life Insurance has launched “Bima Kavach Yojana” a unique ----------------------
affordable insurance product for the rural market to provide a security
net for the population below the poverty line, who has never experienced ----------------------
insurance and to increase the awareness about life insurance amongst the
----------------------
rural masses. Tata-AIG has launched “project micro insurance” for the
landless, daily wagers in rural Andhra Pradesh. ----------------------
3. Credit Cards: Market segmentation is done as per income levels and ----------------------
usage patterns. As per a recent market research study, the motivations
to own a credit card vary as per the income group. The Very Rich want ----------------------
convenience and wide acceptability, level of service and higher credit
limit from their cards as card usage is very high. ----------------------
Interestingly, on the other hand, the “Climbers” are motivated to own ----------------------
a card, as it gives them prestige; other factors do not seem to matter as
much simply because card usage is very low. Credit card issuers have also ----------------------
created a variety of affinity or co-branded cards to target different types ----------------------
of usage. Those customers who extensively use their cards for travel are

Notes offered co-branded cards with airlines and hotels. Likewise, those who
use their card extensively for shopping, can chose co branded cards of
---------------------- retailers.
----------------------
----------------------

1. ______________ can be defined as the process of dividing a market
---------------------- into distinct subsets of consumers with common needs, goals,
---------------------- characteristics, with the goal of selecting one or more segments to
target with a distinct marketing mix.
---------------------- i. Market Segmentation
---------------------- ii. Market Strategy
---------------------- iii. Positioning
iv. Partitioning
----------------------
2. A _____________ is a narrowly defined group of customers seeking
---------------------- a highly distinctive and unique solution.
---------------------- i. Niche
---------------------- ii. Segment

iii. Consumer
----------------------
iv. Individual
----------------------
---------------------- Activity 1
----------------------
Visit the websites: bose.com and Asian Paints .com.
----------------------
a. Make a note of the different sectors that these companies operate in.
----------------------
b. Within each sector, read about the different segments they operate
---------------------- in.
----------------------
7.3 BASES FOR SEGMENTATION
----------------------
The first step in developing a segmentation strategy is to select the
---------------------- most appropriate bases(s) or variables to segment the market. Nine major
categories of consumer characteristics provide the most popular bases or
----------------------
variables for segmentation. They are geographic factors, demographic factors,
---------------------- psychological factors, psychographic (lifestyle) factors, socio-cultural, use
related characteristics, use-situation related characteristics, benefits sought and
---------------------- forms of hybrid segmentation.
---------------------- Each of the nine bases is discussed in detail below.

7.3.1 Geographic Segmentation Notes
Geographic variables divide the markets by locations. Geographic variables
----------------------
consider the following factors:
● Region ----------------------
● City size ----------------------
● Population density ----------------------
● Climatic conditions
----------------------
The concept is that people living in the same area will have similar needs
and wants and that these wants differ from people living in other areas. The ----------------------
factors given above can affect product choice in certain categories like clothing
(type of clothing related to the climate), food (predominance of a regional taste), ----------------------
and transportation (population density and infrastructure). Food is one product ----------------------
category where geographic variables have a very dominant effect.
----------------------
For example, there are very predominant regional preferences in the way
people drink tea. People in the northeast prefer the aromatic Assam leaf tea: ----------------------
the southern regions are predominantly coffee drinking states and the tea that
is consumed here is dust tea. Climatic conditions affect food choices greatly, as ----------------------
people develop tastes for what is cultivated locally. Coffee drinking was very
----------------------
uncommon in the northern states, until the companies’ marketed coffee as a
cold rather than a hot beverage. ----------------------
Marketers have observed divergent product preferences among metro,
----------------------
other urban cities, semi urban and rural areas. In the metro cities, population
density is high and homes are smaller; consequently, products, which are ----------------------
compact, e.g. modular or space saving furniture, convertible sofas and compact
appliances are preferred. Such products have not found much of a market in ----------------------
other areas, where space is not so much at a premium.
----------------------
Geographic variables are important for media selection because geographic
segments can be reached through local media like newspapers, radio, outdoor ----------------------
and regional editions of magazines. There are strong regional and language ----------------------
preferences in terms of what people read or watch on television.
7.3.2 Demographic Segmentation ----------------------
Demography refers to the vital and measurable statistics of the population ----------------------
and help to locate a target market. Demographic information is most popularly
used, as it is accessible, measurable and cost-effective. ----------------------
Demographic trends can reveal opportunities such as shifts in age, gender ----------------------
and income distribution. The demographic variables most commonly used are:
----------------------
● Age and stage of life cycle
----------------------
● Gender
● Marital status ----------------------
● Income ----------------------

Notes ● Education
● Occupation
----------------------
a) Age and stage of lifecycle
----------------------
Product needs and interests do vary with age and stage of family cycle.
---------------------- The combined effect of these variables is more important for market
segmentation; a 26-year-old bachelor male and a 26-year-old married
---------------------- male will have different responsibilities, which will affect needs, wants
and product choices. Because of age motivated differences in consumption
----------------------
goals, marketers find this to be a useful segmentation variable; companies
---------------------- have successfully targeted particular age segments.
---------------------- Marketing to Tweens
---------------------- Tweens (short for in between) are children between the ages of 8 and 12, are
still dependant on their parents, but now exhibit a definite mind of their own
---------------------- because of the media exposure over the past decade. The newly emerged
tweens segment today represents a market opportunity of Rs 20,000 crores
---------------------- for everything from gaming consoles to books, apparel to cricket lessons,
---------------------- and burgers to Beyblades. The Beyblade phenomenon, popularised by the
character Tyson on the popular Cartoon Network show, Toonami, has sold
---------------------- close to 1 million units since their launch in May 2005.
---------------------- There are close to 120 million tweens in India today, but the relevant audience
for companies is a smaller, 45 million, who live in the larger cities and belong
---------------------- to the higher socio economic classes. The growth of nuclear families and
double income families has put purchasing power and influence into the hands
---------------------- of tweens. The following segments in particular represent big opportunities
---------------------- and marketers are targeting them with specific marketing mixes: Games
(150 crores), Food and eating out (2,500 crores), Apparel (7,000 crores) and
---------------------- Gizmos (4,600 crores).
---------------------- Tweens are playing a much larger role in decision making in a number of
categories, simply because they are at times better informed and more techno-
---------------------- savvy than their parents. This survey found that 11 year olds were better
informed about digital cameras than their fathers.
----------------------
Source: Business Today, January 2006, ‘Tween Power’.
----------------------
Demographers have drawn an important distinction between age effects
---------------------- (preferences due to chronological age) and cohort effects (preferences
due to growing up during a specific period). Examples of age effect is the
---------------------- heightened increase in leisure travel in the late fifties and early sixties age
---------------------- group. Travel companies have created special tours and arrangements for
this age group as it represents a business opportunity.
---------------------- Cohort effects states that people hold on to interests that they grew up
---------------------- to appreciate. This effect is seen particularly in categories like, music,
movies and clothes. Levis found that the “baby boomer” generation,
---------------------- today in their fifties, continues to prefer Levis jeans, as they grew up with

these products. Although sales as such were not particularly affected, it Notes
did present a major problem for the brand, which found itself increasingly
alienated from the present teenagers and twenty-somethings, who rejected ----------------------
the product because it was “something their fathers wore”.
----------------------
b) Gender
----------------------
Gender is very frequently used as a segmentation variable; women have
traditionally been buyers or users of groceries, hair color and cosmetics; ----------------------
men have been main users of shaving preparations and buyers of
automobiles. But over the years, gender roles have blurred mainly because ----------------------
of the impact of dual-income households. It is increasingly common
----------------------
to see commercials that depict men and women in roles traditionally
occupied by the opposite sex. Many ads show the man taking more ----------------------
interest in categories like detergents and playing a more child-nurturing
role. Women are taking active interest in traditionally male domains like ----------------------
investments and retirement planning.
----------------------
Whilst gender roles may have blurred, there are clear differences between
the genders in the way they think and approach tasks. Recent research has ----------------------
shown that men and women differ in the way they use the internet. Men
----------------------
tend to click on a website because they are “information hungry”, whereas
women click because they expect to be “entertained and educated”. Search ----------------------
categories also vastly differ between the genders.
----------------------
c) Marital Status
Traditionally, the family has been the focus of most marketing efforts; for ----------------------
many products and services, the household continues to be the relevant ----------------------
consuming unit. Marketers are interested in the number and kind of
households that buy or own certain products. They are also interested in ----------------------
the buying roles of the different members of the household to develop
appropriate marketing strategies. ----------------------
Marketers have discovered the benefits of targeting specific marital status ----------------------
groupings such as singles living away from home, divorced individuals,
single parents, and dual-income no kids (DINK’S) households, as the ----------------------
numbers of such households is on the rise. ----------------------
d) Income, Education and Occupation
----------------------
For long, income has been the key variable for distinguishing between
market segments, because it is a strong indicator of the ability or inability ----------------------
to pay for a product and hence a strong indicator of demand.
----------------------
However, income when combined with education and occupation gives a more
accurate picture of the “buying power” of a market segment. Purchasing Power ----------------------
(buying power) is a function of income, education and occupation. Education ----------------------
and occupation determine the stability of present earnings as well as future
growth potential in earnings. Purchasing power is also closely co-related with ----------------------
the level of aspirations, level of materialism, optimism about life, job, economy
etc. and age. ----------------------

Notes Buying power is an important variable for determining market potential for
discretionary product categories like entertainment, gizmos like digital cameras
---------------------- and high-end mobile phones, holidays, purchase of second homes amongst
others.
----------------------
----------------------
Recall the previous unit where we learnt how the intrinsic qualities of an
---------------------- individual i.e. motivations, personality, perceptions, learning and attitudes
determine consumption goals; and that there are differences between individuals
---------------------- based on these intrinsic qualities. Very naturally, these qualities will be become
important bases for segmenting markets.
----------------------
Market Segmentation in the automobile market
----------------------
According to the findings of the 2004 4-wheeler brand health and need
---------------------- segmentation study by leading market information provider, TNS, emotive
needs such as potency, prestige, and status account for over 50% of the car
----------------------
buyers in India. The study identifies the following six need segments in the
---------------------- Indian automotive market.
---------------------- Contrary to the belief that prestige and status needs are pre-dominantly
among buyers of higher-end vehicles, the study clearly reveals that needs
---------------------- exist across vehicle segments. While prestige and potency related needs are
the key motivators for entry luxury buyers, these needs exist across segments,
---------------------- including the cheaper small cars The key drivers for the six need segments in
---------------------- India are summarised below:
Potency buyers are motivated by a need to attract opposite sex and feel
---------------------- powerful; brand image of trendy and innovative appeals to this group.
---------------------- Utility buyers seek a need for basic transportation and care for family; Value
for money and cost of ownership are the benefits that these buyers associate
---------------------- with.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Prestige buyers are motivated by a need for prestige, indulge self, and Notes
exclusivity; They are least price sensitive and desirous of latest/ futuristic
----------------------
features in cars.
Adventure buyers seek fun & adventure and to increase popularity; SUV ----------------------
finds preference for these buyers who relate to their cars as lover. ----------------------
Status buyers want to show-off success and attract attention; Superior ----------------------
craftsmanship and best technology are imagery issues that this group relates to.
Liberation is the smallest of the six need segments .These buyers seek ----------------------
increased freedom and latest technology; safety consciousness is relatively ----------------------
higher among them.
----------------------
It is apparent from the need segment drivers that a majority of motives are
about what a consumer desires to communicate to the outside world based ----------------------
on the car he/ she uses, Therefore, it is vital to understand these underlying
drivers for consumer behavior and position brands accordingly instead of ----------------------
solely focusing on rational elements of purchase such as fuel economy and
----------------------
engine power.
Source: TNS ----------------------
7.3.4 Psychographic Segmentation ----------------------

This form of market segmentation, commonly referred to as ‘lifestyle ----------------------
segmentation’, has identified promising market segments responsive to specific
marketing messages. The psychographic profile of the consumer reveals how ----------------------
consumers allocate their time, energy and money to activities and their interests
and opinions about various issues. Lifestyle analysis, as it is commonly referred ----------------------
to, very important reveals aspects of a person’s personality, real buying motives, ----------------------
interests, attitudes, beliefs and values; aspects which are otherwise difficult to
uncover. ----------------------
Some of the uses to which Values and Lifestyles segmentation has been put are: ----------------------
● To identify whom to target and find niche markets much more easily.
----------------------
● To locate where concentrations of your target group lives.
----------------------
● To gain insight into why the target group acts the way it does.
● To improve and introduce products that speak to customers’ values. ----------------------
● To target marketing and advertising campaigns much more effectively ----------------------
and much more accurately.
----------------------
● To position products much more accurately in the marketplace
----------------------
----------------------
----------------------
----------------------

Notes VALS Studies
---------------------- VALS is an acronym for Values, Attitudes and Lifestyles. VALS is a well
known syndicated market research study pioneered by SRI International, a
---------------------- Management Consulting firm in California.
---------------------- A VALS study done in India recently revealed six lifestyle clusters :
The Self-driven Materialists
----------------------
This group represents people who are ambitious and practical. They are
---------------------- self-driven individuals constantly striving to achieve success in terms of
---------------------- materialistic possessions as well as social recognition. Money is more
important to them than job satisfaction and success to them is defined in terms
---------------------- of money. They are meticulous, organised and plan things to the finest details.
They think logically and rationalise every action in the light of the manner
---------------------- that they are benefited from it. They are not very social and their life revolves
around their family. They like to spend Sundays with their family and a movie
----------------------
with the family is their idea of entertainment. They watch Hindi movies and
---------------------- like to listen to Hindi pop. These are the people who would be receptive
to advertisements aired during commercial breaks of Hindi movies, before
---------------------- and after Hindi movie related programmes and even commercials appearing in
Hindi movies. Newspapers do not influence their behaviour. They idolise
----------------------
people in higher social circles and are constantly trying to emulate them,
---------------------- hence celebrity endorsements of products appeal to them. As consumer they
are reluctant to be extravagant and do not indulge themselves. They are not
---------------------- reciprocative to discounts and sales and do not indulge in excessive buying
of garments and jewellery during the festive season.
----------------------
14.8% of the population of SEC A & B lies in this group.90 % of the population
---------------------- is more than 25 years old. 57% of the groups are graduates. A majority of the
people are from the service class.
----------------------
The Independent Explorer
----------------------
This group comprises of fiercely independent people. They are broadminded,
---------------------- loyalists, not excessively ambitious, and unorthodox in their behaviour. Not
materialistic in their approach to life they equate success with job satisfaction.
---------------------- Their general approach to life is slightly casual and relaxed. They prefer an
informal work environment and like to take frequent breaks from their daily
----------------------
routine. Generally non-conformists they constantly try to form their own
---------------------- opinions on issues. This trait is manifested in their buying behaviour. Family
and friends do not influence the choice of brands they purchase and celebrity
---------------------- endorsements too do not make an impact on them. They prefer newspapers to
television as sources of information. They are more likely to watch television
---------------------- channels like Star World and Star Movies. They are receptive to new ideas
---------------------- and do not mind experimenting or trying out a new thing. They believe that
branded products offer more benefits than unbranded products. They prefer
---------------------- stability but also crave for some amount of excitement. They have courage of
conviction, are socially responsible, environmentally conscious and have a
---------------------- forgiving nature.

They are expressive. Progressive people in tune with the times, these Notes
consumers are not averse to embracing the western culture.
----------------------
24% of the population lies in this group. A majority of the people lie in the age
groups 18–24 & 25–34 and 42 % of the people are post graduates which goes ----------------------
to explain the independent nature of this group. This is a group represented
by young people. ----------------------
The Passive Traditionalists ----------------------

People who are the epitome of tradition and conservatism define this group. ----------------------
Indian values as well as belief in the Indian system are strongly embedded
in these people. They prefer job security to progress in career or job ----------------------
satisfaction and are averse to risk. They are complacent and do not make
an effort to change the way things are at present. They are satisfied with ----------------------
their position in life and do not possess any motivation to achieve more in
----------------------
life than they already have. These people prefer to work in groups and do
not like to take responsibility. Not adaptive of new technology, people of ----------------------
this group are suspicious of new products. They are family oriented and
most of their leisure activities are centered on the home. These people do ----------------------
not generally form any strong opinions themselves and prefer to go with the
flow. Newspapers influence their opinions and they believe more in regional ----------------------
language newspapers and entertainment in regional languages appeals to ----------------------
them. As a consumer they prefer to buy brands that their families bought
and are not open to purchasing any foreign brands (nationalists). Not ----------------------
experimentative, they generally plan their purchases and do not indulge in
impulse buying. ----------------------
Demographically 12% of SEC A & B lies in this group. 51% are graduates & ----------------------
41% of the people are in the age group 35–49 which explains the conservative
nature of the group ----------------------
The Enthusiastic Experimenters ----------------------
Individuals belonging to this group are enthusiastic in nature. These people
----------------------
are ardent followers of fashion, trends and fad (in vogue). They are
the consumers who are ever ready to try out new brands and products. ----------------------
(experimentative) These are the kind of people who would shop in
supermarkets or make their purchases via teleshopping/e-commerce. They ----------------------
are more likely to be seen at a McDonalds or a Pizza Hut rather than at a
roadside pav-bhaaji stall. They generally hold very radical and liberal views ----------------------
like ‘ There is no discipline in democracy’. Impulsive people, they like to ----------------------
indulge themselves through excessive buying-purchases usually comprising
of designer brand names. They tend to purchase heavily during festive seasons ----------------------
and are attracted by sales and discounts. They use credit cards to make most
of their purchases. Being financially better off, their needs are mainly for ----------------------
social recognition as well as social acceptance. They try to satisfy these
needs through membership of exclusive clubs. Image therefore is important ----------------------
to them not as an expression of power or in materialistic terms, but as an ----------------------
expression of taste and sophistication. They are focused on meeting their
needs and it is these ends that matter more than the means to arrive there. ----------------------

Notes They are focused on meeting their needs and it is these ends that matter more
than the means to arrive there.
----------------------
14.1% of the population belongs to this category. The enthusiastic nature of
---------------------- the group could be attributed to the fact that 50% of the people are in the age
group 18~24.
----------------------
The Opinionated Realists
----------------------
These people are self-centered and consider no one else but themselves. They
---------------------- are loners, very uncomfortable in groups. (indifferent) They are broadminded
only when it concerns issues, which don’t have an immediate effect on their
---------------------- lives as individuals. At the same time, they believe in religion & caste being
a criterion for marriage. These people are low on the spiritual aspects of life
---------------------- like inner harmony, social recognition & self-respect. In a way, they have
---------------------- the most realistic approach to life. Not very logical in their thought process,
they are not very particular about finer details and insist on doing things their
---------------------- own way. They believe in fending for themselves and are stubborn regarding
certain issues. In short their motto in life would be ‘each one to his own’. These
---------------------- people are not very socially responsible & their activities are never planned.
---------------------- They feel that newspapers are more credible than Television and go through
advertisements in newspapers consciously. They watch television without
---------------------- any particular preference. For these people, commercials during programs are
a welcome break. (Not experimentative)They are not quick to accept new
---------------------- media/ product/ ideas. They do not experiment much but believe that branded
products do offer better quality than unbranded ones. Education is of low
----------------------
priority. They believe more in hard work to achieve their goals.
---------------------- Demographics reveal that this is a fairly large group of 21%, very evenly
spread out in the age groups 18~49. 59% of the people have been educated
----------------------
till the higher secondary level. This group is predominantly made up of the
---------------------- affluent business class.
The Mature Sensibles
----------------------
This group believes in traditional values and systems like joint families and
---------------------- are religious though they do not follow rites and rituals regularly. They are
polite well-mannered people who prefer a formal work environment. They
----------------------
have a high degree of respect for institutions of authority and social decorum.
---------------------- They stick to their morals and principles like equality and honesty. They are
not fast to accept new ideas and look for the finer things in life like a ‘world
---------------------- of beauty’. They care a lot about their loved ones and display a high degree
of brotherhood. Family security is very high amongst their list of priorities.
---------------------- The people in this group tend to be more spiritualistic than others. These
---------------------- individuals prefer to remain at home rather than socialise. Their hobbies and
interests revolve around their home and they are not very experimentative. If
---------------------- betrayed they are not quick to forgive and this would apply to products and
brands too. As consumers they are not easily influenced and as a result are
---------------------- not responsive to discounts and sales. They are very cautious and logical in
---------------------- their approach. They are not biased towards products that are branded, insist

on value for money, and yet are quality conscious. They appreciate the Notes
value of education. Commercials generally do not appeal to them. Radio is
----------------------
still of relevance to them.
Representing 14.1% of the population, this group is evenly spread across all ----------------------
age groups. Graduates make up 50% of this group.
----------------------
Source: SRI International
----------------------
----------------------
Consumer markets have been successfully subdivided into segments on
the basis of social class, cultural values and subcultures. ----------------------
Social Class implies that people in the same social strata, have the
same set of values, product preferences, beliefs and attitudes and buying and ----------------------
consumption habits. People are more influenced by peers of their own social ----------------------
strata than by people from other strata of the society. Social class membership
is not fixed as individual can move either up or down from the class position ----------------------
held by their parents. In India Social classes have been traditionally defined as
affluent, middle class, lower middle class, lower class and destitute; but these ----------------------
parameters were found to too general for a meaningful classification. ----------------------
The Market research society of India, in 1987-88 redefined social classes
as Socio-economic classes (SEC), where social strata , education and income ----------------------
were combined to create a new variable which was discriminatory enough and
----------------------
more accurate in determining buying behavioral patterns. SEC classifications
(SEC A1, A2 and so on till SEC E) have since been used by all marketers in ----------------------
India as the defining parameter or starting point for market segmentation.
----------------------
The 90’s post liberalisation decade saw a huge upward mobility in socio-
economic status of a large number of Indians, especially from SEC B to SEC ----------------------
A and SEC C to SEC B categories; consequently, there was a shift in buying
patterns as well. Spurt in literacy and pursuit of higher education, exposure ----------------------
to the outside world through media, availability of credit created a new set
----------------------
of consumers whose buying behaviour was being fuelled by aspirations rather
than by socio-economic status alone. ----------------------
The SEC classification is now being reviewed by the MRSI, NCAER and
the Planning Commission, to create a more accurate system of classification ----------------------
and is expected to be ready by end 2006. ----------------------
Culture and Sub-culture
People of the same culture and sub-culture share the same values, beliefs ----------------------
and customs, food habits and ways of dressing. Marketers have to look out ----------------------
for the emergence of new subcultures, like the “youth brigade”, “netizens”;
emerging subcultures create a new set of values, thinking, lifestyles, language ----------------------
and dress codes.
----------------------
Cultural segmentation is of particular importance to international
marketing and multinational companies; marketers need to be sensitive to ----------------------
cultures, especially when designing their communication programs or benefit
appeals. ----------------------

Notes 7.3.6 Use-related Segmentation
Use related segmentation is a very effective form of segmentation that
----------------------
categorises consumers in terms of usage characteristics, awareness levels and
---------------------- degree of brand loyalty.
● Usage characteristics differentiate among heavy users, medium users, light
----------------------
users, regular users, irregular users and first time users. This characteristic
---------------------- has been used very effectively by product categories like alcoholic
beverages, non-alcoholic beverages, shampoos, internet usage, telecom
---------------------- service providers (mobile and landlines) air travel amongst others.
---------------------- ● Awareness levels include the consumers’ awareness of the product,
interest in the product, readiness to buy the product or whether substantial
---------------------- product education is required.
---------------------- ● Degree of brand loyalty is sometimes as a segmentation parameter.
Marketers need to create loyalty programs for loyal users, and other
---------------------- promotional appeals for the “brand switchers”.
---------------------- 7.3.7 Usage Situation Segmentation
---------------------- Marketers have recognised that the use situation or occasion is in some product
categories the prime variable that determines what the consumer will purchase
---------------------- or consume.
---------------------- ● Time: Leisure, at work, formal, informal rush hour, morning, night etc.
For example, cold medications usually contain substances that induce
---------------------- sleep. Marketers have created products targeted for cold relief during
the day (hence non-sleep inducing) and for relief at night, which may
----------------------
induce a good night’s sleep. Vicks Vaporub specifically targeted a rub for
---------------------- children at night, for adults as rub for monsoon colds.
● Occasion: Where usage is linked to a special or specific occasion.
----------------------
Consumer research showed that a substantial number of Indian families
---------------------- consider painting their homes when there is special occasions in the family
like a marriage or a festival. Asian Paints created a brand called Utsav,
---------------------- targeted specifically to this market segment; the colour choices, marketing
communications very strongly resonated the festivity associated with
----------------------
usage occasion. Titan watches also very effective used this variable to
---------------------- carve out several occasion related usage segments in the market. They
created watches for office wear, which were simple, formal yet classy,
---------------------- watches for casual wear and dress watches for formal occasions.
---------------------- ● The success of both these cases points specifically to the fact that
these companies challenged the existing preconceptions about market
---------------------- segmentation within the industry and, through in-depth research and
consumer insight, were able to uncover and satisfy unmet needs.
----------------------
● Objective: Personal use, gifting, celebration, etc.
----------------------
● Location of use: In home or outside home consumption, at work and so on.
---------------------- ● Context: private consumption for self or used in the context of other

persons such family, peers or friends. People behave differently when Notes
with family and with friends; this naturally affects buying motives.
Usage situations are important variables that determine product attributes, ----------------------
communication appeal and message, packaging, distribution patterns, the ----------------------
value that the consumer attaches to the usage, hence pricing.
----------------------
Benefit or specific end use, is used at the primary level to broadly ----------------------
categorise markets. For example, the batteries market is a very large market;
----------------------
hence, first level of categorisation would be in terms of automotive batteries,
batteries for appliances, industrial batteries, batteries for inverters. However, ----------------------
these by themselves do not constitute segments. Automotive batteries can be
further categorised as passenger car batteries, two wheeler batteries and so on. ----------------------
This level of categorisation is necessary to proceed with market segmentation,
but must not be confused as market segmentation itself. ----------------------
Marketers constantly attempt to identify the one most important benefit, ----------------------
which will meaningful to the customer. A homogenous group of customers, who
consider a particular benefit as most important, could then be said to constitute ----------------------
a market segment. ----------------------
For example in the soaps category, personal hygiene is the generic benefit
offered by all the brands; in addition to this, some benefits are more important ----------------------
to individuals such as protection from germs, hygiene, freshness, fragrance and ----------------------
beauty. Dettol soap is targeted at individuals seeking protection from germs and
contamination; Dove is targeted at women that seek a soap with moisturising ----------------------
properties; Liril is targeted at individuals who seek freshness and fragrance.
----------------------
Changing lifestyles also play a major role in determining the product
benefits that are important to consumers and provide marketers with opportunities ----------------------
for new products and services. The microwave oven was the perfect solution
for the needs of dual income households, offering the benefit of cooking in ----------------------
seconds. In India however, meals are more elaborate and require longer cooking ----------------------
time, hence this benefit of instant cooking was not valued by Indian households;
the benefit that instead appealed to them more was that food could be instantly ----------------------
heated in seconds and tasted as though freshly prepared. Marketers stress
freshness and taste to women who are “taste conscious”, and the benefit of ----------------------
instant cooking to those women who are “time poor”. ----------------------
----------------------
All the variables studied earlier are single segmentation bases. As
customers become “more in tune” with their needs, they fine-tune their own ----------------------
expectations from products. This has led to further segmentation of markets
into micro-segments. Marketers have learnt that they need to combine several ----------------------
variables rather than rely on a single variable, for a more accurate definition ----------------------
of market segments. As consumers evolve and become more in tune with their
needs, marketers also need to continuously review market segments. ----------------------
----------------------

Notes It has become common marketing practice to combine diverse consumer
characteristics-demographics, lifestyles, attitudes, psychographics, and
---------------------- motivations - with different analytical techniques to find the most meaningful
way of identifying and understanding different customer groups. This may
---------------------- reveal niche market opportunities, but equally, it may show that it is possible to
---------------------- combine small customer groups into larger and more profitable segments.
There could be a number of hybrid segmentation approaches such as
----------------------
Psychographic-demographic segmentation, Geo-demographic Segmentation
---------------------- and Socio-cultural – Psychographic segmentation. Hybrid approaches are very
specific to product categories and extensive consumer research is often the best
---------------------- guide to the appropriate variables for the category.
---------------------- Market Segmentation is not a one-time exercise; marketers have to
continuously review segments, segmentation variables and adapt their marketing
---------------------- mix to the evolving needs. Ongoing consumer research helps to track evolving
consumer needs and is the critical input to any segmentation exercise.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
Match the following. ----------------------
i. Use-related segmentation a. It divides the markets by locations.
----------------------
ii. Psychological Segmentation b. It refers to the vital and measurable
statistics of the population. ----------------------
iii. Socio-cultural segmentation c. It divides the market on the basis of
intrinsic qualities of an individual. ----------------------
iv. Hybrid Segmentation d. This form of market segmentation
----------------------
is commonly referred to as ‘lifestyle
segmentation. ----------------------
v. Usage situation segmentation e. Consumer markets have been
successfully subdivided into segments ----------------------
on the basis of social class, cultural
values and subcultures. ----------------------
vi. Benefit Segmentation f. It is a very effective form of ----------------------
segmentation that categorises
consumers in terms of usage ----------------------
characteristics, awareness levels and
degree of brand loyalty. ----------------------
vii. Geographic Segmentation g. Marketers have recognised that the ----------------------
use situation or occasion is in some
product categories the prime variable ----------------------
that determines what the consumer
will purchase or consume. ----------------------
viii. Demographic Segmentation h. Benefit or specific end use, is used ----------------------
here for market segmentation.
ix. Psychographic Segmentation i. This has led to further segmentation ----------------------
of markets into micro-segments.
----------------------
----------------------
Activity 2
----------------------
1. For the next 3 days, make a detailed note of all the advertising that
----------------------
you watch. Try to identify the profile of the consumer to whom those
advertisements were possibly targeted. What segmentation variables ----------------------
would the companies have used?
----------------------
2. Can you cite some examples of newer sub cultures that have emerged?
How are these groups distinctive from other groups? Which companies ----------------------
target these subcultures?
----------------------
----------------------
----------------------

Notes 7.4 CRITERIA FOR EFFECTIVE MARKET SEGMENTATION
---------------------- The potential benefits of a segmented business strategy (benefits in terms
of marketing effectiveness, efficiency and competitive advantage) can be
---------------------- achieved if the segmentation satisfies three key tests of validity:
---------------------- ● It is based on real and substantive differences between customer groups
(e.g. in what they want).
----------------------
● These differences have significant implications for market behaviour (e.g.
---------------------- different segments display different buying patterns).
---------------------- ● As a way of understanding the structure of the market, the segmentation
is predictive (e.g. what it implies about brand preferences are confirmed
---------------------- by research data).
---------------------- Segmenting a market is not simply a case of ‘slicing and dicing’ and
partitioning it into smaller niches. A more sophisticated approach looks for
---------------------- opportunities to fulfill unmet needs and to re-define a market by questioning the
industry’s preconceptions on the segmentation variables. A fruitful segmentation
----------------------
exercise is one, which takes a fresh look at fundamental issues such as:
---------------------- ● What business is the company really in?
---------------------- ● What is the psychological basis of the needs/wants that customers express?
---------------------- ● How is the structure of the market evolving?

● How could the market be re-shaped by new technology or new products?
----------------------
● What competitive threats and opportunities are emerging?
----------------------
For a market segment to be an effective target, a market segment should
---------------------- be Substantial, Accessible, Differentiable, Actionable and Measurable.
1. Substantial: For a market segment to be a worthwhile target, it must
----------------------
consist of a sufficient number of people to warrant a marketing mix to
---------------------- satisfy the specific needs or interests of the group.
2. Accessible: Marketers must be able to reach the market segments they
----------------------
want to target through media and distribution channels in an economical
---------------------- way. Marketers are constantly on the lookout for newer accessibility
points; but it must be worthwhile or the segment must be large enough to
---------------------- justify the effort.
---------------------- 3. differentiable: Segments should be distinguishable and respond
differently to different marketing mix programs. If married and unmarried
---------------------- men respond similarly to the launch of a new brand of shirts, then they are
not different market segments.
----------------------
4. Actionable: A fourth requirement for effective segmentation is that
---------------------- effective marketing programs can be created for serving the market.
---------------------- 5. Measurable: Lastly, the market segment should be measurable in terms
of size, purchasing power and other characteristics. To estimate the size
---------------------- and characteristics of each segment marketers often use demographic

data provided by the census department, NCAER, NRS surveys and SEC Notes
classifications, or undertake a probability survey whose findings can be
extrapolated to the total market. ----------------------
----------------------
----------------------
----------------------
1. For a market segment to be an effective target, a market segment
should be , which means that the marketers must be able to reach the ----------------------
market segments they want to target through media and distribution ----------------------
channels in an economical way.
i. Substantial ----------------------
ii. Accessible ----------------------

iii. Differentiable ----------------------
iv. Actionable
----------------------
----------------------
7.5 THE MARKET SEGMENTATION PROCESS
----------------------
In the previous sections, we have learnt the variables used to define market
segments and the criteria for effective market segmentation. In this section, we ----------------------
will learn about the process of market segmentation. The process is continuous
and follows four different stages: Survey, Analysis of findings, Segment ----------------------
Profiling and Feasibility. These stages need not necessarily be sequential and
----------------------
will at times overlap.
1. Survey: The survey stage consists of extensive consumer research, as ----------------------
marketers try to gather extensive quantitative and qualitative information ----------------------
about consumer buying motivators, consumption goals and buying
patterns. At this stage, marketers use the segmentation variables we ----------------------
studied earlier to gain an understanding of consumer behaviour. Various
research methodologies are used (Unit 5) to gain extensive information ----------------------
on consumer behavior. ----------------------
2. Analysis of Findings: The data gathered has to be collated in a meaningful
way and analysed. The aim of the analysis is to identify need gaps in the ----------------------
market, emergence of new buying patterns, shift in consumer perceptions, ----------------------
attitudes, values and any other changes, which may represent opportunities.
Effective analysis will provide a rich understanding of consumer needs, ----------------------
whether present unmet needs, latent needs or newer needs as they emerge.
----------------------
3. Segment Profiling: As most companies use a hybrid segmentation
approach, segment profiling becomes a part of the earlier stages. At this ----------------------
stage, market may try to find additional information about the observed
----------------------
segments, such as media habits, ownership of durables, spending patterns
on other related categories to gain a detailed understanding of the segment. ----------------------

Notes Profiling is an important input the designing the marketing mix, especially
the communication and distribution program.
----------------------
4. Evaluating Segment Attractiveness: The last stage of the segmentation
---------------------- process, before the marketers decide on segment(s) to target, is a detailed
feasibility study of the different market segments. The first step is to
---------------------- use the five criteria, we learnt earlier, to determine attractiveness. The
segment may pass the first test, but marketers need to look at long-term
----------------------
profit attractiveness of a segment as well.
---------------------- Additional criteria for segment attractiveness are:
---------------------- ● Expected market growth rate. Unstable growth rates do not make for
long-term attractiveness of the segment.
----------------------
● Competitive intensity and other competitive forces. A “five forces”
---------------------- analysis can be done on market segments as well to determine profit
attractiveness.
----------------------
● Segment Development Costs; emerging market segments would require
---------------------- market development efforts. Marketers must account for these costs to
determine the feasibility of targeting a segment.
----------------------
● Availability of resources
---------------------- ● Leveraging of existing competitive advantage and skills and competencies.
---------------------- ● Impact of either environmental forces on the market segment
● Impact on other market segments presently being targeted by the company.
----------------------
All the factors that we learnt in the earlier units are used to evaluate the
---------------------- attractiveness of a potential market segment. Sometimes attractive segments
may not mesh with the companies long-run objectives or the company may lack
---------------------- a competitive advantage and necessary competencies to offer superior value to
---------------------- the customers
---------------------- 7.6 MARKET TARGETING

---------------------- Once a firm has identified feasible market segment opportunities, it has
---------------------- to decide how many and which ones to target. The targeting approach revolves
around two key decisions:
---------------------- ● How many segments to target?
---------------------- ● Which segments to target?
---------------------- The detailed internal and external strategic analysis conducted by the company
(Unit 3) aids the targeting decision.
----------------------
----------------------
----------------------
----------------------

There are five different patterns of target market selection. Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 7.1: Different Patterns of Market Selection ----------------------
1. Single Segment Concentration
----------------------
Also known as the “be a big fish in a small pond” strategy is, as you
might recall, based on the generic competitive strategy – focus. Through ----------------------
concentrated marketing, a firm gains a strong knowledge of the segment’s
----------------------
needs, develops competitive advantages to achieve a strong presence in
the given segment. Through segment leadership, it captures a high return ----------------------
on investment.
2. Selective Specialisation ----------------------
The company may decide to target several segments, but may be selective ----------------------
about the segments to target. This multi segment strategy has the advantage
of diversifying a firm’s risk and gives it larger presence in an industry. ----------------------
3. Product Specialisation ----------------------

A firm specialises in a certain product and sells it to several segments. A ----------------------
firm may specialise in water purifiers and may decide to target homes,
institutions, commercial research labs and government establishments. For ----------------------
each market segment it targets the company would have to appropriately
modify several elements of the marketing mix, but what it achieves ----------------------
is a strong reputation in a specific product area. The downside of this ----------------------
strategy is a technological revolution that may threaten the business of the
company. But this would be true only for those organisations that have ----------------------
not monitored the changes in the technological environment and have
been unable to adapt their business appropriately. ----------------------

Notes 4. Market Specialisation
A firm concentrates on serving the many needs of a particular customer
----------------------
group. An example would be an online seller of books, who having built
---------------------- up a large customer base, diversifies into selling other products like music,
cameras and other such assortments to the customer group. The firm gains
---------------------- a strong reputation in serving this customer group and becomes a channel
for additional products that the customer segment can use. The downside
----------------------
of this strategy is major shift in the attractiveness of the given market
---------------------- segment, would threaten the entire business of the company. Again, as
earlier, such factors are a threat to those companies that have not seen it
---------------------- coming and have not been able to adapt successfully.
---------------------- 5. Full market coverage
The company attempts to cover all market segments with their products.
----------------------
Very large corporations like Maruti, Hyundai, Coke and Hindustan Lever
---------------------- can undertake a full market coverage strategy. Companies can cover
the market in two broad ways: through undifferentiated marketing or
---------------------- differentiated marketing.
---------------------- In undifferentiated marketing, the firm practices mass marketing by
going after the entire market with one marketing mix. It designs a product
---------------------- and marketing program that appeals to the broadest number of buyers
---------------------- and relies on mass distribution and mass advertising. It relies on mass
production and standardisation of the product to achieve economies of
---------------------- scale and profitability. Presently such an approach is possible only in highly
regulated markets, where a single firm enjoys a monopoly status, due to
---------------------- regulatory protection; or in underdeveloped markets, with consumers at
---------------------- the very basic level of biogenic needs. A slightly varied “Undifferentiated
marketing” approach, may work successfully for companies that have
---------------------- achieved cost leadership and are able to maintain differentiation parity
with other key competitors. Such firms chose to target the largest segment
---------------------- in the market (often confused with a mass-marketing approach) and earn
---------------------- returns higher than industry average due to their cost advantages.
In differentiated Marketing, the firm operates in several markets, but
---------------------- designs a specific marketing mix for each market segment, that it selects
---------------------- to target. Full market coverage with, differentiated marketing is highly
appropriate for companies with a strong competitive advantage and the
---------------------- financial resources; without a competitive advantage, the strategy is
highly unlikely to be successful in today’s intensely competitive market
---------------------- place. Profitability is achieved only by the firm’s ability to influence the
---------------------- competitive forces and by having a clear generic business strategy in
place.
---------------------- Which approach a company should take will depend on a company’s:
---------------------- ● Objectives in a market place
---------------------- ● Generic competitive strategy

● Competitive Advantage Notes
● Skills, assets, competencies
----------------------
● Access to financial resources.
----------------------
1. What is Selective Specialisation? ----------------------

i. Also known as the “be a big fish in a small pond” ----------------------
ii. The company may decide to target several segments, but may
----------------------
be selective about the segments to target.
iii. A firm specialises in a certain product and sells it to several ----------------------
segments. ----------------------
iv. A firm concentrates on serving the many needs of a particular
customer group. ----------------------
----------------------
Summary ----------------------
● Market segmentation exists because consumer diversity exists. Market ----------------------
segmentation focuses first on homogenous needs and then groups
customers that have these needs into a market segment. ----------------------
● A segmented approach to business strategy is win-win situation for both ----------------------
consumers and companies: consumers benefit as companies try to fulfill
their needs in better ways; companies benefit due to higher customer ----------------------
satisfaction and profitability.
----------------------
● Market segmentation is the first step in the three phase marketing strategy
of segmentation, targeting and positioning. ----------------------
● A niche is a narrowly defined group of customers seeking a highly ----------------------
distinctive and unique solution. Niche segments consist of buyers with
high purchasing power, who have unique needs and a strong motivation ----------------------
to fulfill their needs.
----------------------
● Market Segmentation is not a onetime exercise; marketers have to
continuously review segments, segmentation variables and adapt their ----------------------
marketing mix to the evolving needs. ----------------------
● For a market segment, to be an effective target, a market segment should
be Substantial, Accessible, Differentiable, Actionable and Measurable. ----------------------
● The process of market segmentation is continuous and follows four ----------------------

different stages: Survey, Analysis of findings, Segment Profiling and
Feasibility. These stages need not necessarily be sequential and will at ----------------------
times overlap. ----------------------

Notes Keywords
----------------------
● Segmentation: Division into segments
---------------------- ● Niche: A place or position suitable or appropriate for a person or thing, a
distinct segment of a market
----------------------

---------------------- 1. What is the difference between mass marketing and segmented marketing?
---------------------- Give one example of each. Between the two, which is the more profitable
marketing approach and why?
----------------------
2. Briefly explain the segmentation, targeting and positioning approach.
---------------------- What is the difference between sector and segment? Give some examples.
3. Explain the statement “Market Segmentation is about consumer needs and
----------------------
not just consumers”. Explain the nine commonly used bases for market
---------------------- segmentation. For each variable, find out one example from industry.
4. Write short notes:
----------------------
a. Niche segment
----------------------
b. Psychological variables Vs. Psychographic variables
---------------------- c. Hybrid segmentation
---------------------- d. SEC system of classification
----------------------
----------------------
----------------------
---------------------- 1. ___________ can be defined as the process of dividing a market into
distinct subsets of consumers with common needs, goals, characteristics,
----------------------
with the goal of selecting one or more segments to target with a distinct
---------------------- marketing mix.
i. Market Segmentation
----------------------
2. A ___________ is a narrowly defined group of customers seeking a highly
---------------------- distinctive and unique solution.
---------------------- i. Niche
----------------------
i. –f
----------------------
ii. –c
---------------------- iii. –e

iv –i Notes
v. –g
----------------------
vi. –h
----------------------
vii. – a
viii. – b ----------------------
ix. -d ----------------------
----------------------
1. For a market segment to be an effective target, a market segment should
be ___________________, which means that the marketers must be ----------------------
able to reach the market segments they want to target through media and
----------------------
distribution channels in an economical way.
vi. Accessible ----------------------
1. What is Selective Specialisation?
----------------------
ii. The company may decide to target several segments, but may be
selective about the segments to target. ----------------------
----------------------
Suggested Reading
----------------------
Research in a Marketing Environment. St Louis: Time Mirror/Mosby ----------------------
2. amaswamy, V.S. and S. Namakumari 2002. Marketing Management -
R
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Notes
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Positioning
UNIT
8
Structure:
8.1 Introduction
8.2 Positioning
8.2.1 Definition of Positioning
8.3 The Positioning Concept
8.3.1 The A – The Target Audience
8.4 The Process of developing a Position
8.5 Positioning Strategies
8.6 Repositioning
Summary
Keywords
Suggested Reading
Positioning 205
Notes
Objectives
----------------------
----------------------
● Discuss positioning
----------------------
● Explain why a brand should be positioned
---------------------- ● Evaluate important positioning concepts
---------------------- ● Describe the process of developing positioning
● Assess positioning strategies
----------------------
----------------------
---------------------- 8.1 INTRODUCTION
---------------------- The idea of ‘positioning’ a product or service emerged in the early 1970s
when Al Ries and Jack Trout, advertising executives, wrote a series of articles
---------------------- called ‘The Positioning Era’forAdvertisingAge. In their 1981 book, “Positioning:
The Battle for your Mind”, Ries and Trout describe how positioning is used as
----------------------
a communication tool to reach target customers in a crowded market place.
---------------------- Not long thereafter, the advertising industry the world over began to develop
positioning slogans for their clients and very soon ‘positioning’ became a key
---------------------- aspect of marketing communications.
---------------------- “Positioning: The Battle for your Mind” (recommended reading), has
become a classic in the field of marketing. The concept of positioning
---------------------- has evolved from being just a communication tool to being a very important
marketing concept in an era of hyper competition.
----------------------
---------------------- 8.2 POSITIONING

---------------------- Brand positioning is at the heart of marketing strategy. A position is a
place that a product, brand or company occupies in the consumers’ mind relative
----------------------
to competing offerings.
---------------------- 8.2.1 Definition of Positioning
---------------------- Position or positioning has been defined in innumerable ways by different
sources; Kotler defines brand positioning as “the act of designing the company’s
---------------------- offer and image so that it occupies a distinct and valued place in the target
customer’s minds.”
----------------------
Al Ries and Jack Trout defined it as follows:
----------------------
“A position of a brand is it’s perception among its target customers”.
---------------------- “Positioning is not what you do to a product. Positioning is what you do to
the minds of the prospect. That is, you position the product in the mind of the
---------------------- prospect.”
----------------------

Thus positioning involves finding the proper “location” in the minds of Notes
a group of customers or market segment so that they think about the product
in the right way. Not only brands, products and companies, but also everything ----------------------
occupies a position in our minds. People, incidents, experiences, countries all
occupy a place in our minds, accompanied by certain associations, emotions, ----------------------
attitudes and beliefs. That place along with the accompaniments is the position. ----------------------
A clear brand positioning guides marketing strategy and creation of the
----------------------
appropriate marketing mix to achieve the desired position. Positioning is thus
the art of placing the entire marketing mix in the mind of the customer and ----------------------
creating the relevant associations, emotions, attitudes and beliefs, so as to stand
apart from competitive offerings. It is important to understand that the entire ----------------------
marketing mix is placed in the customers mind and not just the product. To
----------------------
the customer the entire marketing mix is the product. He does not separate the
different elements of the marketing mix and instead takes a holistic view of the ----------------------
product. To the customer the product is a sum total of his experiences with the
product, the value he has derived, the way the company might have treated him, ----------------------
the communication he saw, the associations that he has with the product and
----------------------
everything else. It is only marketing people who separate the different elements
of the ‘product’ and term it the marketing mix, so as to be able to manage every ----------------------
element of the customer’s experience.
----------------------
Before we elaborate the concept of positioning, it is important to ----------------------
understand, why positioning is such an important concept.
----------------------
In a free society, a consumer is faced with innumerable choices and is
therefore constantly making decisions as to which products are most suitable for ----------------------
him. We live in an over communicated society, where our minds are constantly ----------------------
being bombarded with information about everything from everybody. In Unit
6, we learnt how humans are selectively attentive to marketing communications ----------------------
and selectively retain information.
----------------------
Because our mind’s ability to cope with information is limited, this is
the customers’ coping mechanism with the overload of information. Contrary ----------------------
to popular belief, too much choice actually causes stress and anxiety to the
customer, and makes his decision making that much more difficult. He has so ----------------------
many alternatives to compare and may not have the time to or even the ability ----------------------
to compare the alternatives. Whilst it is obvious that customers will select the
“best” alternative, the factors used to judge better are numerous, vary from ----------------------
person to person and many a times not even completely known to the customer.
----------------------
Positioning a brand actually, in a sense simplifies the decision making for
the customer, by placing the brand in the appropriate “slot” in the customers’ ----------------------
mind, so that when the need is felt, the relevant brand simply “pops up” in his
mind, without any great effort on the customer’s part. This is reassuring for the ----------------------
customer as it relieves him of a lot of decision-making stress and anxiety every ----------------------
----------------------
Positioning 207
Notes time he is faced with a consumption choice. The most powerful positions are
the ones where the brand’s promise can be distilled down to a word or just a few
---------------------- words. See these examples:
---------------------- ● Dettol - Best germ protection
● Disney - Magical family entertainment
----------------------
● Hutch - The network follows you wherever you go
----------------------
● Coca Cola - Refreshingly cool
---------------------- ● Coca Cola - Thanda matlab Coca Cola (particularly in India)
---------------------- Not surprisingly, if you look at the market share of these brands in their
relevant target markets, you will find that these brands are the market leaders in
---------------------- their target markets.
---------------------- Thus, a clear and distinct position not only simplifies the consumers’ life;
it rewards marketers with market share, mind share and heart share; all three
----------------------
being very important elements of a brand’s position. Those brands that make
---------------------- a very powerful emotional connect with the target market are rewarded with a
long lasting position.
----------------------

---------------------- 1. It is the art of placing the entire marketing mix in the mind of the
customer and creating the relevant associations, emotions, attitudes
---------------------- and beliefs, so as to stand apart from competitive offerings.
---------------------- i. Marketing
---------------------- ii. Branding
iii. Positioning
----------------------
iv. Selling
----------------------
----------------------
8.3 THE POSITIONING CONCEPT
----------------------
The concept of positioning has several elements, which we will examine
---------------------- as the ABC of positioning.
---------------------- 8.3.1 The A – The Target Audience
1. Effective positioning begins with effective market segmentation and
----------------------
selection of target markets; positioning after all is done in the mind of a
---------------------- target customer. If market segmentation is ineffective, or target market
selection is incorrect, the position too will be ineffective.
----------------------
2. Selecting a target market in whose mind the marketing mix is to be
---------------------- positioned. No brand can be everything to everybody; because then the

brand ends up being nothing to nobody. The “mass market” approach Notes
works in the absence of competition, but in a competitive environment, the
segmentation, targeting and positioning is the most beneficial marketing ----------------------
strategy. It is possible to position the same brand in the minds of two
different target markets differently, but it requires appropriate marketing ----------------------
mix modification. ----------------------
For example, Hajmola is positioned as a tangy candy in the minds of kids,
----------------------
and as a digestive in the minds of adults. The marketing mix for each
target segment is different – in the kids segment, the product formulation ----------------------
is a candy in different flavours, with a pillow packaging, pricing on par
with other candies and communicated as a fun, tangy product. To the ----------------------
adult market segment, the product formulation is like tablets, packed in
----------------------
a glass bottle, sold through grocers and chemists, pricing on par with
other similar digestive formulations and communicated as a formulation ----------------------
to relieve digestive stress.
----------------------
In this example, even though the brand name is the same, several elements
of the marketing mix have changed. Hence, technically no brand can ----------------------
have two different positions in the minds of two different target markets,
because some element of the marketing mix will have to be modified. ----------------------
Even the smallest modification is tantamount to creating and managing
----------------------
yet another marketing mix.
3. A fundamental concept in positioning is understanding the “slot” or ----------------------
category where the marketing mix is to be placed. Understanding the
----------------------
slot means understanding how customers define categories, which is very
different from the way companies define categories. In the earlier units, ----------------------
we have stated this difference and it is important to recall the differences.
----------------------
Customers define a category as a group of products, irrespective of physical
form, that satisfy the same need. Marketers and companies very often ----------------------
make the mistake of defining a category as group of products with similar
physical forms, manufacturing process, raw materials or even distribution ----------------------
channels. Developing a customer centric category perspective is vital to ----------------------
the positioning exercise
4. Kevin Keller in his September 2002 HBR article “Three questions you ----------------------
need to ask about your brand” further emphasised the importance of ----------------------
categories from the customer perspective as a frame of reference or
Point of Parity in the consumer’s mind. The frame of reference signals to ----------------------
consumers the goal they can expect to achieve by using a product and thus
includes all substitutes that satisfy the same need. Establishing a frame of ----------------------
reference becomes particularly critical when the product concept itself is ----------------------
very new.
----------------------
----------------------
----------------------
Positioning 209
Notes Motorola launched its Personal Digital Assistant, Envoy in 1994. The Envoy
received messages wirelessly like a pager, but no one viewed it as a pager
---------------------- because it was too large (the size of a VHS tape) and too expensive (1500$) to
---------------------- be a pager. Envoy sent emails and faxes like a laptop computer, but it couldn’t
substitute for a laptop because it lacked a keyboard and sufficient storage.
---------------------- Envoy could store calendar and contact information like an organiser, but its
price tag and cumbersome entry system made it an implausible member of that
---------------------- category as well. Without a clear frame of reference, consumers weren’t sure
why they should purchase the product or for that matter what it was. Envoy
---------------------- was withdrawn from the market in 1996.
---------------------- Shortly after the failure of the Envoy, the PalmPilot 1000, a device which had
a fraction of the capabilities of Envoy, was launched and it quickly became a
---------------------- success; the key factor was its point of parity with electronic organisers, as it
looked and functioned like an electronic organiser but with greater capabilities.
----------------------
Sony’s AIBO
---------------------- Sony managers had a problem. Racing to beat competitors to the market, the
---------------------- electronics giant has spent millions of dollars developing its first household
robot. But building a personal robot that could do anything useful proved
---------------------- daunting as Sony’s prototypes were unpredictable and has several flaws. How
could a company establish a foothold in the nascent household robots market
---------------------- without getting laughed at? The answer they realised was not to obsess about
perfecting the technology.
----------------------
The company’s managers realised that because of the tremendous success
---------------------- of the Star Wars movies, consumers’ had already developed a “frame of
reference”. Any robot that looked like a Hollywood movie robot would be
---------------------- expected to act like C-3PO; and they would be sorely disappointed if it did not
measure up to expectations. So Sony made a conscious decision to manipulate
---------------------- the “framing” of its product, and turn the robot’s shortcomings into attributes.
---------------------- Rather than develop a household helper that would fall disastrously short
of expectations, Sony realised it could position the robot as an entertaining
---------------------- lovable household pet, that sometimes disobeyed your commands; and whom
no one would expect to be useful. Sony cleverly positioned and marketed The
---------------------- AIBO as an entertainment robot with a quirky personality of its own, through
entertainment and toy stores across the US.
----------------------
Because of its clever positioning, customers were extremely forgiving of AIBO’s
---------------------- flaws and quirks, and the company had tremendous leeway now to tinker with
the technology. Moreover AIBO’s initial success gave Sony invaluable insights
---------------------- into how consumer’s relate to robots; insight which it is using for continuous
development of its robot AIBO’s success shows the pivotal role of “framing”
---------------------- especially when marketing “discontinuous innovations” for consumers. If
---------------------- managers want mainstream customers to embrace a new technology, they need
to establish the most effective “frame” early on in the development process.
---------------------- The strategy boils down to knowing the difference between what the product
is and what consumers expect it to be.
---------------------- Adapted from HBR March 2004
----------------------

5. Understanding the mind of the target market implies understanding all Notes
the perceptions, attitudes, beliefs, values surrounding the need and its
importance. In-depth and insightful consumer research is the foundation ----------------------
of the market segmentation and positioning exercise. Figure 8.1 shows a
perceptual map; perceptual mapping is a market research technique used ----------------------
to map the customer’s mind. ----------------------
----------------------
1. The benefit is the solution that the brand offers to its target customers,
in fulfilling a particular need. The benefit is primarily the functional ----------------------
capabilities of a brand. Identification of the benefit to be offered begins
----------------------
with the market segmentation exercise when marketers are looking for
unfulfilled, unmet needs, or needs that are not being met effectively by ----------------------
any of the current product offerings. In many ways, positioning actually
mirrors the market segmentation; segmentation and positioning can be ----------------------
viewed as two sides of the same coin.
----------------------
2. The benefit could be related to type of usage or time of usage or any of the
other variables that we use to segment the market. In our first unit, we have ----------------------
learnt that every need has several dimensions. A physical need like hunger
----------------------
too has an emotional and self-concept dimension. So the benefit that a brand
seeks to provide will also have a functional, emotional and self-expressive ----------------------
dimension to it. In positioning the brand, marketers must address all the
dimensions to the need for which they are providing the solution. ----------------------
Addressing the need for its different dimensions is also known as ----------------------
developing a Value Proposition. For example, Colgate whitening
toothpaste offers the clear functional benefit of whitening teeth that have ----------------------
become discolored. Discoloration of teeth like bad breath is not just a ----------------------
functional problem, but a social and emotional one as well as it affects
the appearance, confidence and self-esteem of the person who has this ----------------------
problem. A brand must address all the dimensions of the need or problem
that the target customer is trying to fulfill. ----------------------
3. Marketers very often try to “pack their brands with features” as a way of ----------------------
differentiating their brand from their competitors. This is clearly contrary
to the concept of positioning, as it only ends up confusing the target ----------------------
customer. Remember what we learnt earlier of the dangers of a brand ----------------------
trying to be everything and ending up being nothing- “A jack of all trades
and master of none”. Such brands occupy no clear distinct slot in the ----------------------
consumers mind.
----------------------
4. Sometimes product attributes or benefits are negatively co-related; for
instance customer’s believe that if a product low priced , then they cannot ----------------------
expect high quality; or if an antiseptic is mild then it is not effective.
Other examples of negatively correlated attributes are taste vs. calories, ----------------------
nutritious vs. good tasting, powerful vs. safe, heritage vs. contemporary ----------------------
and strong vs. refined.
----------------------
Positioning 211
Notes Now consumers desire to maximise both of the negatively co-related
attributes, but find it difficult to believe that it could be possible. Marketers
---------------------- first need to understand through consumer research such negatively co-related
dimensions, redefine the relationship and then establish that the product
---------------------- performs well on both the dimensions. When DuPont introduced “Gore-Tex”
---------------------- a unique waterproof fabric, which was extremely “breathable”, their marketing
communications demonstrated the performance of the fabric on both negatively
---------------------- co-related dimensions.
---------------------- Apple computers
When Apple computers launched the Macintosh, its key point of difference
----------------------
was “user friendly”. Although many consumers valued ease of use – especially
---------------------- those who bought personal computers for the home – one drawback with the
association was that customers believed that if the personal computer was easy
---------------------- to use then it could not be very powerful, a key choice consideration in that
market. Recognising this potential problem, Apple ran a clever ad campaign
----------------------
with the tag line, “The power to be your best”, in an attempt to redefine what
---------------------- a powerful computer meant. The message behind the ads was that because
Apple was easy to use, people did just that – they used them – a simple yet
---------------------- powerful indication of “power”; in other words, the most powerful computers
were the ones that people used.
----------------------
Source: website of Apple computers
----------------------
---------------------- A key aspect of positioning is dealing with Competitors and making your
---------------------- brand start apart from the competitors, in the customers mind. Remember, by
competition here we refer to all solutions competing to fulfill the same need.
---------------------- This means endowing your brand with a point of differentiation, which is
distinctive and delivers worthwhile benefits to the customer.
----------------------
According to Keller, “The point of differentiation (POD) is a strong
---------------------- favorable and unique brand association that sets your brand apart from the
competitors. The POD could be a service, benefit, ingredient, program that no
---------------------- competitor offers; or it could be a superior performance on any of the existing
---------------------- benefits or services that no competitor is able to match.” (Product differentiation
is dealt with in detail in Unit 9 product Concepts I)
----------------------
The concept of a POD is similar to the very popular marketing concept of
---------------------- unique selling proposition or USP, a term coined by Rosser Reeves of the Ted
Bates advertising agency in the early 1950’s. The original idea behind USP was
---------------------- that advertising should give consumers a compelling reason to buy the product,
which competitors could not match. But over time, the emphasis shifted much
----------------------
towards communicating the difference, at times even compromising on the
---------------------- credibility and actual delivery of the difference.
Marketers have learnt, that the point of difference must be real and Credible
----------------------
to the customer. Claims like ‘faster’, ‘better’, ‘longer lasting’, and ‘sturdier’ are
----------------------

meaningless unless supported by credible and compelling evidence. Points of Notes
differentiation supported by a Sustainable Competitive advantage are the most
credible points of differentiation. ----------------------
The Himalaya brand renowned for its ayurvedic pharmaceutical and ----------------------
cosmetic formulations can make the claim of being most effective products, as
the company has a very strong and reputed R&D facility. Extensive research ----------------------
and clinical trials provide the credibility to their products and have given the
----------------------
brand the reputation of being amongst the best ayurvedic formulations, in India
and now even internationally. ----------------------
Swedish furniture retailer Ikea took a luxury product – home furnishings
----------------------
and furniture-and made it a reasonably priced alternative for the large market
segment of middle class families. Ikea supports its low prices by having ----------------------
customers serve, deliver and assemble the products themselves.
----------------------
As companies increase the number of claimed benefits for their brands,
they risk disbelief and a loss of a clear positioning. According to Kotler, in ----------------------
general a company must avoid four major positioning errors:
----------------------
● Under positioning: Buyers have a very vague idea of what brand is or
does. ----------------------
● Over positioning: Buyers have too narrow an image of the brand. ----------------------
● Confused Positioning: Buyers have a confused image of the brand because
the company either has made too many claims or has frequently changed ----------------------
the positioning. ----------------------
● Doubtful positioning: Buyers find it hard to believe the claims made b
----------------------
the brand due to credibility issues.
----------------------
----------------------
1. What is the ABC of Positioning? ----------------------
i. A - The Target Audience, B - The Benefit, C - The Compelling
Reason ----------------------
ii. A - The Target Audience, B - The Brand, C - The Complex ----------------------

Reason
----------------------
iii. A - The Whole Audience, B - The Brand, C - The Company
----------------------
iv. A - The Whole Audience, B - The Brand, C - The Compelling
Reason ----------------------
----------------------
----------------------
----------------------
Positioning 213
Notes
Activity 1
----------------------
---------------------- 1. Milkfood launched flavoured Yogurt with huge media spend and fanfare
in the early 1990’s. Initially the product was a success, due to the huge
---------------------- “pull effect” and curiosity generated by the advertising; but failed to
generate repeat sales. Had the product been positioned differently it
----------------------
could have been successful. Find out why Milkfood yogurt failed:
---------------------- Could it be because the company failed to establish a correct frame of
reference? Or was it because it had no point of difference vis-à-vis other
---------------------- occupants of the category?
---------------------- 2. Find out more examples of:
a) Negatively co-related attributes in different categories.
----------------------
b) Brands that have ended up being “jack of all trades” and have
---------------------- consequently lost market share.
---------------------- c) Over promising and under delivering dilutes the position of
brands. Give some examples of brands that have suffered because
---------------------- of this.
---------------------- 3. Visit the website of Ikea; find out information about how the company
has created a unique marketing mix to support its position of affordable
----------------------
furniture.
----------------------
---------------------- 8.4 THE PROCESS OF DEVELOPING A POSITION

---------------------- The positioning process really begins at the stage of consumer research
for market segmentation. These research studies attempt to understand the
---------------------- consumers mind space. Consumer studies attempt to uncover unmet needs, or
needs not being satisfactorily met by competitors.
----------------------
Positioning is facilitated by a graphical technique called perceptual
---------------------- mapping, based on various survey and statistical techniques like multi
---------------------- dimensional scaling, factor analysis, and conjoint analysis (Unit 5 Market
Research).
---------------------- Perceptual mapping is a graphical technique used by marketers that
---------------------- attempts to visually display the positions of brands relative to competitors in
the mind space of customers or potential customers. Typically, the position of a
---------------------- product, product line, brand or company is displayed relative to their competition.
---------------------- Perceptual maps can have any number of dimensions but the most
common is two dimensions. The dimensions are the benefits that the target market
---------------------- considers as most important in a product category. Any more is a challenge to
draw and confusing to interpret.
----------------------
----------------------

Makes extra Notes
white
Detergent powders ----------------------
 Robin Liquid 
----------------------
Detergent bars
 ----------------------
----------------------
 Laundry soaps
Cleans ----------------------
dirt
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 8.1: An Example of a Perceptual Map
----------------------
Brands that are positioned close to each other are seen as similar on the
relevant dimensions by the consumer; they are close competitors and form a ----------------------
competitive grouping. A company considering the introduction of a new model
will look for an area on the map free from competitors. Some perceptual maps ----------------------
use different size circles to indicate the sales volume or market share of the ----------------------
various competing products.
Displaying consumers’ perceptions of related products is only half the ----------------------
story. Many perceptual maps also display consumers’‘ideal points’. These points ----------------------
reflect ideal combinations of the two dimensions (most important benefits) as
seen by a consumer. Perceptual maps depict where the brands lie with respect ----------------------
to the ideal point.
----------------------
Strategy decisions that follow from perceptual mapping are essentially
these: ----------------------
● Bring your brand closer to the ‘ideal point’, supported by credible ----------------------
evidence.
----------------------
● Deposition the competitor, by looking for a weakness in the competitor’s
position. This strategy is recommended only for a strong market challenger ----------------------
with a competitive advantage that can make a credible superior claim.
----------------------
● Change the ideal point. Many a times, customers are unable to articulate
benefits that are important to them and could be completely missing in a ----------------------
product class.
----------------------
----------------------
Positioning 215
Notes
Nycil vs. dermicool
---------------------- With a heritage of over 34 years, Nycil had become almost generic to the
prickly heat powder (PHP) category with a 65% market share and was easily
----------------------
one of the most recognised brands in India. Nycil’s position in the market was
---------------------- that of the most effective prickly heat fighter.
Nycil had driven growth in this category and the attractiveness of the category
----------------------
was evident from the number of brands trying to make their presence felt in it.
---------------------- Shower to Shower was a distant second at 17% market followe4d by a host of
other not very significant brands.
----------------------
The Nycil product was formulated on a three-pronged holistic approach to
---------------------- combat prickly heat: prevention, healing and soothing. Prevention was made
possible by the 51% pharma grade starch which absorbed the sweat and kept
---------------------- the skin dry and is possibly the best way to prevent prickly heat. Affected
---------------------- skin was healed by Chlorphenesin, which fights off the bacterial and fungal
infections and provides the healing touch. The soothing sensation comes
---------------------- from Zinc Oxide, which provides soothing protection to the skin. The claim
of being the most effective prickly heat powder was therefore very credible to
---------------------- the customer.
---------------------- In 1999, Paras Pharmaceuticals considered entering this category with its
Dermicool brand. Extensive consumer research done by the company showed
---------------------- that all prickly heat powders including the market leader focused on providing
---------------------- relief from sweat, skin burns, prickly heat and itchy rashes. Whilst the customer
wanted relief from the condition, what he really craved for was an immediate
---------------------- cooling sensation and relief from the burning.
---------------------- Dermicool went a step ahead and redefined the category. It offered what the
body really craves for, in such heat - icy cool breeze, a long lasting freshness,
---------------------- the feel of a slight drizzle. The TV commercials showed that every time
Dermicool is used, “one experiences comfort that is heavenly, as it provides
---------------------- immediate respite from the oppressive heat.” Dermicool had successfully
---------------------- changed the ‘ideal point’ and added a new dimension to the perceptual, which
soon became an important benefit sought from the category.
----------------------
Source : Hindu Business Line
---------------------- A company considering introducing a new product will look for areas with
a high density of ideal points. They will also look for areas without competitive
----------------------
rivals. This is best done by placing both the ideal points and the competing
---------------------- products on the same map.
---------------------- The positioning process can be summarised as follows:

1. Define the market in which the product or brand will compete (the target
---------------------- market).
---------------------- 2. Identify the attributes (also called dimensions) that define the product
‘space’, through consumer research.
----------------------

3. Collect information from a sample of customers about their perceptions Notes
of each product on the relevant attributes.
----------------------
4. Determine each product’s share of mind.
5. Determine each product’s current location in the product space by ----------------------
constructing the perceptual map.
----------------------
6. Determine the target market’s preferred combination of attributes.
----------------------
7. Examine the fit between the position of your product and the ideal point.
8. Strategy decisions on positioning ----------------------
----------------------
8.5 POSITIONING STRATEGIES
----------------------
As we have seen all along, a product’s positioning strategy has three
major components: ----------------------
● The target market ----------------------

● The benefit to be communicated ----------------------
● Point of differentiation vis-à-vis competitors
----------------------
Having defined the target markets, the marketer has to decide specifically
on the positioning or “benefit” strategy for the product. The most common ----------------------
bases for constructing a product positioning or benefit strategy are:
----------------------
1. Positioning on specific product features: The “coolest” refrigerator,
the most spacious refrigerator, the power saver compressor, “keeps food ----------------------
fresh for a longer period” are examples of specific features or benefits ----------------------
used for positioning refrigerators.
2. Positioning on specific benefits, needs or solutions: The strategy must ----------------------
focus on the emotional and self-image dimensions of the need as well. ----------------------
3. Claiming to be the “best in class” on a given benefit: As Porsche can
claim in the sports car category or when Mac Donald’s claims operational ----------------------
excellence in the fast foods industry. ----------------------
4. Claiming “pioneer” status or first to offer a benefit: Ries and Trout
----------------------
reasoned that in an “over advertised society”, the mind often knows
brands in the form of product ladders. Their argument goes like this: ----------------------
people remember the first mountaineers to scale Mount Everest; although
thousands of climbers have scaled the mountain later, nobody remembers ----------------------
who the second to scale Mt. Everest were. They believed that positioning
----------------------
success was because the company was the first in the product category,
and that it is best to be first and establish leadership. ----------------------
If a company is not going to be first, then it must find an unoccupied
----------------------
position in which it can be first. At a time when larger cars were popular,
Volkswagen introduced the Beetle with the slogan “Think Small”. ----------------------
Volkswagen was not the first to introduce small cars, but they were the
first to claim that position in the mind of the consumer. ----------------------
Positioning 217
Notes 5. Positioning on specific usage type: The hair oil market can broadly be
divided into two benefit categories, hair nourishment and hair grooming.
---------------------- For a long time, there were no specific products catering to the hair-
grooming segment, as customers continued to use the existing products.
----------------------
Consumer research showed that whilst customers believed that a hair oil
---------------------- was the most desired hair grooming product but they wanted a hair oil
which was non sticky and more appropriate for grooming. They were
----------------------
unhappy with the current products, which gave them the “oily look”.
---------------------- (Stickiness is considered an important benefit by the customer desiring
nourishment). Keo Karpin detected an opportunity and launched a hair
---------------------- product for this specific usage type. Today hair-grooming oils are a large
category with several segments.
----------------------
6. Positioning on specific usage occasions: Allen Solly positioned its
---------------------- brand to the target market of young corporate executives in the metros,
as a “Friday Dressing” brand. Friday symbolises the day when executives
----------------------
are more relaxed at the end of a week and like to “dress down” in smart
---------------------- casuals. At the time of product launch, smart casuals were a new category,
which Allen Solly saw an opportunity to create.
----------------------
7. Positioning against another competitor by claiming superior
---------------------- performance: Avis acknowledged its second position to Hertz in the
rental car business market and famously claimed: “because we are second,
---------------------- we try harder.”
---------------------- 8. Positioning through product class dissociation – the UnCola strategy:
7Up used this strategy very effectively. They found a market segment of
---------------------- consumers wanting non-cola beverages; however, most aerated beverages
---------------------- were seen as colas. 7Up communicated itself as “the UnCola”, creating
a distance from the colas and creating a new frame of reference in the
---------------------- consumers’ mind.
---------------------- 9. Positioning by cultural symbols: Certain product categories are

associated with countries or cultures. For instance, German engineering,
---------------------- Russian Vodka, French wine, perfumes, cheese and so on. Brands have
successfully used these cultural symbols authentically to claim better
---------------------- performance. Seagram’s 100 Pipers, a premium scotch whisky uses its
---------------------- Scottish heritage to position its product.
10. Positioning by price or “lowest Cost”: This strategy is feasible and a
---------------------- powerful positioning strategy only for those companies which either are
---------------------- cost leaders in an industry or have an absolute cost advantage over their
competitors. Southwest Airlines has used this positioning strategy over
---------------------- the years, due to their absolute cost advantage in the airline industry.
None of the other airlines have able to match Southwest fares, profitably;
---------------------- southwest has the unique distinction of being the only low cost carrier
---------------------- with a consistent track record of profitability for nearly three decades.
----------------------

Positioning Tools Notes
Brands must have a consistent positioning, through every point of contact
----------------------
with their customer. Five months after arriving at Hewlett – Packard in July
1999, company president Carly Fiorina, showed 200 top managers a video ----------------------
of customers talking about how incoherent HP had become. Salesmen from a
dozen business units sometimes called on a single customer account. From that ----------------------
moment on, she vowed that HP had to present “one face to the consumer”.
----------------------
A positioning program should address many more issues that go beyond
a good logo and a great campaign with haunting music. It is the culmination ----------------------
of everything you do that plants an image of who you are in the minds of your
----------------------
customer and that sets you apart. Presenting a “single coherent face” or a clear
consistent positioning through all points of contact with the customer is critical ----------------------
to the concept of positioning.
----------------------
Ask yourself this question “How many times have you been convinced
and impressed by the claims made in an ad, only to go to the retail outlet and ----------------------
find a completely different picture”? Such contradictory experiences completely
render a brands position ineffective, and it is only a matter of time that a strong ----------------------
competitor will leverage this weakness.
----------------------
Marketers today recognise numerous “contact points” with customers,
which are “moments of truth” for the brand: Retail ambience and experience, ----------------------
interaction with sales people and dealers, merchandising at the outlet, availability ----------------------
at the outlet, packaging, press coverage, web sites, after sales service, call centre
complaint redressal systems are just some of these contact points. ----------------------
The concept of Integrated Marketing Communications employs all ----------------------
communication tools to present a consistent and clear image to the consumer.
Positioning Nokia ----------------------
When Nokia, a world market leader in cellular handsets, positions its brand ----------------------
in the crowded mobile phone marketplace, its message must clearly bring
----------------------
together the technology and human side of its offer in a powerful way. The
specific message that is conveyed to consumers in every advertisement and ----------------------
market communication the world over (though not necessarily in these words) is
“Only Nokia Human Technology enables you to get more out of life” ----------------------
In many cases, this is represented by the tag line, “We call this human ----------------------
technology”. This gives consumers a sense of trust and consideration by the
company, as though to say that Nokia understands what they want in life, and how ----------------------
it can help. And it knows that technology is really only an enabler so that you-the
----------------------
customer-can enjoy a better life. Nokia thus uses a combination of aspirational,
benefit-based, emotional features, and competition-driven positioning strategies. ----------------------
It owns the “human” dimension of mobile communications, leaving its
competitors wondering what to own (or how to position themselves), having ----------------------
taken the best position for itself.
----------------------
Source: brandingasia.com
----------------------
Positioning 219
Notes
----------------------

1. A product’s positioning strategy has three major components:
----------------------
i. The target market, the benefit to be communicated and the point
---------------------- of differentiation vis-à-vis competitors.
---------------------- ii. Define the market, Identify the attributes, & Collect information
from a sample of customers.
----------------------
iii. Determine each product’s share of mind, determine each
---------------------- product’s current location and determine the target market.
---------------------- iv. Identify the dimensions, collect information and determine

each product.
----------------------
---------------------- 1. Marketers today recognise numerous “contact points” with customers,
which are “moments of truth” for the brand. They are:
----------------------
i. Interaction with sales people and dealers
----------------------
ii. Merchandising at the outlet
---------------------- iii. After sales service
---------------------- iv. Advertisements
----------------------
---------------------- Activity 2
---------------------- 1. Moov, a brand from Paras Pharmaceuticals, successfully challenged the
---------------------- market leader Iodex and redefined the pain balm category. Find out how
Moov positioned itself against Iodex.
----------------------
2. From commercials in newspapers, magazines and television, identify
---------------------- one example of each of the above positioning strategies.
----------------------
8.6 REPOSITIONING
----------------------
The two case studies given below have one thing in common:
---------------------- competitive forces often dictate shifts in positioning strategy over time.
----------------------
----------------------
----------------------
----------------------

Repositioning Castrol Notes
A BRAND new positioning, a new logo and a 360-degree communication ----------------------
strategy : Lubricant major Castrol India is in for an image makeover.
----------------------
Talking about the new positioning, ‘Castrol - It’s more than just oil. It’s Liquid
Engineering’, Mr. Naveen Kshatriya, Managing Director, Castrol India, said ----------------------
that the focus now would be on the well being of the vehicle. “While most
lubricant brands talk about how a vehicle could change a person’s life, we are ----------------------
going to talk about how Castrol has been formulated with specialist molecules
----------------------
that help increase the performance of an engine. We want to drive in the
message as to how its various ingredients address various issue of an engine.” ----------------------
“It is about how Castrol helps to keep the engine clean, ensures a safe drive,
----------------------
keeps compression up, and reduces sludge in the engine and so on. Hence,
the focus on liquid engineering,” he added. Mr. Kshatriya felt that the new ----------------------
positioning would contemporarise the brand and connect well not only with
its existing customers but also with the new generation. “India is the second ----------------------
largest motor cycle market with 50 million bike owners, and is the fastest
----------------------
growing car market. India sold one million cars in 2004.”
The brand re-launch has also been accompanied with the launch of new ----------------------
products such as Castrol Edge in the car segment, which is reportedly a high-
----------------------
end product meant for those passionate customers who want the best for their
cars. It has also launched products such as Active 4T and Castrol Power 1 in ----------------------
the motorcycle segment. Also on cards is the launch of a TV campaign, driving its
proposition of liquid engineering and a host of below-the-line activities. ----------------------
Source: Hindu Business Line ----------------------
Repositioning Louis Phillipe ----------------------
FROM being a formal menswear brand, Madura Garments’ Louis Philippe
is now positioning itself as a complete apparel brand for men, with offerings ----------------------
in the causal wear segment also. The company is shortly going to foray into ----------------------
denims and has already launched a range of casual clothing such as jackets,
knitted shirts and trousers and also printed shirts. ----------------------
Speaking to Business Line, Mr. Vineesh Chadha, Brand Head, Louis Philippe, ----------------------
said, “When we first launched in India, the casual wear market was non-
existent. But now, the lifestyle of consumers has changed, and they are willing ----------------------
to spend on causal clothing also. Moreover, with companies no longer strict
----------------------
about formal dressing the youngsters are looking for clothing, which is neither
too formal nor casual. We have changed our focus keeping in mind the tastes of ----------------------
the young consumer.”
----------------------
----------------------
----------------------
----------------------
Positioning 221
Notes The brand is planning to spend around seven per cent of its total turnover on
marketing and advertising activities. Mr. Chadha said that the company is
----------------------
shortly going to launch a print campaign, which would be followed by a TV
---------------------- commercial, showcasing Louis Philippe as a lifestyle brand. The company
is also increasing its retail presence across cities by launching more flagship
---------------------- stores. They have already launched seven stores and are planning to launch
more.
----------------------
“There was a time when consumers used to buy apparel from neighborhood
---------------------- multi-brand stores, after which they moved to plush large format retail stores
which had a number of brands on display. Retail has now moved to the third
----------------------
stage of evolution, where the consumer wants to see the entire range of a
---------------------- particular brand. Therefore, flagship stores form an integral part of the retail
strategy of most brands today.”
----------------------
Source: Hindu Business Line
---------------------- Brands have to update their POD’s over time vis-à-vis newer and stronger
---------------------- competitors. Product categories themselves are undergoing a change due to
“convergence” and brands have to continuously establish new points of
---------------------- parity with these categories as well as new points of differentiation. A
brand’s position has to be continuously fine-tuned, as consumers and categories
---------------------- evolve. Sometimes the direction and magnitude of the change may necessitate
---------------------- a more drastic action like re-positioning the brand. Repositioning could also be
necessitated due to an earlier faulty positioning strategy.
---------------------- Repositioning a brand involves either:
---------------------- ● Selecting a new target market
---------------------- ● Communicating a different benefit
● Communicating a new point of differentiation
----------------------
● Under certain circumstances, all three
----------------------
It is not often that brands need to be repositioned, but when they do,
---------------------- several elements of the marketing mix will necessarily undergo a change.
---------------------- YLR Moorthi has identified nine different circumstances for repositioning:
1. Increasing relevance to the consumer: Sometimes brands, which have been
----------------------
in the market for long, lose touch with their customers because consumer
---------------------- needs have evolved. Thus, a brand, which is otherwise fundamentally
strong, may not be in-sync with the customer’s current concerns.
----------------------
Visa card had to change its positioning to make itself relevant to customers
---------------------- under changed circumstances. In 1981, when the card was launched,
the concept of credit cards was very new to India, so Visa used the tag
---------------------- line “Pay the way the world does”. By the 1990’s when the concept of
credit cards had been established and several competitors had entered the
----------------------
market, Visa positioned itself as the “the world’s most preferred card”,
---------------------- with the largest number of establishments accepting the card. By 1998,

card acceptances became universal for almost all cards and Visa had to Notes
augment their product with newer services. Its positioning since 1998
has been Visa Power. In the present circumstances, credit cards are under ----------------------
threat as “virtual cards” and online shopping gains ground. Visa now has
to compete not only with other cards but also with a host of other “virtual ----------------------
payment mechanisms”.
----------------------
2. Increasing occasions for use: Sometimes the market segment chosen
becomes too narrow or unviable, hence positioning becomes too narrow. ----------------------
Such a small customer franchise makes the marketing program unviable.
----------------------
One of the methods is to increase usage rate, which can be done by
increasing the number of usage occasions. Monaco biscuits were initially ----------------------
positioned as perfect salted biscuits. To increase usage the brand was
pitched as “excellent plain, terrific with toppings”. An earlier plain salted ----------------------
biscuits was turned into an anytime snack, consumed with toppings,
increasing occasions of usage. ----------------------
3. Search for a more viable position: ‘Complan’ has at various times ----------------------
positioned itself as the “food for the convalescing”, “against Horlicks, “for
the family”, “for the child who is a fussy eater, “for the “busy executive ----------------------
lacking nourishment” and so on. These several repositionings were ----------------------
necessitated as the brand searched for more viable positions. Complan is
currently positioned as the “complete food for growing children”. ----------------------
4. Making the brand “serious”: Saffola was initially positioned as the “edible ----------------------
oil good for the heart”. To create a greater impact, the brand adopted the
positioning” The heart is not safe without Saffola” and currently as “the ----------------------
heart of a healthy family”. This has put the brand in a different league as
it has now become synonymous with “health consciousness” ----------------------
5. Falling Sales: The Ambassador was positioned for years positioned ----------------------
as the ‘rugged road master” an ideal car for Indian roads and Indian
families. But as sleeker, fuel-efficient cars made an entry into the market, ----------------------
Ambassador’s ruggedness lost its relevance. Falling sales have forced
----------------------
several repositionings in the consumer market, but without much success.
6. Bringing in new customers: Ray Ban became very popular because of its ----------------------
aviator sunglasses, initially launched for men and popularised by Tom
----------------------
Cruise in the movie Top Gun. However as ‘aviators’ became very popular
even with women, Ray Ban went on to launch a range of sunglasses for ----------------------
women.
7. Making the brand contemporary: for decades, Honey has been used in ----------------------
India as a base for herbal medicines and the nourishing and medicinal ----------------------
properties of the product are well known. Over time this actually became
a handicap as customers associated honey as “medicinal and something ----------------------
my grandmother recommends”. To give the product a more contemporary
look, Dabur launched its Honey as” a nourishing food to be consumed ----------------------
with parathas, toast or as an additive to milk”.
----------------------
8. Differentiate from a newer set of competitors: Companies from completely
different categories are now competing with each other. Google not only ----------------------
Positioning 223
Notes competes with Yahoo, but now Microsoft and Amazon as well. Nokia
must now contend with Apple launching its iPod phone, as much as it does
---------------------- with Samsung or Sony. Repositioning in such a case means establishing a
newer point of differentiation, with different target markets.
----------------------
9. Changed market conditions: As the product moves through its lifecycle,
---------------------- the brand may require to be repositioned especially at the maturity stage of
the lifecycle. Repositioning due to changed market conditions at different
----------------------
stages of the product life cycle will be examined in detail in the next unit.
---------------------- One must remember that brands cannot frequently consider repositioning
as an answer to all their problems. Frequent repositioning causes confusion as
----------------------
customers are unable to develop a clear mental picture of the brand. Repositioning
---------------------- involves modification of several elements of the marketing mix, and it used only
when market conditions and competitive dynamics have unalterably changed.
----------------------

---------------------- 1. Repositioning a brand involves:
i. Selecting a new target market
----------------------
ii. communicating a different benefit
----------------------
iii. Communicating a new point of differentiation
----------------------
iv. None of the above
----------------------
---------------------- Activity 4
----------------------
For some of the examples given above, find out the marketing mix changes
---------------------- that the company had to make due to the repositioning of the brand. From
the internet, review how the marketing communications has changed for
---------------------- the different brands over the years.
----------------------
---------------------- Summary
---------------------- ● Brand positioning is at the heart of marketing strategy. A position is a

place that a product, brand or company occupies in the consumers’ mind
---------------------- relative to competing offerings.
---------------------- ● Kotler defines brand positioning as “the act of designing the company’s
offer and image so that it occupies a distinct and valued place in the target
---------------------- customer’s minds”.
---------------------- ● Positioning is important to customers as it simplifies their decision-
making; and to companies as brands with a clear distinct position are
---------------------- rewarded with market share, mind share and heart share.

● Positioning concepts can be summarised as four distinct questions that a Notes
brand must provide answers to, to its target customers:
----------------------
a. Who am I?
b. What am I? ----------------------
c. For whom am I? ----------------------
d. Why me? ----------------------
● The positioning process begins with understanding the consumers mind
space. ----------------------
● Brands must have a consistent positioning, through every point of contact ----------------------
with their customer.
----------------------
● The concept of Integrated Marketing Communications employs all
communication tools to present a consistent and clear image to the ----------------------
consumer.
----------------------
● Brands have to update their POD’s over time vis-à-vis newer and stronger
competitors. Sometimes the direction and magnitude of the change may ----------------------
necessitate a more drastic action like Re-positioning the brand.
----------------------
Keywords ----------------------
● Compel: To force or drive, especially to a course of action ----------------------
● Reposition: Place in a different position; adjust or alter the position of; ----------------------
change the image of (a company, product, etc.) to target a new or wider
market. ----------------------
----------------------
----------------------
1. Explain the statement: “Positioning is what you do to the mind of ----------------------
the prospect and not the product.” Why is positioning important to the
customer and company? ----------------------
2. Customers define categories very differently from marketers. What is the ----------------------
difference? Why is this difference important for positioning?
3. Explain what is meant by “Brands that try to be everything to their ----------------------
customers end up being nothing”. Can you cite some examples of such ----------------------
brands, giving reasons for their failure?
----------------------
4. What is meant by point of differentiation? With respect to whom do
brands have to establish a point of differentiation? ----------------------
5. What is meant by re-positioning? Under what conditions is repositioning
----------------------
necessitated? Give one example of a repositioning of a brand. Explain the
changes that had to be made in the marketing mix due to the repositioning. ----------------------
6. Brands should not continuously shift their positions. Do you agree with
----------------------
this statement? Why or why not?
Positioning 225

1. It is the art of placing the entire marketing mix in the mind of the customer
---------------------- and creating the relevant associations, emotions, attitudes and beliefs, so
---------------------- as to stand apart from competitive offerings.
iii. Positioning
----------------------
----------------------
---------------------- 1. What is the ABC of positioning?
---------------------- i. A – The Target Audience, B – The Benefit, C – The Compelling
Reason
----------------------
----------------------
---------------------- 1. A product’s positioning strategy has three major components:
---------------------- i. The target market, the benefit to be communicated and the point of
differentiation vis-à-vis competitors.
----------------------
---------------------- 1. Marketers today recognise numerous “contact points” with customers,
---------------------- which are “moments of truth” for the brand. They are:
i. Interaction with sales people and dealers
----------------------
ii. Merchandising at the outlet
----------------------
iii. After sales service
---------------------- 1. Repositioning a brand involves:

i. Selecting a new target market
---------------------- ii. Communicating a different benefit
---------------------- iii. Communicating a new point of differentiation
----------------------
Suggested Reading
----------------------
College Publishing.
----------------------
Product Concepts
UNIT
9
Structure:
9.1 Introduction
9.2 Product Differentiation
9.2.1 Differentiation Tools
9.3 Product Classifications
9.3.1 Product Mix and Product Lines
9.4 Brand Decisions
9.4.1 Brand
9.4.2 Brand Equity
9.4.3 Branding Decisions
9.5 Product Innovation
9.5.1 Organising for New Product Development
9.5.2 The Consumer Adoption Process
9.6 The Product Life Cycle (PLC) Concept
9.6.1 PLC Stages and Strategies in Different Phases
Summary
Keywords
Suggested Reading
Product Concepts 227

Notes
Objectives
----------------------
----------------------
● Discuss the different ways in which companies differentiate their
---------------------- products
---------------------- ● Evaluate the impact of product classifications on the marketing mix
● Describe the basic concepts of product line management
----------------------
● Analyse the importance of product innovations and different types of
---------------------- innovation
---------------------- ● Identify the consumers’ adoption process of new products
---------------------- ● Evaluate the product life cycle concept and marketing strategies
appropriate at different stages of the life cycle
----------------------
----------------------
9.1 INTRODUCTION
----------------------
We have learnt so far that marketing strategy is built on the concept of
---------------------- segmentation – targeting – positioning. A company discovers different needs
---------------------- in the marketplace, targets those needs that it can satisfy in a superior way and
then positions its offering so that the target market recognises the company’s
---------------------- distinctive offering as most appropriate to satisfy its needs.
---------------------- Once a company has carefully segmented the market, chosen its target
customers, identified their needs and determined its market positioning, the
---------------------- company is in a better position to develop a product. Marketers play a key role
in planning and developing new products and working with R&D departments
---------------------- at every stage of development.
---------------------- Every company must develop new products, as new products shape the
future of the company. Continuous improvements and replacements of products
----------------------
must be done to ensure future revenue streams. Boston Consulting Group
---------------------- recently surveyed 940 senior managers in the US; increasing top-line revenues
through innovations was rated as the key managerial challenge.
----------------------
---------------------- 9.2 PRODUCT DIFFERENTIATION
---------------------- “Positioning of a product means designing the company’s offer and image
so that it occupies a distinct and valued place in the target customer’s minds
---------------------- such that it stands apart from competing offerings.”
---------------------- Product differentiation is the strategy of creating those differences that
make a product stand apart from competitive offerings, to give it a distinct and
---------------------- valued place in the customers’ mind. The most profitable strategies are built on
differentiation; offering customers something, they value that competitors don’t
----------------------

have. If the concepts of positioning and product differentiation appear to be the Notes
same, it is so because they are in fact two sides of the same coin.
----------------------
Kotler defines product differentiation as “the process of adding a set of
meaningful and valued differences to distinguish the company’s offerings from ----------------------
the competitors offering”.
----------------------
Differentiation is meaningful if it satisfies the following criteria:
● Valued: Must deliver a highly valued benefit to a sufficient number of ----------------------
buyers.
----------------------
● Distinctive: Something not currently offered by competitors.
----------------------
● Profitable: It must be viable and profitable for the company.
● Sustainable: Not easily imitable by competitors. ----------------------
● Companies can create differentiation in three ways: ----------------------

● Provide the same solution/benefits, in better ways. ----------------------
● Provide the same solution in a better way and at a better price. ----------------------
● Provide a unique solution that nobody else provides. Michael Porter states
that there are two “kinds” of companies: ----------------------
1. Those that achieve operational effectiveness, which means they perform ----------------------
similar tasks but perform them better than their competitors.
----------------------
2. Those that aim at strategic positioning, which means they perform similar
tasks differently or do very different things from their rivals. ----------------------
He states that companies that aim for operational effectiveness alone are ----------------------
seldom able to achieve sustainable product differentiation. It is only companies
that aim to achieve a strategic position in the industry that can create sustainable ----------------------
product differentiation.
----------------------
Sustainable product differentiation is created when a company develops
distinctive capabilities, a competitive advantage or a core competency and then ----------------------
aims for a strategic position in the industry.
----------------------
An important distinction needs to be made between product differentiation and
products being different from rival products. A company’s products can be different ----------------------
from their rivals either by way of features, packaging, aggressive advertising or in ----------------------
any other way; however, if that difference provides no value to the customer it is a
completely meaningless difference and cannot be termed as product differentiation. ----------------------
The customer will not be willing to pay more for such differences.
----------------------
Product differentiation is when, the unique products or unique ways
of providing products to customers, are valued by the customer enough for ----------------------
him to be willing to pay a premium for the differentiation. Remember product
differentiation must create value for the customer and the company, only then ----------------------
can it be termed as product differentiation. ----------------------
----------------------

Notes The number of differentiation opportunities varies with type of industry.
The Boston Consulting Group has distinguished four types of industries
----------------------
based on the number of available competitive advantages and their size.
---------------------- 1. Volume industry: One in which companies can gain only a few but rather
large competitive advantages. For instance, in the construction equipment
----------------------
industry, a company can strive for the low cost position or the highly
---------------------- differentiated position and make gains on either basis. Profitability
becomes co-related with company size and market share.
----------------------
2. Stalemated industry: An industry in which, there are few opportunities to
---------------------- achieve competitive advantages and each is small. In the steel or cement
industry, opportunities to differentiate are fewer.
----------------------
3. Fragmented industry: One in which companies face many opportunities
---------------------- for differentiation, but each opportunity for competitive advantage is
small.
----------------------
4. Specialised industry: One in which companies can face many
---------------------- differentiation opportunities and each can have a very high payoff.
---------------------- Yet even in stalemated and “commodity-type” industries, some
differentiation is possible. We will now examine the different dimensions along
---------------------- which a company can differentiate its offering.
---------------------- 9.2.1 Differentiation Tools
Companies can differentiate their market offerings along the five
----------------------
dimensions of product, services, personnel, channel and image.
---------------------- A. Product
---------------------- Physical products vary in their potential for differentiation; some product
categories offer numerous opportunities to differentiate the physical
---------------------- product such as in:
---------------------- 1. Product Forms: The size, shape or physical structure of the product,
which make the product more convenient to use or consume. For instance,
---------------------- tea has been differentiated in the form of a variety of flavours, tea bags,
---------------------- which facilitate convenient consumption, iced tea and instant tea through
vending machines. Even a commodity like milk is available in low-fat,
---------------------- skimmed, fortified with vitamins and flavoured versions.
---------------------- Intel
Global chip major Intel has launched a new “ruggedised personal
----------------------
computer for rural India”. The rugged computers are designed to withstand
---------------------- adverse weather conditions including heat, dust and humidity and can run
on alternate power sources, including car batteries. The chassis is designed to
---------------------- keep the motherboard cool at temperatures as high as 45 degree Celsius, and
resistant to humidity levels of 70-85 RH (relative humidity). The total power
----------------------
consumption of all the peripherals is less than 100 watts. The platform comes
---------------------- installed with a certificate-based access, allowing banks to verify the validity

of installment payments against the purchase of the PC. The “Ruggedised” Notes
PCs would be manufactured by original equipment manufacturers (OEMs)
like HCL Infosystems and Wipro. ----------------------
Source: Hindu BusinessLine ----------------------

2. Product Features: Most products can be differentiated with features ----------------------
that enhance the product performance or enhance the overall product
experience. ----------------------
Samsung Home Appliances ----------------------
Samsung India Frost Free line of refrigerators offer features like ‘Cool
----------------------
Pack’ which maintains the freezer temperature even in case of power failure,
framed toughened glass shelves that can even bear 150 kgs load, High ----------------------
Versatility Compressor that can operate at voltages as low as 135V and as
high as 290V, eliminating the need for stabiliser, Twin Bio Vegetable Box ----------------------
having separate compartments for storing fruits and vegetables and Special
----------------------
Base Vegetable Box to collect excess water/moisture droplets.
Samsung Microwave ovens have Bio Ceramic Enamel coating inside the ----------------------
Microwave oven which produces less oxidation, helps retain essential vitamins ----------------------
and leads to faster cooking of food and the innovative Steam Cleaning feature,
which coupled with the ceramic enamel coating, ensures that the bacteria and ----------------------
food particles can be wiped away easily, leaving the oven hygienically clean.
----------------------
Source: Samsung
3. Performance Quality: It is the level at which the products’ primary ----------------------
characteristics operate. Performance quality does not necessarily imply ----------------------
highest quality; companies must design a performance level appropriate
to the target market and competitors’ performance levels, as is stated in ----------------------
the Intel and Samsung examples above. Companies must also manage
performance quality through time by maintaining product quality and at ----------------------
the same time improving performance quality. ----------------------
4. Conformance Quality: It is the degree to which all the units of a particular
----------------------
product are identical, have a consistent quality and meet the promised
specifications. This is true for all categories, but even more so for frequently ----------------------
bought products. Imagine buying a particular brand and flavour of fruit
juice, only to experience a different taste and consistency each time. ----------------------
Differentiation in the Mineral water Category ----------------------
The mineral water category sees different players using different ----------------------
attributes to differentiate their products. Brands like Bailey, Yes, and Hello are
trying to ride the mineral water wave. Evian, launched by French transnational ----------------------
Danone sells itself as ‘’water from the French Alps’ competing with premium
soft drinks. The fact however remains that almost all players in this category ----------------------
are positioning themselves on the purity and hygiene platforms since the very ----------------------
raison d’être of bottled drinking water is the bad quality of tap water in the
country. ----------------------

Notes Bisleri positions its product on the purity and hygiene platform, with
its breakaway seal as an assurance of purity. Market research conducted by
---------------------- Bisleri revealed that 76 % of mineral water consumption happens in transit,
when the overriding concern for this set of buyers is the tampering of the seal
----------------------
and the reuse of bottles. Many have witnessed used bottles being refilled at
---------------------- railway stations. So when a consumer buys mineral water, he would like to be
assured that the water has not been tampered with.
----------------------
Source: Hindu Business Line
---------------------- 5. Durability: It is a measure of the products’ expected operating life under
---------------------- natural or stressful conditions and is a valued attribute for certain products.
Nokia has developed a special line of rugged phones for “Rural India”
---------------------- which has dust resistant covers and anti-slip grip for humid conditions.
---------------------- 6. Reliability: It has different connotations for different people. It could mean
that a given product will perform consistently and will not malfunction or
----------------------
fail. Reliability is also an image of consistent performance quality or of a
---------------------- product living up to the performance commitments made by the company.
7. Reparability/Serviceability: Despite claims that companies would make
----------------------
about performance quality, durability or reliability, consumers prefer
---------------------- products that are repairable if they malfunction or fail. Easy reparability
and access to service centres are key aspects on which companies can
---------------------- differentiate their product offerings.
---------------------- 8. Style/Design/Aesthetics: It is not surprising that styling, aesthetics and
design are key product differentiation elements. We have learnt in the
---------------------- previous units that almost every human need has a social dimension to it;
people use products to convey their self-concept, personality and image to
----------------------
the world around them, irrespective of age, gender or social strata. Design
---------------------- and styling do not contribute only to the pleasant looks of a product, but
also to a product’s performance and efficiency.
----------------------
When people talked about innovation in the ’90s, they invariably meant
---------------------- technology; when people speak about innovation today, it is more than likely
they mean design. Consumers look at design as the new differentiator; in a sea
---------------------- of look-alike products and services, design creates the “Wow!” factor. Product
---------------------- design has evolved from a simple way of giving form and colour to products
into a powerful product differentiation tool. Design methods get managers close
---------------------- to their customers, design research helps top executives visualise the future and
design strategies help companies innovate.
----------------------
Winners of the best designed products of 2005 :
---------------------- Product Design : The Shift Bicycle
---------------------- Credit : Matt Grossman, IDSA; Ryan Lightbody, Purdue University
---------------------- The SHIFT bicycle helps children learn how to ride a bike by gradually
teaching them how to balance on their own. With this concept, designers
---------------------- wanted to evolve beyond traditional training wheels, which only serve to

prevent a bike from tipping. SHIFT provides more balance at lower speeds Notes
when stability is most critical (starting and stopping). As the child builds
forward momentum, the bike’s dual rear wheels shift inward, thus causing the ----------------------
balance to gradually shift from the bicycle to the child. Designers also wanted
----------------------
the bike’s appearance to help build self-confidence. The look evokes nothing
of the generally perceived childish training wheels. ----------------------
The Jeep hurricane
----------------------
Credit : Chrysler Group
----------------------
The purpose of the Hurricane project was to design the most
maneuverable, most capable, and most powerful 4x4 ever. The exploration ----------------------
resulted in a twin- engine fully-functional concept vehicle with the ability to
turn on its own axis. Adding to the vehicle’s maneuverability is its ability to ----------------------
crab steer (all four wheels can turn up to 45 degrees in the same direction, ----------------------
allowing the vehicle to literally move sideways). Hurricane’s raw and honest
appearance helps communicate the vehicle’s extreme capability. An exposed ----------------------
carbon frame, brushed and polished aluminum components and HEMI
orange engine blocks and interior accents are true to the materials used. ----------------------
Designers succeeded in creating a vehicle that has generated enthusiasm and ----------------------
buzz for the Jeep brand—as seen in the positive media coverage and many
awards and accolades. ----------------------
Source : IDSA ----------------------
B. Services
----------------------
Some product categories offer very limited opportunities for differentiation
in the product elements, for example, share broking services. Providing value- ----------------------
added services are an excellent opportunity for differentiation. The main
----------------------
service differentiators are ordering ease, delivery, installation, customer training,
customer consulting and maintenance and repair. But in competitive categories ----------------------
many of these differentiators have become the minimum expectations, and
companies are looking at newer value-added services with a focus on “end-to- ----------------------
end solutions” to differentiate their product offerings.
----------------------
Sharekhan, an online trading portal, offers its customers complete trading
solutions through its trading accounts, customer education, technical analysis, ----------------------
portfolio management and even a knowledge centre for beginners and advanced ----------------------
investing.
IBM global Services – The turnaround of IBM by selling solutions. ----------------------
After leading the market for many years, IBM an undisputed technology ----------------------
giant, and classic sales and product driven company could no longer command
price premiums as its competitors narrowed the gap in perceived quality. ----------------------
Between 1991 and 1993, IBM recorded losses of $16 billion. In 1993, ----------------------
when Lou Gerstner became chairman and CEO of IBM, recognised IBM
main problem was that “We understood computers, but we didn’t understand ----------------------
what they did for our customers”. Gerstner realised that customers lacked the
----------------------

Notes expertise and the resources to integrate their hardware and software. They
wanted solutions to their problems, but were hampered by the shortage of IT
---------------------- professionals and the rapid rate of technological change. He felt IBM’s future
---------------------- lay in delivering vertically integrated products and services to the customer,
and he changed IBM’s focus from selling hardware products to bundling
---------------------- hardware with software and service into a total technology solution.
---------------------- IGS (IBM Global Services) was formed to deliver customer solutions by
connecting and improving information flow among different businesses. IGS
---------------------- uses the vast pool of engineering and mathematical talent available in house
to deliver solutions to its customers. For the US Postal Services, IGS helped
---------------------- develop a new mail processing and distribution system for its 400 plus facilities
---------------------- nationwide, using advanced algorithms to select the right transportation – air,
rail or trucks for each shipment. IGS has rebuilt the electronic trading system
---------------------- for the New York Stock Exchange, and has even developed new handheld
devices for floor brokers that allow them to make and track trades.
----------------------
For Dun & Bradstreet, IGS has put together credit information on 63
---------------------- million companies and also handles customer support, telemarketing, and
electronic credit report distribution. IGS has a ten year alliance with Boeing
----------------------
to create technologies for “network-centric” warfare, where all branches of
---------------------- the US military and intelligence services are linked via a network that allows
them to share information and make crucial decisions “on the fly”. IGS
---------------------- is today working leading Fortune 500 companies, like Proctor & Gamble,
Nestle, Mayo Clinic, Virgin Group among others.
----------------------
In 2002 IGS reported revenues of 36.4 billion $ (IBM’s total revenue
---------------------- was 81.3 bn $); in 2005, IGS expects revenues of 50 billion $, with healthy
operating margins of 20%. By redefining the business in terms of delivering
----------------------
solutions, IBM has been freed from the commoditised hardware business
---------------------- which was growing at just 6%.
---------------------- Source: Business Week, April 2005 and “Marketing as Strategy” by Nirmalaya
Kumar.
---------------------- C. Personnel
---------------------- Companies can gain a strong competitive advantage through having better
trained service employees. Companies like Singapore Airlines, Disney,
---------------------- IBM and GE have become market leaders in their industries because of
---------------------- service excellence made possible only because of their service personnel.
Service personnel must be carefully recruited and trained to exhibit the
----------------------
following characteristics:
---------------------- Competence – Required skill and knowledge to perform the job. Courtesy
– Friendly, respectful and considerate.
----------------------
Credibility – Trustworthiness.
----------------------
----------------------

Reliability – Perform the service consistently and accurately. Notes
Responsiveness – Empathetic to customer issues and responsive.
----------------------
Singapore Airlines
Singapore Airlines decided on a fully branded product/service ----------------------
differentiation strategy from the beginning. Innovation, best technology,
----------------------
genuine quality and excellent customer service have become the major drivers
of the brand. ----------------------
It has pioneered many in-flight experiential and entertainment
----------------------
innovations, and strived to be best in class. SIA was the first to introduce hot
meals, free alcoholic and non-alcoholic beverages, hot towels with a unique ----------------------
and patented scent, personal entertainment systems, and video-on-demand
in all cabins. The company keeps driving innovation as an important part of ----------------------
the brand, and the cabin ambience and combined experience are key factors
----------------------
of its success.
On the technology side, Singapore Airlines still maintains the youngest ----------------------
fleet of aircraft among all major air carriers, and keeps to the stringent policy
----------------------
of replacing older aircrafts for newer, better models. It has always been first
in line to take delivery of new aircraft types like Boeing 747 jumbo jets, Boeing ----------------------
777, and it will become the first airline to fly the Airbus super jumbo A-380 in
2006. Even the aircrafts are sub-branded like 747-Megatop and ----------------------
777-Jubilee to further distinguish SIA and its brand from competitors. ----------------------
Singapore Airlines also flew Concorde between Singapore and London in
the late seventies in collaboration with British Airways (BA). The strategy ----------------------
behind the technology program was enhances cost efficiency to use the latest
aircrafts and at the same time, uses these events for marketing purposes. ----------------------
Singapore Airlines recognises that each innovation has a relatively short ----------------------
life span. Once other airlines adopt it, it is no longer considered “innovative.”
Therefore, SIA continues to invest heavily in R&D, innovation and technology ----------------------
as an integrated part of the business strategy to further differentiate itself. ----------------------
The Singapore Girl
----------------------
The personalisation of the Singapore Airlines brand can be found in
the cabin crew (male and female), where especially the flight stewardesses, ----------------------
commonly referred to as Singapore Girls have become very well known. SIA
----------------------
engaged French haute-couture designer Pierre Balmain at the inauguration of
the airline in 1972. He designed a special version of the Malay sarong kebaya ----------------------
as the uniform, which later became one of the most recognised signatures of
the airline—a designated and visual part of the entire brand experience. ----------------------
The Singapore Girl strategy turned out to be a very powerful idea ----------------------
and has become a successful brand icon with an almost mythical status and
aura around her. She encapsulates Asian values and hospitality, and could be ----------------------
described as caring, warm, gentle, elegant and serene. The icon has become
----------------------
so strong that Madame Tussaud’s Museum in London started to display the
Singapore Girl in 1994 as the first commercial figure ever. ----------------------

Notes Singapore Airlines also runs one of the most comprehensive and
rigorous training programs for cabin and flight crew in the industry to make
---------------------- sure the SIA brand experience is fully and consistently delivered.
---------------------- Source: Brandchannel.com
---------------------- D. Channel
Companies can achieve competitive advantage through the way they
----------------------
design their distribution channels, coverage, services offered at retail end and
---------------------- expertise in channel management. The Nokia case below illustrates how a
company can achieve differentiation through its channel coverage, expertise
---------------------- and management. Customers prefer the company’s product offering as it offers
them a superior buying experience, simplifying their product purchase.
----------------------
Nokia’s Distribution in India
----------------------
Nokia, the world’s largest handset manufacturer, has the largest
---------------------- and most comprehensive distribution network in the country making it the
undisputed market leader. Its distribution network modeled on the lines
---------------------- of FMCG distribution networks is the largest organised chain amongst
handset manufacturers in India. Nokia Priority Dealers present in more than
----------------------
255 cities and towns offer the consumer a superior buying experience. For
---------------------- its high end phones, the company has created two concept stores at Delhi
and Bangalore as a destination for the “evolved replacement customer”. The
---------------------- concept stores offer the customer a complete product experience, live usages
and application downloads.
----------------------
In smaller rural towns, The Company established a “Nokia Vans
---------------------- network” a special network of showrooms on wheels, operational across the
---------------------- country. These mobile showrooms showcase the full range of products and
give live demonstrations and product education to prospective customers and
---------------------- have been able to establish more than half a million contacts.
---------------------- Nokia initially also had a tie up with HCL Infosystems India’s
premier information enabling company. HCL infosystems is a one-stop-
---------------------- shop for products and services in the areas of computers, Laptops, servers,
storage, enterprise networking, copiers, digital projectors and communication
---------------------- devices. Through this tie up Nokia had access to a direct presence at over
---------------------- 300+ locations and a channel base of over 48,000 channel partners all
over India. This tie up is not functional now as Nokia is concentrating on
---------------------- strengthening and developing its own network.
---------------------- E. Image
Market segments respond differently to company and brand images.
----------------------
A company or brand image is the holistic way in which the customers perceive
---------------------- the company and its products. People retain information about products and
services in the form of associations, which put together forms a complete
---------------------- mental picture of the brand or brand image. Brand image is created not only
by the conscious efforts of the marketer, but by the customer’s experience at
----------------------

every point of contact with the brand, as well as through word of mouth. So, Notes
every marketer will try to create the desired brand image, and try to project a
consistent brand image through every contact point. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Differentiation is meaningful if it satisfies value, distinctive, profitable
and ______________ criteria. ----------------------
2. Sustainable product differentiation is created when a company ----------------------

develops distinctive capabilities, a _______ or a _________ and then
aims for a strategic position in the industry. ----------------------
----------------------
Activity 1 ----------------------
----------------------
1. Pick any one commodity category (cement, automobile fuels, steel).
Find out which companies have leading market shares. Visit their ----------------------
websites and collect information on their products. Make a list of the
different ways in which the companies are trying to differentiate their ----------------------
products. ----------------------
2. Visit the websites of Intel and Samsung. Study their products in detail.
Make a list of other ways in which these companies differentiate their ----------------------
products from their competitors. What are the different ways in which ----------------------
their competitors differentiate their products?
----------------------
3. For any brand of your choice, make a collage of its packaging,
symbols, slogans, logos, print commercials or any other visuals of the ----------------------
product. Do all visuals present a clear consistent image? What image
does the brand project? You can test the collage with your friends and ----------------------
family.
----------------------
9.3 PRODUCT CLASSIFICATIONS ----------------------
Product classifications are important conceptual tools, as each product ----------------------

class has an appropriate marketing mix strategy. ----------------------
Products can be classified into three broad groups:
----------------------
1. Durability and tangibility
----------------------
2. Consumer Goods
3. Industrial Goods ----------------------
----------------------
----------------------

Notes A. Durability and Tangibility
Products can be classified into three groups according to durability and
----------------------
tangibility:
---------------------- ● Non-durable goods are tangible goods but consumed in a single or
several uses; examples would be beer and toothpaste.
----------------------
● Durable goods are tangible goods and survive usage over a
---------------------- long period of time; examples would be all appliances, shoes and
watches.
----------------------
● Services are intangible, variable and perishable products.
----------------------
B. Consumer Goods Classification
---------------------- The vast arrays of consumer goods available are classified mainly on
---------------------- the basis of shopping habits or the way consumers buy these products. It is
important to understand this classification, as it dictates the marketing mix
---------------------- strategy. Marketers need to understand the following factors with respect to
each classification:
----------------------
● Buyer behaviour
----------------------
● Extent of post-purchase dissonance
---------------------- ● Role of technology
---------------------- ● Nature of competition
---------------------- ● Quality dimensions

● Extent of differentiation
----------------------
● Key challenges
----------------------
We will examine each classification with respect to the above factors
---------------------- and understand its impact on the marketing mix.
---------------------- 1. Convenience goods: These are those goods that consumers purchase
frequently, immediately and with minimum effort.
---------------------- Convenience goods can be further classified as staples or daily necessities
---------------------- such as groceries and toiletries; impulse goods, which are purchased
without planning or search effort such as candies, snacks and even
---------------------- beverages at times; and emergency goods such as those bought in a hurry
or a crises with no time for thinking or evaluation.
----------------------
• Buyer behaviour: Convenience products are essentially
---------------------- low involvement products, where consumers exhibit either
variety seeking behaviour or habitual behaviour depending on
---------------------- the differences between brands. For low involvement products,
---------------------- distribution coverage, distribution intensity, shelf space and point
of sale merchandising are key to sales. If products are not available
---------------------- or visible, consumers will switch brands, but will not postpone
product purchase. Point of sale merchandising is particularly critical
---------------------- for impulse products.

Marketing communications play a very important role in low Notes
involvement categories in keeping the brand on top of mind and
constantly reminding and persuading the consumer. ----------------------
• Extent of post-purchase dissonance: Since these are low involvement ----------------------
products, the amount of time spent in evaluating products post
purchase is minimal; the extent of post dissonance is minimal. ----------------------
• Role of technology: It is limited insofar as the products themselves ----------------------
are concerned. However, because the vast distribution networks,
logistics and supply chain management are critical to these ----------------------
categories, information technology has an important role to play in
----------------------
supply chain management.
• Nature of competition: Convenience product markets are very large ----------------------
heterogeneous markets; the competitive structure of such markets is
----------------------
usually monopolistic competition.
Market leadership is determined by the extent of product ----------------------
differentiation or cost advantages and distribution muscle, which ----------------------
is why the larger firms with clear competitive advantages become
dominant players. The smaller regional players occupy market ----------------------
segments unattractive to the larger players. These categories,
depending on the market growth rates are marked by intense rivalry ----------------------
amongst players ----------------------
• Quality dimensions: The dimensions relevant in these categories
are performance quality, conformance quality and aesthetics of the ----------------------
packaging. ----------------------
• xtent of differentiation: It is with respect to the product features
E
and performance, image and channel. ----------------------
• Key challenges: In today’s markets, the key challenges are the ----------------------
intense competition and lack of sustainability of differentiation, as
----------------------
products very easily get commoditised and consequently there is
low brand loyalty. Marketers need to focus on increasing market ----------------------
penetration, increasing usage of products and building brand loyalty
in such intensely competitive markets. ----------------------
2. Shopping goods ----------------------
They are those goods that consumers buy infrequently. These are ----------------------
usually preplanned purchases and consumers make some comparison
on features, styling, prices and quality. Clothing, footwear, cosmetics, ----------------------
personal accessories like watches and home appliances like televisions,
refrigerators and washing machines and automobiles (4-wheelers or ----------------------
2-wheelers) are examples of shopping goods. ----------------------
• Buyer behaviour: It is relatively higher involvement as perceived
risk is higher. Wide variety as well as purchase assistance and ----------------------
product merchandising at point of sale are critical to these categories. ----------------------

Notes Marketers look not so much for extensive distribution coverage as
much as strong brand presence in multi-brand specialty stores that
---------------------- offer the consumer variety. Brands that have sufficient variety within
their product lines can support even a few single brand outlets, such
---------------------- as the kind that Titan, Levis, Raymonds and Metro Shoes have.
---------------------- • Extent of post-purchase dissonance: It is very high especially as
many of these products are also “image products”. Marketers must
----------------------
address the reasons for post-purchase dissonance through marketing
---------------------- communications as well as customer contact points like service
centres.
----------------------
• Role of technology: The role of technology in the product itself is
---------------------- important to product performance and product features. Due to the
product variety, inventory management at the retail end and supply
---------------------- chain management are critical, so information technology is critical
to inventory management as well as for sales forecasting.
----------------------
• Nature of competition: Shopping goods markets are not such large,
---------------------- but still very heterogeneous markets, due to differences in tastes
and preferences. The competitive structure of these markets is
----------------------
monopolistic competition. Market leadership is determined by the
---------------------- extent of product differentiation and market coverage strategy. Firms
have an option of either differentiated full market coverage strategy
---------------------- or to become a dominant player in a niche segment. Consumers in
these markets are relatively brand loyal.
----------------------
• Quality dimensions: Quality dimensions of product performance,
---------------------- features, reliability and especially styling, design and aesthetics
---------------------- are all important in these categories. Serviceability is especially
important to automobiles and home appliances categories.
---------------------- • Extent of differentiation: Differentiation is possible as far as the
---------------------- product, channel and image are concerned; but image differentiation
is particularly important for these categories.
---------------------- • Key challenges: Although competitors are fewer in number,
---------------------- competitive intensity is still high depending on the market growth
rate. Product parity or commoditisation is very rapid especially in
---------------------- the home appliances market; marketers need to constantly address
the issue of how to generate ‘replacement demand’.
----------------------
3. Specialty goods
----------------------
They are very “high-end” lifestyle or luxury products or products related
---------------------- to a consumer’s hobby or area of interest for which the consumer is
willing to make special purchasing efforts. Examples include high-end
---------------------- cars or performance bikes, specialised music equipment or photographic
equipment.
----------------------
An important distinction needs to be made between specialty goods
---------------------- and shopping goods. An automobile can be both a shopping product

and specialty product; automobiles that offer the primary benefit of Notes
transportation are shopping goods, but automobiles which are performance
products like sports cars or luxury cars would be termed as specialty ----------------------
products. The difference is in the way consumers buy these products and
what they value more. ----------------------
Also remember that what may be a speciality product for one target ----------------------
market (customer) may be a shopping product for another.
----------------------
• Buyer behaviour: There is very high involvement as perceived risk
is very high. Buyers are affluent and well aware of the product and ----------------------
their comparisons. Product experience and buying experience are
----------------------
very important in these categories. Distribution is very exclusive
with a lot of emphasis on brand experience at the retail end. ----------------------
• Extent of post-purchase dissonance: It is very high in these image
----------------------
categories. Companies are very protective and careful about their
brand image. ----------------------
• Role of technology: It is very important in all aspects of the product
----------------------
performance and product features. Product and technological
innovations are very critical to these categories. Only companies ----------------------
that have strong technological competitive advantages can become
market leaders. ----------------------
• Nature of competition: These are very small markets with few ----------------------
competitors, each following a niche market strategy. Competitive
intensity is very low or moderate. ----------------------
• Quality dimensions: All aspects of the quality, be it performance, ----------------------
reliability, features, styling, design, aesthetics are important.
• Extent of differentiation: Differentiation is possible along all the ----------------------
dimensions but image differentiation is especially critical. ----------------------
• Key challenges: Technological and design innovation and
maintaining brand image are the critical factors in these categories. ----------------------
4. Unsought goods ----------------------
They are all those products that customers although aware of, usually ----------------------
postpone buying as they are not priority enough or because they cause
some discomfort. A medical checkup, a vaccination, medical insurance, ----------------------
home security and safety systems, helmets and car seat belts are some
examples. Marketing such products becomes especially challenging ----------------------
because although customers are “convinced” about the importance of ----------------------
these products, they “avoid” such purchases and may even pay a price to
“avoid” such purchases. ----------------------
Marketers try to increase the risk perception of avoiding such products ----------------------
through large scale awareness programs through mass media and
personal selling. Marketers also try to provide a comfortable and pleasant ----------------------
product buying and usage experience, such as making “helmets a fashion
----------------------
statement”.

Notes C. Industrial Goods Classification
Industrial goods are classified in terms of how they enter the production
----------------------
process and their relative value. The three broad classifications are raw
---------------------- materials and parts, capital items and supplies, consumables and services.
1. Raw materials can further be classified as natural products,
----------------------
which are either mined or grown and manufactured parts such as
---------------------- component materials or component parts. Most raw materials are
sold directly to industrial users. Service, quality and price are the
---------------------- important variables in these transactions.
---------------------- 2. Capital items are long-lasting goods, which facilitate the
manufacturing of finished product. Capital items can be further
---------------------- classified as installations such as factories and offices and
equipment, which is essentially plant and machinery for the
----------------------
manufacturing. Capital items are major purchases with long lead
---------------------- times and negotiation processes. Product customisation, personal
selling and installation and service are the key factors in these
---------------------- transactions.
---------------------- 3. Supplies, consumables and services are frequently bought products
required to facilitate the manufacturing and plant administration
---------------------- process. Supplies and consumables are like convenience goods
---------------------- purchased with a minimum effort and normally marketed through
intermediaries because of the geographical dispersion of customers.
---------------------- Price and service are key considerations in these transactions as
the items are standardised and brand preferences are not critical.
---------------------- Services would include maintenance services, legal, advertising,
---------------------- business advisory services. These are highly customised services.
Organisations today are outsourcing many of their in-house
---------------------- activities to concentrate on their core processes.
---------------------- 9.3.1 Product Mix and Product Lines

Most companies today offer an assortment of products and services to
---------------------- different market segments over wide geographies. A Product Mix, also known
---------------------- as a Product Portfolio, is the set of all products and services that a company
offers to its various markets.
----------------------
To effectively manage product portfolios or the product mix, companies
---------------------- structure their product mix into product lines. For some companies the number
of product areas that they are into may be so vast and diverse that the company
---------------------- may create mini business units called Strategic Business Units (SBUs). Each
business unit will have its own product mix or product portfolio which is
----------------------
organised into product lines.
---------------------- A product mix has a certain width, length and depth and consistency.
---------------------- ● Width of a product mix refers to the number of product lines that the
company carries within the product mix.
----------------------
● Length of a product mix refers to the number of products in the mix.
● Depth of a product mix refers to how many variants are offered for each Notes
product in the line. Variants are different pack sizes, flavours, formulations,
colour variants and so on. ----------------------
● Consistency refers to how closely related or the synergies between ----------------------
the various product lines in the end use, production requirements and
distribution requirements or in any other way. ----------------------
A product line consists of similar products or products within a certain ----------------------
category. For instance, The India Today Group, which is a highly diversified
media with presence in magazine publications, television, radio, music, art, ----------------------
education and printing, has organised itself into various product lines.
----------------------
One such product line, the Business Group, consists of all the business
publications that it publishes and distributes such as Business Today, Time and ----------------------
Fortune and so on. India Today, which is a news weekly is a separate line;
----------------------
within the line are the various language editions of the magazine, such as the
Hindi, Malyalam, Telegu, Tamil and international editions. ----------------------
A product line is a subset of a SBU and of a product mix or product ----------------------
portfolio. An SBU is a subset of a product mix or product portfolio
A product line has length, depth and consistency as well. ----------------------
● Length of a product line refers to the number of products in the line. ----------------------
● Depth of a product line refers to the variants of each product in the line. ----------------------
● Consistency of a product line refers to the synergies between the products
----------------------
in the line.
With respect to the product mix and product line, a company can: ----------------------
1. Add new lines – widen the mix: Why would a company want to widen the ----------------------
mix?
----------------------
For the India Today Group, which is aiming to be a media powerhouse, it
is important to have a presence in all the current media as well as newer ----------------------
upcoming media. Hence, over the years they have entered new areas,
thereby adding product lines or widening the product mix. ----------------------
2. Lengthen the product mix or lengthen the product line: This is one and the ----------------------
same thing, as each time you add a product to the mix you add a product
----------------------
to the line as well and vice versa. Adding length to a line is also referred
to as Line Filling. ----------------------
Why do companies add products to the line?
----------------------
A product line is set of product offerings within a certain category or a
set of very closely related products within the category. Each product ----------------------
offering caters to a different market segment. So, India Today’s TV Today
----------------------
Network product line has Aaj Tak, a Hindi news channel and Headlines
Today, which is an English news channel; each of these product offerings ----------------------
cater to a different market segment.
----------------------

Notes The length of a company’s product line is driven by its market coverage
strategy. Companies that aim for full market coverage with a differentiated
---------------------- approach will have full product lines, catering to all the viable market
segments. Conversely, companies that aim for limited market coverage or
---------------------- full market coverage with an undifferentiated approach will have sparse
---------------------- product lines.
3. Add depth to the product mix or product line: Again this is one and the
----------------------
same thing, as each time you add a variant to the product line, you add a
---------------------- variant to the product mix.
hy do companies add more variants or increase the depth of mix and
W
----------------------
line?
---------------------- s we have learnt earlier, a market segment is group of people with
A
homogeneous needs. However, even within market segments, absolute
----------------------
homogeneity is a myth, as no two people can have identical needs and
---------------------- wants; there are bound to be differences in tastes and preferences, even if
they are minor.
----------------------
I n very competitive markets, companies try to fulfill the needs and
---------------------- wants and even the minor differences in tastes and preferences of their
customers, to the extent it is feasible. Adding colour, flavour or pack size
---------------------- variants enables companies to “micro segment” their markets and aim for
---------------------- greater customer satisfaction. Adding depth to the product line gives the
customer a greater variety within the product line, thus discouraging brand
---------------------- switching especially in low involvement categories, where customers
continuously seek variety and novelty.
----------------------
ong and deep product lines give a company “shelf presence” at the retail
L
---------------------- end, which is again particularly important in low involvement categories.
---------------------- ariants are not limited to FMCG products alone; almost all categories
V
of products have variants. For instance, Maruti 800 has several colour
---------------------- variants as well as AC and non-AC versions.
---------------------- Product Portfolio and Product Line Management
dding length or depth to product lines is not simply a matter of
A
----------------------
execution or number crunching. If there are obvious advantages, there are
---------------------- downsides as well. Each time a company adds any “unit” to its product
mix or product line it adds a Stock-Keeping Unit (SKU), which needs to
---------------------- be accounted for, managed and marketed. Each of these activities adds
“costs”; hence, companies need to continuously review each SKU for
----------------------
its reason for existence, viability and sales off take. Market conditions
---------------------- are continuously changing; an SKU may no longer justify its existence,
although at some time it might have been very successful.
----------------------
Managing product lines involves several decisions and operational
---------------------- activities.
----------------------

Some of the important ones are: Notes
1. Composition of product lines. How many market segments to tap? Which
----------------------
market segments to target?
2. Allocation of marketing resources between product lines as well as ----------------------
within product lines; resources are essentially financial as well as human
----------------------
resources. A company’s products are competing with each other for
resources; this competition should not become self-defeating. Resources ----------------------
need to be allocated depending on the role of the product in the product
line as well as the marketing objectives for each product offering. ----------------------
3. Promotional decisions for each product offering. Which product offerings ----------------------
to be actively communicated depending on the marketing objectives of
each product offering. ----------------------
4. Positioning of each product offering. Companies need to ensure that there ----------------------
is no positioning overlap between products; otherwise, products end up
“cannibalising” each other. ----------------------
5. Product line appraisal is a regular audit of each SKU in the company’s ----------------------
portfolio. Appraisal is done to review the SKU’s performance vis-à-vis
the objectives. Is the SKU justified? Does it have an important role ----------------------
to play? Companies regularly appraise product lines to identify SKUs, ----------------------
which are not contributing to either profits or marketing objectives.
Profitability is not always the only reasons for review, as sometimes non- ----------------------
profitable items may be retained for tactical or competitive reasons. Some
decisions following product line appraisal are Line Pruning (where SKUs ----------------------
are deleted) or line filling (addition of new items to product lines). ----------------------
6. Product line modernisation and improvements needs to be carried out on
a regular basis. Companies introduce value added, advanced versions to ----------------------
migrate customers to higher valued items. ----------------------
7. Demand and sales forecasting of each SKU.
----------------------
8. Cost accounting, margin analysis and pricing of each SKU. Products
within lines and their variants will have different margins; companies ----------------------
need to take decisions on pricing of each SKU, keeping in mind the target
----------------------
segments, marketing objectives as well as margins.
9. A brand name decision for the different product offerings. The following ----------------------
section explains the branding decisions in more detail. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. __________ are those goods that consumers purchase frequently,
----------------------
immediately and with minimum effort.
---------------------- 2. _________ are long-lasting goods, which facilitate the manufacturing
of finished product.
----------------------
3. _______ of a product mix refers to how many variants are offered for
---------------------- each product in the line.
---------------------- 4. Product line appraisal is a regular audit of each _______ in the
company’s portfolio.
----------------------
----------------------
Activity 2
----------------------
---------------------- 1. Visit any grocery or convenience store. Make a list of at least 5 types
of staples, impulse and emergency goods. Make a special note of their
---------------------- product display and list your observations. How are product displays
different for the three categories? Why do you think it is so?
----------------------
2. Make a list of at least 3 other examples of unsought goods. What type
---------------------- of marketing tactics are companies using to convince customers to
purchase?
----------------------
3. Visit the website of any company of your choice. First map out the
---------------------- product portfolio of the company, indicating the product lines, details
of products in the product line, the variants and pack sizes offered.
----------------------
To complete this information, you may need to visit a retail store or
---------------------- company outlet as well. This chart will help you identify and explain
the company’s reasons for lengthening, widening and deepening of
---------------------- product lines. Find out the changes the company may have made over
the years. Why were those changes necessary?
----------------------
----------------------
9.4 BRAND DECISIONS
----------------------
Brand decisions are a major part of product strategy. Companies aim to
---------------------- create strong brands as they command price premiums. The most important
---------------------- skill of a marketer is the ability to create, maintain and enhance brands.
In a sense, therefore, marketing is all about branding and branding is all
---------------------- about marketing; the two are inextricably linked.
---------------------- 9.4.1 Brand
---------------------- The American Marketing Association (AMA) defines a brand as “a name,

term, sign, symbol, or design, or combination of them, intended to identify, the Notes
goods and services of one seller or group of sellers, and to differentiate them
from competition”. Thus, the brand identifies the seller and under the trademark ----------------------
laws, the seller is guaranteed exclusive rights to the use of the brand name and
logo in perpetuity. ----------------------
So, technically, when a marketer has created an identification consisting ----------------------

of the name, symbol, logo and slogan, he has created a brand. However, that is
----------------------
not what brands are really about; brands have several levels of meanings.
At the first level, a brand is a badge of origin, as it identifies the seller, as ----------------------
given in the definition above.
----------------------
Next, it is a set of attributes that must translate into valued benefits for its
target customers. A brand is a promise of performance that is unique, of value ----------------------
to the customer and sets it apart from its competitors.
----------------------
The next level is the brand essence, which represents the deeper
motivations and goals that the customer is trying to satisfy. These goals and ----------------------
motivations as we have learnt earlier are abstract or intangible. These goals are ----------------------
expressed through the emotional and expressive benefits that brands provide
their customer. ----------------------
Finally, the brand is set of beliefs and values of the company or seller, the ----------------------
culture in which the brand is rooted and its unique personality.
If you visualise the above, brands seem exactly like humans. Powerful, ----------------------
long- lasting brands are created when a marketer can tap into all the different ----------------------
levels and dimensions of the brand and not merely by naming a product. Strong
brands are those that create competitive advantage through product performance ----------------------
and non- product related means.
----------------------
Ultimately, a brand is something that resides in the minds of consumers.
----------------------
Brands versus Products
It is important to understand the real difference between a brand and a ----------------------
product. ----------------------
A product represents the physical or functional solution offered to a set
of target customer. This functional solution would consist of several levels we ----------------------
have learnt earlier: the core benefit, the generic level, expected product level, ----------------------
augmented level and potential levels.
And with time, products evolve through these various levels. ----------------------
A brand is all of this and more; it is an implicit promise to the customer of ----------------------
a certain performance. A brand also represents how consumers feel about these
----------------------
product attributes and their performance; but more importantly it is about what
makes them feel about using the brand. ----------------------
Physical elements of the product have a finite life, which we will learn
----------------------
about in the product life cycle concept. The black and white camera gave way
to the colour camera. Film-based cameras are giving way to digital cameras, ----------------------

Notes which in turn may give way to an all-in-one handheld device. But brands, if
well managed, can live infinitely. Brand names like Kodak, Canon and Minolta
---------------------- can live on infinitely irrespective of what level the physical product is at a
given time.
----------------------
A brand can encompass several physical products; Tata, GE and Godrej
---------------------- brands are embodied in several products over a variety of categories.
---------------------- Importance of Brands
Brands perform important functions, which are advantageous to both
----------------------
consumers and companies.
---------------------- 1. For a consumer, a brand serves as an identification of a product. If
---------------------- consumers recognise the brand and have some prior knowledge of it, then
they do not have to engage in a lot of additional thought and information
---------------------- processing to make a purchase decision. It reduces the customers’ search
effort and time, thus simplifying his decision-making.
----------------------
Brands serve to reduce the risks in product decisions. Consumers
---------------------- perceive several risks such as financial risk, physical risk, functional
risk, social and psychological risks. Although consumers have several
---------------------- different ways of handling these risks, one way in which they cope is
---------------------- to buy known brands, especially those with which they have favourable
past experiences. Brands are an important risk-reduction device even in
---------------------- business-to-business settings.
---------------------- Because of what brands stand for, they can form deep relationships and
bonds with the customer. Consumers offer their trust and loyalty to such
---------------------- brands with the understanding that the brand will behave in a certain way
and will provide value to them through consistent product performance,
---------------------- and appropriate pricing, promotion and distribution programs.
---------------------- Brands also act as symbolic devices, allowing customers to project their
self- image. This is an important function performed by the brand. Certain
----------------------
brands are associated with being used by certain types of people and thus
---------------------- reflect different values or traits. Consuming such brands is a means by
which consumers convey to others the type of person they are or would
---------------------- like to be.
---------------------- 2. For the company, brands provide a legal protection for all the investment
and efforts made by the company in creating unique features, associations
---------------------- and differentiation. Brands are enormously valuable legal assets; the only
asset that appreciates with time, which can be bought and sold. Large
----------------------
earnings multiples have been paid for valuable brands.
---------------------- Strong brands generate price premiums and are the source of profitability
---------------------- for the company.
Can anything be branded?
----------------------
Whenever and wherever a consumer is in a situation where he has to
---------------------- make choice between competing offerings, there is an opportunity to create

a brand irrespective of the product category. Consumers face choice today Notes
in virtually every category; healthcare, public utilities, educational services,
entertainment to name a few; branding has gained importance in all these ----------------------
categories. In this book, we have listed out 10 types of entities that can be
marketed; it thus goes without saying that all these entities can be branded. ----------------------
9.4.2 Brand Equity ----------------------

Brands vary in the amount of power and value they have in the marketplace. ----------------------
At one extreme are brands that are unknown to most buyers and at the other
extreme are brands that have become an invaluable part of the customers’ life, ----------------------
such that he is devoted to the brand.
----------------------
David Aaker, world renowned brand expert, distinguishes five different
levels of consumer attitudes towards brands from the lowest to the highest. i. ----------------------
Customer will switch brands; no brand loyalty.
----------------------
ii. Customer is satisfied, but may consider switching brands with inducements.
----------------------
iii. Customer is satisfied, cannot be induced to switch brands.
iv. Customer values the brand and considers it as a “friend”. ----------------------
v. Customer is devoted to the brand and cannot do without the brand. ----------------------
Brand equity is the value of the customer’s mind share and heart share; ----------------------
the greater the number of customers in categories iii. to iv., the greater the brand
equity. Brand equity is not just a measure of the consumer’s loyalty; it is a ----------------------
measure of the brand’s perceived quality, strength of emotional associations,
----------------------
degree of brand recognition and other assets such as patents, trademarks and
channel relationships. ----------------------
9.4.3 Branding Decisions ----------------------
Product line management is about creating brands and managing and
enhancing the brand’s equity through the entire gamut of marketing activities. ----------------------
The goal is maintaining brand awareness, improving perceived quality and ----------------------
product functionality and maintaining positive brand associations.
All the product line decisions we listed earlier are taken with respect to ----------------------
brands; but the additional brand decisions companies need to take are: ----------------------
1. Number of brands they will support: For multi-product companies,
----------------------
with numerous and diverse product lines, this is a crucial decision. At one
extreme, a company creates a brand for every product; but this requires ----------------------
huge investments in creating, protecting and managing so many brands.
At the other extreme, companies use a single brand name for every single ----------------------
product offering. This can create confusion for the customers, as the brand
----------------------
may not represent any clear value proposition.
2. The branding strategy to be used: There are broadly four branding ----------------------
strategies available today.
----------------------
i. Individual brand names: Policy fairly common in FMCG markets,
followed in part by Hindustan Lever, Proctor & Gamble and Marico ----------------------

Notes Industries; Tide, Pampers, Rin and Parachute are individual and
independent brand names.
----------------------
ii. Range brand names: Individual brand names, which extend to
---------------------- include a range of closely related products, become range brand
names. Sunfeast (biscuits and pastas), Ponds, Surf, Horlicks and
---------------------- Maggi have all become range brands today.
---------------------- iii. Umbrella brand names: The brand which earlier may have been a
range brand now includes a larger family of products such as Amul
---------------------- and Britannia.
---------------------- iv. Corporate name combined with a individual product name: The
company name is used as the brand name for all the products like
---------------------- Toyota, Honda, Nissan and Sony. In such cases, especially for much
diversified companies with large portfolios, individual products
----------------------
need names for identification; hence, the corporate name and an
---------------------- individual sub-brand name is used like Sony Viao, Sony Walkman
and Sony Trinitron.
----------------------
In practice, companies follow their own unique model of branding,
---------------------- which would be based in part on the above four strategies.
---------------------- Companies take a decision on the branding models depending

on the number of brands they can support, the product categories
---------------------- they intend to get into and the suitability of those categories with
the brand’s promise. Stretching a brand into too many categories
---------------------- weakens or dilutes the promise of the brand; at the same time
---------------------- creating too many brands can be a severe strain on the company’s
resources, as each brand needs adequate support.
----------------------
9.5 PRODUCT INNOVATION
----------------------
---------------------- Booz, Allen and Hamilton identified six categories of new products:
1. New to the world: Very innovative products that create entirely new
---------------------- markets and categories.
---------------------- 2. New product lines: New products that enable companies to enter an
established market for the first time. These are new product offerings in
---------------------- existing categories.
---------------------- 3. Addition to existing product lines: Variants, pack sizes, flavours and so
on.
----------------------
4. Improvements and revisions of existing products: New products that
---------------------- provide improved performance or greater perceived value and replace
existing products.
----------------------
5. Repositioning: Existing products that are targeted to new market
---------------------- segments.
----------------------

6. Cost reductions: Generic versions of existing products. Notes
Less than 10% of all new products are new-to-the-world products. Most
----------------------
new product introductions in the market belong to the third and fourth category.
Innovative products involve the greatest risks and costs as they are new to the ----------------------
market and the company, and failure rate is very high.
----------------------
Most companies rarely innovate, whilst some innovate on a continuous
basis. In the last category are organisations like Apple, 3M, Microsoft, Sony and ----------------------
Nokia. These companies have made innovations the very essence of their being,
and it is no wonder that these organisations are market leaders in every sense ----------------------
of the word. They know that in a global economy of rapid change, continuous
----------------------
innovations are the key to the future.
Top 20 Innovative Companies in the world ----------------------
A 2005 poll of 940 senior executives in 68 countries by Boston ----------------------
Consulting Group and what these managers had to say about the companies is
reproduced below. (Only the top 8 are reproduced here) ----------------------
Apple (24.84%):’ ‘Delivers great consumer experiences with ----------------------
outstanding design; steady flow of new ideas that redefine old categories
such as music players; continual evolution of business model and brand. ----------------------
3M (11.77%): “Strong internal culture of creativity with formal ----------------------

incentives to innovate. Results in high success rate in turning ideas in health
care, industrial components and other areas into profitable products.” ----------------------
Microsoft (8.53%) “Strong management pushes continuous ----------------------

improvements of products, expansions into new markets and rapid strategy
----------------------
changes when necessary.”
GE (8.53 %) “Management practices that are ahead of competition, ----------------------
along with strong training, are allowing CEO Immelt to reinvent GE’s
----------------------
business model and culture to promote innovation.”
Sony (5.94%) “Understands the importance of media convergence; ----------------------
creates new user friendly electronic products with great design.”
----------------------
Dell (5.62%) “Superior business-process model built on ruthless cost
cutting and innovations in supply chain-management.” ----------------------
IBM (5.29%) “Wants to use its powerful IT base to solve customers’ ----------------------
problems and even run their businesses.”
----------------------
google (5.18%) “Steady stream of tools and services provide simple
solutions to complex problems. Dominates online search and is growing fast ----------------------
in advertising. Strong connection with customers.”
----------------------
Source: businessweek.com
----------------------
Types of Innovations
An innovation is defined as any change, alteration or renewal of an ----------------------
existing product or process, which significantly improves product performance ----------------------
and perceived value.

Notes An innovation is very different from an invention. An invention is a
creation of something new to the world and not based on an improvement or
---------------------- development of an existing product or process. For instance, the first electric
bulb, telephone or television were inventions when first introduced to the
---------------------- world. Over the years several innovations, big and small, have vastly changed
---------------------- the product form, functionality and value of these products.
Innovations occur at two levels:
----------------------
1. Incremental or continuous innovations are gradual improvements
---------------------- or modifications of products through a series of variants. For instance,
continuous innovations of the cell phone with inbuilt cameras, downloadable
----------------------
ringer tones, SMS and MMS facilities, FM stereo capabilities, games and
---------------------- colour displays have over the years vastly improved the functionality of
the product as a communication device.
----------------------
Incremental innovations are more readily accepted by the market as they
---------------------- do not have a disruptive influence on consumer usage habits; they do not
require consumers to learn new skills to use or understand the product.
---------------------- These innovations occur more commonly and are a critical element of a
company’s market leadership strategy.
----------------------
2. Breakthrough or discontinuous innovations are significant changes in
---------------------- the product usually driven by technology, design or by incorporating
---------------------- an invention. For instance, the cell phone was itself a breakthrough
innovation of the landline telephone. Breakthrough innovations have a
---------------------- disruptive influence on markets as they require consumers to unlearn old
usage habits and learn new skills for usage. Other examples include home
---------------------- computers, medical self-test kits and Internet. A discontinuous innovation
---------------------- is of a greater magnitude and occurs rarely.
How do companies innovate?
----------------------
There are three innovation models or strategies that companies can follow:
----------------------
1. Integrator model: Here the company assumes responsibility for the entire
---------------------- innovation process in-house as well as manufacturing and marketing of the
innovation from start to finish. This approach involves huge investments,
---------------------- greatest costs and risks. Intel follows this model.
---------------------- 2. Orchestrator model: Key functions such as the design may be in-house,
but manufacturing and marketing may be handed over to other companies
---------------------- with the required expertise. For instance, when Porsche could not handle
the over-demand for its popular Boxster model (1997), it co-opted another
----------------------
manufacturer rather than create additional investments. The same was the
---------------------- case with the BMW X-5. There are potential risks even with this strategy
especially in the areas of quality control.
----------------------
3. Licensor/licensee model: The innovator company licenses its technology
---------------------- or innovation to another company for marketing and distribution. Proctor
& Gamble, a marketing powerhouse, has licensed several innovations
---------------------- and hires teams of outside designers who scout for innovations, which

have potential. P&G’s strength as an organisation has been the ability to Notes
spot the “unmet, unarticulated needs” of customers and create meaningful
products out of licensed technologies or bought out innovations. The ----------------------
Spin Brush, a money-spinner product for the company was a bought out
innovation. ----------------------
9.5.1 Organising for New Product Development ----------------------

Companies handle the organisational aspect of new product development ----------------------
in several different ways unique to their industries. Earlier new product
development used to be purely an R&D function with inputs from marketing ----------------------
executives. Technologies used to be developed in labs and marketing had to
----------------------
“find a market” for the products. But clearly that approach did not work for
long. Today companies are creating special high level, cross-functional teams of ----------------------
managers with specific responsibilities. These teams have major responsibilities
ranging from developing consumer insights, developing or scouting for new ----------------------
ideas, working with R&D departments in giving shape to these ideas, testing
----------------------
the ideas and concepts right through to commercialisation of products.
These teams of “entrepreneurs” are relieved of other duties and given a ----------------------
budget, timeframe and a “skunkworks” setting to achieve their objectives.
----------------------
The Mistakes
----------------------
They vary from industry to industry, but the most common innovation
failures come from companies that confuse R&D with innovation. Hiking ----------------------
R&D spending doesn’t automatically raise innovation success. Cutting internal
R&D spending and seeking new ideas from around the globe can often be more ----------------------
productive. ----------------------
• Consumer marketing with consumer understanding
----------------------
Marketing has few tools for ferreting out the unarticulated needs of
consumers. ----------------------
• Design with design strategy ----------------------
Traditional design is about style and colour but the new design strategy ----------------------
provides tools for fashioning products, visualising the future and
understanding the customei emotion. ----------------------
• Innovation with technology ----------------------
Tech-centric innovation generates feature ridden products that can
frustrate consumers. Consumer-centric innovation generates products ----------------------
that people crave. ----------------------
• ‘ ‘Out-of-the-box’’ thinking with innovation
----------------------
Creativity is key to innovation but must be part of a broader discipline
that includes management incentives, CEO leadership, and financial ----------------------
hurdles.
----------------------
Source: BCG research 2005, key findings published in BusinessWeek August
8/15, 2005, ----------------------

Notes Managing the product development process
As we have learnt earlier that companies follow different innovation
----------------------
models to generate new products. Attractive ideas must be refined into testable
---------------------- product concepts. A product concept is an elaboration of a product idea
expressed in meaningful consumer terms.
----------------------
1. Concept development and testing: We can illustrate this with the following
---------------------- example. A pharmaceutical company has innovated a non-injectable
insulin, which can be consumed orally. This is the product idea. But
---------------------- consumers don’t buy ideas they buy concepts. This product idea can be
turned into several concepts as a capsule to be marketed as a prescription
----------------------
drug or as a prescription nutritional supplement. Who should this be
---------------------- targeted to; younger patients or older adults?
ach of the above concepts represents different category concepts, which
E
----------------------
will determine the product’s competition, frame of reference, point of
---------------------- differentiation and marketing mix. As a tablet formulation it will be a
medical prescription drug, competing with injectibles; as a nutritional
---------------------- supplement it will compete with a host of other nutritional supplements.
---------------------- he key issue in this case would be which product concept is the
T
consumer likely to perceive as more effective? The marketing task here
---------------------- is to determine the appropriate product concept and determine the brand
---------------------- concept. Will a new brand be created or will they use an existing brand to
introduce the product into the market? How will the brand be positioned?
---------------------- ext the concept now needs to be tested with appropriate target customers
N
---------------------- to get their reactions. Concept testing is not to be confused with clinical
trials as would be applicable in this case. Clinical trials would certify the
---------------------- medical efficacy of this drug; concept testing is the testing of how this
concept is to be marketed to consumers.
----------------------
oncepts can be presented symbolically or as physical prototypes. Today
C
---------------------- firms use rapid prototyping to design products (such as appliances or
small toys) on a computer and produce plastic models of each. For such
---------------------- products, consumers can view the plastic models and give their reactions.
---------------------- Companies also use virtual reality to test product concepts.
onsumers are an important part of the concept development of a
C
----------------------
product and are being co-opted by companies to be a part of the concept
---------------------- development process.
2. Marketing plan and business analysis: Following a successful concept
----------------------
test, the new product concept needs a preliminary marketing plan for
---------------------- introducing the product into the market.
he first part of the marketing plan will describe the target market size,
T
----------------------
structure and behaviour, the product positioning, competition, category
---------------------- sales and expected market share over a period of time.
----------------------

he second part of the plan will describe in detail the entire marketing
T Notes
mix, i.e., the product and brand strategy, pricing strategy, distribution and
communication strategy. This part will present in detail a specific launch ----------------------
plan and marketing budget specifically for the launch.
----------------------
he third part of the preliminary marketing plan will present in detail the
T
expected sales, expenditures and profits projections. ----------------------
he management now has to take a decision on the business attractiveness
T ----------------------
of the project and its fit with the firm’s overall business strategy. These
deliberations usually result in revisions and expansions of business plans ----------------------
as the case may be. Detailed financial analysis and statements need to be
prepared so that a final management decision can be taken on the project. ----------------------
3. Test marketing: After the management is satisfied with the broad ----------------------
functional and psychological performance of the product and the market
potential and business feasibility of the product, the product is ready to be ----------------------
“dressed up as a brand” and put into a market testing. The market testing ----------------------
at this stage is done in an authentic “shopping environment” and is very
different from the consumer testing at the initial stage, which was done in ----------------------
a controlled environment.
----------------------
est marketing is usually a full-scale market launch of the product, but
T
in limited cities only. The company puts on a full-scale promotion and ----------------------
distribution campaign similar to the one that the company would use in
national marketing. It allows firms to test all elements of the marketing ----------------------
mix of the product and get distributor, retailer and consumer feedback on
----------------------
all aspects of the product. Test marketing permits testing the impact of
alternative marketing plans. ----------------------
ot all firms undertake test marketing as not all products are suitable
N
----------------------
for test marketing such as high priced and high involvement products
like durables, financial products or entertainment products like events ----------------------
and movies. Test marketing is more commonly used for low involvement
consumer products. ----------------------
he amount and time duration of test marketing is influenced by the
T ----------------------
cost of test marketing, time pressures due to the onset of the season and
competitive pressures if competitors are also ready to launch their brands ----------------------
of a similar product. One of the criticisms of test marketing is that it
reveals too much information to competitors and companies may prefer ----------------------
to face the risk of product failure. The costs of test marketing can also be ----------------------
very high which is why these days many firms are skipping test marketing
and use a modified approach such as a phased launch of the product in ----------------------
select regions.
----------------------
High-end durables such as cars and appliances or business goods are tested
by companies at trade shows. Companies can assess the interest shown by ----------------------
prospective consumers in the various features and commercial terms and
the purchase intention expressed by. The excitement and “buzz” created ----------------------
or not created by the products allows the company to make appropriate ----------------------
modifications wherever necessary.

Notes 4. Commercialisation: Irrespective of which form of test marketing a firm
undertakes, the company has to take a final decision on the market
---------------------- readiness of the product and whether to launch the product. The key
commercialisation decision is the market entry timing. The timing
---------------------- decision is particularly important when a competitor is also working on a
---------------------- similar product and is ready to enter the market.
he company faces three choices; first to market, parallel entry or late entry
T
----------------------
after the competitor. Each decision has it pros and cons, and companies
---------------------- need to weigh their options. The timing decision involves additional
considerations; where the new product replaces an older product, the
---------------------- company may delay the launch until the stocks of the older product are
drawn down sufficiently. If the product is seasonal, the launch would be
----------------------
deferred until the right season arrives.
---------------------- he company must decide on the geographical launch strategy. Whether
T
to launch the product nationally or whether to go for a phased launch
----------------------
depends mainly on the company’s size, resources and finalised distribution
---------------------- arrangements. For companies that have the funds and a strong distribution
network already in place, a national launch can be considered.
----------------------
The commercialisation plan is the final launch plan for the product.
---------------------- 9.5.2 The Consumer Adoption Process
---------------------- How do potential customers learn about new products? What will motivate
them to try a product? Why do some products take a long time to get a foothold
---------------------- in the market, whereas others seem to become instant hits?
---------------------- These are just some of the questions that dog marketers. Not all products
that are new have equal potential for consumer acceptance; also some products
---------------------- take much longer to gain a foothold in the market. The theories of diffusion
---------------------- of innovation and consumer adoption help marketers develop appropriate
strategies for introduction of their innovative products to the market.
----------------------
Product characteristics that influence diffusion
---------------------- The uncertainties of product marketing would be reduced if marketers
could anticipate how consumers would react to their products. Although there
----------------------
are no precise formulas by which marketers can evaluate a product’s acceptance,
---------------------- diffusion researchers have identified five product characteristics that seem to
influence consumer acceptance of new products.
----------------------
1. Relative advantage: The degree to which potential customers perceive a
---------------------- new product as superior to existing substitutes is its relative advantage.
The fax machine and photocopying machine are examples of innovations
---------------------- that offered a significant relative advantage over existing alternatives.
---------------------- 2. Compatibility: The degree to which potential consumers feel a new
product is consistent with their needs, values and practices is a measure
---------------------- of its compatibility. If the new product does not require consumers to
---------------------- change usage habits or patterns, it gains faster acceptance. When Gillette

introduced the Mach3 razor, the transition from disposable or non- Notes
disposable razor was easier as it did not require men to change their wet
shaving rituals. One cannot imagine men adapting just as easily to a new ----------------------
depilatory cream designed to remove facial hair, it would be incompatible
with their values and habits. ----------------------
3. Complexity: The degree to which a new product is difficult to understand ----------------------

or use affects product acceptance. The easier a product is to understand
----------------------
or use, the more likely it is to be accepted. The issue of complexity
is especially important for high-tech consumer products. There are four ----------------------
predominant types of technological fears that act as barriers to product
acceptance: the fear of technical complexity, fear of rapid obsolescence, ----------------------
fear of social rejection and fear of physical harm. Of the four, technical
----------------------
complexity is the most widespread concern of most consumers.
4. Trialability: It refers to the degree to which a new product is capable of ----------------------
being tried on a limited basis. The greater the opportunity to try a new
----------------------
product, the easier it is for consumers to evaluate it and ultimately adopt
it. In general, household products are inherently most trialable, as they ----------------------
can be made available through trial packs or sizes. Computer companies
offer free trials of their new programs for limited periods to encourage ----------------------
computer users to try the program and subsequently purchase it. On the
----------------------
other hand, durable goods cannot be offered on trial. Marketers conduct
extensive demonstrations to offer some sort of trialability to consumers. ----------------------
5. Observability: It is the ease with which a product’s benefits can be
----------------------
observed, imagined or communicated to potential consumers. Products
that have a high degree of social visibility are more easily diffused than ----------------------
products that are used in private. Similarly, tangible products are more
easily observable than intangible products. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
---------------------- State True or False.

1. Companies can differentiate their market offerings along the five
----------------------
dimensions sales, purchase, after sales, revenue and satisfaction.
---------------------- 2. Brands also act as symbolic devices, allowing customers to project
their self- image.
----------------------
3. Product line management is about creating brands and managing and
---------------------- enhancing the brand’s equity through the entire gamut of marketing
---------------------- activities.
Fill in the blanks.
----------------------
1. An ________________ is defined as any change, alteration or renewal
---------------------- of an existing product or process, which significantly improves
product performance and perceived value.
----------------------
2. A product concept is an elaboration of a ____________ expressed in
---------------------- meaningful consumer terms.
---------------------- 3. In the ____________, the company assumes responsibility for the
entire innovation process in-house as well as manufacturing and
---------------------- marketing of the innovation from start to finish.
----------------------
---------------------- Activity 2
---------------------- 1. Visit the website of Lego and find out the details of their new product,
---------------------- a robot called “Mindstorm”. Make a special note of the involvement of
its customers in the development of this product.
----------------------
2. From the Internet, collect information on three “new-to-the-world”
---------------------- products launched in the past one to two years. What kind of consumer
resistance did they face? What did the companies do to effectively
---------------------- counter consumer resistance?
----------------------
---------------------- 9.6 THE PRODUCT LIFE CYCLE (PLC) CONCEPT

---------------------- All products have a life cycle; the concept of the product life cycle has
been based on the life cycle of biological organisms, and like the different life
---------------------- stages of biological organisms, products too have definite life stages. Each stage
---------------------- of the life cycle poses different challenges and opportunities to the company
because of which products require different marketing, financial, manufacturing
---------------------- and purchasing and resource strategies at each stage.
----------------------

The life cycle curve is portrayed as bell-shaped curve, representing the Notes
product sales over a period of time. The curve is divided typically into four
stages: introduction, growth, maturity and decline. There are several exceptions ----------------------
when the life cycle may not follow this path. As shown in the figures, there
are products that show a sharp growth and decline, or products that remain in ----------------------
indefinite maturity and in fact may never face a decline. Fads and fashions can ----------------------
be grouped in the first category, whereas products in closed and highly protected
markets may fall into the second category. Commodities like steel, cement and ----------------------
food grains, where demand remains inelastic relative to other products, may
also experience indefinite maturity. ----------------------
The profit curve, also shown in the figures below, does not follow the ----------------------
lifecycle curve. Profits never or rarely appear in the introduction phase. The
----------------------
growth phase brings some profits and by the time the product enters the latter
part of the growth or early maturity, profits peak. As the product moves through ----------------------
the maturity phase, profits start declining.
----------------------
The PLC concept is used to analyse the life cycle of a product category
(mobile phones), product form (monochrome handsets) or a technology ----------------------
(CDMA). The PLC concept cannot be effectively used to analyse a brand’s life
cycle, which is a completely different concept. A product’s life cycle curve, ----------------------
i.e., the sales curve of the product represents the combined sales for the entire
----------------------
category, and not the sales of an individual firm’s product. A brand’s life cycle,
on the other hand, represents the sales of a particular brand and may not follow ----------------------
the product category’s life cycle curve. The brand’s sales curve is dependent on
the strategic actions of the individual firm; a brand may have gone into decline ----------------------
even though the product category is in the growth phase, because of incorrect
----------------------
strategies employed by the company.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 9.1: Product Life Cycle
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 9.2: Product Life Cycle Patterns
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 9.3: Style, Fashion and Fad Life Cycles

---------------------- 9.6.1 PLC Stages and Strategies in different Phases
---------------------- Introduction Stage
The introduction stage is when a new product category, product form or
----------------------
technology is brought to the market. A new product is brought to the market
---------------------- before there is a proven demand for it and before it has been proven technically.
How it will take for a product’s demand to be created depends on several factors
---------------------- which have been studied earlier. Despite these conditions, it is almost impossible
to accurately predict how long a product will take to take off the ground. The
----------------------
fatality rate of new products is extremely high.
---------------------- This stage is a period of slow sales growth and may not necessarily
---------------------- be a smooth upward trajectory; some sales ups and downs may be witnessed.
Usually there is only one pioneering firm in the market and profits are non-
---------------------- existent because of the heavy expenses incurred on gaining product acceptance
with the consumer. This is also a period of learning for the pioneer as product
---------------------- glitches and teething problems will inevitably occur despite the vast amount of
---------------------- product testing carried out earlier. This is why many firms adopt a “wait and
watch” policy, as they prefer to learn to at the expense of the pioneer. However,
---------------------- this “second bite of the apple” strategy also has its risks, as pioneer firms are
quickly able to adapt their products and reap the rewards of the first mover
---------------------- advantage of market dominance. Pioneering companies usually enjoy higher
---------------------- perceived quality and these establish the standards that the product category
should possess.
----------------------

Firms use different generic strategies to enter markets, summarised as Notes
follows:
----------------------
1. Offensive strategy: Firms that follow this strategy are pioneering
companies with innovative products. This strategy would only work for ----------------------
companies that are R&D intensive, although they may follow the different
innovation models we have discussed earlier. ----------------------
DuPont’s core competence in chemical technologies and creation of new ----------------------
fibres has lead to the successful creation of new products like Nylon,
Teflon and Lycra. Over a period of time the company developed several ----------------------
applications of these products, which they licensed to end-product
----------------------
manufacturers.
2. Defensive strategy: This strategy is followed by firms lacking any real ----------------------
core competence to innovate products or by firms that lack the resources
----------------------
required by a pioneering firm. Such companies use their resources to
instead improve the existing products using reverse engineering or to ----------------------
develop incremental innovations or develop competitively priced versions
of existing products. ----------------------
RCA developed the first video recorders for professional use, which Sony ----------------------
quickly adapted for home entertainment; but Matsushita’s technically
inferior but more market focused products dominated the sector for a ----------------------
long time. Firms that follow this strategy usually enter the markets with ----------------------
products in the growth stage of the PLC.
3. Imitative strategy: This strategy is similar to the defensive strategy in ----------------------
many ways, except that it focuses mainly on producing low-cost clones ----------------------
through licensing technologies, focusing on low-cost manufacturing and
operates in localised markets. Such firms would enter the market at the ----------------------
latter part of the growth stage, by which time the market has sufficiently
developed. ----------------------
amsung’s initial growth was through producing low-cost copies of

S ----------------------
Sharp’s microwave ovens, which they loaded onto boats and shipped
them to US. Many firms lacking resources and expertise in markets have ----------------------
successfully used this strategy to enter and gain a foothold in industries. ----------------------
Samsung today is a world-class organisation and is today pioneering
and innovating semi-conductor, communication and entertainment ----------------------
technologies and products.
----------------------
key marketing objectives
----------------------
• Market development
• “Sell the product concept” and stimulate demand ----------------------
• Getting distribution ----------------------
• Sorting out product performance and design issues ----------------------
The marketing strategies, which follow from the marketing objectives
----------------------
are as under:

Notes 1. Product strategy: Pioneering firms usually enter the markets with basic
products and very limited product versions. As the utility of the product
---------------------- is yet to be understood by the customer, no market segments exist. The
emphasis of the firm is to correct problems arising with design, features
---------------------- and usage and quickly establish a competitive advantage.
---------------------- Technology pioneers especially would also consider licensing their
technologies to other manufacturers to develop products. The advantage
----------------------
being, that while the pioneer continues to reap the rewards of their
---------------------- innovation, the burden of market development is shared by several players
in the market.
----------------------
Pioneering firms are also able to better utilise their resources
---------------------- for making product or technology improvements, product adaptations
and incremental innovations. Phillips, the innovator of the compact disc
---------------------- technology, quickly licensed this technology to several manufacturers.
They continue to make key components of compact discs on which they
----------------------
enjoy the patents.
---------------------- 2. Communications strategy: The key task of marketing communications
is to first build awareness of the product and more importantly prove
----------------------
the utility of the product to the consumer and stimulate trial. Therefore,
---------------------- companies use media, which will allow them to demonstrate the product
and allow the customer to “experience” the utility of the product.
---------------------- Demonstrations at retail outlets and trade shows and personal selling are
the very popularly used communication media. Deep public relations
----------------------
support, which will ensure that the product is written about by the media,
---------------------- helps customers understand the product.
---------------------- The aim is to create a sufficient “buzz” about the utility of the product and
companies have used innovative means to achieve this. When Sony first
---------------------- introduced the walkman in the US, it hired hordes of youngsters to wear
the walkman and ride the subway in New York. Onlookers were curiously
---------------------- amused to watch these youngsters enjoy the music on their walkmans,
---------------------- and this started huge word-of-mouth publicity for the product as people
started walking into the stores inquiring about the Walkman.
---------------------- Likewise, when Nokia introduced Ngage, it hired groups of young gamers
---------------------- to play games with each other on the Ngage at busy street corners and
shopping malls. These gamers attracted huge crowds of onlookers all of
---------------------- whom wanted to experience the product.
---------------------- Selecting the appropriate media is key to the communications strategy of
building primary demand for the product and its utility.
----------------------
3. Pricing strategy: Pioneering firms use either a market skimming or a
---------------------- market penetration strategy depending on the market conditions.
Marketing skimming strategy is a strategy of using a high price relative to
----------------------
competitive substitutes or other benchmarks. The skimming strategy has
---------------------- two variants: rapid skimming or slow skimming.

Rapid skimming is a strategy of using high prices backed by a very high Notes
level of marketing communications support. Companies would use this
strategy, when competitive threat is large and imminent. The pioneer firm ----------------------
will try to rapidly skim the cream off the market and maximise profits,
before the competitor enters the market. However a basic requirement for ----------------------
this strategy to work is that product must be superior both technologically ----------------------
and in terms of utility to all other competitive substitutes available.
----------------------
Slow skimming uses high prices but with a slow build up on marketing
communications. This strategy can work when competitive threat is not ----------------------
so imminent, because the technology used by the company is highly
sophisticated and there is long lead time before competitors can catch up. ----------------------
This strategy may also work in highly protected and closed markets or
----------------------
where there are several barriers to entry.
The pioneering firm may instead choose to adopt a market penetration ----------------------
strategy, which too has two variants: rapid penetration or slow penetration.
----------------------
Rapid penetration is the strategy of using low prices but with very high
communication support. The strategy is appropriate for products, which ----------------------
though new and useful are not vastly superior to existing substitutes and
----------------------
where competitive threat is imminent. The basic difference between rapid
skimming and rapid penetration is the superiority of the product with ----------------------
respect to competitive substitutes. In rapid penetration, the company tries
to rapidly penetrate the market and build market share, sacrificing profits ----------------------
in the short term, before a competitor enters the market. This strategy may
----------------------
also be used for a product where a competitor has an equally challenging
product to bring to the market. ----------------------
Slow penetration is the strategy of using low prices to penetrate the ----------------------
market, but with a slow build up on marketing communications. The
product conditions being the same as in rapid penetration, this strategy ----------------------
would deliver results when threat from competition is not imminent.
----------------------
4. Distribution strategy: Getting distribution channels to carry the product
is a challenge at this stage as distributors too need to be convinced about ----------------------
the utility and business viability of the product. Established companies
will already have channels and will therefore find it easier than new ----------------------
entrants, but even they will have to provide deep sales and margin support ----------------------
to their channel partners. Companies do not need extensive distribution
networks at this stage; rather they need to build their networks selectively ----------------------
and in stages.
----------------------
So, the distribution strategy is largely selective distribution, whether new
or within existing networks, with deep sales support. The distributors are ----------------------
expected to demonstrate the product and “sell” the product concept. Point
of sale merchandising, allowing the consumer to experience and try the ----------------------
product is very essential. Since sales off take will be low, channel partners ----------------------
will have to be compensated by the organisation for the additional role
played. ----------------------

Notes 5. Competitive strategy: The introduction stage is usually marked by the
absence of competition.
----------------------
If the product concept is a success, competition will inevitably enter
---------------------- the industry attracted by the profit opportunities. Potential competitors
waiting in the wings jump into the fray; some enter with carbon copies,
---------------------- others make design and functional improvements. The pioneer now has
to prepare for competition, which means the pioneer must not only sell
----------------------
the product concept and its utility but aim at building brand preference as
---------------------- well.
Pioneering firms have to decide at this stage itself, the basis on which they
----------------------
are going to compete and build appropriate competitive advantages.
---------------------- Despite pioneering a successful product concept, many pioneering firms
lose their advantage at this stage, only because they haven’t prepared
---------------------- for competition with a clear competitive strategy or because they fail to
develop a competitive advantage early on.
----------------------
Growth Stage
----------------------
The growth stage is characterised by a sharp growth in sales, entry of
---------------------- competitors and profits. The sharp growth in sales is not only because of the
success of the product, but because of the combined efforts of all firms present
---------------------- in the market to develop and grow the market. As customers get familiar with the
---------------------- product, different need levels and motivations emerge which is the right time to
segment markets. Companies need to plan for the growth stage well in advance.
---------------------- In a recent study, Tellis and Golder identified five factors as underpinning
long-term market leadership: vision of a mass market, persistence, relentless
---------------------- innovation, financial commitment and asset leverage. The pioneer should
---------------------- visualise the various product markets that it can enter, segmenting markets as
they develop.
---------------------- The growth stage itself needs to be viewed in two parts as early growth
---------------------- stage and latter growth stage. This is because although the category continues,
the challenges that companies face in the early growth stage are quite different
---------------------- from the challenges that companies face in the latter part of the growth stage.
Companies need to be geared up to face these challenges and shift gears at the
---------------------- appropriate time.
---------------------- Key marketing objectives (early growth)
---------------------- Marketing strategy’s emphasis now gradually shifts from building primary
demand for the product category to building selective demand for its brand and to
---------------------- build market share. The key marketing objectives can be summarised as follows:
---------------------- • Build selective demand
---------------------- • Market segmentation

• Build market share through market penetration
----------------------
• Incremental innovations
----------------------
• Product strategy

The growth stage is marked by product improvements through added Notes
features, improved functionality and design. A firm’s product strategy will
depend on its selection of market coverage strategy. Companies that aim for ----------------------
full market coverage with a differentiated strategy will build over time different
product offerings for different market segments. That means that over time ----------------------
they will add length and depth to their product lines. Companies that aim for ----------------------
full market coverage with an undifferentiated approach, will aim at the cost
reductions rather than improved functionality, and bring to the market a standard ----------------------
product. Other companies may choose to target certain segments only and will
build products with relevant features, design and functionality for their markets. ----------------------
A key aspect of the product strategy especially for pioneering firms is to ----------------------
continuously improve the product through incremental innovations, to ensure
----------------------
market dominance. Many first movers lose their advantage at this stage, as they
fail to incrementally innovate the product and thus concede market share to ----------------------
competitors who enter markets with improved functionality and technology.
----------------------
1. Pricing strategy: The overall price levels of the product categories
drop, as all firms aim for market penetration. Price levels also drop as ----------------------
volumes drive down cost of production and firms pass on partially the
benefits of economies of scale. However, a drop in price levels is not ----------------------
to be confused with a firm’s pricing strategy, which could be premium
----------------------
pricing or penetrative pricing strategy. A firm’s pricing strategy is
entirely dependent on its overall business strategy in a particular market. ----------------------
Firms following a differentiated strategy aim for product leadership in a
market; they develop value-added differentiated products based on their ----------------------
competitive advantage with a premium pricing strategy.
----------------------
2. Communications strategy: Since the key marketing objective is to
build selective demand and brand preference, communications strategy ----------------------
is directed towards establishing brand awareness and brand preference
----------------------
through heavy media use for advertising, sampling and promotion
programs. Advertisement spends as a percentage of sales continue to be ----------------------
high, but absolute advertisement spends go up significantly at his stage.
The objective of the marketing communications is not so much to sell the ----------------------
concept and now shifts to emphasising the brand’s differentiation so as to
----------------------
build brand preference.
3. Distribution strategy: As the rate of consumer adoption of the product ----------------------
increases, it is generally easier to expand the distribution channels as ----------------------
the trade channels become convinced about the business viability of the
product. The distribution strategy is essentially to increase coverage, enter ----------------------
newer channels and increase shelf space and product visibility at the point
of sale through merchandising. Promotional campaigns directed towards ----------------------
channel partners and an increased emphasis on better relationships ----------------------
with channel partners become necessary due to increased competitive
pressures. ----------------------
----------------------

Notes Latter Growth Stage
During the growth stage of the product, as product off take increases,
----------------------
companies rapidly expand production capacities and continue to do so
---------------------- throughout the growth phase. The profit opportunities in the industry attract
newer competitors, who bring additional capacity to the industry. The industry
---------------------- now moves to a different threshold of competition with a different set of
challenges. In addition to emphasising product value additions and brand
----------------------
preference, companies now have to emphasise on cost competitiveness in
---------------------- all aspects of their operations, as pricing and margins come under immense
pressure. Companies have to effectively compete on providing value better vis-
---------------------- à-vis their competitors.
---------------------- The capacity additions seen through the growth stage become excess
capacity as soon as the growth rate of the market levels off. A stage of rapid
---------------------- growth is inevitably followed by a shakeout in most industries due to the
excess capacity build up. Weaker companies, those that possess no competitive
----------------------
advantage or lack a clear business strategy for the market, will be forced to exit
---------------------- or sell out. The stronger firms will try to improve their competitive positions
through rationalisation of their product lines and prices and at the same time
---------------------- look for newer growth opportunities or market segments to target. These firms
will take the category once towards a phase of renewed growth. Newer firms
----------------------
may once again be attracted by the renewed opportunities in the industry and
---------------------- may enter the industry at this stage.
In recent times, we have seen shakeouts followed by consolidation and a
----------------------
phase of renewed growth in the cellular services and airlines industry in India.
---------------------- Maturity Stage
---------------------- The first sign of the advent of the maturity phase is market saturation.
Most prospects own the product; therefore market growth rates, sales and
---------------------- profits begin to level off. In fact, a decline in profits seems imminent now. Price
---------------------- competition now becomes intense, and with rapid commoditisation of products,
all competitive attempts to achieve and hold brand differentiation now involve
---------------------- making finer and finer differentiations in the product or customer services,
image etc. This phase is marked by intense competition, as it seems that firms
---------------------- can now only grow by taking away market share from a competitor. Price
---------------------- wars, distribution wars and communications wars become commonplace now.
Efficiency and profit generating ability become major concerns for companies.
---------------------- The key marketing objectives, emanating from these challenges are as follows:
---------------------- Key marketing objectives
• Rationalisation of product lines to maintain profitability
----------------------
• Finding new avenues for growth
----------------------
• Improved efficiency of marketing operations
---------------------- • Product strategy
----------------------

The product strategy at this stage aims at “scalloping the curve” or reviving Notes
the life cycle of the product through either a major technological innovation or
by expanding usage of the existing product through new uses and use situations. ----------------------
The old technology cycle has more or less heading to a decline, hence ----------------------
in technology intensive categories only a technological innovation can once
again put the category on a growth trajectory. For instance, the advent of flat ----------------------
screen and HDTV technologies has “scalloped the curve” for televisions. These
----------------------
new technologies strongly motivate existing television owners to upgrade their
products and buy newer TV sets, which they would not have done so otherwise. ----------------------
Aggressive firms will pursue innovations to expand usage of the product
----------------------
by developing products for new use situations or new uses. The cellophane tape,
a product innovated by 3M, soon became a household product. Cellophane tape ----------------------
is a very low technology product with extremely limited scope for product,
image services or even personnel differentiation. The cellophane tape dispenser ----------------------
was an innovation, which brought in some amount of differentiation into the
----------------------
category. However, since the product is so easy to duplicate, the company faced
intense competition from low priced generics offering equally good products. ----------------------
At that time, 3M innovated a “patterned” cellophane tape, in vibrant
----------------------
colours with prints, which could be used for a number of different occasions.
For gift-wrapping Christmas presents they created a range of tapes with ----------------------
Christmas motifs. This simple innovation of printing on cellophane tape
suddenly expanded the usage of the product, because of the vast number of ----------------------
different occasions it could be used for. Hence, whilst an individual firm’s effort
----------------------
to “scallop the curve” will benefit the entire category, the “pioneering” firm
gains greater ground because of its pioneering efforts. ----------------------
The other aspect of product strategy for most firms at this stage is ----------------------
rationalisation of product lines to weed out non-profitable products or
products that have no clear role or future in the portfolio. Firms also pursue ----------------------
design modifications or production process modifications to improve the cost
competitiveness of the product and ease the margin pressures. Repositioning ----------------------
of brands into other growth market segments or categories can revive specific ----------------------
brands, not the category though.
1. Communications strategy: Ironically, when marketing spends and ----------------------
specifically advertisement spends are under greatest pressure, it is ----------------------
the time when marketers need to communicate with their target markets
the most. There is heavy reliance on sales promotions and below the ----------------------
line promotions at this stage. The communication strategy is to optimise
marketing spends through maintenance advertising. ----------------------
2. Distribution strategy: Distribution channels and processes need to be ----------------------

rationalised at this stage. There is fierce competition for shelf space and
point of sale merchandising. Companies rely heavily on trade promotions ----------------------
to increase presence at point of sale. Companies can also innovate by ----------------------
looking for newer channels of distribution or new distribution formats as
opposed to expanding existing channels. ----------------------

Notes 3. Pricing strategy: The maturity stage is marked by intense price competition
and pressure on margins, irrespective of the pricing strategy that the
---------------------- company follows. The challenge is not to abandon the existing pricing
strategy, but to continue to provide better value to the customers and at
---------------------- the same time maintaining margins. Some firms use price competition to
---------------------- maintain market share; however, this can be a double-edged sword. Only
those firms that enjoy absolute cost advantages will benefit from using
---------------------- price as a weapon of competing for market share. However, the benefits
of this to the firm also maybe short term, as customer still desire better
---------------------- value, only now at lower prices.
---------------------- Decline Stage
---------------------- As stated earlier, products can remain in indefinite maturity. The advent of
the decline is marked by the introduction of newer technologies or products that
---------------------- will replace the old. The decline phase for an existing product sets in gradually
only when the newer technology or product gains market acceptance. This phase
----------------------
is marked by falling sales, absolute decline in profits and a shift in consumer
---------------------- tastes and preferences. When falling sales cannot be reversed or scalloped,
management focus shifts to milking or divesting the business.
----------------------
Key marketing objectives
---------------------- • Exit strategies from the category
---------------------- • Maintain support for existing customers
---------------------- • Reduce investment levels
• Improve short-run profitability
----------------------
The decline strategies used at this stage can be summarised as follows:
----------------------
1. Exit unprofitable segments and strengthen position only in select segments.
---------------------- Some products through product modifications can stay on in the market
by occupying a market niche. For instance, black and white photography
---------------------- became popular as an artistic expression, so equipment manufacturers
---------------------- exited consumer segments and created a range of high-end professional
equipment for professional photographers and serious hobbyists.
---------------------- 2. Selectively decrease investment levels in all aspects of marketing. Cut
---------------------- back on production, advertising and distribution.
3. Alternatively, companies may choose to divest their businesses well before
---------------------- the decline phase of the product sets in; this frees the firm’s resources
---------------------- which it may deploy in other critical areas.
Lessons from the Product Life Cycle Concept
----------------------
The critical concept of the life cycle is the management of profits and sales
---------------------- through the life cycle. A fact that challenges most managers is that the profit
curve does not follow the sales curve. Profits peak before sales mainly because
----------------------
competition and mainly the intensity of rivalry between firms brings down
---------------------- the profitability of the industry. Most competition follows the imitation route

and tends to draw customers away from the pioneering firm with better prices, Notes
service, product features, distribution networks and marketing communication.
To compete and retain market share, a pioneer firm needs to increase marketing ----------------------
expenditure, which puts a downward pressure on profitability.
----------------------
On the other hand, the pioneer firm may have to retain price levels or even
reduce prices to remain competitive. This puts further pressure on the profitability ----------------------
of the firm. Hence, although sales revenue may be rising due to the marketing
----------------------
efforts of the firm, profitability gets eroded due to increased marketing
expenditure and competitive pressure. Another reason is shifting consumer ----------------------
preferences and loyalty. As competition intensifies, better and more efficient
products become available, thereby shifting customer preferences. ----------------------
The key lesson from this is that firms have to evolve product strategies ----------------------
and manage for profitability as the product moves through the life cycle.
The firm has to start early in product modification and adapting to newer ----------------------
technologies. Most progressive and market driving firms follow this route.
----------------------
Market driving firms anticipate competition, develop competitive advantages
and evolve strategies to pre-empt competitive moves. ----------------------
Improve
Performance ----------------------
----------------------
Improve
----------------------
Increase Sales Profitability
----------------------
----------------------
Expand Increase Increase ----------------------
Market Share Price Reduce
Costs ----------------------
----------------------
Convert Increase Win
Promote Buy Prune Fixed Variable ----------------------
non-users usage rate Competitor
new uses Competitors range costs costs
markets
----------------------
----------------------
Fig. 9.4: Strategic Focus and the Product Life Cycle
A Critique of the Product Life Cycle Concept ----------------------
In an article written in Harvard Business Review (Jan−Feb 1976) by ----------------------

Nariman Dhalla and Sonia Yuspeh, called “Forget the Product Life Cycle”, the
authors argued that the concept was essentially descriptive and if management ----------------------
used it as a predictive tool they would commit grievous mistakes. Their key ----------------------
criticisms of the concept are summarised as under:
----------------------
----------------------

Notes • Products do not have fixed life cycle stages and fixed length of the life
cycle stage unlike biological organisms.
----------------------
• Nobody can really tell with certainty what stage of the life cycle the
---------------------- product is in.
• The PLC concept is essentially a “reactive” concept, whereas firms need
----------------------
to be more proactive in their strategic approach.
---------------------- • In reality, the PLC can be reversed. Firms can “scallop” the curve, by giving
products a fresh lease of life, through infusion of newer technologies.
----------------------
Phillip Kotler, renowned marketing guru, argues that the PLC concept
---------------------- focuses too much on what is happening to products. Companies need to look
---------------------- at how markets are evolving too. A product could be at different stages of the
life cycle in different markets. Moreover, firms need to visualise a market’s
---------------------- evolutionary path as it is affected by new needs, competitors, technologies,
channels and other developments
----------------------
Like products, markets evolve through four stages: emerging, growth,
---------------------- maturity and decline.
---------------------- 1. Emerging markets: Before a market materialises, it exists as a latent
market. When pioneers develop products to satisfy latent needs and the
---------------------- product gains a certain level of market acceptance, latent markets evolve
to become emerging markets.
----------------------
2. growth markets: The market growth stage is ushered in when competition
---------------------- enters the market.
---------------------- 3. Market maturity: Eventually competition covers and serves all major
market segments and the market enters maturity stage. Market growth
---------------------- slows; competition intensifies as firms invade each other’s territories
to achieve sales growth, reducing everyone’s profits in the process.
----------------------
Firms carve out smaller and smaller market segments hence market
---------------------- fragmentation occurs.
---------------------- Market fragmentation is followed by market consolidation. However, a

consolidated market condition also will not last as mature markets swing
---------------------- between fragmentation and consolidation. The fragmentation is brought
about by competition and consolidation is brought about by innovation.
----------------------
4. decline: Eventually, demand for the present products will begin to
---------------------- decrease and the market will enter decline stage.
---------------------- The aforementioned concepts on market evolution are actually very

similar to the market conditions that change as the product evolves through the
---------------------- different stages of the life cycle.
---------------------- The criticisms of the PLC concept are nevertheless valid. Despite its
drawbacks, companies have recognised the real utility of the PLC concept and
---------------------- use it as an effective strategic tool.
----------------------

Notes
----------------------
1. Profits peak in the growth phase.
----------------------
2. Defensive strategy is followed by pioneering companies with
innovative products. ----------------------
3. Pioneering firms use either a market skimming or a market penetration ----------------------
strategy depending on the market conditions.
----------------------
Fill in the blanks.
1. _______ is a strategy of using high prices backed by a very high level ----------------------
of marketing communications support. ----------------------
2. _______ is the strategy of using low prices but with very high
----------------------
communication support.
3. The first sign of the advent of the maturity phase of the product is ____. ----------------------
----------------------
Summary ----------------------
• Product differentiation is the strategy of creating differences that make a ----------------------
product stand apart from competitive offerings, to give it a distinct and
valued place in the customers’ mind. ----------------------
• Physical products vary in their potential for differentiation; some product ----------------------
categories offer numerous opportunities to differentiate the physical product
such as in product form, features, performance quality, conformance quality, ----------------------
durability, reliability, serviceability and aesthetic quality.
----------------------
• Brand image plays a crucial role in the customer’s decision-making and
especially so in categories where products and service differentiation has ----------------------
become minimal.
----------------------
• Mapping the consumption chain can help companies uncover opportunities
to create differentiation that neither they nor their competitors thought ----------------------
possible.
----------------------
• Products can be classified into three broad groups: durability and
tangibility, consumer goods and industrial goods. ----------------------
• A product mix also known as product portfolio is the set of all products
and services that a company offers to its various markets. ----------------------
• A product line consists of similar products or products within a certain ----------------------
category.
----------------------
• Managing product lines involves several decisions and operational
activities; some of the important ones are composition of lines, allocation ----------------------
of resources, positioning, and pricing and communication decisions.
----------------------

Notes • A brand is a badge of origin, a set of benefits, abstract goals and motivations
of a customer and a set of beliefs and values.
---------------------- • Brand equity is the value of the customer’s mind share and heart share.
---------------------- Brand equity is not just a measure of the consumer’s loyalty; it is a measure
of the brand’s perceived quality, strength of emotional associations,
---------------------- degree of brand recognition and other assets such as patents, trademarks
and channel relationships.
----------------------
• An innovation is defined as any change, alteration or renewal of an existing
---------------------- product or process, which significantly improves product performance
----------------------
• Concept testing involves consumer responses to believability
---------------------- and communicability, need level, need gaps, perceived value, purchase
intention and target markets.
---------------------- • Five product characteristics influence consumer acceptance of
---------------------- new products. They are relative advantage, compatibility, complexity,
trialability and observability.
---------------------- • The five stages in the innovation diffusion process are awareness, interest,
---------------------- evaluation, trial and adoption.
• All products have a life cycle and each stage of the life cycle poses different
---------------------- challenges and opportunities to the company because of which products
require different marketing, financial, manufacturing, and purchasing and
----------------------
resource strategies at each stage.
---------------------- • The life cycle curve is divided typically into four stages: introduction,
growth, maturity and decline.
----------------------
---------------------- Keywords
---------------------- • Product differentiation: The strategy of creating those differences
---------------------- that make a product stand apart from competitive offerings, to give it a
distinct and valued place in the customers’ mind.
---------------------- • Durability: A measure of the products’ expected operating life under
---------------------- natural or stressful conditions.
• Convenience goods: These are those goods that consumers purchase
---------------------- frequently, immediately and with minimum effort.
---------------------- • Specialty goods: They are very “high-end” lifestyle or luxury products or
products related to a consumer’s hobby or area of interest for which the
---------------------- consumer is willing to make special purchasing efforts.
---------------------- • Rapid skimming: A strategy of using high prices backed by a very high
level of marketing communications support.
----------------------
----------------------
----------------------

Notes
----------------------
1. What is product differentiation? How is product differentiation related to
product positioning? What is the difference between product differentiation ----------------------
and a product being different from its rivals?
----------------------
2. How are consumer goods classified? What are the different factors that
marketers need to understand with respect to each classification? ----------------------
3. What is the difference between a product mix and a product line? Explain ----------------------
the concept of width, length, depth and consistency with respect to each.
Why do companies add new product lines? State one recent example. ----------------------
4. Explain what a brand is. What is the difference between a product ----------------------
and a brand? What functions do brands perform for consumers and for
companies? ----------------------
5. Why do companies need to innovate continuously? Explain the different ----------------------
innovation strategies that companies can adopt. What are the common
innovation failures? ----------------------
6. What is the consumer adoption process? What product characteristics affect ----------------------
the rate of consumer adoption of the product? Explain the different stages
of the consumer adoption process and the marketing tasks at each stage. ----------------------
7. Write short notes on: ----------------------
a) Brand Equity ----------------------
b) Product Life Cycle c) Innovation
----------------------
d) Product Development Process
----------------------
Fill in the blanks.
----------------------
1. Differentiation is meaningful if it satisfies value, distinctive, profitable
and sustainable criteria. ----------------------
2. Sustainable product differentiation is created when a company develops ----------------------
distinctive capabilities, a competitive advantage or a core competency
and then aims for a strategic position in the industry. ----------------------
1. Convenience goods are those goods that consumers purchase frequently,
immediately and with minimum effort. ----------------------
2. Capital items are long-lasting goods, which facilitate the manufacturing ----------------------
of finished product.
----------------------

Notes 3. Depth of a product mix refers to how many variants are offered for each
product in the line.
----------------------
4. Product line appraisal is a regular audit of each SKU in the company’s
---------------------- portfolio.
----------------------
State True or False.
----------------------
1. False
---------------------- 2. True
---------------------- 3. True
Fill in the blanks.
----------------------
1. An innovation is defined as any change, alteration or renewal of an existing
---------------------- product or process, which significantly improves product performance
----------------------
2. A product concept is an elaboration of a product idea expressed in
---------------------- meaningful consumer terms.
---------------------- 3. In the integrator model, the company assumes responsibility for the entire
innovation process in-house as well as manufacturing and marketing of
---------------------- the innovation from start to finish.
----------------------
1. False
----------------------
2. False
---------------------- 3. True
1. Rapid skimming is a strategy of using high prices backed by a very high
---------------------- level of marketing communications support.
---------------------- 2. Rapid penetration is the strategy of using low prices but with very high
communication support.
----------------------
3. The first sign of the advent of the maturity phase of the product is market
---------------------- saturation.
----------------------
Suggested Reading
----------------------
College Publishing.
----------------------
----------------------

Distribution Channels and Marketing of Services
UNIT
10
Structure:
10.1 Introduction
10.2 Role of Marketing Channels
10.3 Channel Structure
10.4 Channel Design
10.5 Managing Channel Relationships
10.6 Channel and Distribution Decisions for Services
10.7 Service Marketing
10.8 Marketing Mix for Service Firms
10.9 Managing Service Quality
10.10 Role of Self-Service Technologies
10.11 Differentiation of Services
10.12 Managing Product Support Services
Summary
Keywords
Suggested Reading
Distribution Channels and Marketing of Services 275

Notes
Objectives
----------------------
----------------------
• Describe the role of the marketing channels
----------------------
• Recommend decisions companies need to take in designing,
---------------------- managing and evaluating channels for both manufacturing and
service companies
---------------------- • Identify new distribution channel trends
---------------------- • Explain how services are different from physical products
• Describe the key elements of marketing of services and how service
---------------------- firms manage their quality
---------------------- • Recommend how service firms can differentiate their offerings
----------------------
10.1 INTRODUCTION
----------------------
During the past three decades, vast progress has been made in our
---------------------- understanding of the design and management of distribution channels. Markets
have evolved and matured and technological developments have made
----------------------
distribution a strategic competitive tool, as against a mere process of marketing
---------------------- which was the case in the past.
In India, distribution channels have evolved in three distinct phases.
----------------------
The first phase spanning the 1950s to early 1960s was when the
---------------------- multinationals and a few Indian companies concentrated their efforts on
reaching out to urban markets. Trade channels performed limited functions
----------------------
of merely redistributing the merchandise to retailers. Their own view of their
---------------------- business was limited to that of being merely “resellers”.
---------------------- The second phase spanning the 70s and 80s saw an improvement in
distribution and transportation infrastructure and led to creation of market
---------------------- savvy wholesalers, stockists and carry forward agents. Companies were able
to extend their reach into smaller towns and even villages. Better management
---------------------- techniques and the advent of technology improved inventory management,
---------------------- warehouse management among others. Due to better information flows,
distribution channels were able to give feedback from the customers to the
---------------------- companies. Companies organised regular meets with channel members as well
as training to improve distribution management practices. This decade saw an
---------------------- expansion in the role of the channel members, with companies now directing
---------------------- their relationship marketing efforts towards the channel members.
In the current scenario, channel dynamics have changed considerably.
---------------------- The trade channel has become organised, with many of the erstwhile smaller
---------------------- players now organised as large professionally run companies. Supermarkets,
hypermarkets and big retail stores are changing the face of distribution at the
---------------------- retail end. Larger retailers are now using their “clout”, and this has changed the

dynamics of relationships between companies and their “channel partners” (as Notes
they are now referred to). Multiple new channels like direct selling, e-commerce,
vending machines are now available to marketers, which brings with it newer ----------------------
challenges of managing multiple channels.
----------------------
Emergence of flexible distribution channels for financial products
----------------------
Technology is enabling banks to provide the convenience of anytime- any
where-banking. Banks are now reengineering the way in which their ----------------------
services can be reached to their customers by bringing in flexibility in their
----------------------
“distribution channels”. The earlier brick-and-mortar branch is no longer
sufficient; technology is now taking banks to the homes 01 offices, 24 hours ----------------------
a day 365 days a year through ATMs, phone banking and PC banking. The
financial supply chain is undergoing a fundamental strategic change. ----------------------
Traditionally, consumers could do their banking only by coming to the ----------------------
bank’s branch. The brick-and-mortar building of the bank branch defined the
periphery of service delivery ol banking products. The trend of Non-Branch- ----------------------
Service Delivery in banking started with the growing popularity of electronic
----------------------
payment services. It started with Electronic Funds Transfers (EFT). Then came
credit cards; ATMs and smart cards were next in the evolutionary history. ----------------------
Gradually, with the advance of computing technology, telephone banking
and Computer Telephony Integration (CTI) became a powerful medium of ----------------------
delivering banking services. The latest product is Internet banking, where the
----------------------
technology and other issues are still under evolution.
These new technologies have broken the paradigm of branch banking. ----------------------
Customers, whether individual consumers or busines s corporates, no longer
----------------------
have to go to the bank to do their business; It can be done from home, using
the PC or the telephone, or at the shopping markets, using plastic money. ----------------------
Some banks have now also started door to door delivery oi services. As
a result, it is now possible to order cash or demand drafts to be delivered ----------------------
at home. Consumers wishing to open accounts with banks or to apply for
----------------------
durable loans can call up Direct Sales Associates (DS As) of banks and their
representatives will complete the necessary documentation at the customer’s ----------------------
convenience, at his desired place und time. These are the elements of the new
flexible financial supply chain. ----------------------
Source: “Emergence of flexible distribution channels for financial products: ----------------------
E-banking as a competitive strategy for Banks in India” by De Sarkar, Partha
et at. ----------------------
----------------------
10.2 ROLE OF MARKETING CHANNELS ----------------------
Most companies do not sell their goods directly to the end-consumers
----------------------
even in B2B markets. Between the companies and end-consumers are a
set of intermediaries performing a variety of functions. These intermediaries ----------------------
constitute the marketing channel or trade channel or distribution channel as
they are alternately known. ----------------------

Notes In any distribution channel, there are three sets of intermediaries:
1. Merchants: They are retailers and wholesalers, who buy the merchandise,
----------------------
hence, take title to the merchandise from companies and resell the
---------------------- merchandise in smaller lots to other channel members or end-customers.
2. Agents: They are sales agents, carrying and forwarding agents or
----------------------
manufacturer’s representatives; these agents represent the company, look
---------------------- for new customers, negotiate on behalf of the company and help expand
the reach of the company’s channel. However, they do not take title to the
---------------------- goods.
---------------------- 3. Facilitators: They comprise transportation companies, warehousing
companies, insurance companies and after-sales service facilities. They
---------------------- facilitate the distribution process but do not take title to the goods nor
negotiate purchases or sales.
----------------------
In a general sense, channel members “add value” to a company’s
---------------------- products by making the merchandise available at the right time, place and in the
---------------------- right quantity and right condition to the end-customer. To do so, a number of
activities need to be performed. We can broadly classify these activities into
---------------------- forward flows, backward flows and point of sale.
---------------------- The various activities undertaken by channel members are:

• Transfer of title or ownership.
----------------------
• Physical movement of goods.
---------------------- • Storage of goods at various transit points.
---------------------- • Stocking and inventorying goods.
---------------------- • Processing orders from retailers and customers.
• Assuming risk connected with movement of goods.
----------------------
• Providing for payment of bills through financial institutions.
---------------------- • Providing credit to buyers.
---------------------- • Negotiating pricing and other terms.
• Maintaining a sales force to stimulate demand at retail level and to service
----------------------
retailers.
---------------------- • Developing and disseminating information to stimulate purchases.
---------------------- • Displaying products at retail level through attractive merchandising.
• Assisting buyers in product demonstrations and product information.
----------------------
• Handling complaints and sales returns.
----------------------
• Providing after-sales assistance in usage and training and servicing
---------------------- breakdowns.
• Gathering and sharing information with companies about buying patterns
----------------------
of current customers, potential customers, competitors and other factors
---------------------- that impact the business.

These functions are not performed by any one individual or distribution Notes
entity. A number of different channel partners perform these tasks. Companies
have to take decisions on which channel entity will perform which activity as ----------------------
well as co-ordinate the functioning of numerous channel partners so that the
forward and backward flows happen smoothly. As companies expand their ----------------------
reach, the number of channel entities increase, increasing the complexity of ----------------------
channel management. All the activities add value to the products, but they also
add costs to the products as they move through the channels. Companies have ----------------------
to ensure that there is no overlap of functions, activities and territories, so that
cost of distribution is minimised. ----------------------
----------------------
----------------------
1. In any distribution channel, there are three sets of intermediaries: ----------------------
____________, agents and facilitators.
2. ____________ add value to a company’s products by making the ----------------------
merchandise available at the right time, place and in the right ----------------------
quantity and right condition to the end-customer.
----------------------
----------------------
Activity 1
----------------------
Visit the websites of ITC and Hindustan Lever and collect detailed
----------------------
information on the e-Choupal and Project Shakti initiatives. Draw detailed
charts on how the channel functions and the flow of goods and information ----------------------
within the channel.
----------------------
10.3 CHANNEL STRUCTURE ----------------------
The variety of channel participants can be combined in many different ----------------------
ways to create effective marketing channels. Channel structures are very
unique to countries and regions and as such there defy categorisation. Some ----------------------
common channel structures or formats are direct, indirect, vertical marketing
systems, horizontal marketing systems and multi-channel marketing systems. ----------------------
Distribution channels do not remain static; channel structures do evolve in ----------------------
response to local opportunities and conditions.
1. Direct/indirect distribution channel: A company may undertake ----------------------
to distribute its goods to customers or retailers without involving any
----------------------
intermediaries. This is referred to as direct channels and they are the
shortest channels. Direct mail, catalogue selling and direct channels of ----------------------
Avon, Tupperware, Oriflame and Amway are examples of direct channels.
Direct channels give a firm limited reach or coverage and as such may ----------------------
be more suited to companies whose target markets are concentrated in
----------------------
geographic pockets.

Notes Alternatively, goods may be distributed through several intermediaries
such as wholesalers, agents and stockists, retailers before they finally reach
---------------------- the end- customer. Indirect channels are necessary to gain extensive reach and
coverage. Convenience goods typically use indirect channels.
----------------------
Figure 10.1 shows indirect channel systems for consumer products and
---------------------- industrial products respectively.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 10.1: Indirect Channel Systems for Consumer and Industrial Products
2. Vertical marketing systems: In the conventional channels, which
----------------------
comprise direct or indirect distribution methods, none of the channel
---------------------- members has complete or even substantial control over other members.
Each channel member was a completely independent entity. A Vertical
---------------------- Marketing System (VMS), on the other hand, includes parties like
wholesalers, producers and retailers acting as a unified system. A VMS
----------------------
is a tightly coordinated distribution channel designed specifically to
---------------------- improve operating efficiency and marketing effectiveness. One channel
member, the channel captain, owns the others or franchises them or has
---------------------- so much power that they all cooperate. The channel captain can be the
producer, wholesaler or retailer. VMSs arose as a result of strong channel
----------------------
members attempts to control the channel behaviour and eliminate the
---------------------- conflict that results when individual channel members pursue their own
objectives. VMSs achieve economies through size, bargaining power and
---------------------- elimination of duplicated services.
---------------------- There are three types of VMS:
---------------------- a) Corporate VMS: A firm at one level of the channel owns a firm
at the next level or at subsequent levels or it may own an entire
---------------------- channel. VMS here combines successive stages of production and
distribution under single ownership, giving higher degree of control
---------------------- to the manufacturer.

b) Administered VMS: The coordination of the system is secured through Notes
the size and power of one of the members. Manufacturers of dominant
brands will be able to secure strong trade co-operation from the channel ----------------------
intermediaries in terms of shelf space, displays and support from the
sellers. Companies like HLL, P&G, Coke are able to command a high ----------------------
level of co-operation from their channel intermediaries. ----------------------
c) Contractual VMS: A contractual VMS consists of independent
----------------------
firms at different levels of production and distribution, integrating
their programmes on a contractual basis to obtain more economies ----------------------
or sales impact than they would achieve alone. Contractual VMSs
are fast growing and one of the most significant developments in ----------------------
the economy. There are three types of contractual VMS:
----------------------
i.
Wholesaler sponsored voluntary chains: Wholesalers
organise voluntary chains of independent retailers to help them ----------------------
compete with large chain organisations. The wholesaler develops
----------------------
a programme in which independent retailers standardise their
selling practices and achieve buying economies that enable the ----------------------
group to compete effectively with retail chains.
----------------------
ii.
Retailer cooperatives: Retailers take the initiative and
organise a new business entity to carry on the wholesaling ----------------------
and possibly some production. Members concentrate their
purchases through the retailer co-operative and plan their ----------------------
advertising jointly. Profits are shared by the members in
----------------------
proportion to their purchases.
iii.
Franchisee organisations: A channel member called ----------------------
a franchisor might link several successive stages in the ----------------------
production-distribution process. Franchising has been the
fastest growing retailing development in recent years. ----------------------

The traditional franchising system is the manufacturer ----------------------
sponsored retailer franchise. Automobile majors, Maruti,
Ford, Hyundai, license dealers to sell their cars. The dealers ----------------------
are independent business people who agree to meet the
terms and conditions of sales and services. Another is the ----------------------
manufacturer sponsored wholesaler franchise. Coca Cola, for ----------------------
example, licenses bottlers (wholesalers) in various markets
who buy its syrup concentrate and then carbonate, bottle ----------------------
and sell it to retailers in local markets. A newer system is
the service firm sponsored retailer franchise. A service firm ----------------------
organises a whole system for bringing its service efficiently to ----------------------
its customers. Examples can be found in the fast food service
business (McDonalds, Pizza Hut) and car rental (Hertz). ----------------------
3. Multiple channels: Rarely does a company use just one type of channel ----------------------
structure for its distribution system. It usually employs several different
or alternative channels, which include multiple channels, non-traditional ----------------------

Notes channels and strategic channel alliances. When a company selects two or
more different channel structures to distribute the products to its target
---------------------- markets, this arrangement is known as multiple or dual distribution. Dell
Computers made a radical departure from its direct channel sales mode
---------------------- by testing retail kiosks in shopping malls to increase its market share in
---------------------- personal computers. Dell has also tried selling its PCs directly to home
users through cable shopping channels. Cellular service providers like
---------------------- Airtel sell their prepaid cards through FMCG retailers in addition to
selling them through their traditional service outlets.
----------------------
Usage of multiple channels increases the market coverage and reach for
---------------------- the company and provides greater convenience and better service levels
to its customers.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 10.2: hLL’s Marketing Channels

---------------------- 4. Non-traditional channels: Often non-traditional channel arrangements
help differentiate a firm’s product from competition. For example, a
----------------------
company may chose to use a mail-order channel or the Internet to sell
---------------------- products instead of going through traditional retailer channels. A non-
traditional channel unique to India is the “Paanwallah”. FMCG companies
---------------------- have targeted the “paanwallahs” to sell smaller SKUs of toothpaste,
chewing gum, candy; even pharma companies have sold OTC products
----------------------
like Aspirin, Dispirin and Crocin through these outlets. Non- traditional
---------------------- channels may limit coverage for a company but they are particularly
useful for companies serving niche markets to gain access to their target
---------------------- markets without having to establish channel intermediaries.
---------------------- 5. Horizontal marketing systems: Companies form strategic channel
alliances also known as horizontal marketing systems, which enable the
----------------------
companies to use another company’s already established channel. For
---------------------- example, banks have arrangements with hotels and petrol pumps for their
ATMs. Marico Industries has alliances with several FMCG companies.
---------------------- For some time, Nokia had a strategic alliance with HCL Infosystems for
distribution of its handsets. Currently HCL has formed a strategic alliance
----------------------
with Apple for sales and service for its IPod in India.
----------------------
Alliances are used most often when the creation of marketing channel
---------------------- relationships may be too time consuming and expensive. Strategic

channel alliances are proving to be more successful for growing Notes
businesses than mergers and acquisitions. This is especially true for
global markets, where cultural differences, distance and other barriers ----------------------
may prove too daunting.
----------------------
6. Internet: The Internet allows consumers to directly access manufacturers
and vice versa. As a result, channel structures are undergoing a rapid ----------------------
change and in many industries the role of channel intermediaries is
----------------------
rapidly undergoing a change. In the travel industry, as more airlines
offer e-ticketing, the role traditionally performed by the travel agent is ----------------------
rapidly diminishing. Travel agents are now positioning themselves as
travel consultants for holidays, as their role as ticketing agents may soon ----------------------
become redundant.
----------------------
The market potential for the Internet is only bounded by the penetration
of the Internet and the number of consumers who are able to shop online. ----------------------
In an earlier unit, we have discussed how Internet commerce is carried out
----------------------
over four major domains: B2B, B2C, C2C and C2B. Internet commerce
or e-commerce is growing by leaps and bounds further fueled by the ----------------------
advent of safe electronic payment mechanisms. However, the Internet as a
distribution channel is particularly suited to certain types of products only. ----------------------
Internet selling is likely to be more successful when it offers time saving,
----------------------
high quality service and products that appeal to a more affluent audience.
The Internet would not be suitable to product categories requiring a “high- ----------------------
touch” selling experience with extensive personal service.
----------------------
Indians take to shopping on the web
----------------------
According to a “Indian Online ‘06” survey conducted by Juxtconsult, the
number of Indians shopping online grew by 42% over the previous year. A ----------------------
sizeable number 5.9 million consumers, representing 28% of the 25 million
----------------------
people logged on the net, spent an estimated Rs 3500 to 4000 crores online
in the year 2005.Time flexibility and home delivery convenience were the ----------------------
predominant reasons to buy online. Ticketing is fueling the rapid growth of
online shopping, with almost a third of all online buyers going for train tickets ----------------------
online; 23% use it for net banking and 22% for airline tickets. Books, selective
----------------------
electronic goods and clothing are some of the other popular categories. Credit
cards and cash-on-delivery are the biggest mode of payment with 38% and ----------------------
32% of online shoppers using them for payments.
----------------------
Source: Economic Times, 11th July 2006
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Activity 2
----------------------
---------------------- 1. Visit at least three to four retailers of different product categories (say
consumer durables, grocery store, pharmacy, etc.) Find out information
---------------------- on the channel intermediaries or middlemen they deal with. You
can also try to find information on the terms on which business is
----------------------
conducted with the channel partners.
---------------------- 2. Collect articles from business magazines and the Internet on channel
alliances recently forged by different companies. What were the
----------------------
reasons for making these alliances? What does each partner stand to
---------------------- gain?

----------------------
10.4 CHANNEL DESIGN
----------------------
Designing a marketing channel requires several critical decisions.
----------------------
Marketing managers must decide the role of distribution in the overall marketing
---------------------- strategy and must ensure that the channel strategy chosen is consistent with
product, promotion and pricing strategies. There are several factors that will
---------------------- influence the choice of channel and what level of distribution intensity will be
appropriate.
----------------------
Levels of distribution Intensity
----------------------
Companies have three options for intensity of distribution: intensive distribution,
---------------------- selective distribution or exclusive distribution.
• Intensive distribution is a type of distribution aimed at maximum market
----------------------
coverage. The company tries to make the product available in every
---------------------- outlet that potential customers might visit. This is because customers are
unwilling to search for it and want to spend the least time and effort in
---------------------- purchasing such goods (convenience products and office supplies).
---------------------- • Selective distribution is aimed at making the product available to select
dealers and retailers in a given territory. This strategy is appropriate for
---------------------- shopping products where purchases are preplanned. Customers prefer to
shop for such products in shopping districts or reputed retail outlets, where
---------------------- they can make comparisons with other brands. Selective distribution
---------------------- strategies may also be appropriate for FMCG products, but where the
company wishes to maintain a superior product image; for instance, high-
---------------------- end cosmetics and toiletries are made available only at very select reputed
retailers.
----------------------
• Exclusive distribution is the most restrictive form of market coverage
---------------------- The products are made available through only one or two exclusive retail
outlets in a given area. This distribution strategy is appropriate for high-
---------------------- end shopping products, specialty goods and industrial products. Such
products require a high level of customer service both presale and post
----------------------
sale, which is possible only through a restricted number of outlets.
1. Target market factors: In an earlier unit, we have studied how products Notes
can be classified as either consumer goods or industrial goods. Further,
consumer goods can be further classified as per the shopping habits of ----------------------
customers into convenience goods, shopping goods, specialty goods and
unsought goods. These classifications become important considerations ----------------------
when designing a channel strategy. ----------------------
Convenience goods are those goods that consumers purchase frequently,
----------------------
and therefore want to do so immediately and with minimum effort.
Convenience goods can be further classified as staples or daily necessities ----------------------
such as groceries and toiletries; impulse goods which are purchased
without planning or search effort such as candies, snacks and even ----------------------
beverages at times; and emergency goods such as pain relievers and
----------------------
other OTC products umbrellas and so on. Availability is the key; hence,
distribution channels for such products are intensive with wide coverage. ----------------------
Generally, the wider the coverage, the more will be the number of
----------------------
intermediaries in the distribution channel. Availability of the appropriate
pack sizes and product variants in demand is the other critical element. ----------------------
Hence, inventory control throughout the channel becomes a key
distribution task. For perishable products that need to be refrigerated like ----------------------
milk, butter, ice cream and chocolates, companies have to create a “cold
----------------------
chain network” that keeps the commodity in a refrigerated condition from
factory to customer. For other perishables like bakery products, service ----------------------
levels to retail outlets have to very high with almost daily replenishment
of stocks. ----------------------
Shopping goods are those goods that consumers buy infrequently. These ----------------------
are usually preplanned purchases and consumers make some comparison
on features, styling, prices and quality. Clothing, footwear, cosmetics, ----------------------
personal accessories like watches and home appliances like televisions,
----------------------
refrigerators and washing machines and automobiles (4-wheelers or
2-wheelers) are examples of shopping goods. ----------------------
Distribution channels for such products are selective with wide ----------------------
market coverage. Retailers add value to the products through product
demonstrations, assistance to customers in decision-making, installation ----------------------
and even after-sales service. Hence, companies have to support the retail
intermediaries through training of sales force; other factors like inventory ----------------------
control and service levels to retail outlets are also important. Transportation ----------------------
conditions are a critical element of the distribution strategy to ensure the
safe transportation of products from factory to end- customer. ----------------------
Companies have to take a decision on whether after-sales service is to be ----------------------
provided through the retailer or through a separate service channel.
Specialty goods are “high-end” lifestyle or luxury products or products ----------------------
related to a consumer’s hobby or area of interest for which the consumer ----------------------
is willing to make special purchasing efforts. Examples include high-end
cars or performance bikes, specialised music equipment or photographic ----------------------

Notes equipment. Distribution intensity for such products is usually very
exclusive with limited market coverage. Other important elements of
---------------------- the distribution strategy are presale and post-sale customer service, retail
ambience, product demonstrations and product displays.
----------------------
Unsought goods are all those products that customers although aware of,
---------------------- usually postpone buying as they are not priority enough. The distribution
strategy for such products is either direct selling through a network of
----------------------
agents (insurance) or through selective distribution outlets (helmets). In
---------------------- the event that the company opts for direct selling, channel management
would involve various activities such as recruitment of agents, training,
---------------------- assignment of territories, managing the compensation and motivation of
sales force.
----------------------
2. Product-related factors: Product positioning is a prime determinant
---------------------- of the type of channel to be used. For instance, packaged fruit juices, if
positioned as a health drink, may be made available through gyms and
----------------------
fitness clubs in addition to the mainstream convenience goods channels.
---------------------- Likewise, cosmetic contact lenses need to be available at specialty
outlets that have large cosmetic counters in addition to being available at
---------------------- opticians.
---------------------- Products that are more complex or customised tend to benefit from shorter
and more direct distribution channels; such types of products sell better
---------------------- through a direct sales force. The product’s life cycle is also an important
factor in choosing a channel. The distribution strategy changes as
----------------------
the product moves through the life cycle. During the introduction stage,
---------------------- companies may use direct selling or exclusive distribution arrangements.
---------------------- During the latter stages, distribution coverage is wider; distribution

intensity will depend on the type of product. Perishability of the product
---------------------- is an important factor, as also the fragility of the product; as such, products
require special packaging and special handling arrangements during
---------------------- transportation and display at retail end.
---------------------- 3. Company-related factors: Push vs Pull strategy to stimulate consumer
demand for the brand.
----------------------
A pull strategy relies heavily on marketing communications to stimulate
---------------------- demand and “pull” the customer into the store. A push strategy relies
heavily on the distribution channel to stimulate demand by “pushing”
---------------------- the product. Which strategy a company chooses depends on a number of
---------------------- factors.
A push strategy is relevant for:
----------------------
• Undifferentiated “me too” products.
----------------------
• For brands that do not have large communication budgets.
---------------------- • New companies that may initially rely on push.
---------------------- A pull strategy on the other hand is a must for:

• Lodging the brand in the customers’ mind space. Notes
• Highly differentiated image products.
----------------------
• High involvement products.
----------------------
An important point to note is that companies use a combination of push and
pull strategies rather than just a push or pull strategy. The combination and proportion ----------------------
of push and pull needs to be adapted as market and competitive conditions change.
The typical tools for a push strategy are margins, trade promotions, credit and ----------------------
payment policies, slotting allowances and even fixed assets allowances. At the point
----------------------
when a company chooses to rely more on a push strategy, its distribution strategies
will include greater emphasis on using these tools. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 10.3: Push and Pull Strategies ----------------------
----------------------
10.5 MANAGING CHANNEL RELATIONSHIPS
----------------------
A marketing channel is more than a set of institutions linked by economic
ties; social relationships play an important role in building unity among ----------------------
channel members. A critical aspect of managing distribution channels is
managing the social relationships among channel members to achieve synergy. ----------------------
The basic social dimensions of channels are power, control, leadership, conflict ----------------------
and partnering.
----------------------
1. Channel power, control and leadership: Channel power is a channel
member’s capacity to control or influence the behaviour of other channel ----------------------
members. Channel control occurs when one member affects another
member’s behaviour. To achieve control, a channel member assumes ----------------------
channel leadership and exercises authority and power; this member is
----------------------
termed the channel leader. In one distribution channel, the manufacturer
may be the leader because it controls product availability, whereas in ----------------------
another channel the retailer may be the channel leader because it wields
great power and control over the retail price and inventory. Large retailers ----------------------
like Wal-Mart and Tesco wield great power in pricing and inventories and
----------------------
are channel leaders in convenience goods markets in the US and Europe.

Notes The exercise of channel power is routine element of many business
activities, the outcome of which is often more efficient operations and
---------------------- cost savings.
---------------------- 2. Channel conflict: Inequitable channel relationships often lead to channel
conflict, which is a clash of goals and methods among the members of
---------------------- the distribution channel. Conflicts can arise because a channel member
refuses to adapt with the times and therefore becomes inefficient.
----------------------
Often conflicts arise due to channel pursuing different goals. A multi-
---------------------- brand home appliances retailer would want to sell as many products as
possible, regardless of brand, to improve his overall sales and profitability.
----------------------
On the other hand, a particular company would want him to push their
---------------------- products more, as they desire a certain sales volume and market share.
Companies that have long and deep product lines also set sales targets
---------------------- for the different SKUs and would want channel members to keep their
sales in line with these targets; individual channel members would want
----------------------
to push those SKUs which deliver greater profitability, regardless of the
---------------------- targets.
Conflicts can also arise when channel members fail to fulfill expectations
----------------------
of other channel members; for instance, if a franchisee does not follow
---------------------- the rules set by the franchiser. A lack of communication between company
and channel members is also very common cause of conflict. A company
---------------------- may change its policy with regards to the period of warranty coverage
and fails to communicate the same to the dealer. The dealer continues to
----------------------
make repairs free of charge to the consumer, expecting to be reimbursed
---------------------- by the company. Ideological differences and different perceptions of
market realities are also a source of conflict. Retailer and dealers come
---------------------- face to face with customers and are more likely to empathise with the
customer and believe that the “customer is always right”. They would
----------------------
like the company to offer a more liberal return policy. On the other hand,
---------------------- many companies hold the view that customers may “try to get something
for nothing” or don’t follow product instructions carefully.
----------------------
Conflicts can occur at any level within the distribution chain. A conflict
---------------------- among channel members at the same level, such as two retailers or stockists,
is known as horizontal conflict. This type of conflict is common where
---------------------- companies practice dual or multiple distribution strategies. Horizontal
---------------------- conflict can also occur when channel members on the same level feel they
are being unfairly treated by the manufacturer. Most managers regard
---------------------- horizontal conflict as healthy competition, and may allow such a conflict
to play out to their advantage.
----------------------
A more serious conflict is vertical conflict, which occurs between two
---------------------- different levels in the distribution chain, such as between a manufacturer
and wholesaler or between a manufacturer and retailer. Manufacturer
---------------------- versus wholesaler conflict typically arises when a manufacturer bypasses
---------------------- a wholesaler to deal directly with the customer, such as does happen in

institutional sales. Similarly, manufacturers that experiment with selling Notes
to customers directly over the Internet are creating conflict with their
intermediaries. Producers and retailers may also disagree over the terms ----------------------
and conditions of doing business or some other aspect of the business
relationship ----------------------
4. Channel partnering: Regardless of the power equation, channel members ----------------------

rely heavily on each other. Even the most powerful of companies rely on
----------------------
their dealers to sell their products and the most powerful of retailers require
the products supplied by companies. In a sharp contrast to the adversarial ----------------------
relationships of the past between manufacturers and sellers, contemporary
channel management emphasises close working partnerships among ----------------------
channel members. Channel partnering or channel co-operation is the joint
----------------------
effort of all channel members to create a supply chain that serves the
customers and creates a competitive advantage. By cooperating retailers, ----------------------
wholesalers and manufacturers can speed up inventory replenishment,
improve customer service and reduce the total costs of the marketing ----------------------
channel. Supply chain management emphasises channel alliances and
----------------------
partnerships as it helps supply chain managers to create parallel flows of
material and information. The rapid growth in channel partnering is due ----------------------
to information technology as well as a common need to lower costs and
improve operational efficiency. Forced to become more efficient, many ----------------------
companies are now turning towards channel partnering as a “win-win”
----------------------
situation.
----------------------
----------------------
1. A includes parties like wholesalers, producers and ----------------------
retailers acting as a unified system.
2. is a prime determinant of the type of channel to be ----------------------
used. ----------------------
3. is a channel member’s capacity to control or
----------------------
influence the behaviour of other channel members.
4. A conflict among channel members at the same level, such as two ----------------------
retailers or stockists, is known as .
----------------------
----------------------
1. The basic social dimensions of channels are power, control, leadership,
conflict and partnering. ----------------------
2. A pull strategy relies heavily on the distribution channel to stimulate ----------------------
demand.
----------------------
----------------------

Notes 10.6 CHANNEL AND DISTRIBUTION DECISIONS FOR
SERVICES
----------------------
The services sector is the fastest growing sector of our economy and
---------------------- although distribution channels for services are hard to visualise, the same
---------------------- factors and issues apply to designing and managing of services channels as
well. One thing that sets service distribution apart from traditional distribution
---------------------- for manufactured goods is the simultaneous production and consumption of
services. The benefits of a service are also relatively intangible and because
---------------------- service industries are so customer oriented, dealing with customers is a priority.
---------------------- Services distribution must focus on three priority areas:
---------------------- 1. Minimising waiting time: Minimising the amount of time that customers
spend in a line to deposit a cheque, meet a customer service representative,
---------------------- airport check in line, wait for their food at the restaurant or wait in the
hospital OPD to meet the doctor, is the key area in delivering quality of
----------------------
service. When customers have wait in a line, as the waiting time increases
---------------------- so does their anxiety; people then tend to overestimate the actual time
spent waiting in the line, thus reducing their “zone of tolerance”. The
---------------------- actual service they receive is most likely to be perceived as deficient,
when waiting time is long.
----------------------
How can service marketers address this issue? It is unlikely that they can
---------------------- actually reduce the waiting time to nil, even though they can take steps to
---------------------- even out the mismatch between demand and supply. The key issue here
is to alleviate the anxiety of the customer while he or she is waiting to
---------------------- receive the service. Given below are some of the things that companies
can do:
----------------------
• Provide for comfortable waiting areas with adequate seating and
---------------------- entertainment and even beverage vending machines.
---------------------- • Provide for orderly movement of the queue, so that customers do
not have to clamor for service. Some banks now give tokens to
---------------------- their customers to meet service representatives like the earlier teller
system.
----------------------
• Fast food service outlets help customers decide their order whilst
---------------------- waiting in the line itself. This not only saves some time in placing
the order, but gives the customer the perception that he is already
---------------------- being attended to.
---------------------- • Companies reward loyal customers by eliminating their waiting
altogether.
----------------------
• During the waiting time on a telephone line, customers need
---------------------- to be additionally reassured that they have not been disconnected.
Soothing music and intimation of approximate wait time are some
----------------------
of the things that companies do to reduce the anxiety.
---------------------- • Self-service technologies can also reduce the wait time.

2. Managing service capacity: Service manufacturers do not have the Notes
luxury of an inventory buffer to meet inordinate demand. If they don’t
have the capacity to meet the demand, they must either turn down some ----------------------
prospective customers, let service levels slip, or be able to temporarily
expand capacity. Most companies try to shift some of the peak hour ----------------------
demand to off-peak hours and off-seasons, by offering incentives or ----------------------
some additional services during non-peak hours and off-season. Another
strategy is to add additional temporary personnel to meet the additional ----------------------
demand.
----------------------
3. Improving service delivery mechanisms: Like manufacturing
companies, service companies are also experimenting with different ----------------------
distribution channels for services. Choosing the right distribution channel
----------------------
can increase the times the services are available or add to customer
convenience. The airline industry has found that Internet ticket sales ----------------------
reduces distribution costs and raises the level of customer service, as
making a reservation is instantaneous. The Internet is a very important ----------------------
delivery channel for services.; payment of bills, online banking, booking
----------------------
tickets for an event, planning a vacation, buying mutual funds and payment
of insurance premium are just some of the ways in which companies have ----------------------
vastly improved service delivery using the Internet.
----------------------
Activity 3 ----------------------
1. Visit any outlet of service products like a Reliance Web World, Hutch ----------------------
Shoppe or a Maruti True Value. Collect information on their service ----------------------
channels and terms of business.
2. Visit a branch of your local bank on any working day and observe ----------------------
customers as they wait to be served. Make a list of the ways in which ----------------------
the branch manager can improve customer service.
----------------------
10.7 SERVICE MARKETING ----------------------
One of the megatrends of recent times has been the phenomenal growth ----------------------
of services. In India, services today account for 53% of gross domestic product. ----------------------
The services industries are quite varied and are found in the government
----------------------
sector (police, fire departments, and public utility), private non-profit sector
(charities, foundations), business sector (airlines, hotels, law firms, accounting ----------------------
firms, hospitals, insurance, hospitality) and even in the manufacturing sector
(support services such as legal and administration). ----------------------
Over the years, as opportunities for differentiation have diminished, ----------------------
companies have turned towards services to differentiate their products.
----------------------
----------------------

Notes Characteristics of Services
A service is defined as “any act or performance that one party can offer
----------------------
to another that is essentially intangible and does not result in the ownership of
---------------------- anything. Its production may or may not be tied to a physical product.”
Services vary from the purely intangible services such as legal, counseling and
----------------------
consulting to hybrid services which include some physical tangible elements.
---------------------- Services have four major characteristics that greatly affect the design of
their marketing programmes: intangibility, inseparability, variability and
----------------------
perishability.
---------------------- 1. Intangibility: Services are intangible products; the product here being
---------------------- the experience and outcome of using a service. Unlike physical products,
services cannot be seen, touched or experienced before they are bought.
---------------------- The intangibility of services has several implications:
---------------------- • Risk and uncertainty for the buyer is very high.

• Assessment of service quality is difficult as it is highly subjective.
----------------------
• Prescribing detailed quality standards for every service process is
---------------------- very critical.
---------------------- • Services cannot be patented.
• They cannot be displayed or sampled.
----------------------
• Pricing becomes complex.
----------------------
The challenge for the service marketer is to “tangibilise the intangible” to
---------------------- the extent possible, to reduce the buyer’s uncertainty and risk. Marketers
try to provide physical evidence of every aspect of the service.
----------------------
For instance, the case of a fast food restaurant providing quick self-
---------------------- service, the marketer will have to take care of the following :
---------------------- a) Place: The exteriors and interiors of the restaurant should be clean.
The layout should provide for several ordering counters so that
---------------------- waiting lines do not get long.
---------------------- b) Service personnel: Should be efficient and helpful so that orders
can be processed quickly. There should be sufficient number of
---------------------- employees to handle the increased workload during peak hours.
---------------------- c) Equipment: Kitchens and food service counters should be state of
the art and clean and well maintained.
----------------------
d) Communication material: Like menu cards, menu displays at the
---------------------- counters should assist in quick and easy ordering and must suggest
efficiency and speed.
----------------------
e) Products: On the menu should only be those that can be “fast food”
---------------------- and served quickly and efficiently. Products which require elaborate
preparation, although they may be popular, cannot be offered in a
---------------------- fast food restaurant.

To tangibilise the intangible, companies develop a detailed “service Notes
blueprint” that will give a clear picture of what they want the
customers experience and perception of service experience to be. ----------------------
They then design a detailed set of performance and context clues to
support that experience. ----------------------
2. Inseparability: Services are simultaneously produced and consumed. ----------------------

The interaction between the service provider and customer produces a
----------------------
service outcome. Physical goods, on the order hand, are manufactured
first, inventoried, shipped and distributed through several channel partner ----------------------
before they are finally sold to the end-consumer and finally consumed
later. The implications of inseparability for the service marketer are: ----------------------
a) Several “moments of truth”: No matter what a service provider ----------------------
claims to provide, it is the quality of the actual encounter between
the service employee and customer and what transpires between ----------------------
them that determines the service outcome.
----------------------
b) Service provider employees affect the encounter: The services
business is a highly people-oriented and people-intensive business. ----------------------
The quality and performance of service employees is key to outcome
----------------------
of the service.
c) Customers participate in and affect the transaction: The ----------------------
customer participation in the service interaction produces the service ----------------------
outcome. Customers who are unaware of how to use a service or
what to expect from the service, affect the quality of the outcome. ----------------------
Because of this, the service quality may “fall short” or may appear
inadequate, although in reality it is the customer’s inability to ----------------------
participate appropriately in the service interaction which affects the ----------------------
quality of the outcome.
The service marketers’ task is to manage the moment of truth ----------------------
by service personnel: employing the “right” people with a service ----------------------
attitude; and then training and motivating them on an ongoing, so
that they perform their role in the service encounter efficiently. ----------------------
Customer training and communication with customers on their role ----------------------
in the service encounter and clearly informing them about what to
expect will affect the outcome positively. For instance, for many ----------------------
service products, customers have to fill up detailed forms to avail
of the service. If the forms are incorrectly filled or incomplete, ----------------------
the service cannot be availed of causing delay and frustration for ----------------------
the customer. If before hand, customers are trained and assisted in
filling up of forms and if they are made aware of the importance ----------------------
of filling the form correctly, unnecessary delays in providing the
service can be avoided. This results in a happier customer and ----------------------
the organisation is able to handle a larger number of customers as ----------------------
unnecessary delays are avoided.
----------------------

Notes 3. Variability: Every time a customer uses a service, he may not experience
the identical service outcome as the previous encounter; moreover, the
---------------------- same service availed of in a different location or with a different service
employee may create a different service encounter. Unlike physical
---------------------- products, variability of the service encounter is a natural outcome of the
---------------------- simultaneous production and consumption and people intensive aspects
of the services.
---------------------- To address these issues, marketers must take care of the following:
---------------------- a) Service standards: Need to be clearly defined and communicated
to all service employees.
----------------------
b) Systems and processes: Clearly defined systems and processes to
---------------------- achieve the service standards need to be laid down. Service delivery
employees must be trained to follow the systems and processes to
---------------------- ensure homogeneity of the service encounter.
---------------------- Companies have to be careful that in laying down systems and
processes, they must provide for redressal of unique customer
---------------------- issues, otherwise the organisation will appear too rigid. On the other
hand, the service cannot be “flexible” to accommodate every whim
----------------------
and fancy of the customer, which in turn will affect the quality of
---------------------- the service to other customers. Organisations have to draw a fine
line between being too flexible or too rigid.
----------------------
4. Perishability: Since services are simultaneously produced and consumed,
---------------------- they cannot be inventoried and are therefore highly “perishable”. If a
hotel is unable to sell a hotel room for a particular day, say 10 July, the
---------------------- room remains unoccupied for that day. The “room night” for 10 July has
perished as it cannot be inventoried and resold for another day. The same
----------------------
applies for almost all services; if the service moment if unsold, unused or
---------------------- unoccupied, it cannot be inventoried.
Perishability of services creates a unique challenge for service marketers
----------------------
and that is the mismatch between demand and supply. If the demand
---------------------- for the service remains absolutely steady over duration of 24 hours and
through the year, then perishability is not an issue. However, that is not
---------------------- the case for most service industries, as there are peak and non-peak hours
and days and seasons.
----------------------
During peak hours, the service infrastructure comes under severe pressure,
---------------------- causing delays, failed or even missed service. Marketers cannot increase
service capacity at short notice and may not find it feasible to increase
----------------------
service capacity over the long term as well. To overcome these unique
---------------------- challenges, service marketers use the following strategies:
On the demand side
----------------------
a) Differential pricing will help shift some of the demand from peak
---------------------- hours to non-peak hours or days. Restaurants have “happy hours”,
airlines and hotels have “off-season rates” and cellular service
---------------------- providers have different call rates for non-peak hours.

b) Cultivate non-peak demand by providing additional benefits or Notes
facilities.
----------------------
c) Charging a penalty for non-utilisation of a service as the service
moment cannot be stored. ----------------------
On the supply side
----------------------
a) “Temps” or part-time employees are hired for the peak demand
seasons or hours. This is a common practice in the retail industry or ----------------------
call centre industry.
----------------------
b) Peak time efficiency routines can be introduced and employees
perform only essential tasks during peak hours ----------------------
c) Self-service technologies and increased customer participation ----------------------

can reduce the pressure on the service infrastructure during peak
seasons or hours. ----------------------
----------------------
----------------------
1. Services have four major characteristics that greatly affect the design ----------------------
of their marketing programmes: , inseparability,
and . ----------------------
2. To tangibilise the intangible, companies develop a detailed ----------------------
.
1. Services distribution must focus on three priority areas like minimising ----------------------
waiting time, managing service capacity and improving service
----------------------
delivery mechanisms.
----------------------
Activity 4 ----------------------
----------------------
Visit any well-known restaurant or fast food outlet in your locality. Based on
the factors stated above, develop a checklist of observations to make. Where ----------------------
does the restaurant excel and where is it found lacking? What would you
rectify to improve the service experience? ----------------------
----------------------
10.8 MARKETING MIX FOR SERVICE FIRMS ----------------------
The traditional 4 Ps marketing approach works for physical goods. Because ----------------------
of the unique characteristics of services, certain elements require additional
attention in service businesses. Booms and Bitner suggested 3 additional Ps for ----------------------
service marketing: People, Physical Evidence and Processes.
----------------------

Notes 1. People: Since services are provided through people, the service business
is a highly people intensive business. The competence and knowledge
---------------------- level of services personnel and their attitude will directly determine the
service outcome. Companies need to take care of the following:
----------------------
• Select the right employees with requisite service skills and service
---------------------- attitude.
---------------------- • Train the employees to enhance their efficiency.
• Appropriate compensation and rewards to enhance the motivation
----------------------
of employees.
---------------------- • The belief is that happy employees make for happy customers.
---------------------- People intensive businesses have to invest heavily in people
by recognising, rewarding and retaining talent. Just as much as
---------------------- customers need to acquired and nurtured, companies today have
recognised that employees too need to be nurtured. Companies have
---------------------- formal marketing programmes directed to the internal customer.
---------------------- Not surprisingly the human resources department of services companies
has a very key role to play in the marketing of services.
----------------------
2. Physical evidence: Companies must tangibilise the intangible aspects of
---------------------- the service by providing physical evidence of the service quality outcome.
The elements of the physical evidence are:
----------------------
• The physical location of the service.
----------------------
• Service layout and ambience. Most service organisations have
---------------------- standard layout, décor and ambience for all their service locations.
Maintenance and cleanliness of facilities is very critical.
----------------------
• Employee uniforms and name tags for key service employees.
---------------------- • A formal and routinised way of greeting the customer.
---------------------- • Prompt telephone handling.
---------------------- • Signages within the service locations, so that customers know
which counters to approach.
----------------------
• Comfortable waiting areas which alleviate the distress of customers
---------------------- in case of delays.
• External signages that identify the service location should be well
----------------------
maintained.
---------------------- 3. Processes: Processes are the flow of activities through which the service
---------------------- is delivered and can be considered as the lifeline of any service product.
First service standards have to be clearly defined; then the processes by
---------------------- which the standards will be achieved. Processes need to be defined for
even the simplest and smallest of tasks to ensure there is homogeneity
---------------------- in the service delivery. Many organisations create detailed service
---------------------- manuals documenting service-operating procedures. The next step is to

communicate the procedures and training service employees to the follow Notes
service procedures. At the same time, firms have to take care to ensure
that service procedures do not become so rigid at the risk of losing the ----------------------
empathy or human touch. Service employees are trained to deal with the
various situations that might arise whilst delivering a service. ----------------------
----------------------
Activity 5
----------------------
1. Read Business Today’s annual survey on the 10 best companies to ----------------------
work for. State its implications for services firms.
----------------------
2. Visit any outlet of a supermarket in your area. Based on all the
factors learnt so far, rate the outlet’s performance. What are the areas ----------------------
for improvements? What recommendations would you make to the
supermarket manager? ----------------------
----------------------
10.9 MANAGING SERVICE QUALITY ----------------------
Over the years, several researchers have attempted to define service ----------------------
quality and have proposed various attributes that customers use as criteria to
evaluate quality of service. Service quality is particularly hard to define due to ----------------------
the intangible nature of services. The SERVQUAL instrument developed by
----------------------
researchers Parsuraman, Zeithaml and Berry defines five generic dimensions
along which customers evaluate service quality. These are: ----------------------
• Reliability: The ability to perform the promised service accurately and
----------------------
dependably.
• Responsiveness: Willingness to help the customers and provide prompt ----------------------
service. ----------------------
• Assurance: Knowledge and courtesy of employees and their ability to
inspire trust and confidence. ----------------------
• Empathy: Caring and individualised attention that a firm provides to its ----------------------
customers.
----------------------
• Tangibles: The appearance of the physical facilities, equipment, personnel
and communication materials. ----------------------
Customers evaluate service quality on these dimensions vis-à-vis their ----------------------
expectations along the same dimensions. Service quality is thus defined as
the degree and direction of discrepancy between the customer’s service ----------------------
expectations and his perceptions of service that he receives. Quality of service
----------------------
is a comparison between expectations and performance. Customers evaluate
not only the outcome but the process by which the service is delivered. ----------------------
Figure 10.4 gives examples of how customers judge the five dimensions of ----------------------
quality.
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 10.4: Gaps Model of Service Quality

---------------------- According to the authors, customers’ service expectations exist at two
levels, which they use as comparison standards:
----------------------
• Desired service: The levels of service representing a blend of what
---------------------- customers believe “can be” and “should be” provided.
---------------------- • Adequate service: The minimum level of service customers are willing
to accept.
---------------------- Separating these two levels is a zone of tolerance that represents the
---------------------- range of performance a customer would consider satisfactory. Within this zone
of tolerance, customers do not notice service deficiencies if any. The zone of
---------------------- tolerance can expand or contract depending on the situation.
---------------------- Most organisations are aware of the dimensions along which customers
evaluate service quality. However, despite this awareness, customers regularly
---------------------- experience deficient service. Parsuraman, Zeithaml and Berry suggested that the
deficient service may be due to four key internal shortfalls or “gaps” represented
----------------------
in the Gaps model of service quality.
---------------------- The gap on the left-hand side of the figure is the service quality gap and
represents the customers’ assessment of service quality. The four gaps shown on the
----------------------
right side of the figure represent the organisational shortfalls that ultimately lead to
---------------------- the service quality gap. The internal shortfalls or gaps are explained as follows:
Gap 1: Market Information Gap
----------------------
This gap occurs because the company has incomplete or inaccurate
---------------------- knowledge of customers’ service expectations. Companies lack knowledge

about customers’ expectations primarily because of inadequate market research. Notes
The market research may be too general or not specifically focused on service
quality. Secondly, even if the market research is adequate, if the results and ----------------------
information is not shared organisation-wide with the key personnel, service can
be found deficient. ----------------------
Lack of interaction between customers and management and insufficient ----------------------

communication between customer contact employees and managers also
----------------------
contribute to the market information gap. Some service organisations are
too hierarchical, with too many layers between the top management and the ----------------------
customer contact employees. A service business is a “hands-on” business and
requires the “involvement” of the top management in day-to-day operations. ----------------------
Gap 2: The Service Standards gap ----------------------
The company’s failure to accurately translate customers’ service
----------------------
expectations into specifications or guidelines for employees to follow is the
service standards gap. A customer always expects prompt service and this can ----------------------
be interpreted in many ways by different employees; an employee may think
he is providing prompt service if he responds within ½ an hour, however, the ----------------------
customer may expect service within 10 minutes. Companies have to clearly
----------------------
define service standards by quantifying and qualifying every dimension in exact
terms, not leaving any room for individual interpretation. ----------------------
Achievement of service standards cannot be left to an employee. ----------------------
Processes have to be clearly defined to the standards laid down. The lack of
proper processes or facilities to achieve the standards lead to deficient service. ----------------------
A company may promise prompt query handling through a toll free number. But
if the numbers of telephone lines are inadequate, it can lead to long delays in ----------------------
customers being able to get through to the company. If clear processes are not ----------------------
laid down by which the company’s employees are to address the queries, this
too will lead to service deficiencies. ----------------------
Sometimes companies define the service standards from their own ----------------------
perceptions and constraints rather than taking into account customer needs.
Inadequate management commitment to the setting of service standards and ----------------------
goals also leads to service deficiencies.
----------------------
Gap 3: Service Performance gap
----------------------
This gap occurs where there is a lack of appropriate internal support
systems that enable or “empower” employees to deliver the service standards. ----------------------
Internal support systems like training and technological support empower
employees to do their jobs more efficiently. ----------------------
Ineffective recruitment by companies, inadequate training or at times role ----------------------
ambiguity or role conflict, where an employee does not have clarity about his
job, result in ineffective and frustrated employees, unable to do their job well ----------------------
enough.
----------------------
A company’s failure to smoothen out the demand-supply mismatches
puts a lot pressure on the customer contact employees resulting in service ----------------------

Notes deficiencies. Customers too have a role to play in the delivery of the service. If
they do not adequately perform their role or are unaware of their roles it will
---------------------- result in deficient service.
---------------------- Gap 4: Internal Communication Gap
Inconsistencies between what customers are told the service will be like
---------------------- and the actual service performance is due to an internal communications gap
---------------------- between the “promisers” (such as sales people) and the service providers (such
as after-sales service representatives.) Overpromising in advertising, personal
---------------------- selling or through physical evidence cues, and under-delivering leads to service
deficiencies. Inadequate communication between sales and operations staff or
---------------------- differences in policies and procedures across branches and units leads to service
---------------------- deficiencies.
According to the authors, these four key organisational deficiencies lead to
---------------------- differences between the customer service expectations and service perceptions,
---------------------- which is the Gap 5: Service Quality Gap experienced by customers.
Implications of the gaps Model for Companies
----------------------
The first overall implication of the gaps model is that unless internal
---------------------- organisational gaps are removed, the external service quality gap cannot be
closed. That means that companies wanting to improve their service quality
---------------------- must first diagnose internal deficiencies and then take corrective action. A mere
---------------------- external focus, i.e., being customer oriented or conducting periodic customer
satisfaction surveys is not enough to deliver superior customer service. Managers
---------------------- must analyse and correct potential deficiencies within the organisation.
Secondly, companies must specifically measure service expectations on
----------------------
all parameters of service. Yet many companies simply ask their customers to
---------------------- rate the firm’s performance on a series of attributes, without asking them to
indicate how the performance compares with their expectations. Performance
---------------------- ratings are not diagnostic and can be misleading.
---------------------- Thirdly, companies must view service quality improvement as an ongoing
process rather than as an occasional project. Consistently delivering superior
---------------------- service requires a continuous process for assessing and improving service
quality. Companies must establish a formal service quality information system
----------------------
for continuous data collection. Moreover, they must use multiple approaches
---------------------- for gathering this data, as each source would have its limitations.
Fourthly, service quality improvement cannot occur without insights
---------------------- from employees, especially customer contact employees. Employees are the
---------------------- “internal customers” and as such, firms need to understand the expectations and
perceptions of those customers as well. The quality of service that an employee
---------------------- expects will have a strong impact on the employees’ own ability and willingness
to deliver superior service to the firms’ external customer. Since services are
---------------------- produced and consumed simultaneously, employees in effect become a part of
---------------------- the service firm’s product and of the customer’s total experience. Dissatisfied
or unhappy employees are not likely to perform at their peak and deliver what
---------------------- customers will consider as superior customer service.

Finally, firms must establish processes and procedures to deliver the service Notes
right the first time (reliability). If the service is not delivered right the first time
then provide for effective service recovery. Firms must develop systems to ----------------------
provide reliable service. However, despite proper systems and processes,
service problems can occur because of the inherent complexity and variability ----------------------
of services. When problems do occur, companies must resolve those problems ----------------------
effectively if they want to win back the trust and goodwill of their customers.
----------------------
In a multi-sector study involving 3000 customers from four different
companies, researchers measured the extent to which customers were likely to ----------------------
engage in the following types of behaviour in future:
----------------------
• Being loyal to the company (loyalty).
• Being willing to pay a higher price for the company’s service (pay more). ----------------------
• Being inclined to switch to a competitor (switch). ----------------------
• Being inclined to complain to other customers (complain). ----------------------
The most favourable behavioural intention scores (loyalty and pay more)
were for customers who had experienced no service problem. This clearly ----------------------
demonstrates the importance of reliable service. The next sets of favourable ----------------------
scores were for customers who had experienced service problems, but whose
problems had been satisfactorily resolved. The least favourable scores were for ----------------------
customers who had experienced service problems that were not resolved to the
customer’s satisfaction. These findings emphasise the importance of effective ----------------------
service recovery. Many organisations today recognise the need to retain a ----------------------
customer and are paying particular attention to resolving customer problems or
service recovery. ----------------------
Research Approaches for building an effective Service Quality Information ----------------------

System ----------------------
• Transactional Surveys ----------------------
Are service satisfaction surveys immediately following a service experience.
The purpose is to obtain feedback when the experience is still fresh; act on ----------------------
the feed back quickly. The limitation is that the feed back is limited to the ----------------------
most recent experience rather than their overall assessment.
• Mystery Shopping ----------------------
Market researchers become customers to experience and evaluate first hand ----------------------
the quality of service delivered. This method helps to measure individual
----------------------
employee service behaviour and identify systemic strengths and weaknesses.
The limitations of this method are that it subjective, researchers are likely ----------------------
to be more critical than customers would be; and that it can hurt employee
morale if properly used. ----------------------
----------------------
----------------------

Notes • New, Declining and Lost customer surveys
---------------------- Surveys to determine why customers select the firm, leave the firm or
reduce their buying. The purpose is to assess the role service quality
---------------------- plays in customer patronage and loyalty. But the limitations are that
---------------------- firms must be able to identify service usage on a per customer basis.
• Customer Advisory Panels
----------------------
Groups of customers are recruited periodically to provide the firm with
---------------------- feedback and advice on service performance and other issues. The
purpose is to obtain timely feedback and suggestions from experienced
----------------------
customers. The limitations of this method are that results may not be
---------------------- protectable to the entire customer base. Panelist may assume the role of
“experts” in time and become less representative of the customer base.
----------------------
• Focus Group Interviews
---------------------- Directed questioning of a small group of customers (8-12 people).
---------------------- Questioning would focus on a particular topic. The purpose is to provide
a forum for participants to suggest service improvement ideas and offer
---------------------- fast and informal feedback. However focus groups serve merely as
brainstorming sessions. The feedback may not be representative of the
---------------------- customer population or may not be very feasible.
---------------------- • Customer Complaint, Comment and Inquiry Capture
---------------------- A formal system to retain, categorise, track and distribute customer
complaints and other communications with the company. This
---------------------- systemhelps to identify the most common types of service failures for
corrective action. But dissatisfied customers frequently do not complain
----------------------
directly to the company, hence it offers only a partial picture to the
---------------------- company.
• Employee Field Reporting
----------------------
Is a formal process for gathering, categorising and distributing field
---------------------- employee intelligence about service issues. But the limitations are that
some employees will be more conscientious and efficient reporters
----------------------
than others will. Also employees maybe hesitate to provide negative
---------------------- feedback to the management.
---------------------- • Employee Surveys

Surveys to identify employee perceived obstacles to improved service
---------------------- and track employee morale and attitude. The limitations are that
---------------------- employees may view the service from their own vantage point,
subject to their own biases and may not be objective or correct in their
---------------------- interpretations.
----------------------
----------------------

• Service Operating Data Capture Notes
Systems to retain, categorise, track and distribute key service performance ----------------------
operating data. The purpose is to monitor service performance indicators
and take corrective action to improve performance. Relate operating ----------------------
data to customer and employee feedback. The limitations of this method ----------------------
are the operating data may not be relevant to customer’s perception of
service. Focus is on what is occurring but not why. ----------------------
----------------------
10.10. ROLE OF SELF-SERVICE TECHNOLOGIES ----------------------
One major change that has occurred in recent times is the replacement ----------------------
of service employees by self-service technologies. Self-Service technologies
(SSTs) are technological interfaces that allow customers to produce services ----------------------
independent of direct service employees. Automated Teller Machines (ATMs),
----------------------
online banking, package tracking offered by courier services, beverage and
snack vending machines and even e-commerce are all examples of self-service ----------------------
technologies. Figure 10.5 shows a comprehensive set of categories and examples
of SSTs in use today. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 10.5: Categories and Examples of SSTs in use
SSTs are commonly used in many service industries as they benefit both ----------------------
the customers (quicker service, more convenient and consistent service quality) ----------------------
and company (greater reach and lower service delivery costs per customer.)
This fundamental shift in service delivery mechanisms does not mean that ----------------------
companies can afford to now ignore customer service. On the contrary, the
growth of self- service technologies calls for a greater emphasis on customer ----------------------
service, which is necessary for ensuring that the customer technology interface ----------------------
is user-friendly. More importantly, companies need to put into place an excellent
customer service infrastructure (including properly trained and motivated ----------------------
employees) to assist customers experiencing problems or difficulties with self-
service technologies. ----------------------

Notes Studies conducted by researchers Bitner, Meuter, Roundtree and others,
published in the Journal of Marketing, found that customers have very strong
---------------------- feelings about SSTs; they love them and hate them depending on a few key
conditions.
----------------------
Customers love SSTs when:
----------------------
• SSTs bail them out of difficult situations, such as being able to withdraw
---------------------- cash for an emergency at 1.00 a.m.
• SSTs are better than the interpersonal alternatives and save the customers
----------------------
time, money and psychological costs. The Internet allows customers to
---------------------- shop at any time and complete transactions more quickly than they would
in person.
----------------------
• Customers are impressed when SSTs work when they are supposed to.
---------------------- On the other hand, customers hate SSTs when the following problems occur:
---------------------- • They fail. The researchers found that 60% of the negative stories
they heard stemmed from failures of SSTs. Broken machines, failed PIN
---------------------- numbers, websites that are down and goods not shipped as promised
---------------------- infuriate customers.
• They are poorly designed. Poorly designed technologies that are difficult
----------------------
to use or understand create hassles for customers, making them feel that
---------------------- it is not worth using them. Websites that are difficult to maneuver are
particularly troublesome. If customers cannot reach the information that
---------------------- they need within a few clicks (some say two clicks are all that customers
will tolerate), then customers shun the website.
----------------------
• The customer messes up. Customers dislike using technologies
---------------------- they feel they cannot handle adequately. Even though they feel partial
responsibility, they will avoid using them in future. A common frustration
----------------------
is having different user names and passwords for different websites. When
---------------------- confronted with a screen requiring this information, and not recalling it
accurately, many customers will give up and go elsewhere.
----------------------
• There is no service recovery. When the process or technology fails, SSTs
---------------------- rarely provide ways to recover the service on the spot. In such cases,
customers have to call or visit the company, precisely what they were
---------------------- trying to avoid by using the self-service technology.
---------------------- Research by Parsuraman shows that customers vary in terms of “technology
readiness”, which refers to the customers’ propensity to embrace and use new
---------------------- technologies for accomplishing goals in home life and at work. Companies
---------------------- need to be sensitive to the customers’ knowledge and awareness levels and help
customers learn how to effectively use SSTs.
----------------------
----------------------
----------------------

Notes
----------------------
1. The instrument was developed by researchers
----------------------
Parsuraman, Zeithaml and Berry.
2. Quality of service is a comparison between and ----------------------
.
----------------------
3. Self-Service technologies (SSTs) are_____________ that allow
customers to produce services independent of direct service ----------------------
employees. ----------------------
----------------------
1. The traditional 4 Ps marketing approach works for service marketing.
----------------------
2. Inadequate management commitment to the setting of service
standards and goals also leads to service deficiencies. ----------------------
3. Companies must view service quality improvement as an occasional
----------------------
project.
----------------------
Activity 6 ----------------------
----------------------
You would have experienced self-service technologies in different service
categories. Did the SSTs facilitate your service interaction? Write down the ----------------------
ways in which you did see the SST improve the service experience?
----------------------
----------------------
10.11 DIFFERENTIATION OF SERVICES
----------------------
In our previous unit on product concepts, we have seen how physical
products can be differentiated. How can services which are largely intangible ----------------------
and variable be differentiated?
----------------------
As with products, service marketers can develop a differentiated service
offering in the following different ways: ----------------------
1. Product offering can include innovative features. The customers’minimum ----------------------
expectations are the core service elements. To this the marketer can offer
optional secondary service features which enhance the core elements. In ----------------------
the hotel industry, hotels offer special facilities for business travelers like
fax machines, secretarial services and computers. Likewise to passengers ----------------------
transiting through the city they offer check in and check out as per the ----------------------
arrival and departure schedules of major airlines. Many companies use
the internet to offer value added services as secondary service features. ----------------------
----------------------

Notes 2. People can become an important service differentiator. The frontline
service personnel’s understanding, responsiveness, willingness to assist
----------------------
customers, courtesy and empathy shown towards customers are what
---------------------- differentiate the service offering. Such service organisations put a lot of
emphasis on hiring the right people, training, motivating and developing
---------------------- the employees. Such best practices are difficult to imitate and offer a very
sustainable point of differentiation.
----------------------
3. Faster service delivery and timeliness of response can be a service
---------------------- differentiator. However, service companies have to ensure that the
reliability of the service is not compromised in ensuring faster service.
----------------------
Speed of service requires an organisation to lay down clear service
---------------------- standards and quantify the exact parameters of timely service. To achieve
each standard, detailed processes and systems have to be put into
---------------------- to help employees achieve the service standards consistently. Dominos
Pizza differentiates its offering on the basis of its guaranteed delivery
----------------------
within 30 minutes or else the customer gets the pizza free. To achieve
---------------------- this service standard, a lot of thought has to go into selection of outlet
sites, menu offerings, processes for preparation of the products, training
---------------------- of employees, order taking process, the quality of equipment used for
preparing the pizza and so on.
----------------------
4. Image differentiation through building a reputation as a trusted and
---------------------- dependable service is a powerful differentiator especially in the service
businesses. Several hospitals have achieved “mega brand” reputation
----------------------
for being the best in their field such as Manipal Hospital, Escorts Heart
---------------------- Centre or Apollo Hospital. These hospitals could open clinics in other
cities and attract patients on the basis of their brand reputation.
----------------------
---------------------- Activity 7
----------------------
Have you ever had a negative service experience? Write down what about
---------------------- the experience infuriated you the most. In light of the gaps model, try to
identify where the organisation was lacking, which resulted in a bad service
---------------------- experience. What recommendation would you give to the management?
----------------------
10.12 MANAGING PRODUCT SUPPORT SERVICES
----------------------
So far we have focused on service industries; but customer services are
---------------------- just as important in product based industries. In these industries companies
offer two types of services;
----------------------
• Value-added services to enhance product performance.
----------------------
• Product support services or after-sales services such as installation,
---------------------- training on product use, repairs and maintenance.
---------------------- 1. Value-added services: Product differentiation based on features and

performance or technology has got eroded due to accelerating competition
and increasingly knowledgeable customers. Increasingly companies have Notes
found that value-added services and product support services can provide
the product differentiation. Many companies today offer their customer ----------------------
“end-to-end” solutions which would include physical goods and service
components. ----------------------
These end-to-end solutions are in fact earning more revenues and profits ----------------------
for the companies.
----------------------
Competing based on superior customer service, an intangible, difficult-
to- imitate component of the company’s overall market offering, offers a ----------------------
solid foundation on which companies can create an enduring competitive
advantage. Excelling in the increasingly competitive marketplace will ----------------------
require a convergence of conventional marketing and customer service. ----------------------
According to Parsuraman, true marketing excellence cannot occur in the
absence of a genuine commitment to delivering superior customer service. ----------------------
Many companies fail to appreciate this fact, as they look at customer
service as a mere add-on to traditional marketing resulting in mediocre ----------------------
market performance. Such companies are increasingly compelled to ----------------------
compete on price-offs or sales promotions, as they have very little to
offer their customers. Figure 10.6 shows the customer service - external ----------------------
marketing matrix.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 10.6: Customer Service - External Marketing Matrix ----------------------
The term external marketing explains the conventional customer attraction ----------------------
activities, such as advertising, sales promotions offers, personal selling
and other such promotional activities. Customer service, on the other ----------------------
hand, focuses on creating an enjoyable experience during all customer-
company interactions. Most companies, accordingly fall into quadrant 4 ----------------------
and practice what is essentially a counterproductive strategy. Quadrant ----------------------
2 companies, although offering superior customer services, are wasting
resources on “over killing” their customers. Quadrant 1 is the optimal ----------------------
quadrant in terms of marketing excellence as well as in terms of utilisation
of resources. ----------------------
2. Product support services: In designing their product support services or ----------------------

after-sales services, companies need to keep customer worries specifically
----------------------
in mind when designing their services. Customers worry about:
• Reliability and failure frequency. ----------------------

Notes • Accessibility of service during a product breakdown.
• The downtime duration; this can impose a serious burden for
----------------------
industrial clients.
---------------------- • Maintenance and repair costs.
---------------------- • Anxiety of dealing with and following up with the service
departments.
----------------------
Companies have been able to improve the quality of after-sales services
---------------------- by:
---------------------- • Offering a basic support service with an annual service contract

for which the customer pays extra. During the annual maintenance
---------------------- contract, preventive maintenance is carried out by the company
and is initiated by the company itself. In case of a breakdown, the
---------------------- customer calls the designated service representative and receives
---------------------- prompt service.
• More efficient third party call centres, which can handle customer
---------------------- complaints more expeditiously, rather than having customer call up
---------------------- the company or dealer repeatedly.
• Outsourcing the service or tying up third party service contractors,
----------------------
who can offer a wider range of services more cost effectively.
---------------------- The concepts of services marketing that we have learnt so far apply equally
to the management of value-added services as well as the management
----------------------
of after-sales services. Customers have the same concerns about service
---------------------- quality irrespective of the category of service. The same organisational
gaps can lead to deficient service in either category of service.
----------------------
---------------------- Summary
---------------------- • In any distribution channel there are three sets on intermediaries:

merchants, agents and facilitators.
----------------------
• A Vertical Marketing System (VMS) includes parties like wholesalers,
---------------------- producers and retailers acting as a unified system.
---------------------- • When a company selects two or more different channel structures to

distribute the products to its target markets, this arrangement is known as
---------------------- multiple or dual distribution.
---------------------- • Companies form strategic channel alliances also known as horizontal

marketing systems, which enable the companies to use another company’s
---------------------- already established channel.
---------------------- • The Internet allows consumers to directly access manufacturers and vice
versa.
----------------------
• Companies have three options for intensity of distribution: intensive
---------------------- distribution, selective distribution or exclusive distribution.

• Intensive distribution is aimed at maximum market coverage, selective Notes
distribution is aimed at making the product available to select dealers
and retailers in a given territory and exclusive distribution is the most ----------------------
restrictive form of market coverage.
----------------------
• Marketing channels for services are different from marketing channels
for manufactured goods because of the simultaneous production and ----------------------
consumption and the intangibility of services.
----------------------
• Services distribution must focus on three key areas; minimising waiting
time, managing service capacity and improving service delivery ----------------------
mechanisms.
----------------------
• Services have four major characteristics that greatly affect the design
of their marketing programs: intangibility, inseparability, variability and ----------------------
perishability.
----------------------
• The traditional 4 Ps approach does not work for service products. Three
additional Ps are suggested for service marketing: People, Physical ----------------------
Evidence and Processes.
----------------------
• The SERVQUAL instrument developed by researchers Parsuraman,
Zeithaml and Berry defines five generic dimensions along which ----------------------
customers evaluate service quality. These are reliability, responsiveness,
assurance, empathy and tangibles. ----------------------
• As with products, service marketers can develop a differentiated service ----------------------
product through product offering, people, faster service delivery and
image. ----------------------
• In designing their product, support services or after-sales services ----------------------
companies need to keep customer worries specifically in mind when
designing their services. ----------------------
----------------------
Keywords
----------------------
• Dual distribution: When a company selects two or more different channel
----------------------
structures to distribute the products to its target markets.
• Intensive distribution: A type of distribution aimed at maximum market ----------------------
coverage.
----------------------
• Selective distribution: A type of distribution aimed at making the product
available to select dealers and retailers in a given territory. ----------------------
• Channel power: A channel member’s capacity to control or influence the ----------------------
behaviour of other channel members.
----------------------
• Horizontal conflict: A conflict among channel members at the same level,
such as two retailers or stockists. ----------------------
• Vertical conflict: A conflict between two different levels in the distribution ----------------------
chain, such as between a manufacturer and wholesaler or between a
manufacturer and retailer. ----------------------

Notes • Service: Any act or performance that one party can offer to another that is
essentially intangible and does not result in the ownership of anything.
----------------------
• Service quality: The degree and direction of discrepancy between the
---------------------- customer’s service expectations and his perceptions of service that he
receives.
----------------------

---------------------- 1. Explain marketing channel and the need for intermediaries. Describe the
different types of channel intermediaries and the role that they play.
----------------------
2. Explain the importance of the Internet as a distribution channel.
----------------------
3. Describe the factors that affect the choice of channel strategy. Explain
---------------------- channel leadership and channel partnering.
4. Explain the four major characteristics of services that affect the design
----------------------
of their marketing programmes. For each characteristic, explain the
---------------------- challenges or implications for the managers and how these challenges
can be overcome.
----------------------
5. Why does the traditional 4 P’s approach not work for services? What are
---------------------- the additional 3 Ps recommended for marketing?
---------------------- 6. What is the gaps model of service quality? Explain each gap and how it
results in deficient service? What are the overall implications of the gaps
---------------------- model for companies?
---------------------- 7. What is the role of Self-Service Technologies in service delivery

mechanisms today? What are the customers’ key concerns regarding
---------------------- SSTs that companies must address? Explain the different ways in which
services can be differentiated?
----------------------
8. “Excelling in the increasingly competitive marketplace will require a
---------------------- convergence of conventional marketing and customer service.” Explain
this statement. What happens when companies focus inordinately on
---------------------- “external marketing”?
---------------------- 9. How do the concepts of services marketing apply to the management
of value-added services and product support services in physical goods
----------------------
organisations?
---------------------- 10. What is internal marketing? Whom is it directed towards? Why is it so
important for services organisations?
----------------------
----------------------
----------------------
----------------------
----------------------

Answers to Check your Progress Notes
1. In any distribution channel, there are three sets of intermediaries:
merchants, agents and facilitators. ----------------------
2. Channel members add value to a company’s products by making the ----------------------

merchandise available at the right time, place and in the right quantity and
right condition to the end-customer. ----------------------

1. A vertical marketing system includes parties like wholesalers, producers
----------------------
and retailers acting as a unified system.
2. Product positioning is a prime determinant of the type of channel to be ----------------------
used.
----------------------
3. Channel power is a channel member’s capacity to control or influence the
behaviour of other channel members. ----------------------
4. A conflict among channel members at the same level, such as two retailers ----------------------
or stockists, is known as horizontal conflict.
----------------------
State True or False
1. True ----------------------
2. False ----------------------
Fill in the blanks.
----------------------
1. Services have four major characteristics that greatly affect the design of
their marketing programmes: intangibility, inseparability, variability and ----------------------
perishability.
----------------------
2. To tangibilise the intangible, companies develop a detailed service
blueprint. ----------------------
1. True
----------------------
1. The SERVQUAL instrument was developed by researchers Parsuraman, ----------------------

Zeithaml and Berry.
----------------------
2. Quality of service is a comparison between expectations and performance.
----------------------
3. Self-Service technologies (SSTs) are technological interfaces that allow
customers to produce services independent of direct service employees. ----------------------

Notes State True or False.
1. False
----------------------
2. True
----------------------
3. False
----------------------
---------------------- Suggested Reading
---------------------- 1. Dillon, William R., Thomas J. Madden and Neil H. Firtle. Marketing
---------------------- College Publishing.
---------------------- 2. Ramaswamy, V.S. and S. Namakumari 2002. Marketing Management -
---------------------- Macmillan India Ltd.
----------------------
----------------------
----------------------
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Strategic Pricing
UNIT
11
Structure:
11.1 Introduction
11.2 Costs: Impact on Pricing
11.3 Customer Value and Price Sensitivity
11.3.1 Nagle and Holden’s Nine Factors that influence Price Sensitivity
11.3.2 Market Segmentation using Price-Value Perceptions
11.3.3 Effect of the Internet on Price Sensitivity
11.4 Pricing Strategy and the Product Life Cycle
11.5 Understanding the Pricing Game
11.5.1 Price Competitiveness
11.5.2 Reacting to Competition with Price
11.6 Pricing: Key Tool of a Company’s Growth Strategy
11.6.1 Role of the Distribution Channel in Setting Prices
11.6.3 Pricing Tactics
11.6.4 The Pricing Process
Summary
Keywords
Suggested Reading
Strategic Pricing 313

Notes
Objectives
----------------------
----------------------
• Analyse why approaches to pricing have changed over the years
----------------------
• Assess the impact of customers’ price sensitivity on pricing strategy
---------------------- • Evaluate the impact of the product life cycle on pricing
---------------------- • Describe how competition and distribution channels affect the
pricing decision
----------------------
• Explain how special pricing tactics are used to fine tune pricing
----------------------
• Discuss product line pricing and pricing process
----------------------
---------------------- 11.1 INTRODUCTION
---------------------- Pricing as a management function has undergone a vast revolution over

the years. What was largely seen as decision taken by finance and accounting,
---------------------- using cost-plus pricing procedures because they were seen as financially prudent,
pricing has assumed a key strategic role today. Attitudes towards pricing changed
----------------------
radically when marketers encountered the challenges of the 1980s and 1990s.
---------------------- Fierce competition, erosion of brand loyalty and pricing power, e-competitors,
guerilla brands and the shift in the balance of power between manufacturers and
---------------------- distribution channels brought a new approach to pricing.
---------------------- Marketing managers realised that blindly chasing market share and
customer satisfaction often resulted in margin erosion and ultimately erosion of
---------------------- shareholder value. Managers were jolted into realising that the ultimate purpose
of a business is to create value for the shareholder or owner of the business
----------------------
through the process of creating value for the customer.
---------------------- A new understanding of pricing has now emerged, that pricing is about
much more than merely setting prices. It is about targeting marketing markets
----------------------
that can be served profitably, communicating information that justifies price
---------------------- levels, and managing pricing processes and systems to keep prices aligned with
value received. The difference between price setting and strategic pricing is the
---------------------- difference between reacting to marketing conditions and proactively managing
them.
----------------------
Strategic pricing is the co-ordination of interrelated marketing, competitive
---------------------- and financial decisions to set prices profitably. Strategic pricing requires a new
---------------------- kind of relationship between marketing and finance; it involves achieving a
balance between providing value to the customer and the firm’s need to cover
---------------------- costs and earn profits.
---------------------- Strategic pricing is about profitable pricing, which requires that managers
must consider how each decision will affect competitive behaviour and
---------------------- profitability. Pricing decisions should always be made a part of a longer term

marketing strategy to generate and capture greater value for the company. It Notes
may be possible for a company, using price indiscriminately to win individual
battles, and yet end up losing the war. ----------------------
This is not to say that pricing should not be used as a competitive weapon, ----------------------
as it can be a very successful weapon, but the conditions to make it successful
depend on the reactions of customers and competitors. Also price when used ----------------------
from a position of strength can be a very powerful weapon, yielding long-
----------------------
term growth and profitability. The goal of this unit is to provide guidelines for
understanding the impact of pricing on competitors and vice versa and using ----------------------
this knowledge to develop profitable pricing.
----------------------
Distribution channels play a key role in design and implementation of
the pricing decision. The key to managing pricing strategy through a channel ----------------------
involves seeing the channel as a route to reaching the target customer.
The channel members add value to the product in different ways and must be ----------------------
adequately compensated for that role. Price setting now involves creating value
----------------------
for the customer, profitability for the company and for the channel members.
Careful coordination is required in order to ensure that the pricing strategy is ----------------------
executed as planned throughout the channel, and not subverted by some channel
members to meet their own objectives to the detriment of the customer and ----------------------
company. Usage of multiple channels by most organisations makes this task
----------------------
particularly complex. The aim of this unit is to provide an understanding of the
distribution channel issues to be considered whilst setting prices. ----------------------
11.2 COSTS: IMPACT ON PRICING ----------------------
----------------------
We have learnt that costs should not determine prices, but costs play a
critical role in formulating pricing strategy. ----------------------
Effective pricing decisions first consider the markets they want to serve, the
----------------------
price that those buyers can be convinced to pay, the quantity that they will sell
at that price and the consequent relevant costs they must incur at that level of ----------------------
sales.
----------------------
Any changes in cost due to external reasons (such as increase in
raw material prices, energy prices) will result in price changes not because of ----------------------
passing on the increased costs to the customers, but because it will change the
quantities the firm can profitably supply and the buyers it can profitably serve. ----------------------
Companies that price profitably make decisions on markets and quantities that
----------------------
intend to serve based on the changes in costs.
One cannot price effectively without understanding costs. Knowing costs ----------------------
is not merely about possessing the relevant cost accounting data, but more ----------------------
importantly knowing how the costs will change with the changes in sales that
result from pricing decisions. ----------------------
The first step is identifying the relevant costs, i.e., those that will determine ----------------------
the profit impact of the pricing decision. Pricing decisions affect whether a
company will sell less of the product at a higher price or more of the product at ----------------------

Notes a lower price. In either case, some costs do not change (as a total), hence do not
affect the pricing decision. Only the costs that will rise or fall when the price
---------------------- changes, affect the relative profitability of the different pricing strategies; these
are considered as incremental costs, as they represent the increment to costs that
---------------------- result from the pricing decision.
---------------------- However, the mistake that is commonly made is focusing on average
costs, as such data is readily available. The manager who focuses on average
----------------------
costs would be misled into rejecting a profitable proposal in the mistaken belief
---------------------- that the price would be inadequate to cover the average costs. The adequacy
of the price can only be determined by looking at the incremental cost of sales
---------------------- and ignoring those that would be incurred anyway, instead of averaging out all
costs.
----------------------
Incremental costs are very similar to variable costs, as variable costs are
---------------------- always incremental for pricing. Fixed costs are generally not considered as
incremental costs which is a mistaken assumption as some fixed costs could be
----------------------
incremental and must be properly identified. Incremental fixed costs are those
---------------------- that directly result from implementing a price change or from offering a version
of the product at a different price level. Many costs are neither purely variable
---------------------- nor purely fixed; they are fixed over a range of sales and may go up when
the sales move outside the range. These semi-fixed costs such as the cost of
----------------------
installing additional capacity for production of increased quantities must be
---------------------- considered as incremental costs when making the pricing decision.
Managers must consider the contribution margin for each product sold,
----------------------
which is essential for making profitable pricing decisions. Contribution margin
---------------------- as a percentage of price has important strategic implications as it is the share
of price that adds to profit or reduces losses; in other words, the added profit or
---------------------- loss resulting from an additional sale.
---------------------- Rupee CM = Price – Variable Cost
---------------------- % CM = Total CM / Sales Revenue × 100

The percentage contribution margin (CM) is a measure of the leverage
---------------------- between a firm’s sales volume and its profit.
---------------------- Note: Breakeven Sales Analysis, which is covered in the course on
financial management, is essential to the understanding of how costs should
----------------------
affect the pricing decision. This analysis would help a manager determine two
---------------------- key issues:
• How much would the sales volume have to increase to profit from a price
----------------------
reduction?
---------------------- • How much could the sales volume decline before a price increase becomes
---------------------- unprofitable?
----------------------
----------------------

Notes
----------------------
1. play a key role in design and implementation
----------------------
of the pricing decision.
2. is the co-ordination of interrelated marketing, ----------------------
competitive and financial decisions to set prices profitably. ----------------------
----------------------
1. Companies that price profitably make decisions on markets and
quantities that intend to serve based on the changes in costs. ----------------------
2. Contribution margin as a percentage of price has important strategic ----------------------
implications.
----------------------
11.3 CUSTOMER VALUE AND PRICE SENSITIVITY ----------------------
An effective pricing strategy requires a good understanding of the value ----------------------

of the product to the buyers. Value is the most commonly used, but least ----------------------
understood terminology. In common usage, the term value refers to the total
savings or satisfaction that the customer receives from the product or in other ----------------------
words the utility gained from the product. This implies that the utility that a
customer gains from the product is constant on all use occasions; which we ----------------------
know is not true. The utility of a chilled beverage on a hot summer day with ----------------------
temperatures soaring to 45 degrees centigrade is vastly different from the utility
of the same cold beverage on a chilly winter morning. In the first case, the buyer ----------------------
may be willing to pay a price premium and yet derive utility; in the second case,
the buyer may not consume the product even if it is offered free. ----------------------
Marketers are therefore concerned with “economic value” which is ----------------------

determined first and foremost by what the customers’ alternatives are and the
value of whatever differentiates a particular product from its alternatives. The ----------------------
value is also determined by the context or conditions under which the decision is ----------------------
being made. The economic value is thus defined as the “price of the customer’s
best alternative plus the value of whatever differentiates the offering from the ----------------------
alternative”.
----------------------
However, not all customers are fully informed; they may be unaware of
the product and be influenced by its price or that they may be unsure of the ----------------------
differentiating attributes and may be unwilling to spend the time and effort in
learning about the attributes. In case of low involvement products, purchases ----------------------
may be made on an impulse, without making an estimation of economic value. ----------------------
Hence, economic value and the perceived value that the buyer places on the
product may be completely different. ----------------------
----------------------

Notes Economic value estimation has its strengths and weaknesses. The
strength is that it enables the firm to determine whether a product is selling
---------------------- poorly because it is overpriced relative to its true worth or because it is under-
communicated and thus “undervalued” by the market. It also forces firms
---------------------- to quantify the benefits, as in sophisticated business and consumer markets,
---------------------- customers demand economic value estimation. The weakness is that economic
value cannot indicate the price to charge, but probably the maximum that the
---------------------- target customer would be willing to pay.
---------------------- Steps in Economic Value Estimation
---------------------- • Step 1 : Identify the cost of the competitive product that the customers
vie w as the best alternative. This is the products reference value.
----------------------
• Step 2: Identify all the factors that differentiate your product from the
---------------------- competitive product. For example
---------------------- Superior Performance

Reliability
----------------------
Additional features
----------------------
Lower maintenance costs
---------------------- Faster Service
---------------------- • Step 3: Determine the value to the customer of these differentiating
factors. The positive and negative values associated with the product’s
---------------------- differentiating attributes comprise the differentiation value.
---------------------- • Step 4: Add the reference value and differentiation value to determine
the total economic value, the value that some one would pay when
---------------------- fully informed and economically rational when making the purchase
---------------------- decision.
---------------------- In the real world, the value that the customer places on the product is only
partly the economic value, but is largely the perceived value. There are many
---------------------- reasons for the gap between the buyers’ willingness to pay and the “economic
value” of the product and marketers must understand what drives the customers’
----------------------
willingness to pay.
---------------------- Thomas Nagle and Reed Holden studied nine effects that influence the
willingness to pay and cause buyers to be more or less sensitive to the difference
----------------------
between price and value when making purchase decisions. For each factor there
---------------------- are tactics that marketers can use to reduce the gap between the value they offer
and the prices they must charge to get the business.
----------------------
11.3.1 Nagle and Holden’s Nine Factors that influence Price Sensitivity
---------------------- 1. Reference price effect: Economic value is recognised only by customers
---------------------- who are fully informed about the alternatives. In the real world, even
knowledgeable customers are not entirely aware and are lost in a sea of
---------------------- information. The reference price effect states that buyers are more price

sensitive the higher the products price relative to the prices of the buyers Notes
perceived alternatives.
----------------------
The key word here is “perceived alternatives”. Perceptions of available
substitutes and their prices vary widely amongst consumers and across ----------------------
purchase situations. Customers “unaware” of alternatives are likely to see
more value with known and familiar brand names and consequently be ----------------------
less sensitive to their price.
----------------------
Reference price effect has other implications in terms of product
positioning as well. The category in which a marketer positions the ----------------------
products will determine the frame of reference of the customer. For
----------------------
instance, hair oil can be positioned either as hair oil or in the category
of hair grooming products. In the case of hair oil positioning, the frame ----------------------
of reference is other hair oil brands and the prices of competing brands
will be the reference points. However, as a hair-grooming product, the ----------------------
frame of reference has shifted to a different set of alternatives to compare
----------------------
with. Hence, the perceived value of “hair oil” is very different from “hair
grooming products”; impacting the prices customers would be “willing” ----------------------
to pay.
----------------------
How retailers display competing products in store will affect the
comparison amongst perceived alternatives. Generic brands which are ----------------------
low priced, when displayed alongside premium or more value-added
brands will make comparison easier for the customer. However, this has ----------------------
been seen to affect higher priced genuinely value-added brands with a
----------------------
high differentiation value.
A customers’ perception of the available substitutes is not necessarily ----------------------
based on the knowledge of exact price levels of the specific brands. Given ----------------------
the number of categories and brands, it would be impossible for anybody
to maintain such vast amounts of information. Consequently, customers ----------------------
carry in their minds a general price expectation for the category. Different
market segments would carry different price expectations, which are in ----------------------
line with the level of need they are expecting to fulfill with the product. ----------------------
A buyer’s reference price also depends on his or her expectation about
future prices. Consumers have come to expect deals, discounts and ----------------------
promotional offers during specific times of the year. Consequently, they ----------------------
have learnt to delay purchases for categories where it is possible to do so,
temporarily affecting price sensitivity during certain times of the year. ----------------------
2. Difficult comparison effect: The concept of economic value, explained ----------------------
earlier, assumes that customers possess full knowledge of all the
alternatives and can accurately and cheaply evaluate the offers. In reality, ----------------------
buyers are not fully aware and find alternatives difficult to compare. This
illustrates the difficult comparison effect, which states that buyers are less ----------------------
sensitive to the price of a known or more reputable product, when they ----------------------
have difficulty comparing it with alternatives. Most customers in such
a situation would find the higher prices justifiable for the assurance that ----------------------

Notes their regular brand offers what others do not; the confidence and trust
having accumulated over the years. Rather than attempting to find “good
---------------------- value” in such a situation and risk getting poor value in the process, many
buyers prefer to settle with the known brand albeit at a higher price.
----------------------
The difficult comparison effect causes value to be associated with known
---------------------- brand names in categories where comparison is difficult or is where
the perceived risk is very high. Consequently, in high involvement
----------------------
categories, where customers price sensitivity is seen to be lower than in
---------------------- low involvement categories where comparisons are generally easier and
perceived risk is also lower. The important thing to remember is that the
---------------------- buyer would see value in paying a price premium in a high involvement
category, only when it is difficult to make comparisons. Once buyers
----------------------
become familiar, comfortable and knowledgeable about a category, and
---------------------- are able to make comparisons with ease, the price sensitivity will change.
IBM traditionally enjoyed 20% premiums because of its enviable
----------------------
reputation for integrity and service. The customers found the premiums
---------------------- justifiable; because of the risk of buying a costly mainframe from a
relatively unknown competitor was much higher. The premiums declined
---------------------- as personal and minicomputers replaced mainframes. The risk of the new
product from a relative unknown competitor was limited to a smaller
----------------------
computing capacity.
---------------------- Companies in such categories try to minimise the price sensitivity
and maximise difficult comparison by actually making their brands
----------------------
“incomparable”, through value added services and benefits. Such
---------------------- differentiation when based on a competitive advantage that the company
has nurtured over the years minimises the buyer’s price sensitivity towards
---------------------- the company’s brands.
---------------------- In low involvement categories, it is difficult to minimise the price
sensitivity and maximise difficult comparison (by making comparisons
---------------------- difficult). Products are often packaged in odd shapes and sizes making
---------------------- comparisons difficult, which lower priced generics; but this tactic would
have a short-term effect. A longer-term tactic would be to make the buyer
---------------------- more quality sensitive and increase the buyers risk perception of using
unknown brands yet to prove their quality. Again product differentiation
---------------------- based on a solid competitive advantage that the company has will minimise
---------------------- the price sensitivity towards a particular brand.
Newer, unknown suppliers with untried technologies and products on the
---------------------- other hand will try to increase price sensitivity towards existing known
---------------------- brands by making comparisons easier. This they do by imitating the
packaging shape size and colour of well-known brands and by inducing
---------------------- sampling and trials on a large scale. Coupons, free samples and money
back guarantees are all ways of minimising the difficult comparisons
---------------------- and increasing price sensitivity towards known brands, thereby inducing
---------------------- brand switching.

3. Switching cost effect: Switching costs are costs that customer incurs when Notes
he switches brands and suppliers; switching costs can be both monetary
and non-monetary. For example, cost of installation of a broadband ----------------------
connection will have to be incurred every time one changes a supplier
(monetary cost), changing the telephone number every time one changes ----------------------
the service provider (non-monetary). The switching cost effect states that ----------------------
the greater the added cost of switching suppliers, the less sensitive buyers
are to the price of a product. The reason for this is that many products ----------------------
require that the buyer make product-specific investments to use them. If
those investments do not have to be repeated, when switching from one ----------------------
supplier to another, then price sensitivity will be greater. The greater the ----------------------
product specific investment that a buyer must make to use a product, the
greater the “inertia” and hence, the less price sensitive the buyer is. ----------------------
The product specific investments range from installation, training, cost of ----------------------
spares, service add-ons to even personal relationships and rapport. People
are generally reluctant to change their doctors, lawyers and accountants ----------------------
because of the considerable time invested in developing a rapport, which
----------------------
is significant to the quality of service one receives. Price sensitivity is low
as switching costs are considerably high. ----------------------
Companies have used this knowledge very effectively to reduce price
----------------------
sensitivity and build loyalty towards their brands. Amazon, one of the
world’s largest online book retailers, has held on to its dominant market ----------------------
share in a category, which is primarily driven by discounting. It uses
technology very effectively to track and understand each individual ----------------------
customer preferences in subjects and topics. It uses this knowledge
----------------------
to customise book offers, thus providing a very high level of service
and rapport with its customers. This acts as a switching cost, even as ----------------------
competitors match or undercut prices.
----------------------
On the other hand, aspiring suppliers understand the switching costs and
will absorb them in part or full by providing free training, “trade-in” ----------------------
allowances and so on. But the key is to do this without lowering the price
expectations. ----------------------
4. Price-quality effect: Generally, price is nothing more than what a ----------------------
customer pays to a seller to acquire a product or service. But for a few
products, price is more than what a customer pays; such products fall into ----------------------
three categories: ----------------------
• Image or prestige products
----------------------
• Exclusive products
----------------------
• Other products without any clues as to their quality
In these cases, prices is the signal of value that the customer expects to ----------------------
receive. The price sensitivity is influenced by the price quality effect,
----------------------
which states that buyers are less sensitive to a product’s price to the extent
that a higher price signals better quality. ----------------------

Notes Prestige products offer their target markets an ego gratification and
prestige. They buy these products not only for their consumption value
---------------------- or utility but mainly to tell the world that they can afford them. A Mont
Blanc pen is not bought because it writes better, but because the customer
---------------------- wishes to tell the world that he belongs to an elite set. A gold credit card
---------------------- is bought for the exclusive set of privileges and prestige that come with it.
A prestige image is only one reason that buyers might find an expensive
----------------------
purchase more satisfying. The exclusivity that discourages some people
---------------------- from buying at a high price, can in addition to the image, actually add
objectively to the value. Business flyers pay higher prices to fly business
---------------------- class or first class, not just for the image value, but because the number
of passengers in the first class is limited and thus offers greater privacy
----------------------
unlike the “crammed” economy class sections. Many professionals like
---------------------- doctors, dentists and accountants take on fewer customers to be able to
devote greater amount of time to each client. The higher fees charged
---------------------- automatically restrict the number of clients that would approach them.
---------------------- Then there are other categories where customers seek neither prestige
nor exclusivity and yet use price to determine the quality of the product.
---------------------- This happens when buyers either lack the knowledge to ascertain quality
or that they have no prior experience with the product. In such cases,
----------------------
consumers will rely somewhat on relative price as a cue to the products
---------------------- quality, apparently assuming that the higher price is probably justified
by the corresponding higher value. The more consumers rely on price to
---------------------- judge quality, the less price sensitive they will be.
---------------------- This price–quality effect is another reason why new products, as in new
product concepts, when first offered to the market, use a price skimming
---------------------- strategy. The higher prices signal value and quality.
---------------------- 5. Expenditure effect: The effort that a consumer will make in evaluating
alternatives and making a purchase decision is in a large part dependent on
---------------------- the importance of the purchase and the perceived risk. Large expenditures
---------------------- impose greater risk on the consumer, to reduce which, the consumer is
willing to spend greater time and effort in evaluating alternatives. A buyer’s
---------------------- willingness to evaluate alternatives depends on how large the expenditure
is relative to the effort necessary. The expenditure effect states that buyers
---------------------- are more price sensitive when the expenditure is larger, either in rupee
---------------------- terms or as a percentage of household income. The larger the expenditure,
the more the buyer gains by spending greater time in carefully evaluating
---------------------- the alternatives and attempting to find a better deal. In business markets
the absolute size of the expenditure is the consideration, whereas in
---------------------- consumer markets it is not just the total size of the expenditure, but the
---------------------- expenditure as a percentage of total income also is considered.
One must remember here that the expenditure effect cannot be looked at
---------------------- in isolation; difficult comparison effect and price quality effect must also
---------------------- be considered. Even in cases where the expenditure is large the buyer may

exhibit price sensitivity due to reasons other than expenditure effect. Notes
In consumer markets, this price sensitivity is further compounded by the
----------------------
tradeoffs that consumers must make between disposable incomes and
limited time available for evaluating alternatives. Fig 11.1 explains the ----------------------
effects of these tradeoffs that consumers must make.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 11.1: Expenditure Effect
----------------------
Consumers have to make tradeoffs between limited disposable incomes
and limited time, to evaluate alternatives. ----------------------
• Between A& B, which segment will be more price sensitive? ----------------------
• Between C & D, which segment would be more price sensitive? ----------------------
The income rich/time poor customer will exhibit least price sensitivity
even if the expenditure is large, simply because he does not have time ----------------------
to spend evaluating the purchase and not because of the size of the ----------------------
expenditure.
The income rich/time rich customer will exhibit greater price sensitivity ----------------------
than the income rich but time poor customer, simply because he has ----------------------
the time available to evaluate alternatives. In communicating with such
customers, marketers must justify the price premiums charged. ----------------------
The cash poor/time rich customer will exhibit greatest price sensitivity ----------------------
for two reasons: limited disposable income and the availability of time to
evaluate alternatives. ----------------------
Finally, the time poor/cash poor customer will exhibit lesser price ----------------------
sensitivity than cash poor but time rich customer, because even though
the expenditure is large enough to be important, the customer lacks the ----------------------
time to evaluate the alternatives.
----------------------

Notes 6. End-benefit effect: Certain products, although they form a part or a
component of another, are bought independently from another supplier.
---------------------- Software is just one component of a computer system, but contributes
significantly to the end benefit derived from the computer. Likewise
---------------------- car tyres and car batteries and accessories are used as a part of the end
---------------------- product. The relationship of a purchase to a larger benefit is the basis
of the end benefit effect. This effect can be understood in two parts: the
---------------------- derived demand and the price proportion.
---------------------- Derived demand is the relationship between the desired end benefit and
the buyers’ price sensitivity for one of the products contributing towards
---------------------- achieving that end benefit. The more sensitive (for all reasons stated
earlier and later) that buyers are to the price of the end benefit (product),
----------------------
the more sensitive they are to the price of the products that contribute
---------------------- towards that end benefit.
Price proportion cost refers to the percentage of the total cost of the end
----------------------
benefit accounted for by the products price. The greater the proportion,
---------------------- the greater will be the price sensitivity.
Derived demand is quite obvious in business markets. The more (less)
----------------------
price sensitive the demand is for a company’s own product, the more
---------------------- (less) sensitive that company will be when purchasing supplies. The
manufacturer knows that he cannot pass on any price increases to his
---------------------- customers and he would therefore be more sensitive to the prices of the
components. It is essential for sales people in B2B markets to understand
----------------------
the end benefit that drives a customers’ purchase decision in order to
---------------------- understand the importance of price in the purchase decision. The buyer
of the end product may be more concerned about on-time deliveries or
---------------------- adherence to quality standards and may exhibit less price sensitivity.
---------------------- The price proportion effect states that customers are more price sensitive
whenever the purchase price accounts for a larger proportion of the
---------------------- cost of the end benefit, and less price sensitive for a smaller proportion.
---------------------- This has enormous implications for products which are bundled with
complementary products. Customers may exhibit more price sensitivity
---------------------- towards the price of the car, but lesser price sensitivity towards the price
of accessories that form a small proportion of the total cost. This creates
---------------------- opportunities to charge price premiums for products sold to complement
---------------------- large expenditures, provided the proportion is small.
The end-benefit effect is not only a monetary concept, but is a strong
---------------------- psychological phenomenon as well. When the end benefit is an emotionally
---------------------- important decision, customers find it tacky to make choices based on
price alone. Imagine if you were to purchase a gift for a very dear family
---------------------- member living overseas, for a very important personal occasion, it is
highly unlikely that you would suddenly become price sensitive to the
---------------------- prices of courier services, which would deliver the gift.
----------------------

On-time delivery in good condition would assume greater value since Notes
the gift is an important one. Marketers have used this “end benefit” as
an important communication tool to create value. Michelin has for years ----------------------
associated the importance of the quality of its tyres with the safety of
one’s family, charging a price premium for its products. Its tag line “Buy ----------------------
Michelin, because so much is riding on it”, has related the importance of ----------------------
the tyres to end benefits to which the customer already attaches a high
value. ----------------------
7. Shared cost effect: People purchase many products that are actually ----------------------
paid for in part or whole by someone else. Insurance covers the damages
to the vehicle from an accident and medical insurance covers the cost ----------------------
of medication and hospitalisation. The effect of complete or partial
----------------------
reimbursement on price sensitivity is called the shared cost effect. The
less the buyer pays out of his own pocket, the less price sensitive he is ----------------------
towards the product.
----------------------
8. Fairness effect: Consumers the world over are united by their quest
for “fair prices” and companies are frequently accused of not charging ----------------------
fair prices. The question of what is a fair price has dogged marketers for
decades. Buyers are more sensitive to a products price when it is outside the ----------------------
range of what they perceive as “fair” or reasonable, in a certain purchase
----------------------
context. The important thing is that the concept of fairness has little to do
with the issue of supply and demand. Whether a price is deemed fair or ----------------------
not, is very subjective and contextual.
----------------------
An important impact of this effect is with respect to whether the product
is considered a luxury or a necessity. Products become necessities when ----------------------
they are used to maintain a certain standard of living; luxuries on the other
hand are used to improve one’s’ standard of living and to get more out ----------------------
of life. Since standard of living of different market segments will differ,
----------------------
the concept of what is a luxury and necessity will also differ between
segments. ----------------------
Charging a high price for a necessity is considered “unfair”; hence, ----------------------
customers show greater price sensitivity towards prices of what they
consider necessities. People object to the high prices of lifesaving drugs, ----------------------
as they perceive these products to be necessities. But the same customer
would pay a price premium for a luxury which he considers as enhancing ----------------------
his standard of living. ----------------------
Research has shown that the company’s reputation has an important effect
on “fair” pricing of its products. Companies that have built up reputation ----------------------
of trust and earned the good will of its customers, through social ----------------------
development programmes are generally “rewarded” by the customer, who
considers their pricing fair. On the other hand, companies with dubious ----------------------
reputations will always draw suspicion about their pricing.
----------------------
9. Framing effect: Pricing research has shown that consumers “frame”
purchase decisions in their minds as a bundle of gains and losses. Moreover, ----------------------

Notes how they frame the decision affects how attractive they perceive the choice
to be. The framing effect states that buyers are more price sensitive when
---------------------- they perceive the price as a loss rather than as foregone gain and that they
are more price sensitive when they pay the price separately rather than as
---------------------- a part of a bundle.
---------------------- Consider the following example of price offers from two petrol pumps,
equally reputed.
----------------------
Station A: Rs 44.00 per litre, but gives Rs 2.00 discount per litre if the
---------------------- buyer pays in cash.
---------------------- Station B: Rs 42.00 per litre, but charges Rs 2.00 extra per litre, if the
buyer uses a credit card.
----------------------
All other things (quality of fuel, service, location) being equal, which
---------------------- offer seems more attractive? Although the economic consequences are
the same, Station A “seems” like a more attractive offer, simply because
---------------------- it is stated as a “gain”; whereas the offer from station B “seems” more
---------------------- negative and consequently less attractive. Moreover, losses get magnified
disproportionately in the consumers mind, more than an equal size
---------------------- foregone gain.
---------------------- The marketing implications of this effect are several. To make prices seem
less objectionable, they should be stated as opportunity costs rather than
---------------------- as out-of-pocket costs. Banks waive fees for savings accounts in return
for maintaining a minimum balance. Even though the interest foregone by
---------------------- the consumer on maintaining the minimum balance may be more than the
---------------------- charges, consumers opt for the minimum balance option rather paying a
charge for maintaining the account.
---------------------- When the product is priced differently to different market segments,
---------------------- marketers quote list prices at the maximum level, giving different
discounts to different customers. This type of price communication is
---------------------- very common, which proves its efficacy in reducing price sensitivity.
---------------------- Finally, companies that sell products which consist of many individual,
yet complementary products and services, should unbundle the gains, but
---------------------- bundle the losses. In a bundle, the seller should identify the individual price
of each product separately. But when making an offer to the consumer,
----------------------
he should understand the customers’ needs and offer a package price that
---------------------- meets the needs. Value meals at restaurants, holiday package prices at
tourist resorts use this price bundling concept very effectively. Customers
---------------------- perceive the offer as a gain and consequently a more attractive offer.
---------------------- 11.3.2 Market Segmentation using Price-Value Perceptions
---------------------- Very commonly customers get categorised either as price sensitive or

quality sensitive. After studying the various factors that affect price sensitivity,
---------------------- you will have realised that this is too much of a generalisation. Customers are
not alike in their sensitivity to price; and the reason for their sensitivity to price
---------------------- also differs.

An effective analysis of price sensitivity will reveal multiple market Notes
segments. Some customers are very aware of their alternatives, others are
not. Some customers value a brand’s unique differentiation; others consider it ----------------------
worthless at best. These differences in perception affect how customers will use
information about price and value in making a decision. ----------------------
Understanding these differences is the key to developing an effective ----------------------

pricing and value communication strategy. A market segmentation based
on the price sensitivity factors described reveals more differences among ----------------------
customers, and is therefore extremely useful when devising a pricing and value ----------------------
communication strategy.
To illustrate these differences, we can divide the nine factors influencing price ----------------------
sensitivity into two groups: ----------------------
• The first groups of factors are those that affect the perceived “value” of a
product’s differences – reference price, difficult comparison, importance ----------------------
of end benefit, switching cost and price-quality effects. ----------------------
• The second group of factors are those that affect the perceived “pain”
of price – size of the expenditure, the proportion of the cost of the end ----------------------
benefit that the product accounts for, the perceived fairness of the price
----------------------
and the framing of the price as a gain or loss.
Price buyers (high pain of price, low value of differentiation) are those ----------------------
who seek to buy at the lowest price consistent with some minimum level of
----------------------
quality. These buyers cannot be convinced to pay more for unique value-added
features, services or suppliers reputation. They rely on their prior experiences ----------------------
about what they need and what is worth paying for and do not spend time
considering alternatives and evaluating them. ----------------------
Relationship buyers (low pain of price, high value of differentiation) ----------------------
are those who already have a very strong preference for a brand based on
the supplier’s reputation and their own experience with the brand. So long as ----------------------
the price of their preferred brand does not exceed reasonable limits, they will
----------------------
purchase it without evaluating alternatives. Only a serious loss of trust, in their
present supplier will cause then to evaluate another supplier. ----------------------
Price buyers and relationship buyers are two ends of the price-quality
----------------------
continuum. Many customers, however, are somewhere in between; they are
sufficiently concerned both about paying more than they need to (price buyer) ----------------------
and getting all that they want (relationship buyer).
Value buyers (high pain of price and high value for differentiation) will ----------------------
invest time and energy evaluating differences and making tradeoffs. They will ----------------------
check prices and features of alternatives and buy the brand, whose added
value is worth the added cost. ----------------------
Convenience buyers (low pain of price, low value for differentiation) ----------------------
are neither concerned about the differences among brands – any brand will do
– nor too concerned about price to check the price differences between suppliers. ----------------------
evaluation. Such behaviour is common when time is of the essence, as in an
emergency or if the cost is not worth the effort. ----------------------

Notes The challenge in identifying these different value segments is that in most
cases these segments are not necessarily different people, but rather different
---------------------- categories and purchase occasions. The same person may be a relationship
buyer for business travel, but a value buyer for a family vacation.
----------------------
There are two broad implications of this value segmentation:
----------------------
• Firstly, companies wishing to serve different market segments must
---------------------- do so with multiple strategies involving product adaptations, distribution
networks, service distinctions and price differences.
----------------------
• Secondly, keeping in mind the value expectations of the buyers, companies
---------------------- must appropriately communicate the price. Pricing strategy is as much a
decision about the pricing level as it is about how the price and value is to
---------------------- be communicated.
---------------------- 11.3.3 Effect of the Internet on Price Sensitivity
---------------------- Most obviously the Internet has armed customers with unprecedented
amounts of knowledge about every category; searching for and evaluating
---------------------- alternatives have never been easier. Easier identification of suppliers increases
the likelihood of being aware of the best prices and deals, with minimal effort.
---------------------- Mostly it is this factor that people focus on to argue that the Internet has
---------------------- increased price sensitivity, forcing companies to drive down prices.
The reality is something else: to understand this one must understand the
---------------------- psyche of a consumer when shopping online.
---------------------- The quality of a product sold on the Internet is less certain than in the
physical space. A consumer can physically examine a product in a shop, which it
----------------------
is not possible to do so online. Moreover, if the product proves unsatisfactory, the
---------------------- consumer knows he can return the product to the store where he bought from.
Consequently, consumers are less willing to try lower priced unknown brands,
---------------------- when buying online, than when buying in a store.
---------------------- On the service side, when buying from an online merchant there is greater
uncertainty regarding whether the vendor is legitimate, whether he will deliver
---------------------- the promised product and whether he will keep the credit card information
confidential. Precisely for this reason, the most successful e-commerce sites
----------------------
have sought to create powerful brands to reduce the consumers’ perceived risk.
---------------------- The prices they charge are almost always at a premium, which customers are
willing to pay to deal with reputed merchants.
----------------------
Web shoppers also have higher incomes, which generally make people
---------------------- less price sensitive (expenditure effect).Consequently, even if the online shopper
is more price sensitive for the same brand when purchasing on the web, he is
---------------------- likely to have a preference for higher quality/higher priced brands.
---------------------- Lastly, research studies conducted in India and elsewhere have consistently
shown that most people shop online not to get a better price, but to have a
---------------------- more convenient shopping experience and a wider choice of products. They are
---------------------- customers who are cash rich, but too time poor to evaluate alternatives. Online

sites that have understood this motivation have focused on creating a more Notes
convenient shopping experience rather than just on price deals. Providing the
customer ease of navigation, a wide variety of products, ease of comparison, ----------------------
allowing a customer to customise the services to his requirement, tracking
previous purchases and offering a customer products in line with his preferences, ----------------------
are just some of things that successful online sites do to build loyalty. ----------------------
----------------------
Fill in the blanks.
----------------------
1. The is the price of the customer’s best
alternative plus the value of whatever differentiates the offering from ----------------------
the alternative.
----------------------
2. refers to the percentage of the total cost of
the end benefit accounted for by the products price. ----------------------
1. Switching costs are costs that customer incurs when he switches
----------------------
brands and suppliers.
2. Derived demand is the relationship between the desired end benefit ----------------------
and the buyers’ price sensitivity for one of the products contributing
----------------------
towards achieving that end benefit.
3. Convenience buyers are extremely concerned about the differences ----------------------
among brands. ----------------------
----------------------
Activity 1
----------------------
1. Collect pricing information for the postpaid and prepaid plans of ----------------------
different cellular service providers. Are they easily comparable? Make a
note of your observations. ----------------------
2. From cuttings of marketing communications advertising price, observe ----------------------
how the prices have been framed. What are your key findings? How
do you think they will impact the consumer’s value perception? ----------------------
3. Customer value segmentation is common in many industries. From ----------------------
the Internet find out the industries where this is commonly used.
----------------------
4. Make a list of products sold through retail stores and those on the
Internet. Find out the prices quoted on the Internet and in the stores. ----------------------
What price differences do you notice? In which categories are the
differences the least and in which categories are the differences the ----------------------
most? ----------------------
----------------------

Notes 11.4 PRICING STRATEGY AND THE PRODUCT LIFE CYCLE
---------------------- In previous units, we have studied the concept of the product life cycle.
In each of the phases of the PLC, the market has a unique personality; cost
---------------------- structures change, buyers’ price sensitivity changes, the nature of competition
changes as does the product itself. Accordingly, one’s pricing strategy must
----------------------
vary if it is to remain appropriate. We will examine in this section what would
---------------------- be the appropriate pricing strategies at each stage of the life cycle.
---------------------- Note to students: To fully appreciate the concepts in this section, a quick
recap of the product life cycle concept is recommended.
---------------------- 1. Pricing the product at the introduction stage: A product innovation
---------------------- requires substantial market education before it finds a place in the buyers
lifestyle or business practice. Marketers will encounter buyer apathy,
---------------------- skepticism and inertia despite the fact that the product may have a
legitimate value. The diffusion of information also goes through a certain
---------------------- process and recognition of this process is vital.
---------------------- Buyers are completely ignorant about the product; until they learn about
the product benefits they may not even recognise the need for it. Hence,
----------------------
the firms’ primary goal is to educate the buyer about the “worth” or
---------------------- “value” of the product and the pricing strategy has a key role to play in
this buyer education strategy.
----------------------
At this stage, since buyers are ignorant about the product, they are price
---------------------- insensitive towards the innovation. The important thing to remember
though is that this same price insensitivity bears no relation to the long-
---------------------- run price sensitivity of the buyer. Prospective buyers tend to use price
as an indicator of quality and value. Because there are no alternative
----------------------
brands, they lack a reference price for determining value and to evaluate
---------------------- what would constitute a fair or bargain price; although prices of close
substitutes may be used as reference prices.
----------------------
Given the buyers’ ignorance, the firm’s primary goal is to educate the
---------------------- buyers about the product’s utility and set a list price that would establish
the worth of the product. It is the price that the satisfied buyer would be
---------------------- willing to pay for a repeat purchase. It gives the buyer a reference from
which to estimate the product’s worth.
----------------------
Typically, the most preferred pricing strategy at this stage is the price
---------------------- skimming strategy; the list price would be near the value that the price
---------------------- insensitive buyer will place on the product. A market penetration pricing
strategy is not recommended at this stage, since the low price insensitivity
---------------------- of the buyer will make the strategy ineffective and may due to price-
quality effect damage the products reputation.
----------------------
The only conditions under which a market penetration pricing strategy
---------------------- may work is, if the product is not truly innovative and is merely an upgrade
version of an existing product or if there exists a large proven market for
---------------------- the product and several competitors are waiting in the wings to launch

their versions of the product. Even under such circumstances, companies Notes
generally set a neutral pricing strategy, where the price would be near the
relative value that the more typical user would have for the product. ----------------------
One of the ways of educating buyers about the utility and worth of the ----------------------
product is to use price induced sampling. Skype, an Internet calling
software, which allows calls to be made over the Internet, is currently ----------------------
distributing its software free over the Internet. The strategy is to distribute
----------------------
a very basic version of the software free to customers; once the customers
get accustomed to the product and begin to see the benefits, the strategy is ----------------------
to offer the advanced versions at a price, at which point customers would
begin to see the value and would therefore be willing to pay for more ----------------------
advanced versions.
----------------------
Worldspace Satellite Radio when it was first launched in India gave free
subscriptions to all Worldspace users. Customers only had to buy the ----------------------
satellite radios, and were given access to a limited number of channels
----------------------
free of cost for the first few years. Once the customers had experienced
the product, Worldspace introduced a large number of stations and started ----------------------
charging an annual subscription for the service. Price induced can be an
effective strategy where it is possible to be used. ----------------------
Many innovations are durable goods for which price cutting to induce ----------------------
trial is rarely cost-effective and the seller can hardly afford to give the
product away and wait a couple of years for a repeat purchase. Many ----------------------
such products require buyers to learn new skills and acquire new habits.
----------------------
In such cases price induced sampling does not effectively establish the
product’s worth in the buyers’ mind. Instead market development requires ----------------------
more direct education of buyers before they make their first purchases. .
----------------------
Pricing a product also involves setting not just retail prices but setting
wholesale prices as well. Distribution channel members can play a key ----------------------
role in the market education and market development of the product,
for which they must be compensated. Consequently, marketers can use ----------------------
two different strategies. One way is to set low wholesale prices and ----------------------
provide high margins to the distributors, thus giving them an incentive
to promote the product with buyer education and service. This may work ----------------------
when distribution is very exclusive; when distribution is less restricted,
the danger is that the distributors may simply pass on the extra margins ----------------------
as discounts to the customer. This can seriously damage the value of the ----------------------
product as well as the company’s reputation.
The more preferred strategy is to keep the margins at normal levels, but ----------------------
pay incentive fees for stocking new products, co-operative advertising, ----------------------
in-store displays, premium shelf space and for onsite service and
demonstration. ----------------------
2. Pricing the product for the growth stage: Once the product enters ----------------------
the growth stage, the pricing problem begins to change. As competition
begin to break out in the industry, both the pioneer and later entrants ----------------------

Notes begin to assume competitive positions and prepare to defend themselves.
The generic competitive strategies are the competitive positions that
---------------------- companies assume; cost leadership, differentiation, and focus (cost focus
or differentiation focus). The pricing strategy that a company adopts in
---------------------- the growth stage must be in line with the competitive position or generic
---------------------- strategy that the company adopts.
Pricing the differentiated product
----------------------
The role of pricing is to collect the rewards from producing attributes that
---------------------- buyers find uniquely valuable. If the differentiated strategy is focused
towards a particular buyer segment or niche segment (differentiation
----------------------
focus), the pricing strategy adopted is price skimming directed at that
---------------------- target segment. In contrast, when the differentiated product is industry
wide or multi segment, the firms sets neutral and earns it profitability
---------------------- through volumes.
---------------------- Penetration pricing is also possible for a differentiated product, although
the pricing is often equal to the prices of less differentiated products. This
---------------------- pricing strategy is used to lock in a large market share before competitors
imitate and eliminate the products differential advantage. Microsoft used
----------------------
this pricing strategy for its Windows operating system so that it would
---------------------- become the dominant architecture and the default standard for software
programs. This pricing is not commonly used for differentiated consumer
---------------------- products, since buyers who can afford to cater to their desire for the
attributes for differentiated products can afford to buy them without
----------------------
shopping for bargains.
---------------------- Pricing the cost leader’s product
---------------------- Like the differentiated strategy, the cost leadership strategy can also be
focused to a particular market segment or be directed industry wide.
----------------------
It is naturally assumed that the penetration pricing strategy is the most
---------------------- appropriate pricing strategy for the cost leader; this is a mistaken belief.
---------------------- A cost leader may opt for penetration pricing strategy, when the company
is looking for dominant market share in a large market segment
---------------------- and when the cost advantage depends on volumes. Having acquired the
market share, the firm may maintain the pricing strategy which acts as a
----------------------
competitive deterrent, whilst earning its profits through its cost advantage.
---------------------- Japanese companies have used this pricing strategy for television and
other consumer electronics, using extensively redesigned manufacturing
---------------------- processes, modular assemblies and standardised designs.
---------------------- If the market is not price sensitive, penetration pricing strategy will not
give the firm any advantage either in terms of market share or volumes. In
---------------------- such a case neutral pricing strategy may be more appropriate and can still
be consistent with the cost leadership status. The battle for market share is
----------------------
fought using weapons such as technological leadership, communications
---------------------- or distribution sales and service.

Penetration pricing is also not always appropriate when the cost leadership Notes
focus is narrow. The cost advantages in these markets are not dependant
on volumes; competition is more about supplying customised products, ----------------------
quality and reliable deliveries rather than about price. The appropriate
pricing strategy is more neutral. ----------------------
Price level reductions in the growth stage ----------------------

At the growth stage, in addition to establishing differentiation, companies ----------------------
should also prepare for the maturity phase by identifying more cost-
effective ways to do business. Also during the latter part of growth stage, ----------------------
as competition intensifies, the battle for market share heats and some firms
----------------------
may use price as a weapon for gaining share. In such cases cost efficient
companies are better placed vis-a-vis their more inefficient competitors. ----------------------
Overall price levels during the growth stage, regardless of one’s product
----------------------
strategy, are lower than those at the product introduction stage. New
competition during the growth stage gives buyers more alternatives from ----------------------
which to choose and their growing familiarity with the product puts them
in a better position to evaluate those alternatives. Both factors increase ----------------------
price sensitivity over what it was in the introduction stage. Even if the
----------------------
firm enjoys a patent monopoly, reducing overall prices, speeds the product
adoption process and enables the firm to profit from faster market growth. ----------------------
3. Pricing the established product in the maturity stage: Products spend ----------------------
most of their life in maturity, the phase in which effective pricing is
essential for survival. Many firms do not survive the growth and perish in ----------------------
the industry shakeout at the latter part of growth stage, because they failed
to achieve strong competitive positions. Firms that have successfully ----------------------
executed their growth strategies are usually able to price profitably in ----------------------
maturity, although not as profitably as at the height of the growth stage.
In the growth stage, the sources of profits were expanding revenues in ----------------------
growing markets. As market growth rates slow down tending towards ----------------------
stagnation, the source of profitability from expanding sales revenues
starts drying up. Companies need to fiercely defend market share, as any ----------------------
loss in market share at this stage will lead to an absolute sales decline.
Defending market share also becomes imperative, as firms have made ----------------------
production capacity investments to produce a certain level of output; any ----------------------
loss in sales will put tremendous pressures on profitability.
Competitive and market factors thus reduce a firm’s pricing freedom. ----------------------
Pricing latitude is further reduced due to the increased price sensitivity ----------------------
of buyers and reduced scope for product differentiation. Unless a firm
can discover a marketing strategy that renews the products life cycle or ----------------------
achieve a technological breakthrough that enables it to produce a more
differentiated product, it must learn to live with the competitive pressures. ----------------------
Price competition is therefore at its peak; and in such a scenario the ----------------------
company’s major objective is profitable survival. Effective pricing in the
----------------------

Notes maturity focuses not on attempts to “buy” market share, but on making
the most of one’s cost advantages. In earlier units, we have discussed the
---------------------- revamped product, product line and distribution strategies that companies
must focus on to improve profitability and maintain margins, in a market
---------------------- environment when margins are severely under pressure.
---------------------- 4. Pricing the product during the decline stage: A sustained downward
trend in demand characterises the market in a decline. The decline may
----------------------
be limited (as radial tyres replaced conventional tyres) or more extensive
---------------------- (as LP records were displaced by cassettes and compact discs).
A company’s ability to adapt to this stage of the life cycle depends
----------------------
largely on whether production capacity can be adapted. If production
---------------------- costs are largely variable (rare scenario of pure services), capacity can
adjust without any impact on prices. If production costs are sunk costs,
---------------------- but capacity be adjusted to other products or market segments, then the
effect may be limited. But when production costs are largely sunk costs,
----------------------
because it is specialised to a certain market, the effects of market decline
---------------------- are more serious.
The pricing strategy follows the strategic approach that the company
----------------------
takes to exit the category. A word of caution here is that success with the
---------------------- different strategic approaches depends entirely on the individual firm’s
ability to pursue these strategies.
----------------------
Divesting means where a company chooses to divest products/markets,
---------------------- where the products are in decline, choosing to refocus resources on
markets where the product is still in the earlier stages of the life cycle.
---------------------- (Remember that products are at different stages of the life cycle in different
---------------------- market segments/geographic markets). Divesting could also mean that
firm chooses to sell a part or all of its business in certain markets, using
---------------------- the resources to refocus on other markets.
---------------------- Harvesting is a phased withdrawal from an industry. It begins like a

divestment strategy, when a firm begins to withdraw from certain markets.
---------------------- However, the ultimate aim is to withdraw profitably from the industry.
The company may therefore use short-term strategies to defend the
---------------------- competitive position of its “cash cow” products, maintain prices and milk
---------------------- these products/markets. Companies will avoid long-term investments in
any of the market segments, instead using the resources for promising
---------------------- ventures.
---------------------- Consolidation means when a firm actually uses its strong financial
position, using price cutting to drive out weak competitors and capture
---------------------- their markets for the limited term. The aim of the company is to ultimately
exit the business, but to do so in a profitable manner.
----------------------
----------------------
----------------------

Notes
----------------------
1. A market penetration pricing strategy is recommended at the
----------------------
introduction stage.
2. If the market is not price sensitive, penetration-pricing strategy will ----------------------
not give the firm any advantage either in terms of market share or
----------------------
volumes.
3. Competitive and market factors increase a firm’s pricing freedom. ----------------------
4. Harvesting is a phased withdrawal from an industry. ----------------------
----------------------
Activity 2
----------------------
For the following product categories, collect information on how price ----------------------
levels have moved as the product passed through the different stages of the
life cycle. ----------------------
• Film-based cameras ----------------------

• Black and white cameras ----------------------
• Mobile phones
----------------------
• Pagers
----------------------
11.5 UNDERSTANDING THE PRICING GAME ----------------------
Pricing is a game, as defined by game theorists, as success in the game ----------------------

depends not only on a company’s pricing decisions, but on how customers and ----------------------
competitors react to those decisions. Unlike competitive sport, which is a
“positive sum” game, the rules of the pricing game are very different. ----------------------
In a positive sum game, although one team or individual player will end ----------------------
up on the losing side, he would still have gained in terms of experience. Even
if the match or tournament were to get prolonged and intense, the participating ----------------------
teams and players still stand to gain in terms of honing their skills and experience.
----------------------
In a “negative sum” game, the loser does not benefit from participating
in the game; instead he would end up paying a price for having participated in ----------------------
the game. A “negative sum” game is much like the gladiator sports or dueling
----------------------
of the olden days, which were used to settle disputes or establish superiority;
the loser in such games often ended up paying with his life. The pricing game ----------------------
or “price wars” as we would know them are much like that. Participation in such
a game imposes serious costs not only on the loser, but even on the winner as the ----------------------
victory may come at a huge cost. The longer the war continues, the more likely
----------------------
it is that even the winner may not consider playing the game worth the cost.

Notes For marketers, warfare should be the last resort and even then, the
potential benefits of using it must be weighed against the long-term costs
---------------------- involved.
---------------------- 11.5.1 Price Competitiveness
Price competition is more commonly seen in certain industries and not at
----------------------
all in some others. There are certain inherent characteristics of the industry and
---------------------- buyer base, which indicate the likelihood and nature of competitive response to
pricing action within the industry. We have learnt all of these characteristics in
---------------------- earlier units and it’s a good time to summarise them again. The 10 factors stated
can be used as checks to understand the price competitiveness of the industry.
----------------------
1. Cost structure: Industries with a high fixed cost structure is likely to see
---------------------- more firms cut prices to chase volumes.
---------------------- 2. Impact of sales volume on cost: Increased priced competitiveness occurs
when sales volume impacts costs through economies of scale.
----------------------
3. Overcapacity: Overcapacity in industries, when supply exceeds demand,
---------------------- causes firms to compete on prices to drive volumes.
---------------------- 4. Barriers to adjusting capacity: If manufacturing capacity cannot be
adjusted downward due to exit or even mobility barriers, it stimulates
---------------------- price competition.
---------------------- 5. Scope for product differentiation: Industries where there is a greater
scope for product differentiation are lesser price competitive as compared
---------------------- to industries where commoditisation happens rapidly.
---------------------- 6. Product perishability: The more perishable the product (services), the
more the likelihood of price competition.
----------------------
7. Number of and diversity of competitors: The greater the number and
---------------------- diversity of companies, the less intense the internal rivalry and the less
the likelihood of price competition.
----------------------
8. Industry growth rate: When the industry or market is stagnant, firms
---------------------- pursue growth by taking away share from the competitor; in such cases
price competition would be intense.
----------------------
9. Buyer concentration: A highly concentrated buyer base will have
---------------------- bargaining power and can create greater price competition.
---------------------- 10. Price sensitivity of the buyers: The greater the price sensitivity, the greater
is the price competition.
----------------------
It is important to remember that these factors do not create an impact in
---------------------- isolation, but work collectively as well to create greater price competitiveness.
Managers have to identify the factors critical to competition in an industry, so
---------------------- as to build a profitable competitive position in the industry first. Companies
need to become strong competitors first by building sustainable competitive
----------------------
advantages.
---------------------- In a price competitive industry, it is suicidal to drive growth with price

without a competitive advantage. Competition drives out profitability except Notes
for those with a competitive advantage that prevents competition from fully
matching their costs or value proposition. ----------------------
11.5.2 Reacting to Competition with Price ----------------------
A price war is a negative sum game and managers need to be fully aware
----------------------
of the costs it imposes on all the participants in the game. It is imperative
that managers think coolly before initiating price competition. However, the ----------------------
question still remains of how a company should respond should a competitor
initiate price competition. In this section we will discuss in step-by-step detail ----------------------
how to analyse a competitive situation and react to price competition that is not
----------------------
of your making.
The situation is that a competitor has initiated a price cut or a competitively ----------------------
priced new product has entered the market.
----------------------
The dilemma is whether to respond with price, when threatened with a
loss of sales by a lower priced competitor. In the long run, the company can ----------------------
build strategic capabilities to overcome such challenges, but in the short run, the ----------------------
capabilities are fixed. With limited options available, how should the company
respond. ----------------------
Step 1: The first action is to ask, “Is there is a response that would cost less ----------------------
than the preventable sales loss?” Is the cost of responding less than the sales
loss which can be prevented? Managers need to conduct a financial analysis of ----------------------
a reactive price change and if it is concluded that reacting to the price change
is cheaper than losing sales then it may be a good business decision to respond. ----------------------
But further thinking is required before one comes to that conclusion. ----------------------
Step 2: The next question to ask is “how much sales loss is really preventable?”
Whenever a new competitor enters the market, some sales loss is inevitable, ----------------------
even if the company matches the price cut, because people may shift for reasons ----------------------
other than price.
----------------------
Step 3: If one were to reach the conclusion that a substantial portion of sales
loss is preventable, then the next question to ask is “If you respond, is your ----------------------
competitor willing and able to cut price again to match your price levels?”
Asking this question forces managers to think two or three moves ahead. If the ----------------------
competitor matches your price reaction, then any advantage the company might
----------------------
have gained is nullified. At this stage, companies cannot backtrack on their
price reaction and find themselves in an irretrievable and unviable situation. ----------------------
If the competitor is not able to match your price reaction, then it might
----------------------
make sense to go ahead and respond to the price cut. At this stage too,
managers can consider a number of alternatives that can substantially reduce ----------------------
the cost of reacting with a price cut.
----------------------
• Focus the reactive price cut only on those customers likely to be attracted
by the competitors price offer. Companies need to assess the price ----------------------
sensitivity of their customers and focus their offer only on the price
sensitive customer. ----------------------

Notes • Focus the reactive price cut only on the incremental volume at risk.
• Focus your reactive price cut on a particular geographic area or product
----------------------
line where the competitor has the most to lose. This implies retaliating
---------------------- with the intention of signaling to the competitor to back down and stop
the price cutting.
----------------------
• Raise the cost to the competitor of its price cutting actions. This a non-
---------------------- price action that companies can take in markets which are more quality
sensitive. Companies can alert customers, through their communications,
---------------------- of the quality compromises that they may be making by opting for cheaper
price.
----------------------
• Leverage any competitive advantages to increase the value to the
---------------------- customer as an alternative. This is yet another powerful non-price action
that companies can take, which customers perceive as a bigger gain than
----------------------
a discount.
---------------------- Step 4: Going back to step three, if the competitor is able to match your price
---------------------- reaction, then the next question to ask is “Will the multiple actions and reactions
required to match a competitor still cost less than the avoidable sales loss?”
---------------------- This forces managers to think about the total cost of the price war rather than
cost of singular pricing actions.
----------------------
Multiple responses take prices into a downward spiral, at the end of which
---------------------- either the competitor may still hold the advantage or neither company nor
competitor may hold the advantage. In any of these two scenarios, the company
---------------------- is still the loser and will find itself in an irreversible situation.
---------------------- If the answer to the question is ‘Yes’, that the cost of multiple reactions is
still less than the sales loss, then it may make business sense to respond.
----------------------
If however the answer is ‘No’, then it advisable for the company not
---------------------- to initiate a price reaction in the first place at all. At such times focusing
on other areas such as product improvements, increasing reach and efficiency
----------------------
of distribution, effective communications would be more advisable to prevent
---------------------- sales losses.
Step 5: Revert to Step 1: So far we have looked at all responses where the cost
----------------------
of responding was less than the sales loss. We now need to look at situations
---------------------- where the cost of responding is more than the sales loss, i.e., it is cheaper to
accept the sales loss than to respond to the price cut. The logical answer to this
---------------------- question would be for the company to accommodate or ignore the price cut and
focus its efforts in other areas we stated earlier. But the answer is often not so
----------------------
straight forward. A competitor’s pricing actions may end up threatening the
---------------------- company’s business in other territories and market segments or the customer
segment in which the price cut has been initiated is strategically important to
---------------------- the company.
---------------------- Step 6: The question to now ask is if “the company’s position in other markets
is threatened if the competitor gains share?” This could happen in cases where
---------------------- companies sell a range of complementary products, hence, loss of share in one

product category may affect sales of the related categories. If the response is Notes
‘Yes’ the market position is threatened, managers need to further evaluate the
value of the markets at risk to justify the high cost of responding before they ----------------------
actually decide to retaliate.
----------------------
If however the company’s position in other markets is not threatened,
accommodating or ignoring the price cut would be a more prudent response. ----------------------
Reacting to competition involves more than reacting with a price cut. ----------------------
It involves deciding how to adapt to the company’s competitive long-term
strategy. It must be remembered that any pricing action or reaction must fit in ----------------------
with the company’s competitive strategy; problems arise when pricing is viewed
----------------------
independently of a company’s growth and competitive strategy in market.
Any departure from a particular pricing strategy that a company would ----------------------
have adopted will have to be followed up with an adjustment in the
----------------------
competitive strategy in a market. Figure 11.2 summarises different strategic
options that companies have when reacting to competition and when to use ----------------------
them. Price reaction decisions need to be made against this larger backdrop
of strategic options. ----------------------
Competitive strategy involves much more than just deciding whether or ----------------------
not to react with price.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
\
Fig. 11.2: Different Strategic Options ----------------------
In addition to the costs and benefits of retaliation, one must consider the ----------------------
concept of strategic weaknesses and strengths, referring to a competitor’s
relative competitive advantage. ----------------------
• Competitor is strategically weaker/cost of responding is too high: We ----------------------

have seen earlier that when the cost of responding is too high, it may
advisable to ignore the price cut. This is an appropriate response when ----------------------
the competitor is strategically weaker with no competitive product or ----------------------
cost advantages and when the sales one stands to lose may be small and
limited. ----------------------
But one could argue this differently to say that if the competitor is indeed ----------------------
weaker, why should the competitor’s pricing action be ignored, even if it
is costly. A company which is stronger should use its competitive strength ----------------------
and resources to drive out a weaker competitor. Finding a flaw in this logic
----------------------

Notes is difficult, but the consequences of this action must be understood first.
Firstly, it is dead end path, as a weak competitor is likely to get driven
---------------------- out of the market due to the market forces anyway. Whether a company
should actually compromise its profits in driving out a “weak” competitor
---------------------- is the question. Secondly, it would be a misconception to think that by
---------------------- driving out weak competitors, one can actually eliminate competition.
This may happen only temporarily, because with time newer competitors
---------------------- may emerge, who will buy the assets of the bankrupt competitors.
Managers need to be aware of long-term consequences of their actions
---------------------- against weaker competitors.
---------------------- • Competitor is weaker and the price reaction is cost justified: The
logical response is to attack in such a situation. But such situations would
----------------------
seldom arise because in the first place it would be a misjudgment on part
---------------------- of the competitor to use a price action from a position of weakness. But
should such a situation arise, managers should consider attack strategies
---------------------- that yield a larger gain to the company. If the competitor has assets which
could be of value to the company, attacking and forcing a sellout may
----------------------
result in a larger gain.
---------------------- • Competitor is neutral or stronger and the price reaction is too
costly:Companies will have to accommodate stronger competitors when
----------------------
price retaliation is too costly. Accommodate is not to be confused with
---------------------- ignoring the competitor. Accommodating means actively adjusting one’s
own competitive and growth strategies to minimise the adverse impact of
---------------------- the threat and at the same time preparing to live with it. Typically at such
times companies would re-look at their product portfolios and the product
----------------------
markets they compete in. Portfolio rationalisation, exiting unattractive
---------------------- market segments under the market conditions, pruning product lines are
some of the strategic actions companies take when accommodating a
---------------------- stronger competitor. The key is to first understand the changed market
conditions and then adapt one’s strategy to compete profitably in the new
----------------------
market conditions.
---------------------- • Competitor is stronger and the price reaction is cost justified: This
is common scenario when a price-cutting competitor is on par with the
----------------------
defending company whose market has been attacked. Because of the
---------------------- attacker’s strength, the amount of sales at risk is so large that a vigorous
defense becomes cost justified. The purpose of a defend strategy is
---------------------- not merely to react with price but to convince the competitor to back
off. Companies would use a combination of pricing, distribution and
----------------------
communication actions to defend the market share.
---------------------- The above model emphasises once again that managers need to be:
---------------------- • Selective about choosing some confrontations and avoiding others.
---------------------- • Think two or three moves ahead.
• Analyse long-term consequences on profitability rather than just market
----------------------
share.

The two simple rules of price competition that emerge from this are: Notes
• Do not initiate price competition unless the short-term gain is worth it
----------------------
after taking into account the competitor’s long-term reactions.
• Do not react to a competitor’s price cut except with price and non-price ----------------------
actions that cost less than accommodating the competitor’s behaviour
----------------------
would cost.
----------------------
Activity 3
----------------------
Collect information on the price cuts in the airline industry over the past few ----------------------
months. Which industry factors stated above necessitated the price moves?
What was the impact of the price cuts on the different players? ----------------------
----------------------
11.6 PRICING: KEY TOOL OF A COMPANY’S GROWTH ----------------------
STRATEGY
----------------------
So far, we have learnt about avoiding negative sum competitive
confrontation, but this still leaves us with the question “what about companies ----------------------
that have made price the central element of their growth strategy?” Examples of ----------------------
the low cost airlines and retailers come to mind, whose entire value proposition
is built on low prices. One might argue that these companies have built their ----------------------
strategies around capturing markets and more importantly creating new markets
with lower prices. These companies are able to do so profitably and if it can ----------------------
work for them then it can work for everyone. ----------------------
The answer is that it can work for anyone provided that there is an
----------------------
understanding of the circumstances that enabled these companies to be so
successful. This understanding is critical to replicating their success. ----------------------
• Firstly, every one of these companies first created business models that
----------------------
enabled them to have better cost structures than their competitors. In fact,
by serving customers more cost-effectively, these companies actually ----------------------
earned profits in excess of their competitors, making their efforts a
positive sum game. ----------------------
• They communicated their cost advantages decisively to their competitors, ----------------------
which resulted in many of their rivals backing off till such time as they
could revamp their own cost structures. ----------------------
• These companies used price not so much to grab market shares, but ----------------------
more importantly to substantially expand markets. Targeting customer
segments hitherto untapped resulted in bigger gains for these companies ----------------------
themselves and for the industry as a whole too. ----------------------
Before embarking on a price based strategy, managers need to ask which
ones of these is their rationale for building a value proposition solely on price. ----------------------
Importantly, managers need to understand that rarely can the strategy be built ----------------------

Notes on price alone. Each of these companies has delivered products and services on
par with their competitors realising that a strategy based on price alone cannot
---------------------- be sustained indefinitely.
---------------------- 11.6.1 Role of the Distribution Channel in Setting Prices
---------------------- Distribution channels provide a critical linkage to ultimate customers

in an effective and efficient manner. Channel strategy needs to be integrated
---------------------- with pricing strategy, as a well-developed pricing strategy may be poorly
implemented by the distribution channel, dooming the strategy.
----------------------
Distribution channel policy affects the following:
----------------------
• The products and services with which the company’s product is compared
---------------------- (reference effect)
• The image customers have of the product
----------------------
• The ability to differentiate through augmentation
----------------------
• The ability to target and reach desired customer segments
---------------------- • The ability to implement the desired pricing strategy
---------------------- • The ability to control the share of contribution among channel members
---------------------- Since all of these factors are considerations in formulating a pricing
strategy, distribution channel policy and pricing strategy need to be
---------------------- thoughtfully coordinated. In general, distribution channels affect pricing
decisions in the following three ways:
----------------------
• Channel design – the type of channel used
----------------------
• The role of the channel members
---------------------- • Implementing the price through the distribution channel
---------------------- 1. Channel design: Distribution channel strategy like pricing strategy
begins with target customer identification and then selecting or creating
---------------------- appropriate channels to reach those customers. The channel selected will
---------------------- in turn affect the company’s pricing strategies.
Generally, direct routes are used when the customer base is geographically
----------------------
concentrated or consists of institutional buyers. Direct channels while
---------------------- giving the company increase control, increase financial management
issues.
----------------------
Indirect channel routes are used to reach geographically dispersed target
---------------------- markets. Channel intermediaries are given markups over the wholesale
price to cover their costs of marketing, financial, operational activities and
---------------------- earn profit. The longer the indirect channel, the greater the distribution
costs and markups to be incorporated. Most companies choose both direct
----------------------
and indirect channels. This accentuates conflicts between companies and
---------------------- channel intermediaries. Different channel approaches mean the pricing
strategy must deal with different markups for the various intermediaries.
----------------------

The type of channel used affects the product’s perceived value and Notes
consequently its price. A medicinal toothpaste positioned as a prescription
product will necessarily need to be sold through pharmacy outlets. As ----------------------
the frame of reference are other pharmaceutical products giving it higher
perceived value in the customers mind, consequently the price is expected ----------------------
to be higher. The same product positioned as a staple product to be retailed ----------------------
through grocery outlets will have lower perceived value and consequently
lower pricing. Product positioning, type of channel and pricing become ----------------------
inextricably linked.
----------------------
2. Role of the channel intermediaries: The more activities the company
asks channel intermediaries to execute, the more the company must “pay” ----------------------
for these activities through its markup policy. This in turn affects the
----------------------
company’s cost structure. The costs of these activities represent a variable
cost to the company, hence, the greater the variable costs, the higher the ----------------------
contribution margin. However, this decision is taken not only with an eye
on the costs, but more with the requirements of the target markets. ----------------------
3. Managing the price through the distribution channel: The company’s ----------------------
goal should be to develop pricing strategy that is aimed at all channel
intermediaries achieving satisfactory profit levels. Channel members ----------------------
earn profits through markups and driving sales volumes. Companies that
----------------------
provide lower markups must be able to justify the same through providing
volumes to allow the channel member achieve his own profit objectives. ----------------------
Such companies would necessarily use pull strategies.
----------------------
Product line pricing is setting prices for an entire line of products. Compared ----------------------
to setting prices on a single product, product line pricing encompasses broader ----------------------
concerns. In product line pricing, the manager tries to achieve profit and other
goals from the entire line rather than for a single component of the line. ----------------------
To do this effectively, managers have to determine two things: ----------------------
1. Role of products in the product line: In previous units, we have learnt
about the concept of product lines. Each of the products in a line is ----------------------
assigned roles such as “fighter” or “flanker” or “flagship” roles. Fighter ----------------------
brands are created as low priced generic products target the highly price
sensitive market segments and are used as key weapons of the company’s ----------------------
competitive strategy. The margins on these products are typically lower.
Flagship brands, usually the stars of the product line, are differentiated ----------------------
products competing in high growth markets or markets critical to the ----------------------
growth of the company. Flanker brands are products usually in value or
economy segments or any other segments where a tactical presence ----------------------
is required. Companies invest in building them as strong brands in their
respective segments. ----------------------
Product line pricing considers these roles to maintain sufficient price ----------------------
differences between the products in the line to avoid cannibalisation–
----------------------

Notes a situation where one of the company’s products eats into the sales of
another product in the product line.
----------------------
2. Relationships among products: The manager must also determine the
---------------------- relationship that exists among the various products in the line. If products
are complementary, an increase in the sale of one automatically leads to the
---------------------- increase in sale of the other, such as film based cameras and photographic
film. Pricing of complementary products is critical due to derived demand
----------------------
(end-benefit effect). In such cases, companies usually price the basic
---------------------- product competitively and price the accessories or competitive products
at higher prices.
----------------------
Two products in a line can also be substitutes for each other such as liquid
---------------------- shoe polish and cream shoe polish. The pricing of one will affect the
other. Managers assign prices based on the growth strategies and role of
---------------------- the product in the line at a given time.
---------------------- Product line pricing is particularly challenging because of the difficulty in
identifying costs of each product in the line. Many costs in manufacturing
---------------------- and marketing are shared between products. Assignment of these shared
costs to the individual products is a highly subjective exercise and is
----------------------
prone to errors.
---------------------- 11.6.3 Pricing Tactics
---------------------- Pricing strategies set the base level of prices, the general price level at
which company expects to sell the products or services. The general price levels
---------------------- would be in terms of price skimming, penetration pricing or neutral pricing.
---------------------- We have so far learnt the various factors that affect the company’s choice
of pricing strategy and the processes by which those decisions evolve. The final
---------------------- step is to fine tune the base level prices, known as pricing tactics.
---------------------- Fine-tuning techniques are short-run approaches that do not change the
general price level; they do however result in changes within the price level.
----------------------
These tactics allow the company to adjust for competition in certain markets,
---------------------- take advantage of unique demand situations, meet promotional and pricing
goals, affect the target consumers’ perception of price and meet changing
---------------------- government regulations. Fine- tuning tactics include various sorts of discounts,
allowances, geographic pricing and special pricing tactics.
----------------------
1. Geographic pricing: Many companies ship their products to nationwide
---------------------- and worldwide markets. Companies may use different geographic pricing
tactics to moderate the impact of freight costs on distant customers. The
----------------------
following methods of geographic pricing are commonly used:
---------------------- • FOB origin pricing: Free-on-board origin pricing is a price tactic
---------------------- that requires the buyer to absorb the freight costs from the point of
shipping (origin). Because transportation costs generally increase
---------------------- with the increase in the distance the merchandise is shipped,
customers located farthest away pay the highest prices.
----------------------

• Uniform delivered pricing: If the company wants to equalise Notes
the costs for all customers, the firm will adopt uniform delivered
pricing. The company pays the actual freight charges and bills every ----------------------
purchaser an identical flat freight charge.
----------------------
• Freight absorption pricing: The company pays all or part of
the actual freight charges and does not pass them onto the buyer. ----------------------
Companies may use this tactic in intensely competitive markets or
----------------------
as a way to break into new markets.
2. Discounts, allowances and rebates: A base price can be lowered through ----------------------
the use of discounts and related tactics of allowances, rebates and zero-
----------------------
per cent financing. Companies use various forms of discounts to change
buying patterns of customers, such as buying during off season, cash ----------------------
instead of credit and buying larger quantities. The following are the most
common tactics: ----------------------
• Quantity discounts: It is when buyers get lower prices for buying ----------------------
multiple units or larger quantities. Quantity discounts may be
cumulative or non-cumulative. Cumulative discounts are total ----------------------
deductions made from the customers’ total purchases in a specified
----------------------
time period and are intended to encourage customer loyalty. Non-
cumulative discounts are discounts that apply to single orders ----------------------
or purchases rather than to the total volume and are intended to
encourage purchases in larger quantities. ----------------------
• Cash discounts: As the name suggests, it is a discount offered to ----------------------
the customer or channel intermediary in return for prompt payment
for goods and services. Prompt payment reduces interest costs and ----------------------
bad debts for the company. ----------------------
• Trade discounts: They are given to channel intermediaries in
return for certain special functions performed. ----------------------
• Seasonal discounts: These are price reductions for buying ----------------------

merchandise off season; it shifts the inventory function and
inventory carrying costs to the buyer. Seasonal discounts enable ----------------------
manufacturers to maintain a steady production schedule round the ----------------------
year.
----------------------
• Promotional allowances: Also known as advertising allowances,
these are payments to channel members for promoting the company’s ----------------------
products. It is both a pricing tactic as well as promotional tool. As
a pricing tool it is a trade discount, where the retailer or dealer gets ----------------------
partly or fully compensated for certain promotional activities.
----------------------
• Rebate: It is a cash refund given for the purchase of a product during
a specific period. The advantage of a rebate is that it is temporary ----------------------
inducement, and does not alter the base price structures. Discounts
----------------------
become very difficult to withdraw sometimes as the company may
face stiff resistance from the buyers. ----------------------

Notes • Zero per cent financing: It is very commonly used for high priced
items like consumer durables and serves to stimulate demand.
----------------------
3. Special pricing tactics: Special pricing tactics are unique and defy
---------------------- categorisation. Managers may use these tactics for various reasons;
stimulate demand for specific SKUs, increase store patronage and offer
---------------------- wider variety at a specific price point.
---------------------- • Price lining: When a company establishes prices for different
products in its product lines, it establishes a price line. Price lining is
---------------------- the practice of offering a product line with several items at specific
price points. A brand of shirts may have 40 different styles within its
----------------------
product line. The company may establish four price points for the
---------------------- entire line; say Rs 500, Rs 750, Rs 950 and Rs 1250. The company
would then price the 40 different varieties of shirts at these four
---------------------- specific price points. This tactic is very commonly used for product
lines like apparel, shoes, cosmetics, watches, where there is large
----------------------
variety within the product line.
---------------------- • Loss leader pricing: It is an attempt by the company to attract
customers to the store by selling some items at near or below cost, in
----------------------
the hope that customers will then buy other items once in the store.
---------------------- Loss leader pricing is used on items that customers recognise well
as bargains at a special price. The goal is not to sell large quantities
---------------------- of the specific items, but to appeal to customers who might shop
elsewhere.
----------------------
• Odd-even pricing: Also known as psychological pricing, it means
---------------------- prices ending in odd numbers to connote a bargain or even numbers
---------------------- to imply quality. Odd numbered prices end in 9s, such as 799, 499,
259 make the consumers feel they are paying lower prices for the
---------------------- product as Rs 99 sounds far cheaper than Rs 100. Research has
shown that this a very successful pricing tactic. Even numbered
---------------------- pricing is used to denote quality.
---------------------- • Price bundling: It means marketing two or more products in a
single package at a special price and is often used for complementary
---------------------- products such as toiletries, hardware and software, vacation holiday
---------------------- packages and so on. Price bundling can stimulate demand for the
bundled items if the target market perceives it to be good value.
---------------------- Companies also use this tactic to push certain slow moving items,
or to induce trial for new products. There are different views on the
---------------------- effectiveness of price bundling due to its over usage. A related tactic
---------------------- would be unbundling or reducing the number of products that are
sold with the basic product.
---------------------- • Price induced sampling: Also known as promotional pricing, it
---------------------- means offering a special introductory price to the buyer for a limited
time period. This tactic is used to induce trials for new products or
----------------------

to stimulate short- term demand for a product as a sales promotion Notes
tactic.
----------------------
• Cross-benefit pricing: It is when prices are adjusted across various
models of a particular category, such that the margin losses on a ----------------------
specific model are subsidised by a different model. This is similar
to loss leader pricing and the aim is to gain acceptance for a basic ----------------------
model or set competitive prices for a model that faces greater
----------------------
competition.
11.6.4 The Pricing Process ----------------------
The firm must set a price for the first time when it develops a new product ----------------------
or when it introduces its existing products in a new region or country. The first
decision that the company has to take is about the market segment to target and ----------------------
position the product in that market segment. Subsequent decisions of product
----------------------
strategy, distribution strategy and channel design, communication strategy and
media selection as well as pricing strategy, will follow from the segmentation, ----------------------
targeting and positioning decisions.
----------------------
In case of new products at the introduction stage of the life cycle, the
S-T-P decisions will not be relevant, in which case the company has to make ----------------------
an independent decision on the pricing strategy. We have learnt earlier that
companies that follow strategic pricing, use price and cost information (break- ----------------------
even sales and contribution margin) even to select the target markets that they ----------------------
can serve profitably. Hence, preliminary financial analysis will become an
important input to the S-T-P decisions. ----------------------
The pricing strategy will indicate a broad range of prices within which ----------------------
the company would look to pricing the product. The next step is to determine
the demand for a product, in the given target market at different price levels ----------------------
indicated by the pricing strategy. Each price will have differing level of demand
and therefore a differing impact on the company’s profitability. ----------------------
To estimate the differing levels of demand, companies have to estimate the ----------------------
price sensitivity of the target market. Based on the price sensitivity, companies
must estimate how responsive or elastic the demand would be to changes in ----------------------
prices. If demand hardly changes with a price increase or decrease, we say that ----------------------
the demand is inelastic and this could be because the customer is relatively price
insensitive. Elastic demand is when there is a substantial change in the quantity ----------------------
demanded resulting from a price increase or decrease, and could be explained
by the relative price sensitivity of the customer. The higher the elasticity of ----------------------
demand, the greater the volume growth with 1 per cent price reduction. ----------------------
Price elasticity of demand depends on the magnitude and direction of the
----------------------
price change. It may be negligible for a small price change, but substantial with
a big price change. It may also differ for price reductions versus price increases, ----------------------
and there may be a price indifference band within which price changes have
no effect on quantity demanded. Finally, long-run price elasticity may differ ----------------------
from shor- run price elasticity, as buyers may continue to buy from a supplier
----------------------

Notes despite a price increase, but may eventually switch suppliers. The reverse can
also happen as buyers may defect after a price increase, but may eventually
---------------------- return later.
---------------------- Demand sets a ceiling or narrows the range within which marketers can set
prices. Estimating costs at different levels of production will determine the
---------------------- most profitable quantity and hence, the most profitable price that companies can
charge. Companies can also approach cost estimation using the target costing
----------------------
method. Companies determine the price at which they would be able to sell the
---------------------- best quantity in the target market.
From this price, they deduct the desired profit margin, leaving them
----------------------
with the target cost they must achieve. They then examine each cost element,
---------------------- manufacturing, product design, materials and consider ways to reduce each
cost element, without compromising quality or functionality. The objective is
---------------------- to bring final costs within the target cost range. Using strategic pricing concepts
and target costing, companies achieve profitable pricing objectives.
----------------------
Knowledge of competitors’ costs and prices and possible reactions to
---------------------- different price levels must be taken into account. Market conditions, product
life cycle and impact of competition have already been considered when
----------------------
determining the overall pricing strategy. Competitor reactions to specific prices
---------------------- must be considered when determining a price level. A marketer must be aware
of its competitor’s likely reactions to different prices, and the competitor’s cost
---------------------- structure.
---------------------- Selecting the pricing tactic is the final step of determining the price, but not
necessarily the final step in the pricing process. The last step involves the
---------------------- actual reaction of the market, and monitoring and evaluating the response.
---------------------- Companies do need to continuously review their prices and cost structures,
although they may not frequently make price changes. Price changes may be
---------------------- necessitated to competitors or unavoidable cost increases. In any case, it is a
---------------------- decision that a company must take keeping in mind all the factors we have
covered in this and the earlier unit on pricing.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. pricing is a price tactic that requires the buyer to
----------------------
absorb the freight costs from the point of shipping.
2. are given to channel intermediaries in return for ----------------------
certain special functions performed.
----------------------
3. is the practice of offering a product line with several
items at specific price points. ----------------------
4. Odd-even pricing is also known as pricing. ----------------------
----------------------
Activity 1 ----------------------
1. Southwest Airlines and Ikea are two examples of companies that have ----------------------
price as a key element of their growth strategy. Collect information on ----------------------
their business models and ways of operating. Can you identify why
they have been successful in using price as an element of their growth ----------------------
strategy?
----------------------
2. Collect product information on Tata Tea or HLL’s tea portfolio.
Collect price information from a retailer or from the Internet on all the ----------------------
brands and their SKUs. Observe pricing differences between brands.
Are there sufficient differences? Does the pricing reflect the brand’s ----------------------
positioning and role in the portfolio? You can do this exercise for any ----------------------
product portfolio.
----------------------
Summary ----------------------
• Strategic pricing is about targeting marketing markets that can be served ----------------------
profitably, communicating information that justifies price levels and
----------------------
managing pricing processes and systems to keep prices aligned with value
received. ----------------------
• The only way to ensure profitable pricing is to let anticipated pricing
----------------------
and anticipated levels of sales at that price, determine the costs incurred,
rather than the way around. ----------------------
• An effective pricing strategy requires a good understanding of the value of ----------------------
the product to the buyers. Value refers to the total savings or satisfaction
that the customer receives from the product or in other words the utility ----------------------
gained from the product.
----------------------
• The gap between the buyers’ willingness to pay and the economic value
of the product is termed as price sensitivity of the customer. ----------------------

Notes • The pricing strategy is impacted by the product’s life cycle, as at each
stage there are changes in cost structures, buyers’ price sensitivity, the
---------------------- nature of competition changes and the product itself.
---------------------- • Price competition is more commonly seen in certain industries and not at
all in some others due to the inherent characteristics of the industry and
---------------------- buyer base. These characteristics indicate the likelihood and nature of
---------------------- competitive response to pricing action within the industry.
---------------------- • In a price competitive industry, it is suicidal to drive growth with price

without a competitive advantage. Competition drives out profitability
---------------------- except for those with a competitive advantage that prevents competition
from fully matching their costs or value proposition.
----------------------
• Companies have different strategic options, depending on the competitor’s
---------------------- relative strengths and weaknesses and the cost of responding to the price
cuts.
----------------------
• Distribution channels affect pricing decisions through the channel design,
----------------------
the role of the channel members and implementation of the price through
---------------------- the distribution channel.
---------------------- • Product line pricing is setting prices for an entire line of products. In
product line pricing, the manager tries to achieve profit and other goals
---------------------- from the entire line rather than for a single component of the line.
---------------------- • Pricing strategies set the base level of prices; pricing tactics fine tune
the base level prices. Pricing tactics include various sorts of discounts,
---------------------- allowances, geographic pricing and special pricing tactics.
---------------------- • When a firm is setting prices for a product for the first time, the
first decisions to be taken are segmentation, targeting and positioning
----------------------
decisions. The pricing strategy decision follows from the S-T-P decisions.
----------------------
• Demand can be elastic or inelastic. Elastic demand is when the sales levels
---------------------- change, with a price reduction or increase. Inelastic demand is when the
sales levels do not change in response to price changes. Price elasticity of
---------------------- demand depends on the magnitude and direction of the price change and
long-run price elasticity differs from short-run elasticity.
----------------------
• Selecting the pricing tactic is the final step of determining the price, but
---------------------- not necessarily the final step in the pricing process. The last step involves
---------------------- the actual reaction of the market and monitoring and evaluating the
response.
----------------------
----------------------
----------------------
----------------------

Keywords Notes
----------------------
• Value: The total savings or satisfaction that the customer receives from
the product or in other words the utility gained from the product. ----------------------
• Derived demand: The relationship between the desired end benefit and
----------------------
the buyers’ price sensitivity for one of the products contributing towards
achieving that end benefit. ----------------------
• Price buyers: Those who seek to buy at the lowest price consistent with
----------------------
some minimum level of quality.
• Relationship buyers: Those who already have a very strong preference ----------------------
for a brand based on the supplier’s reputation and their own experience ----------------------
with the brand.
• Price lining: The practice of offering a product line with several items at ----------------------
specific price points. ----------------------
----------------------
----------------------
1. What is value-based pricing approach and why have companies adopted
this approach? What is the difference between the cost-based and value- ----------------------
based pricing approach?
----------------------
2. How do costs affect the pricing decision? Explain the terms incremental
cost and contribution margin. ----------------------
3. Explain why price sensitivity of the customer can be an important input ----------------------
to market segmentation. How has the Internet affected price sensitivity?
Explain using the different price sensitivity effects you have studied. ----------------------
4. Why is it important to understand the price competitiveness of an industry? ----------------------
What factors determine the price competitiveness of an industry?
----------------------
5. What is product line pricing? How does the goal of product line pricing
differ from the goal of pricing individual products? How do managers ----------------------
achieve these goals?
----------------------
6. Write short notes on:
a) Pricing Strategy ----------------------
b) Pricing Tactics ----------------------
c) Pricing Process ----------------------
d) Economic Value and Perceived Value
----------------------
e) Price Sensitivity
----------------------
----------------------
----------------------


1. Distribution channels play a key role in design and implementation of the
---------------------- pricing decision.
---------------------- 2. Strategic pricing is the co-ordination of interrelated marketing, competitive
and financial decisions to set prices profitably.
----------------------
----------------------
1. True
---------------------- 2. True
1. The economic value is the price of the customer’s best alternative plus the
----------------------
value of whatever differentiates the offering from the alternative.
---------------------- 2. Price proportion cost refers to the percentage of the total cost of the end
benefit accounted for by the products price.
----------------------
----------------------
1. True
---------------------- 2. True
---------------------- 3. False
----------------------
1. False
----------------------
2. True
---------------------- 3. False
---------------------- 4. True
Fill in the blanks.
----------------------
1. Free-on-board origin pricing is a price tactic that requires the buyer to
---------------------- absorb the freight costs from the point of shipping.
---------------------- 2. Trade discounts are given to channel intermediaries in return for certain
special functions performed.
----------------------
3. Price lining is the practice of offering a product line with several items at
---------------------- specific price points.
---------------------- 4. Odd-even pricing is also known as psychological pricing.

Notes
Suggested Reading
----------------------
1. Dillon, William R, Thomas J. Madden and Neil H Firtle. Marketing
Research in a Marketing Environment. St. Louis: Time Mirror/Mosby ----------------------
College Publishing.
----------------------
2. Ramaswamy, V.S. and S. Namakumari. 2002. Marketing Management –
Planning, Implementation and Control (Global Perspective). New Delhi: ----------------------
----------------------
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Notes
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Integrated Marketing Communications (IMC)
UNIT
12
Structure:
12.1 Introduction
12.2 Concept of IMC
12.3 The Communications Process
12.3.1 The AIDA Concept
12.4 The Communications Mix
12.4.1 Advertising
12.4.4 Personal Selling
12.4.5 Direct Marketing
12.5 Factors affecting the Communications Mix
12.6 The Media Mix
12.6.1 Factors affecting Media Selection
12.7 Planning Communications Campaign
12.8 Budgeting for Marketing Communications
Summary
Keywords
Suggested Reading
Integrated Marketing Communications (IMC) 355

Notes
Objectives
----------------------
----------------------
• Assess the role of Integrated Marketing Communications (IMC) in
---------------------- the marketing mix
---------------------- • Formulate objectives of marketing communications
• Identify the factors to affect the communications mix
----------------------
• Evaluate the strengths and limitations of media mix elements
----------------------
• Develop a communications campaign and create a budget for IMC
----------------------
----------------------
12.1 INTRODUCTION
----------------------
Marketing communications are the means by which firms attempt to
---------------------- inform, persuade and remind its target markets, using both direct and indirect
means, about the brands they sell as well as about the company as a whole.
---------------------- Although communications directed to target markets are the mainstay of
---------------------- the communications programme, firms need to communicate with all its
stakeholders (customers, shareholders, suppliers, channel partners, customers,
---------------------- employees and government agencies). Firms develop specific communications
plans directed to the stakeholders.
----------------------
---------------------- 12.2 CONCEPT OF IMC

---------------------- Integrated Marketing Communications (IMC) is the careful coordination
of all communication messages for a product or service to ensure the consistency
---------------------- of messages at every contact point where a customer meets the consumer. Most
communications plans need to use several communication options and tools,
----------------------
very rarely would a firm use a single communication tool or media option, to
---------------------- reach a particular target market.
---------------------- From a consumer’s viewpoint, the several different elements are already
integrated: consumers do not think of the different elements as separate; for
---------------------- them everything is an “ad”. It is only marketers who recognise them as different
elements, and in doing so, many marketers have neglected the fact that ultimately
---------------------- all communication must be integrated to deliver one coherent message.
---------------------- The most common rift is between the sales force and advertising; it is
very common for sales people to contradict claims made in the advertising.
---------------------- Each element of the communications mix and media mix must work together
---------------------- like different members of a team, to achieve the firm’s overall communications
goals. This emphasis on teamwork and synergies across communications and
---------------------- media options is known as Integrated Marketing Communications (IMC).
----------------------

The strategies behind marketing communications programmes have Notes
changed dramatically over the years. Firms have learnt that emphasising IMC,
rather than treating each element in isolation, amplifies the message intended ----------------------
for the target market. IMC, therefore, is a “force multiplier”.
----------------------
The key pillars of a firm’s communications plan are:
----------------------
• The target market (consumers or stakeholders) for whom the message is
intended. ----------------------
• The communications objectives of the campaign.
----------------------
Based on the above, a firm develops a communication strategy and an
optimal mix by selecting the appropriate communications and media tools. The ----------------------
aim is to choose a variety of different options that share a common meaning and ----------------------
content, but also offer different, complementary advantages. “Mix and Match”
is the key theme of an IMC campaign. ----------------------
Overall marketing ----------------------
objective
Promotional mix ----------------------
 Advertising
 Public relations ----------------------
 Sales promotions
Marketing mix  Personal selling ----------------------
 Product
 Place (distribution)
----------------------
 Promotion
 Price
----------------------
----------------------

Promotion plan ----------------------
Target market ----------------------
----------------------
Fig. 12.1: The Concept of IMC ----------------------
Objectives of IMC
----------------------
The key objectives of any communication by a firm, to any target market
or stake- holder, are essentially Inform, Persuade and Remind. ----------------------
The starting point of developing a communications campaign is to put ----------------------
down clearly and explicitly the objectives of the campaign. That is to say that it
is not enough to state that “We want to inform our customers about our brands”. ----------------------
Managers have to be very explicit in terms of specifically what about the brand ----------------------
do they want their customers to know about.
Firms need to inform their target markets about a number of things: ----------------------
1. New product concept, a new brand launch, a new model, a new pack size ----------------------
or even a new feature or benefit being offered.
----------------------

Notes 2. The brand’s differential advantage over its competitors.
3. Outlets where the brands are available in the city, or the opening of a new
----------------------
outlet in the city or region.
---------------------- 4. A new offer or deal or pricing being offered to the market.
---------------------- 5. Explain how the product works and the utility of the product.
---------------------- 6. Suggest new uses of the product or new ways to use the product.
7. A new packaging design or packaging change.
----------------------
8. New technologies that a company has developed or acquired.
----------------------
9. A cost or competitive advantage that the company may have achieved and
---------------------- wants its target markets and stakeholders to know about.
10. Correct a negative perception that might have developed or to counter a
----------------------
competitor’s claim.
---------------------- Persuading its target markets to buy can also mean a number of things
---------------------- specifically:
1. Stimulate purchase by keeping the brand in the consideration set.
----------------------
2. Persuade consumers to buy now.
----------------------
3. Encourage switching from a competitor by giving the consumer a clear
---------------------- reason why.
4. Persuade the consumer to stay loyal to the company’s brands.
----------------------
The task of any communications programme does not end with informing
---------------------- and persuading. Even the best most memorable communications campaign can
and will be forgotten by consumers. Hence, reminder communication is a very
----------------------
important element of a firm’s communication plan for the year. Consumers need
---------------------- to be reminded about a number of things:
---------------------- 1. Maintaining brand awareness and brand recall. Even the most popular
brands suffer from “awareness decay” if they are not seen or heard from.
---------------------- 2. That a product will be needed in the near future: this is especially true
---------------------- of seasonal products like air conditioners, air coolers, fans, ice creams,
and “cold drinks” amongst others. These products step up their reminder
---------------------- campaigns prior to onset of the season, to rebuild their brand recall.
---------------------- 3. Remind consumers of occasions of use.
To develop an effective IMC programme that meets the organisation’s
----------------------
goals, marketing managers need to put down explicitly and clearly the objectives
---------------------- of their communications programme for the first. This exercise is not done in
isolation. It is based on a great deal on the past year’s results of the earlier
---------------------- communications campaigns, feedback and responses of the target market to the
earlier campaigns. Market research specific to marketing communications is a
----------------------
vital element of developing a communications plan.
----------------------

Notes
----------------------
1. The key pillars of a firm’s communications plan are the ______ and
----------------------
______ of the campaign.
2. The key objectives of any communication by a firm are to _________, ----------------------
________ and ________.
----------------------
----------------------
Activity 1
----------------------
Make a note of five different advertisements today. With the help of the ----------------------
above list, write out what you have understood as the specific objective of
the communication. Now examine how difficult it was for you to do so. Did ----------------------
the communication have a clear objective? Was it clearly communicated? ----------------------
Suggestion: You can expand the scope of this activity later in the unit by
examining the choice of media for the specific communication task. ----------------------
----------------------
12.3 THE COMMUNICATIONS PROCESS
----------------------
Noise
----------------------
 Other Advertisements ----------------------
 News articles
 Other store displays
----------------------
Sender Encoding the Message Decoding the Receiver ----------------------
message channel message
 Marketing  Advertisement  Media  Receiver interpretation  Customers ----------------------
manager  Sales presentation  Salesperson of message  Viewers/
 Advertising  Store display  Retail store listeners
manager  Coupon  Local news show  News ----------------------
 Advertising  Press release media
agency Feedback  Clients
----------------------
channel
 Market research ----------------------
 Sales results
 Change in market share
----------------------
Fig. 12.2: The Process of Communication ----------------------
Firms are both senders and receivers of messages. As senders, marketers
attempt to inform, persuade and remind the target markets about the company ----------------------
and its products and services. As receivers, they must attune themselves to ----------------------
the responses and feedback they get from the target markets, and adapt their
communications programmes. Remember that a lack of response is also a ----------------------
feedback.
----------------------

Notes The message originates from a sender, in this case the organisation.
At first are the sender’s thoughts and ideas, which now have to be put
----------------------
into words. Encoding is the conversion of these ideas into a clear message.
---------------------- Encoding involves words, symbols, feelings, colours, sounds, smells, etc. A
cardinal rule of communication is that 70% of any communication is non-verbal
---------------------- and effective communication is that, which appeals to all the five senses. This
rule applies to marketing communications as well; hence, marketers use several
----------------------
communications elements to appeal to all the five senses.
---------------------- Transmission of the message requires a channel – say radio, store displays,
product demonstrations and film and so on. These channels are the media
----------------------
tools available to the marketer. A firm must select the media, which is most
---------------------- appropriate to the message. Marketers today have recognised that every contact
that a customer has with a product is a media channel. Marketing plans must
---------------------- consider every “touch point” of the company or the brand with the consumer.
---------------------- The receiver, in this the target market, is said to have received the message
when the message enters his frame of reference. However, a number of factors
---------------------- can interfere with the reception of the message, and the target market may not
even notice the message being transmitted. These factors known as media noise
----------------------
or media clutter could be competing advertisements, the physical surroundings,
---------------------- light, climate, presence of other people among others. A customer’s own
emotional state, moods, physical discomfort can prevent a message from being
---------------------- received. Although marketers do not have much control over these factors, they
can select media channels, spots, timings when reception is likely to be at its
----------------------
best.
---------------------- The target market will decode the message received as per their
---------------------- understanding of the communication. Decoding is the interpretation of the
language, tone, symbols, colours and feelings of the message. Even though the
---------------------- message is received, the consumer will interpret the message as per his own
understanding, knowledge and needs. Factors like age, gender, social class,
---------------------- culture, values, attitudes, beliefs all greatly affect how messages are interpreted.
---------------------- Marketers must pay great attention to understanding the consumer’s frame of
reference to ensure that there is proper match between the encoding of the
---------------------- message and the target markets’ attitudes and ideas.
---------------------- In interpersonal communication, the receiver’s response to the message

is the direct feedback to the sender. Marketing communication is largely
---------------------- impersonal, hence, feedback would also be largely indirect. The indirect factors
that marketers try to measure are:
----------------------
• Number of people who saw the communication compared to the number
---------------------- of people exposed to the communication.
---------------------- • Recognition and recall of the communication.
• Brand awareness and brand recall levels.
----------------------
• Purchase intention.
----------------------

12.3.1 The AIDA Concept Notes
The way consumers respond to marketing communications is of prime
----------------------
importance to marketers. Several Response Hierarchy Models (see Figure 12.3)
are used to study how consumers respond to messages, the classic model being ----------------------
the AIDA concept. This model outlines the process for achieving communication
goals in terms of stages of consumer involvement and response to the message. ----------------------
The acronym stands for attention, interest, desire and action being the different
----------------------
stages of consumer response to the communication.
Models ----------------------
spo er
Re nsum
nse
Communications
Stage
AIDA Hierarchy of Innovation-
Modeld
----------------------
Co
Modela Effects Modelb Adoption Modelc

----------------------
Awareness Exposure
Cognitive
stage Attention Awareness Recepion ----------------------
“Learn” Congnitive
Knowledge response ----------------------
Inerest Liking Inerest
Affective Attitude ----------------------
stage Preference
“Feal” Intention ----------------------
Desire Conviction Evaluation
Connative ----------------------
Trail
Behaviour Action Purchase Behaviour
stage “Do” ----------------------
Adoption
----------------------
Fig. 12.3: Response hierarchy Models
The model proposes that consumers respond to marketing messages ----------------------
in a Cognitive (Learn), Affective (Feel) and Conative (Do) sequence. Target ----------------------
consumers must first learn about a product before they can act on it. Marketers
try to draw the attention of the consumer to the message. Attention or awareness ----------------------
is the first stage of response, but this by itself will not lead to action. The message
must create enough interest and arouse a desire to own the product. To enable ----------------------
this to happen, marketers must create opportunities for the target markets to feel ----------------------
the product or get a feel of the product. When the desire to acquire the product is
strong and the target consumers are convinced of the product’s advantage over ----------------------
competing products, then consumers will be compelled to act.
----------------------
Most high involvement purchase situations will pass through the different
stages as suggested by the AIDA concept. The sequence, however, may not ----------------------
apply to all purchase situations. For impulse purchases, consumers are seen to
do or act first, and feel and learn later. ----------------------
For several low involvement purchases, one may observe a Do repeatedly ----------------------
in the case of habitual buying behaviour; or Learn-Do-Feel in the case of
----------------------
variety seeking behaviour. The AIDA model does have its limitations as it does
not explain how communications may affect all types of purchase situations. ----------------------
Regardless of the sequence of the stages, it is still a very useful tool to measure
the effectiveness of the communications campaign. It is also used to evaluate ----------------------

Notes the effectiveness of each element of the communications mix and media mix in
terms of their ability to affect the consumer response process.
----------------------
----------------------

---------------------- 1. __________ includes competing advertisements, the physical
surroundings, light, climate, presence of other people among others.
----------------------
2. AIDA stands for _________, _____________ and _________.
----------------------
----------------------
Activity 2
----------------------
Visit a flagship outlet of any leading brand in your city (say Sony World,
---------------------- Samsung Digital Home, Himalaya) and observe the following:
---------------------- a) Product displays
---------------------- b) Approach of the sales people at these outlets – is it more consultative
or is it sales oriented?
----------------------
c) What are the non-verbal communication cues observed at the outlets?
---------------------- (Hint: waiting time, floor layout, lighting, assistance provided,
---------------------- cleanliness, attitude of staff)
d) Are these outlets more communication oriented or sales oriented?
----------------------
----------------------
12.4 THE COMMUNICATIONS MIX
----------------------
The Communications Mix consists of a set of communications tools,
---------------------- which marketers use to communicate with their target markets. The elements
of the mix differ in their ability to influence and affect target markets. It
----------------------
is therefore important to understand the real utility as well as limitations
---------------------- of each communications tool. In a sense, every customer contact point
with the company is a communications tool. However, the major elements of
---------------------- the communications mix are advertising, public relations, sales promotions,
personal selling and the Internet. (The Internet is very unique in the sense that
----------------------
it is not only a communications tool but also a media tool and a medium of
---------------------- doing business. Most marketing textbooks do not consider Internet as a part
of the communications mix per se. It is today, a very vital element of a firm’s
---------------------- communication strategy and to give it its due importance, we are considering it
as a part of the communications mix.)
----------------------
12.4.1 Advertising
----------------------
Advertising is any form of impersonal, paid-for communication. This not
---------------------- to suggest that the other elements are free, but for advertising, the firm pays

for the media space used. It is the most popularly used form of communication Notes
because of its ability to reach large target markets very rapidly. Advertising
expenditures are on the rise annually and it is estimated that Rs 11,915 crore ----------------------
was spent on advertising in India in 2005, an increase of nearly 15% over 2004.
Spending on advertising varies by industry. ----------------------
What can advertising do very effectively? ----------------------

• Advertising can reach mass markets with great geographic spread very ----------------------
quickly. It is, therefore, known as the mass communication element of the
communications mix. Due to this, cost per contact is very low. ----------------------
• It can communicate the unique benefits of the product and its differential ----------------------
advantage over competitors.
----------------------
• It can influence attitudes and create interest and desire for a product.
• It positions the brand at the desired slot in the consumers mind. ----------------------
• It confers “legitimacy” on a product. There was a time when consumers ----------------------

believed that if a product was being advertised, then it was probably not
selling. Today, it is widely believed that if a product is being advertised, ----------------------
then it is probably a legitimate product worth considering. ----------------------
• It can convey emotional benefits of the brand.
----------------------
• It can combat competitive claims, correct false impressions and
misinformation. ----------------------
• It can build up inquiries for the product. ----------------------
The limitations of advertising are: ----------------------
• It is a monologue or a one-way communication between company
and customer. Despite the several methods used to measure advertising ----------------------
effectiveness, much of the real effect of advertising is long term. Target ----------------------
markets need to be repeatedly exposed to the advertising, for it to take
effect. ----------------------
• Although cost per contact may be low, absolute ad spends required are ----------------------
very high, just for the message to be noticed. This is essentially due to the
media and competitive clutter. ----------------------
• Advertising is seen as interfering with the consumers viewing, reading ----------------------
or listening experience, hence, consumers tend to “zap” the advertising.
There are devices today that enable consumers to record their favourite ----------------------
TV shows minus the advertising. Whilst advertising can influence wants,
----------------------
it cannot change deeply rooted values and attitudes.
Firms often count upon advertising for their products and see it as a ----------------------
quick fix for all problems. It cannot create demand for or sell a poorly conceived
----------------------
product. A company’s success with its products depends equally on the success
of each element of the marketing mix. ----------------------
----------------------

Notes TiVo is a revolutionary new service that puts viewers in control of their
television viewing experience in a way never possible before. TiVo’s service
---------------------- uses an electronic device called a Digital Video Recorder (DVR). It’s set top
---------------------- box series 2, can digitally save upto 60 hours of television programs to its hard
disk. With TiVo viewers get more control than ever before on what they want
---------------------- to watch and minus the advertising . Subscribers can digitally record their
favourite shows, creating and organising their own programming schedule to
---------------------- watch TV when they want and are not bound by the time table of any network.
---------------------- Source: TiVo website
---------------------- Major types of advertising

The firm’s communication objectives determine the type of advertising it
----------------------
uses.
---------------------- 1. Corporate or institutional advertising promotes the company as a whole
and is intended to establish, change or maintain the company’s identity.
----------------------
It does not specifically ask the target audience to do anything, but to be
---------------------- informed and maintain a favourable attitude towards the company and its
products.
----------------------
2. Product advertising on the other hand not only informs, but seeks to
---------------------- promote the benefits of using the firm’s products.
---------------------- 3. Pioneering advertising is used at the introduction stage of the life cycle,
when the company is aiming to create a primary demand for the product
---------------------- concept. Companies need to explain the product concept and establish
the utility of the product. Consumers need to learn in-depth information
---------------------- about the product and need to see the product being demonstrated.
---------------------- 4. Competitive advertising is most appropriate during the growth stage of
the life cycle, when a firm is trying to build demand for their brands.
---------------------- Advertising at this stage stresses differences between brands so as to
---------------------- build brand preference. Comparative advertising directly or indirectly
compares two or more competing brands on specific attributes. Latter
---------------------- growth and maturity stages of the life cycle sees intense competition
amongst players, and companies often resort to comparative advertising to
---------------------- directly attack a competitor. However, companies need to be very careful
---------------------- about comparative advertising for two reasons. Firstly, it can attract a law
suit from a competitor for unfair practices. Secondly, it actually provides
---------------------- the competitor a fair amount of mileage at no cost to the competitor.
---------------------- The major decision for advertisers is the choice of media and the creative
style of communicating with target markets.
----------------------
---------------------- Sales promotion is defined as any short duration communication activity,
which provides an incentive to the target market to purchase a product or
----------------------
service immediately. The incentives can take several forms, both monetary and
---------------------- non- monetary. Sales promotions activities can be directed at target consumers

(consumer sales promotion) or members of the distribution channel (trade Notes
promotions). Advertising offers a reason to buy, sales promotion provides the
immediate incentive to buy; advertising influences attitudes, sales promotion ----------------------
influences purchase behaviour. Sales promotion tools work best when supported
by advertising. ----------------------
There are several sales promotional tools and the choice of tool depends ----------------------
on the typical purchase behaviour of the target consumers. Even within
----------------------
the target markets, several types of purchase behaviour may be observed:
loyal customers, brand switchers, regular users but low product usage, irregular ----------------------
product usage and customers who have not tried the brand at all.
----------------------
• Loyal users: Marketers try to reward loyal users and try to increase their
consumption as well as reinforce purchase behaviour. Loyalty programmes ----------------------
such as frequent flyer programmes (airlines) or preferred customer cards
(petro cards offered by HPCL, BPCL) are commonly used. ----------------------
• To lure competitors’ customers: The objective of the marketer is to ----------------------
entice and persuade the customer to switch. Contests, discounts, free gifts
and sample packs act as incentives to induce trial. ----------------------
• brand switchers: Those customers who are not loyal to any single brand ----------------------
and try a variety of brands. On the one hand, as marketers try to lure the
competitors’ customers, they must persuade their existing customers to ----------------------
buy their brands more often. Discounts, extra quantity at the same price ----------------------
or bonus packs, free gifts, attractive product displays, attractive reusable
packaging rewards programmes and contests are some incentives ----------------------
marketers use to reduce brand switching.
----------------------
• Low product usage or infrequent product usage: These could be
customers loyal to a brand, but whose consumption of the product is low ----------------------
or infrequent. Incentives given would try to increase consumption as well
as frequency of usage. In such cases, marketers try to use a combination ----------------------
of advertising (to influence increased or frequency of usage) and sales ----------------------
promotions to achieve long-term results.
• Non-customers: They would be those prospects who are within the core ----------------------
target markets, but have never used the brand. Marketers try to induce ----------------------
trial with special trial packs or a special price offer. Trial offers work best
when they are supported by product demonstrations at the retail outlets. ----------------------
Consumer promotions pull a product through the channel by creating a ----------------------
demand, whereas trade promotions try to push a product through the channel by
motivating channel members to sell more of a particular brand. ----------------------
The objectives of a trade promotion are to increase the quantity, frequency ----------------------
and regularity of purchases by the channel members. The ultimate objectives
of these trade promotions are to maintain or increase shelf space at the retail ----------------------
outlets, get the retailers to stock the complete line or push slow moving items in
----------------------
the product line, support a consumer sales promotion and increase inventories
to block shelf space available to a competitor. ----------------------

Notes such as dealer contests, free gifts on quantity purchased, free training,
business conferences and conventions at exotic locations to reward top
---------------------- performers, attractive display units and shop signboards. Monetary incentives
include trade allowances such as a price reduction or higher margins and push
---------------------- money, which include monetary bonuses.
---------------------- Since sales promotions produce quick and early results, companies
are tempted to repeatedly run sales promotions. It is important to remember
----------------------
that any successful campaign, if repeated often, will suffer from diminishing
---------------------- returns. Repeated use of sales promotions has led to a reduction of brand loyalty,
increased price sensitivity and has actually encouraged brand switching. In many
---------------------- cases the sales promotion scheme merely subsidises buyers who had bought the
brand anyway. Consumers and trade alike have now come to demand deals and
----------------------
discounts anyway.
---------------------- However, these are drawbacks of the run-of-the-mill sales promotions
schemes. Companies have learnt that a creative and well-executed sales
----------------------
promotion campaign, which involve the customer in some kind of activity
---------------------- surrounding the brand, can produce the desired results in the short term and build
the brand equity in the long term. Hence, sales promotion as a communication
---------------------- tools is still a very effective tool and one must be discriminating about the type
of campaign created.
----------------------
----------------------
Public relations and publicity relate to a variety of programmes designed
---------------------- to promote and protect the image of a company and its products.
---------------------- Publicity relates to any non-personal communications through the

media, such as press releases, interviews, press conferences, feature articles,
---------------------- newsletters, photographs and corporate films. For publicity, the media space is
not bought like advertising media space.
----------------------
Public relations (PR) includes activities like event sponsorships, lobbying,
---------------------- employee and investor relations and public affairs.
---------------------- Public relations and publicity support every element of the communications
mix and increases the effectiveness of the communications campaign.
---------------------- Consumers, today, attach much more credibility to what is written in the media
about a company and its products, rather than the claims that companies make in
----------------------
their advertising. It is for these very reasons that PR and publicity have become
---------------------- an integral part of every company’s communications programme throughout
the year.
----------------------
Public relations tools
---------------------- 1. New product publicity: Product publicity is instrumental in introducing
---------------------- new products to the markets by creating a buzz, prompting free news
stories and positive word of mouth.
----------------------
----------------------

uring the introductory period, innovative new products need much more
D Notes
exposure in the media than conventional advertising. When Sony first
introduced its Walkman to the world, they hired hordes of young people ----------------------
to wear the Walkman and demonstrate their enjoyment of the music
whilst riding the subway in New York. This attracted amused and curious ----------------------
onlookers and created a lot of buzz in the media. At the Oscar Awards ----------------------
show, a few years ago, Toyota provided its Prius hybrid sedans to all
the red carpet Hollywood celebrities. The TV cameras focused on the ----------------------
cars as the celebrities arrived for the show, providing valuable worldwide
publicity for the Prius. ----------------------
2. Event sponsorship: Companies sponsor events, which are sufficiently ----------------------

newsworthy to achieve coverage. Event sponsorship can be of two kinds:
----------------------
one, where the company becomes a part of an already established or well-
known event like the Mumbai Marathon, cricket matches or film awards. ----------------------
In such cases, participation of the company is by way of sponsorship of
the awards and publicity at the venue. ----------------------
The second kind is where the companies create an event exclusively for the ----------------------
company or the brand like the Bournvita Quiz Contest, Brand Equity Quiz
and the Camlin Art Contest. The focus of the entire event is exclusively ----------------------
on a single company or brand and allows the customers to experience and
----------------------
interact with the brand. Such exclusive events create stronger and deeper
ties with brand, but require much greater commitment from the company ----------------------
in executing the event consistently.
----------------------
3. Product placements: Marketers can garner valuable publicity by ensuring
their products appear as a part of a movie or television show. In the ----------------------
Hollywood movie Cast Away, the lead actor Tom Hanks is an employee
of FedEx and although the movie is a human story, FedEx is an integral ----------------------
part of the storyline. Much coverage was given to the company’s ground
----------------------
operations and commitment to service. Recently, TiVo was featured in
the hit sit-com Friends, where Rachel’s character talks about “TiVoing” ----------------------
her favorite shows. Companies have to pay a fee for product placements,
negotiated as per the exposure given to the product. Product placements ----------------------
work best when the product is shown as an integral part of the plot or
----------------------
storyline of the movie or television show.
4. Consumer education: An aware and educated customer is believed to be ----------------------
more loyal; hence, companies organise training programmes and seminars ----------------------
to not only educate and train customers, but also to build stronger ties
with them. Consumer education works for high involvement products ----------------------
like investment and financial planning products, computer hardware and
software products. LG and Samsung regularly run microwave-cooking ----------------------
classes to educate customers about the utility of the microwave oven. ----------------------
Any product, which is technology intensive does intimidate even the most
technologically savvy customer, and such programmes help customers ----------------------
overcome their “fear” of such products and truly understand the product’s
utility. ----------------------

Notes 5. Cause related marketing: Companies build awareness and loyalty by
supporting causes, which are close to the customer’s heart. Education,
---------------------- healthcare and social upliftment programmes get the largest share of
corporate funding. Firms often donate a percentage of sales to causes
---------------------- and charities, which their target markets are likely to favour. “Green
---------------------- Marketing” is becoming very popular. By positioning their companies
as ecologically responsible, marketers convey their concern for the
---------------------- environment and society as a whole.
---------------------- 12.4.4 Personal Selling
Personal selling is direct personal contact between a sales representative
----------------------
and one or more prospective buyers to influence the buyer in a purchase
---------------------- situation. Personal selling offers several advantages:
• Personal selling provides a detailed explanation and demonstration of the
----------------------
product. This is especially required for products, which are technically
---------------------- complex or very innovative.
---------------------- • The sales message can be varied as per the knowledge level and motivations
of each prospective customer. When the customer has objections or
---------------------- doubts, the salesperson is there to provide clarifications.
---------------------- • The personal selling process ensures follow up and is more likely to close
the sale.
---------------------- • Personal selling efforts are directed only to qualified prospects and
---------------------- leads to minimal spillover and wastage associated with other forms of
communication.
----------------------
Although a very effective form of communication, the cost per contact is
---------------------- extremely high. Hence, personal selling works best when:
• The product is of very high unit value, is technically complex or custom
----------------------
made.
---------------------- • Prospective customers are geographically concentrated and few in
---------------------- numbers.
• The product concept is new to the world and requires concept selling.
----------------------
There are different forms of personal selling directed to end consumers,
---------------------- which companies use today: sales force, network marketing (multi-level
marketing), exhibitions or trade fairs and telemarketing. Not all companies
---------------------- would employ sales people to approach customers, but most companies have a
---------------------- sales force to provide sales and service support to their trade or channel partners.
Sales Force Management is part of the Sales and Distribution function in the
---------------------- organisation.
---------------------- 12.4.5 Direct Marketing
Direct marketing is any form of direct but non-personal contact with the
----------------------
target market. Direct marketing activities include sending direct mailers and
---------------------- catalogues to customers, email messages, SMSs or even MMSs to customers.

For direct marketing communications, companies need to acquire updated lists Notes
of customers and their addresses. Many companies use direct marketing to
keep in touch with their existing customers, an effective way of a follow-up ----------------------
communication with the customer.
----------------------
----------------------
The growth of the Internet as communications tool can best be described
as rapid and formidable with a deep far-reaching impact on the way companies ----------------------
will now communicate with their audiences.
----------------------
Most traditional media assumes that target audiences are passive
recipients of the message. Early communication efforts treated the Internet in ----------------------
much the same manner and hence, the results were disappointing. The next
phase of communication efforts treated the Internet as a tool for offering ----------------------
the best deals and discounts to the customer, and it soon became a popular
----------------------
medium for discounting. This, companies realised soon enough, was a gross
underutilisation of the power of the medium. Companies have learnt today that ----------------------
the Internet is a very unique channel as it is a communication tool, a media tool
and an e-commerce medium. The unique characteristics of the Internet have ----------------------
revealed themselves with experience and over time.
----------------------
The unique characteristics of the Internet as stated by David Aaker in his
book, Brand Leadership are: ----------------------
• The Internet is interactive and involving: In contrast to traditional ----------------------

advertising, the Internet is a channel of two-way communications enabling
a dialogue with target audiences. The Web is all about experiences with ----------------------
the audience playing an active role. David Aaker states that customer’s ----------------------
attitude to this medium is “lean-forward” rather than “lean-back”. The
target audience usually has a specific functional goal in mind – seeking ----------------------
information, entertainment or transactions – and treats anything that gets
in the way of achieving this goal as an annoyance. Interactivity is not only ----------------------
with the company, but more so with other target audience members, who ----------------------
share similar goals and motivations. The companies provide a context
or platform for social networking by building communities around the ----------------------
brands.
----------------------
The greater involvement and active participation of the target audience
is what makes the web a unique communication and media tool. However, ----------------------
this also means, that any impact – whether positive or negative – is
likely to be remembered and to influence future behaviour. The brand ----------------------
associations thus created are stronger because of the experience. ----------------------
• The Internet offers current, rich and in-depth information: Companies
----------------------
can describe their entire product lines, complete with specifications and
technical details and guidance for usage. Moreover, this information can ----------------------
be organised in different formats as per the requirements of the different
audience members. Buyers of high involvement products often engage in ----------------------
extensive information search, which in the absence of the web, was often
----------------------
tedious.

Notes The information if kept current lures the customer back to the site and can
help build a relationship. Websites that regularly post new developments
---------------------- in the industry, share information on new technologies and products or
create some entertainment around the product, become destination sites
---------------------- for the enthusiast.
---------------------- • The Internet personalises the information: Persons visiting the site can
select content of interest and avoid irrelevant content by choosing from
----------------------
the menus. Many sites collect information about how customers use the
---------------------- site, based on prior site usage and provide customised recommendations
and information.
----------------------
Amazon.com recommends books based on prior purchases and book
---------------------- searches. Food sites can recall the type of recipes that customers click on and
download and provide specific recipes in that category only.
----------------------
Tools for Internet communication are:
---------------------- • Website
---------------------- • Advertising and sponsored content
---------------------- • Intranet
• Customer extranets
----------------------
• Web PR
----------------------
• Email
---------------------- The website or home page of the company is potentially the most powerful
---------------------- communication tool and is the basis of the relationship between the customer
and the company. The website should deliver a positive experience by having
---------------------- three basic characteristics:
---------------------- The site must be easy to use; the visitor must not get frustrated or confused.
It should meet customer expectations with respect to the functional goals of the
---------------------- customer. It must provide a reason to be revisited. Websites also need to offer
value in terms of information, transactions, entertainment, social experience,
---------------------- which becomes the motivations to revisit the site.
---------------------- David Aaker suggests that companies must become dominant sites for
an area of interest related to the brand. Tide, a leading detergent brand,
----------------------
provides personalised solutions for removal of every possible kind of stain. The
---------------------- site reflects the expertise and leadership of the brand as a powerful cleaning
solution. This cleaning solutions service has now been branded as the Tide
---------------------- Stain Detective.
---------------------- Advertising and sponsored content is described as any paid content
or presence on the Net on any site. The most common forms are banner ads,
---------------------- pop-ups or links. Wallpaper or cursor downloads are also forms of advertising
or sponsored contests. A very effective form of sponsored content on the Net is
----------------------
buying a keyword on popular search engines. This form of advertising though
---------------------- increasingly popular, has created clutter and risks turning audiences off.

Survey research suggests that consumers find most pop-ups and banner Notes
advertising irritating and annoying and are therefore very skeptical about
such communication. Nevertheless, companies need to continue looking for ----------------------
innovative, more targeted ways of advertising to reduce the annoyance.
----------------------
Intranets are systems of private websites connecting people within
organisations, as well as its vendor and channel partners. Intranets are critical ----------------------
for communication within organisations. They are the communication lifelines
----------------------
for organisations, which are multinational or transnational. Communications
within organisations are essential as all employees must share a common ----------------------
understanding of the goals and strategies of the organisation.
----------------------
Customer extranets are where a part of the intranet is open to customers
and usually allows customers to access information, process orders and receive ----------------------
backup support. Dell, for example, has created password protected customised
extranet websites, which allows employees of its 200 largest customers ----------------------
to get access to restricted information such as a technical databank used by
----------------------
Dell engineers to troubleshoot problems. These extranets are valuable tools for
building loyal partnerships with customers. ----------------------
Web PR includes web communications outside the control of
----------------------
organisations, such as personal home pages, news or gossip-oriented sites,
discussion groups and chat rooms. It is an old adage that a happy customer will ----------------------
recount his experience to perhaps three people, but a disgruntled customer will
narrate his experience to 10 or 15; and now on the Net to thousands, instantly ----------------------
at no extra cost. A small computational flaw in the Intel Pentium chip sparked
----------------------
off a massive worldwide discussion, which became a serious image problem
for Intel. Companies influence Web PR by participating in these discussions ----------------------
to correct and influence opinions as well as creating discussion forums that
encourage constructive discussions. ----------------------
E-mail is a popular channel for customer service and other marketing ----------------------
communications. It becomes the ultimate personal contact. Emails are used to
announce new store openings, special offers for existing customers, offer new ----------------------
products and upgrades, confirm orders amongst others. Because the Internet is ----------------------
interactive, information can flow to and from customers. Emails are powerful
tools for building long-term relationships with customers. However, companies ----------------------
must limit the flow of messages by being selective about what the customer
would like to be informed about, and must respond quickly and accurately to ----------------------
customer queries. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. The major elements of the communications mix are ______,
----------------------
_______, sales promotions, _______ and the Internet.
---------------------- 2. __________ is used at the introduction stage of the life cycle of the
product.
----------------------
3. Most traditional media assumes that target audiences are _______
---------------------- recipients of the message.
---------------------- 4. _______ are where a part of the intranet is open to customers and
usually allows customers to access information, process orders and
---------------------- receive backup support.
---------------------- State True or False.
---------------------- 1. Advertising is a monologue or a one-way communication between
company and customer.
----------------------
2. Sales promotion tools work best when supported by advertising.
---------------------- 3. For publicity, the media space is bought like advertising media space.
---------------------- 4. The personal selling process does not ensure follow up and is not
likely to close the sale.
----------------------
---------------------- Activity 3
----------------------
1. Visit any retail outlet in your city and make a note of three different
---------------------- sales promotion schemes currently being offered. Write down what
---------------------- you have observed as the specific objective of the sales promotion.
What “type” of customer do you think it is directed towards? Was it an
---------------------- innovative sales promotion? What kind of sales impact do you think it
will have?
----------------------
2. Pick any one major brand and make a list of all the PR and publicity
---------------------- activities carried out by the brand in the past six months to one year.
You can collect this information from the websites as well as online
---------------------- archives of newspapers and magazines. Do they present a clear
---------------------- consistent picture of the brand?
----------------------
12.5 FACTORS AFFECTING THE COMMUNICATIONS
----------------------
MIX
----------------------
Communications mixes vary a great deal from one product category
---------------------- and one industry to another. The particular communications mix chosen by a

firm will depend on the nature of the product, stage in the product life cycle, Notes
characteristics of the target market, type of buying decision, communications
budgets and whether a push or pull strategy will be used. Very importantly, all ----------------------
of these factors are interdependent and must not be looked at in isolation.
----------------------
1. Nature of the product: Products can be broadly classified into business
and consumer products. Business products are often customised to the ----------------------
buyers’ specifications and are not suited for mass communications.
----------------------
Producers of business goods such as computer servers and industrial
machinery rely heavily on personal selling and advertising would be ----------------------
limited to trade media only. Mass media advertising, if at all used, serves a
different objective altogether. Airbus industry uses television advertising ----------------------
directed at mass markets, only to build a positive corporate image, and to
----------------------
correct any misrepresentations in the media.
Consumer products can be further classified into convenience, shopping, ----------------------
specialty and unsought products. Convenience products being mass-
----------------------
market products rely very heavily on advertising through mass media,
supported by sales promotions. Specialty products will use advertising ----------------------
very selectively through targeted media to maintain their products’
exclusive image. The locations and ambience of the stores play a major ----------------------
role in communicating the exclusive upmarket image. Sales promotions
----------------------
find no place in the communications mix for specialty products. Unsought
goods will rely very heavily on personal selling, supported by highly ----------------------
persuasive advertising to trigger the need for recognition by the consumer
and provide a strong motivation to buy. Sales people actively seek leads ----------------------
to potential buyers, and because consumers do not actively seek such
----------------------
products, companies must go to them through sales people, direct mail or
direct response advertising. ----------------------
2. Stage in the product life cycle: The product’s stage in the life cycle is a
----------------------
big factor in designing the communications mix. During the introduction
stage, the basic goal of communication is to create awareness and ----------------------
knowledge about the product category. The communications strategy is
to trigger a need and establish the utility of the product. There is a very ----------------------
heavy reliance on public relations, publicity, supported by advertising and
----------------------
product displays. Personal selling is used mainly to obtain distribution.
As the product moves to the growth stage, the communications mix ----------------------
changes as the objectives change. The major objective is now to build ----------------------
brand preference. The communications strategy shifts to establishing and
emphasising the brands’ differential advantage over competition. ----------------------
Advertising now becomes a key element of the communications mix. ----------------------
Public relations, publicity and sales promotion play the support role.
Personal selling would be used to enhance distribution networks. ----------------------
The maturity stage of the life cycle is marked by slow market growth ----------------------
rates and intense competition. Typically, firms cut back on advertising,
emphasising mainly on campaigns to remind customers and to combat ----------------------

Notes sales promotions and trade promotions become key elements of the
communications mix at this stage.
----------------------
As the product enter the decline stage, all communications expenditure
---------------------- is cut back. Some personal selling and sales and trade promotions efforts
would be maintained.
----------------------
3. Target market: Niche market products are characterised by highly
---------------------- informed, brand loyal, concentrated set of customers. The communications
strategy is to build long-term profitable relationships. Very targeted and
---------------------- informative advertising and selective distributions work best for such
products. The website is also a very key element of the communication
----------------------
mix for such products.
---------------------- A convenience product targeted at the rural markets would require
extensive consumer education. Advertising supported by personal selling
----------------------
become key elements of a communication strategy directed to this
---------------------- market. Hindustan Lever’s Project Shakti employs rural women to
educate customers about products, inculcate usage habits and to persuade
---------------------- customers to buy. This multi-level marketing initiative achieves both the
communications objective and supports the distribution networks.
----------------------
4. Type of buying decision: The communication depends on the type
---------------------- of buying decisions. For routine buying decisions like toothpastes and
---------------------- detergents, the communications strategy is to maintain brand recall.
Hence, reminder advertising is a key element of the communication mix.
---------------------- Consumer sales promotions are used from time to time to keep the interest
in the brand; trade promotions are also a key element of the mix and are
---------------------- intended to garner larger shelf space.
---------------------- For more complex buying decisions, personal selling and advertising
become the key elements of the communications mix. The website plays
---------------------- a critical role in providing extensive information and assisting the buyer
---------------------- in decision-making.
5. Available funds: Money or rather the lack of it, can easily be the single
---------------------- most important factor in determining the communications mix. Start-ups
---------------------- usually lack funds to use any formal communications tools, and may resort
to a unique communications plan, using only public relations or publicity
---------------------- to achieve their communication goals. Even established organisations,
facing a cash crunch, may cut back on advertising even if it is essential
---------------------- to advertise. Usually firms have to make a tradeoff between the funds
---------------------- available on one hand and the communications objectives and market
necessities on the other hand.
----------------------
6. Push and pull strategy: The last factor that affects the promotional
---------------------- mix is whether a push or pull communications strategy will be used.
Firms that use aggressive personal selling and promotions directed to
---------------------- the distribution channels, try to increase inventory levels throughout the
distribution channel. Because of the increased stock pressure, retailers try
----------------------

to “push” their products through the channel to end consumers. This is Notes
known as a push strategy.
----------------------
A pull strategy, on the other hand, stimulates consumer demand by using
advertising and promotions directed to the consumers. As consumers begin ----------------------
demanding the product, retailers, confronted with rising demand, increase their
inventory levels of the products. Consumer demand “pulls” the product through ----------------------
the retail channel.
----------------------
Rarely does a company use a push or pull strategy exclusively. Most
companies need to balance both push and pull strategies, varying only the ----------------------
intensity levels in response to external factors such as competitive pressures or
----------------------
seasonality of demand.
The demand for most consumer durables like air conditioners, televisions, ----------------------
DVD players is seen to have seasonal peaks and troughs, because in India
----------------------
buying is concentrated around festivals or marriages. Hence, prior to the onset
of the “season”, most firms use a push strategy to garner shelf space. As the ----------------------
season picks up, they switch to a pull strategy to stimulate consumer demand
for their products. ----------------------
----------------------
12.6 THE MEDIA MIX
----------------------
A medium is a channel used to convey a message to a target market. The
media mix consists of all the media tools available to a marketer today. The ----------------------
seven major advertising media available today are television, radio, newspaper,
----------------------
magazines, outdoor, Internet and cinema. In recent years, alternative media
vehicles have emerged giving advertiser’s innovative ways to reach their target ----------------------
audiences and avoid advertising clutter.
----------------------
Media planning is a series of decisions that marketers need to make
regarding the selection and use of media, ensuring optimal and cost-effective ----------------------
communication to the target audience. Specifically advertisers must determine
which types of media are best suited to the message being communicated and ----------------------
when and for how long the campaign must run. Media planning and scheduling
----------------------
is a very scientific decision-making process, aided today by a numerous software
tools. ----------------------
The Advertising Industry has had a 15% growth rate in 2005. Its size ----------------------
today is considered to be Rs. 11.915 crore. The growth in share of various
advertising media is as follows: ----------------------
Internet 57.1% Cinema 40% ----------------------
Radio 33.3% TV 15%
----------------------
Press 14.9% Outdoor 8.7%
----------------------
Source: The Advertising Outlook 2006
----------------------
----------------------

Notes 12.6.1 Factors affecting Media Selection
The primary drivers of media selection are communication objectives
----------------------
and the desired reach for the particular message. Each medium is its own
---------------------- unique number of people exposed to that medium also varies. Marketers need
in-depth understanding of the characteristics of the media options and facts and
---------------------- figures about the reach of the different media.
---------------------- 1. Additional attributes to be considered are editorial fit between the message
and the medium. Automobile manufacturers will convey detailed technical
---------------------- information about their products in magazines like Overdrive, Autocar
or Motoring and on television shows like Top Gear. In this case, there
----------------------
is perfect fit between the editorial content of the medium, the message
---------------------- to be conveyed and the target market, which would be interested in this
information. The same products would also use magazines like India
---------------------- today or Business Today to convey other product attributes like service
networks, fuel economy and styling and aesthetics.
----------------------
2. The target audience’s involvement with medium is another key attribute
---------------------- to be considered in media selection. Higher involvement with medium
ensures a higher opportunity to see for the message. Television shows like
----------------------
daily soaps, horror shows and cricket are high involvement shows and are
---------------------- preferred by advertisers not only for their high ratings, but also for their
ability to grip the viewer.
----------------------
3. Other attributes like the image of the medium itself and cost per contact
---------------------- are considered when making a media selection. It is important to note that
generally no advertiser would only use a single medium. There would
---------------------- however be a lead medium, supported by several complementary media,
---------------------- to ensure fulfillment of the firm’s overall communication goals.
----------------------
1. Television is generally acknowledged as the most powerful advertising
---------------------- medium because it allows for sight, sound and motion and reaches a broad
spectrum of consumers. The wide reach of television delivers a low cost
---------------------- per contact. Television advertising in India in the year 2005 was estimated
---------------------- at Rs 5003 crore a growth of 15% over the previous year.
Television is essentially a visually rich, entertainment medium, with a
----------------------
number of channel and programming options available today. Television
---------------------- is considered as prestigious medium with high impact on the target
audiences.
----------------------
Television advertising involves selection of specific programmes, the
---------------------- number of advertising spots and duration of each spot. Vast amount
of data is available on profile of viewers for each show, the ownership
---------------------- patterns of household products, purchase intentions. Advertisers carefully
study this data to guide selection of the appropriate programme to run
----------------------
their advertising spots. With the number of programme options available
----------------------

today, it is possible for advertisers to be selective in the audiences they Notes
want to target.
----------------------
TV advertising has two key strengths. First, that it is an effective means
of demonstrating product attributes and explaining their corresponding ----------------------
consumer benefits, very persuasively. Second, it can dramatically portray
non-product related user and usage imagery, brand personality and so on. ----------------------
TV is the most effective medium for positioning of products.
----------------------
The key disadvantage of television is very high clutter. Although cost per
contact is low on TV because of its reach, absolute advertising spends ----------------------
on TV are very high because a large amount of advertising is required
----------------------
to stand out of the clutter. Because of the fleeting nature of the message
and the potentially distracting creative elements in the advertisement, ----------------------
the brand and the message can be overlooked by the consumers. TV
advertising rates and production rates have skyrocketed on the one hand ----------------------
and advertisers report diminishing returns for their TV campaigns.
----------------------
TV advertising is under threat in the US and Europe due to digital video
recording services like TiVo. This is because television is essentially an ----------------------
entertainment medium for the target audience and anything that distracts
----------------------
from the entertainment is considered annoying; hence, advertising
zapping is common. Advertisers have tried to overcome this by being ----------------------
sensitive to consumers and delivering their messages in an entertaining
format, ensuring greater receptiveness by the target audience. ----------------------
Despite the drawbacks of television, it remains a very powerful lead ----------------------
medium. Properly designed and well-executed adversisements can
potentially deliver communication results and hence, advertising on ----------------------
television continues to grow. ----------------------
2. Radio is an all-pervasive medium with a reach of 90% in India. The
main advantages of radio are its geographic flexibility because of local ----------------------
coverage, segmented audiences and relatively inexpensive advertisement ----------------------
rates and production costs. It is, therefore, very effective for location
specific communication campaigns. ----------------------
The obvious disadvantage of radio is the lack of visual images, which ----------------------
makes it a passive medium. Listeners are often multi-tasking whilst they
listen to the radio. Hence, processing of messages happens in a very ----------------------
passive way. Radio is very rarely used as the lead medium for a campaign,
but is very good reminder and support medium. ----------------------
Radio advertising in India in 2005 was estimated to be Rs 200 crore, ----------------------

which is less than 2% of the total media pie. Advertising is this medium
----------------------
was fairly static for many years as radio listenership had lost out in a big
way to television. However, post the launch of private FM stations in ----------------------
2000 and the second phase of licensing in 2005, it has once again become
an attractive medium. ----------------------
----------------------

Notes What makes an effective radio advertisement?
Advertising pioneer David Ogilvy believes four factors are critical:
----------------------
• Identify your brand early in the commercial.
----------------------
• Identify it often.
---------------------- • Promise the listener a benefit early in the commercial.
---------------------- • Repeat it often.
---------------------- Radio advertising can be extremely creative. The lack of visual images is
seen as positive, because clever use of words, music, sound, humor can
---------------------- tap into the listener’s imagination and leave long-lasting impressions.
---------------------- 3. Print media are a stark contrast to the broadcast media, because of the static
nature of visuals in the print. In general, there are two main print media –
---------------------- magazines and newspapers. Although the advantages and disadvantages
of both are fairly similar, each has some unique characteristics.
----------------------
Newspapers are topical media with a very regular and loyal readership.
---------------------- Newspapers are well suited to communicate product related information
or for any kind of announcement or newsworthy advertising, which is
----------------------
in keeping with the character of the medium. Since most major dailies
---------------------- have local editions, it is possible to create geographically targeted
campaigns. The major disadvantages of newspapers are short shelf life
---------------------- and limited reproduction quality. Despite these disadvantages, newspaper
advertising is growing in India at almost 15%. This is seen to be a result of
----------------------
macroeconomic changes – increasing disposable incomes, literacy rates
---------------------- in Tier II and Tier III towns and popularity of news channels, which have
had a multiplier effect. According to NRS, the literacy rate has reached
---------------------- 66% and this in itself is adding new consumers to the print media fold.
---------------------- Magazines, in contrast to newspapers, are feature-based media as they
carry articles on a particular area of interest. Shelf life of magazines,
---------------------- depending on the frequency of the magazine, is longer than newspapers
---------------------- and reproduction quality is much better. Because magazines are read at
leisure, advertisers can provide more detailed messages to the readers. In
---------------------- addition to product related information, magazines can also effectively
communicate user and usage imagery.
----------------------
The readership base of magazines is irregular, highly dependent on the
---------------------- interest that the cover story generates. Production lead times are also very
high for magazines especially for prime advertising space.
----------------------
Total print advertising, both newspapers and magazines, logged in Rs
---------------------- 5700 crore in 2005, garnering 48% of the media pie.
---------------------- 4. Outdoor advertising has traditionally always been equated with either
hoardings or billboards and posters. However, there are number of
---------------------- outdoor advertising opportunities today: transit ads on buses, subway,
commuter trains, bus shelters, sports stadia, ATMs, blimps, TV screens
----------------------

at airports or malls, taxi tops, pole kiosks are just some of the outdoor Notes
media options. Even billboards have been transformed over the years
and now employ colourful, digitally produced graphics, backlighting and ----------------------
three-dimensional images. Billboards do not necessarily have to stay in
one place, marketers can buy ad space on billboard laden trucks that are ----------------------
driven continuously all day to selected areas. ----------------------
Advantages of outdoor media are that it is the only type of media which
----------------------
has constant exposure; no other medium allows a message to be displayed
24/7. Ads on billboards are free to consumers; they don’t have to buy a ----------------------
newspaper, magazine or cable TV. People, in busy metros, spend more
time commuting than they do reading newspapers or watching TV. ----------------------
Outdoor is also an appealing option due its ability to target geographically.
----------------------
Marketers have realised that they can more selectively reach their target
audiences by creating outdoor media in places where key audiences can ----------------------
be found and where they are likely to be receptive. Outdoor media offer
lower cost per contact to the advertiser as compared to any broadcast or ----------------------
print media.
----------------------
However, communication has to be very brief, without any elaborate
explanations, as the audiences’ exposure time to the media is fleeting ----------------------
and momentary. For this reason, outdoor advertising is mainly used as a
----------------------
reminder, support medium. The shelf life of the message varies from 10
days to a month, after which billboards can easily become “invisible”, ----------------------
once the brain gets used to seeing the same advertising message there.
Outdoor media are also subject to local laws and restrictions and in India, ----------------------
the site owners are largely in the unorganised sector, with very few large
----------------------
players. Maintenance of sites is a critical issue, as poorly maintained sites
undermine the effectiveness of the communication. ----------------------
Outdoor advertising in India today is close Rs 870 crore and is growing
----------------------
largely due to mushrooming of newer malls, multiplexes and other
entertainment options. ----------------------
5. Cinema advertising today offers two kinds of communication ----------------------
opportunities.
One is the onscreen format, which consists of short advertising films and ----------------------
slides screened before the movie or during the interval. The other being ----------------------
the off-screen format, which offers a much wider breadth of opportunities.
Signboards at ticket counters and snack counters, product displays in the ----------------------
reception areas, events and contests at the food courts in the multiplexes,
special offers or tie-in promotions with specific movies are just some of ----------------------
the countless off-screen options that are possible today. Timex watches ----------------------
ran several tie-in promotions with the movie “Kaal” at select multiplexes
nationwide, which generated a huge interest in the brand with its target ----------------------
markets.
----------------------
Onscreen formats offer very limited exposure today, as the opportunity to
see the message is very low; advertising before the movies and during the ----------------------

Notes interval can easily be missed by the audiences. Off-screen opportunities
are many more, largely due to the growth of multiplexes, popularity of
---------------------- Bollywood films and simultaneous release of Hollywood films in India,
all of which are bringing the audiences to the theatres.
----------------------
Cinema advertising in India is of Rs 32 crore and is expected to grow
---------------------- mainly due to the off-screen opportunities.
----------------------
----------------------

1. Products can be broadly classified into _________ products.
----------------------
2. ___________ is a series of decisions that marketers need to make
---------------------- regarding the selection and use of media, ensuring optimal and cost-
effective communication to the target audience.
----------------------
3. Transit ads on buses, subway, commuter trains, bus shelters, etc. are
---------------------- examples of __________________.
----------------------
---------------------- Activity 4
---------------------- 1. Select any brand and make a note of all the campaigns through
---------------------- different media. As you read the next section, make a note of how the
communication varies from media to media. Has the advertiser used
---------------------- the particular medium effectively, keeping in mind the character of
the medium?
----------------------
2. Find out the following information:
---------------------- a) Penetration of cable and satellite television in India
---------------------- b) Top ten dailies and magazines in India
---------------------- c) Penetration of FM radio and the number of new FM stations to
be launched in the next three years
----------------------
d) Nnew outdoor media options not mentioned earlier for products
---------------------- such as umbrellas or carry bags.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

12.7 PLANNING COMMUNICATIONS CAMPAIGN Notes
CREATING THE CAMPAIGN
----------------------
Marketing Objectives STP
----------------------
Communication Objectives *
----------------------
Communication Tasks May lead to creation ----------------------
of several campaigns
Communications mix to be used ----------------------
Media mix & objectives for each Media & Communication mix elements ----------------------
----------------------
Communication Budget Communication Brief for
the Agencies involved ----------------------
 % of Sales
 Objective / Task Method ----------------------
 Affordability
----------------------
Creative & Media Strategy ----------------------
(Art & Copy)
*Advertising Strategy research
----------------------
 Product / Positioning Media Plan
Media Schedules
 Target Audience ----------------------
Creative Concept Research
 Communications Media
 Message Element
Creative Blueprints ----------------------
Story Boards
----------------------
Create Campaign
Pre Test, Release & Post Test ----------------------
----------------------
Fig. 12.4: Creating the Campaign
In designing and planning a communications campaign, it is important ----------------------
to distinguish between the message strategy and the creative strategy. The ----------------------
message strategy is the explicit objective of the campaign, or what the campaign
attempts to convey about the company and its brands. The creative strategy ----------------------
deals with how the message is to be encoded and conveyed to target audience.
Designing a communications campaign is both an art and a science. The artistic ----------------------
aspects relate to the creative strategy; the scientific aspects relate to the message ----------------------
strategy of the campaign. The message strategy has to be decided by the firm;
however, planning the creative strategy, developing a media plan and executing ----------------------
the campaign are very specialised work and is handled by advertising agency.
Campaign planning happens in distinctive stages. ----------------------
Stage I: The Marketing brief ----------------------

A campaign plan begins with a detailed briefing to the advertising agency ----------------------
personnel on the communications objectives for the company and for each of
----------------------

Notes its brands. The communications brief must share with the agency all details on
the following aspects:
----------------------
• Firms’ marketing objectives, growth and competitive strategies
---------------------- Segmentation, target markets and positioning for each brand.
• Past performance and detailed market research on every aspect of the
----------------------
brand
---------------------- • Results of previous campaigns, achievement of objectives and impact on
brands
----------------------
At this stage the overall communications budget is also communicated
---------------------- to the agency.
---------------------- Stage II: Communications Tasks
---------------------- From the detailed marketing brief, a clear set of communications objectives
are evolved, which must be put down as communications tasks or message
---------------------- strategies. To achieve a particular communications task, several campaigns
may be required. This stage of the campaign plan involves decisions on the
---------------------- appropriate communications mix, identification of the campaigns required and
---------------------- their sequence, the creative strategy and media strategy. At this stage, more
detailed budgets for each campaign and each element of communications mix
---------------------- need to be worked out and finalised.
---------------------- Stage III: Creative and Media Strategy
Once the campaign plan has been approved by the marketer, the agency
----------------------
now begins its work on developing the creative and media strategies. We have
---------------------- discussed earlier in the unit the basic criteria used for media selection and
preparation of a media strategy. Once the overall creative and media strategy
---------------------- is agreed upon, the agency prepares several alternative creative blueprints and
story boards for the marketer.
----------------------
At this stage, several specialised agencies also get involved in the
---------------------- development of the campaign. In the advertising world today, there are
---------------------- specialised agencies for each element of the communications mix including
website creation, media buying, public relations, direct marketing, film
---------------------- production to name a few. In the case of several other agencies being involved,
the coordination responsibility often rests with the lead advertising agency to
---------------------- ensure synergy and cohesiveness of the complete communication plan.
---------------------- Stage IV: Media Plan and Media Schedules
---------------------- The advertising agency will simultaneously begin the work on media
planning and scheduling. Booking advertising space in any media today is a long
---------------------- lead-time activity. Media planning and scheduling is a very complex scientific
process, given the vast array of media options. There are three basic types of
---------------------- media schedules: continuous media schedule, which allows advertising to run
---------------------- throughout the year; flighted media schedule where the advertiser may schedule
advertisements very heavily every two months or every fortnight to achieve a
---------------------- greater impact; pulsing media schedule which combines continuous scheduling

with flighting. For products with a seasonal demand, a more seasonal media Notes
schedule is more appropriate.
----------------------
Stage V: Advertising Pre-testing
The creative blueprints and storyboards, which describes the advertising ----------------------
frame by frame, approved by the client now need to be tested with consumer
----------------------
panels. Advertising pre-testing is a very important part of the campaign
planning and can be fairly lengthy stage of the campaign preparation, as it is ----------------------
an important indicator of the effectiveness of the creative and media strategy.
Great care is taken to elicit accurate responses from consumer panels. Based ----------------------
on the responses several modifications may be effected, which once again must
----------------------
be tested with consumer panels. The advertising pre-testing stage may even
involve reworking of the communications mix, if it is required. ----------------------
Stage VI: Campaign Rollout
----------------------
Once the campaign is finalised, a detailed rollout is plan is prepared and
the campaign is ready for release. Post release, the second phase of advertising ----------------------
testing is carried out on responses from consumers. Based on the response ----------------------
and effectiveness, changes may still be made in the creative or media plan if
found necessary. These market research studies may be carried out at several ----------------------
points in the campaign to get feedback on the effectiveness of the campaign and
achievement of overall communication objectives. ----------------------
Stage VII: Post-campaign analysis ----------------------

The last set of advertising effectiveness studies are carried out at the end ----------------------
of the campaign to measure the overall effectiveness of the entire campaign and
its impact on sales and market share. Post-campaign analysis also assesses how ----------------------
the campaign could have been made more efficient and what factors contributed
to its success. This analysis becomes an important input to planning of future ----------------------
campaigns. ----------------------
Ten common Creative Styles for Advertising
----------------------
Depicts people in their normal or a typical moment in
Slice-of-Life ----------------------
the life of the target audience.
Shows how the product will fit into the consumer’s ----------------------
Lifestyle lifestyle.
----------------------
Can feature a celebrity brand ambassador endorsing
the product or a testimonial from an authentic customer. ----------------------
Creates a fantasy for the viewer built around the use
Fantasy of the product. Creates the aspirational appeal for the ----------------------
product. ----------------------
Advertisers often use humour in their ads, such as SBI
Humorous Home Loans which the husband having lost a bet to his ----------------------
wife, is shown rolling papads.
----------------------
----------------------

Notes Animated Product Creating an animated character like Seven-Up’s Fido
S y m b o l s / B r a n d Dido or a creating a fictitious human character such as
----------------------
Persona “Lalita Ji” for Surf.
----------------------
Builds a mood or image around the product, such
---------------------- Mood/Image
as peace of mind, love or beauty.
---------------------- A rational appeal, which demonstrates to consumers the
Demonstration
expected benefits.
----------------------
Uses the format of a music video to convey the message,
---------------------- Musical such as the Liberty shoes’ commercial or Pepsi’s “Oye
Babli” commercial.
----------------------
Uses research or scientific evidence to give the
---------------------- Scientific
brand superiority over competitors.
----------------------
----------------------
12.8 B UDGETING FOR MARKETING COMMUNICATIONS
---------------------- One of the most difficult marketing decisions is to determine how much
to spend on marketing communications. Industries vary considerably in how
---------------------- much they spend on communications. Communication spends can vary
from 10-12% of sales in the FMCG industry to 5-8% for industrial equipment
---------------------- manufacturers. These are only indicative figures, as they would vary widely
---------------------- from firm to firm, depending on the communications objectives. There are four
commonly used methods for setting advertising budgets: affordable method,
---------------------- percentage-of-sales method, competitive parity and objective or task method.
---------------------- Methods of Setting Communication budgets

1. Affordable method: Many companies use this method to determine
----------------------
budgets. This method completely ignores the role of communication as
---------------------- an investment and its impact on sales volume.
Using this method can lead to uncertain annual budgets, which can make
----------------------
long range planning difficult. However, one cannot completely ignore this
---------------------- method as ultimately companies have to make tradeoffs between what is
necessary and what is affordable.
----------------------
2. Percentage of sales method: Many companies set communication
---------------------- expenditures at a specified percentage of sales, either current or anticipated,
or of the sales price. This method has its advantages as it does take into
---------------------- consideration what is affordable. It also forces marketing managers to
consider the relationship between promotion cost, unit selling price and
----------------------
unit profitability. Lastly, it ensures a continuity of communication efforts,
---------------------- as firms spend approximate the same percentage year-on-year. Whilst this
method is useful for setting the overall communications budget for the
---------------------- year, it is not enough to merely set overall budgets. Marketers have to set
budgets for each campaign, hence more precise methods need to be used.
----------------------

3. Competitive parity method: Some companies set their promotion Notes
budgets to achieve share-of-voice parity with their competitors. Whilst
maintaining share-of-voice is certainly a competitive objective, this ----------------------
method of budgeting is not very scientific, as objectives, resources and
opportunities differ widely from company to company. Most firms use ----------------------
this method mainly as a benchmark figure. ----------------------
4. Objective or task method: The objective or task method calls for
----------------------
marketers to develop budgets by first defining specific objectives and then
determining the tasks that must be performed to achieve the objectives. ----------------------
The sum of these costs becomes the communications budget for the year.
This method of budgeting is more popularly used for several reasons. ----------------------
For one, it is a more scientific method of estimating communications
----------------------
expenditures. Secondly, it treats communications expenditures as an
investment, necessary to achieve certain objectives. Finally, it compels ----------------------
managers to budget for each campaign, leading to better monitoring and
control of communication expenditures. ----------------------
This by far is the most popularly used method: whilst percentage of ----------------------
sales method is used to set the overall limits for communication expenditures,
objective or task method is used to precisely allocate resources to achieving the ----------------------
firm’s marketing objectives.
----------------------
----------------------
1. The message strategy deals with how the message is to be encoded ----------------------
and conveyed to target audience. ----------------------
2. Booking advertising space in any media today is not a long lead-time
----------------------
activity.
3. Flighted media schedule means the advertiser schedules ----------------------
advertisements very heavily every two months or every fortnight to
----------------------
achieve a greater impact.
1. ____________ advertising depicts people in their normal or a typical ----------------------
moment in the life of the target audience.
----------------------
2. The ___________ calls for marketers to develop budgets by first
defining specific objectives and then determining the tasks that must ----------------------
be performed to achieve the objectives.
----------------------
----------------------
----------------------
----------------------

Notes
Activity 5
----------------------
---------------------- Collect information on the advertising budgets of the top 10 companies.

How much do they spend on corporate advertising and product advertising?
----------------------
---------------------- Summary
----------------------
• Marketing calls for more than developing a good product, pricing and
---------------------- making the product available; companies need to communicate with their
target markets.
----------------------
• Most companies use several communication options to communicate
---------------------- with their target audiences.
• All the communication options must work synergistically to create
----------------------
consistent and coherent messages. The concept of communication options
---------------------- supporting each, rather than working in isolation, is known as Integrated
Marketing Communications.
----------------------
• The three tasks that any communication tool performs are Inform,
---------------------- Persuade and Remind.
---------------------- • The communications process consists of nine elements: the sender,

receiver, message, encoding, media, clutter, decoding, response and
---------------------- feedback.
---------------------- • Response hierarchy models explain how consumers respond to marketing
communications. The sequence of response is usually cognitive, affective
---------------------- and connative, but can vary according to types of buying decisions.
---------------------- • The most commonly used response hierarchy model to guide marketing
communications is the AIDA model: Attention, Interest, Desire and Action.
---------------------- This model is used to guide and evaluate the marketing communications
plan.
----------------------
• The communications mix is a set of communications tools and consists
---------------------- of six elements: advertising, sales promotions, personal selling, public
relations and publicity, direct marketing and the Internet.
----------------------
• Communication objectives and reach are the primary factors for media
---------------------- selection. Other factors such as cost per contact, editorial fit, target
---------------------- audience’s involvement with the medium, OTS and image of the medium
are important factors to be considered.
---------------------- • Communications campaigns are planned stage wise; the different stages
---------------------- being marketing brief, communications objectives/tasks, creative and
media strategy, media plan and media schedules, advertising pre-testing,
---------------------- campaign rollout and post-campaign advertising testing and analysis.
----------------------

• There are generally four different methods of determining marketing Notes
budgets: affordable method, percentage of sales, competitive parity and
objective or task method. The most common is the use of percentage of ----------------------
sales and objective methods together.
----------------------
Keywords ----------------------
• Marketing communications: Means by which firms attempt to inform, ----------------------

persuade and remind its target markets, using both direct and indirect
----------------------
means, about the brands they sell as well as about the company as a whole.
• Sales promotion: Any short duration communication activity, which ----------------------
provides an incentive to the target market to purchase a product or service ----------------------
immediately.
• Brand switchers: Customers who are not loyal to any single brand and ----------------------
try a variety of brands. ----------------------
• Publicity: Any non-personal communications through the media, such as
press releases, interviews, press conferences, feature articles, newsletters, ----------------------
photographs and corporate films. ----------------------
----------------------
----------------------
1. What is IMC? Why is it important for communications campaign to be
integrated? Find out one recent example of a successful IMC campaign. ----------------------
How did it help the brand?
----------------------
2. What are the three key tasks that marketing communications perform?
Explain the communications process in detail. ----------------------
3. Explain the different stages of consumer response. Do these always ----------------------

happen in the given sequence? If not, why?
----------------------
4. What is the AIDA model? What is its utility in marketing communications?
----------------------
5. Write short notes on:
a) Communication mix ----------------------
b) Role of Internet in marketing communications ----------------------

c) Different media tools ----------------------
d) Stages of planning a campaign
----------------------
----------------------
----------------------
----------------------
----------------------


1. The key pillars of a firm’s communications plan are target market and
---------------------- communication objectives of the campaign.
---------------------- 2. The key objectives of any communication by a firm are to inform, persuade
and remind.
----------------------
----------------------
Fill in the blanks.
---------------------- 1. Media noise includes competing advertisements, the physical
---------------------- surroundings, light, climate, presence of other people among others.
2. AIDA stands for attention, interest, desire and action.
----------------------
----------------------
Fill in the blanks.
---------------------- 1. The major elements of the communications mix are advertising, public
relations, sales promotions, personal selling and the Internet.
----------------------
2. Pioneering advertising is used at the introduction stage of the life cycle of
---------------------- the product.
---------------------- 3. Most traditional media assumes that target audiences are passive recipients
of the message.
----------------------
4. Customer extranets are where a part of the intranet is open to customers
---------------------- and usually allows customers to access information, process orders and
receive backup support.
----------------------
----------------------
1. True
---------------------- 2. True
---------------------- 3. False
---------------------- 4. False
----------------------
Fill in the blanks.
----------------------
1. Products can be broadly classified into business and consumer products.
---------------------- 2. Media planning is a series of decisions that marketers need to make
regarding the selection and use of media, ensuring optimal and cost-
----------------------
effective communication to the target audience.
---------------------- 3. Transit ads on buses, subway, commuter trains, bus shelters, etc. are
---------------------- examples of outdoor advertising.

Check your Progress 5 Notes
----------------------
1. False
----------------------
2. False
3. True ----------------------
1. Slice-of-life advertising depicts people in their normal or a typical moment ----------------------
in the life of the target audience.
----------------------
2. The task method calls for marketers to develop budgets by first defining
specific objectives and then determining the tasks that must be performed ----------------------
to achieve the objectives.
----------------------
Suggested Reading ----------------------

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Notes
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MARKETING MANAGEMENT

(FOR PRIVATE CIRCULATION ONLY)

COURSE DESIGN AND REVIEW COMMITTEE

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

Copyright © 2019 Symbiosis Open Education Society

Ms. Nandita Dalal

Unit No. TITLE Page No.

Basic Concepts of Marketing 1

---------------------- 1.2 MEANING AND DEFINITION OF MARKETING

• Goods – (motorcycle, ice-cream) ----------------------

No exchange can be created between an organisation and a customer unless ----------------------

Basic Concepts of Marketing 3

---------------------- 1.3.1 The Production Concept

---------------------- • Mass distribution of products is the key to success.

---------------------- • Customers are interested in innovative products.

Basic Concepts of Marketing 5

---------------------- Companies that become excessively obsessed with their products or

Basic Concepts of Marketing 7

---------------------- Starting point Focus Means Ends

---------------------- (a) The selling concept

---------------------- Target Customer Integrated Profit through

---------------------- c) Creating products to satisfy those needs

Ego Needs ----------------------

Social Needs ----------------------

Basic Concepts of Marketing 9

Basic Concepts of Marketing 11

1. Can you identify examples of companies practicing the production ----------------------

1.4 CUSTOMER VALUE AND CUSTOMER SATISFACTION ----------------------

Basic Concepts of Marketing 13

---------------------- Customers are “value maximisers”, within the boundaries of limited

---------------------- How can companies increase value to the customer?

Basic Concepts of Marketing 15

Basic Concepts of Marketing 17

---------------------- 1.5 MISCONCEPTIONS ABOUT MARKETING

Basic Concepts of Marketing 19

---------------------- Answers to Check your Progress

i. Customer Value ----------------------

Basic Concepts of Marketing 21

The Marketing Environment 23

---------------------- 2.2 UNDERSTANDING THE EXTERNAL ENVIRONMENT

The Marketing Environment 25

2) Specialised niche competitors. Market consolidation will continue, ----------------------

The Marketing Environment 27

---------------------- The socio-cultural dimensions of the environment consist of attitudes,

2.3.2 Demographic Factors ----------------------

The Marketing Environment 29

The Marketing Environment 31

The Marketing Environment 33

2.4 CHANGES IN BUSINESS AND MARKETING ----------------------

Major macro environmental forces such as technological advances, ----------------------

The Marketing Environment 35

The Marketing Environment 37

2.4.2 Web Sites ----------------------

The Marketing Environment 39

---------------------- iv. Business to Capital

---------------------- 2.5 MACRO ENVIRONMENTAL CHANGES AND THE

(Source: World Bank, 2004) ----------------------

The Marketing Environment 41

 New Services  Refrigerator,

---------------------- (eg. IT, Media) Telephone