MIDTERM 1 STUDY GUIDE SEPTEMBER 30, 2013 MARKETING AS A DISCIPLINE OF STUDY - Marketing = combination of art + science o Art is qualitative,

, creative, subjective o Science is quantitative, objective, neutral finding best answer using evidence and facts - Universality of marketing strategic advantage o Marketing is universal applicable to all types of businesses, not just in the U.S. o In long-run we should listen to consumers, because market = consumers = people (emotional and irrational) - Individuals and consumers marketing is useful for everyone, not restricted to business MARKETING VERSUS ECONOMICS - Marketing used to be a branch of economics today it is a distinct discipline of study influenced by economic theories as well as psychology, sociology, biology - Four utilities of economics: time, place, possession, from o Time utility creation of time; marketing needs correct timing you need to keep the product on the shelf until people need it, then you release the product at the right time o Place utility manufacturing takes place somewhere far from primary consumer use logistics to move product to its final destination and closer to place of consumption o Possession utility find a way to make it easier for people to buy and use the product (e.g. provide financing so people can buy the product today) o From utility production of raw materials; transforming raw materials into final product; final product raw materials = value of the product - Economists argue that marketing does not use the from utility product is made, then people use marketing to advertise the product o This is incorrect marketing is taken into account before the product is even produced marketing creates value for the product because it anticipates the consumers needs - Economists assume that people are homogeneous and rational o However marketing realizes that consumers are heterogeneous (people are not the same and want different things) and that people are subjective and irrational (act on emotions) - Economist assume complete information before you make a purchase decision, you have all the information on price, suppliers, product, competitors o Marketing understands that you can never know everything about the product not enough data impossible - Economists assume utility maximization we select the product that gives us most benefit, satisfaction, use while spending as little as possible o This involves calculating our satisfaction, but humans dont do this not quantitative - Economics focuses on demographics marketing also looks at psychological/social practices DEFINITION/OBJECTIVE OF MARKETING - Marketing is the planning and execution of marketing mix to create exchanges that satisfy individual and organizational objectives - Emphasis on business transactions to use marketing, you need two parties who have something of value and want to exchange it with each other either B2B or B2C marketing - B2B marketing business to business; does not deal with consumer and no customer relations; consumers are the last link of the distribution process (e.g. investment bank like Goldman Sachs) - B2C marketing business to consumer marketing; deals direct with consumers (e.g. Coco Cola) - Objective: to facilitate an exchange between two parties who each have something of value to offer MARKETING MIX

Four pieces: product, place of distribution, promotion, price A business exchange does not take place unless each party has something of value to offer to the other party the marketing mix facilities this exchange Product decisions idea/concept of product like size, quality, branding, packaging Place of distribution how product is distributed (retailer, wholesale, middle man) Promotion how to communicate idea to consumers (advertising, sales people, type of media to use like TV commercial or newspaper ad) Price high or low price; offer discounts; how often price should be changed

ORGANIZATIONAL ORIENTATION - Production/product oriented, sales/selling oriented, marketing/market oriented PRODUCTION/PRODUCT ORIENTED - Demand > supply eventually supply will equal/exceed demand, and production oriented strategy will not work anymore - Needs of company > needs of consumer - No need for marketing because the problem lies in supply - Only need to focus on production to meet demand - Solution: scientific management minimize production time and cost to manage production and manufacturing process - Sometimes businesses get lucky: production efficiency/orientation benefits both the supplier and customer (e.g. USPS) SALES/SELLING ORIENTED - Supply > demand need marketing because you need to sell your product - Emphasizes sales, promotion, advertising you can sell anything as long as you push it hard enough, regardless of what the product is - Works in short-term, however it is a bad strategy for long-term you need to maintain a good relationship with the consumer to get them to repurchase your product (e.g. car dealership) MARKETING MYOPIA & MARKETING ORIENTED - Myopic lacks foresight; only focuses on short-term; focuses on your own needs; emphasizes the product; narrow minded - Businesses should not be myopic should focus on consumer needs and long-term satisfaction - Do not just emphasize business profit and production adapt your business to consumer as well - Should be market oriented (customer oriented) focus on the consumer, but also must think about profit and needs of the company; satisfy customers while still making money; an integrated marketing program of production and sales orientation to satisfy organizational goals MARKETING STRATEGIES - Mass marketing - Customization - Market segmentation - Market customization (mass marketing + customization) MASS MARKETING - One to many one product that you market to many people - Assumes that consumers are homogeneous think/act alike - Since customers want the same thing, one marketing mix will suffice - One product, color, style, price will satisfy everyone business does not need to adapt to consumers wants (e.g. newspapers, people only read it to update current events/news)

Advantages: efficient (one product, one advertisement, marketing mix) save costs, faster production, takes less time Disadvantage: ineffective; does not fit everyone or satisfy everyones needs

CUSTOMIZATION - Micromarketing; one to one marketing customize the product to target certain individuals - Assumes people are heterogeneous people want different things (e.g. magazines) - Advantages: effective because you can satisfy consumers - Disadvantages: costly, time-consuming, slow production and manufacturing MASS CUSTOMIZATION - Combination of mass marketing and customization effective and efficient - Allows for mass production that can still be customized for consumers (e.g. Pandora uses an algorithm to create an ideal, individualized playlist based on your previous choices/preferences) MARKET SEGMENTATION - Divide heterogeneous consumers (large group) into (smaller) homogeneous/meaningful subgroups (e.g. American Express different credit card types for people based on need) - Devise a unique marketing mix for each subgroup each subgroup has its own identifying and unique characteristic BASES FOR MARKET SEGMENTATION - Geographic location; select a certain area and test product there to see if it works - Demographic variables that change from person to person (income, attitude, age, race, gender) - Psychographic/lifestyle/AIO (activities, interests, opinions) hobbies, political views, personality - Volume/usage how often people use the product (heavy, moderate, light users) - Benefit the use people derive from the product (toothpaste for cavity prevention, whitening) CRITERIA TO USE MARKET SEGMENTATION - Identification segment has identifiable, measurable, unique demographics o Identifiable must be able to identify people in the market subgroup o Measurable a database you can use to measure or collect data so you can gather information about them o Unique demographics understand that people are heterogeneous and unique - Response segment has positive but unique behavior toward the special marketing mix o Subgroup must have a unique response to the marketing mix come up with something unique and appealing for the subgroup to make them feel special o If 2 subgroups like your concept, you do not need market segmentation use mass marketing because the marketing mix is not unique anymore - Accessibility/selectivity segment has selected media to minimize advertising waste o Selective media lets you reach a target/specific audience be selective in the way you communicate so you dont waste money advertising for the wrong audience - Size segment is big and profitable enough to justify special marketing mix, which is costly; group must be big enough to cover expensive marketing costs MARKET SEGMENTATION ISSUES - Multi-basis segmentation you can use more than one variable to segment the market; not limited to one demographic - Multivariable segmentation more segmentation = more precise, homogeneous, small group - Concentrated marketing multiple market segments with emphasis on a specific market segment

o You can have as many market segments as you want, provided you have enough resources use concentrated marketing: not enough money/time choose one segment to focus on Differentiated marketing multiple market segments, each with its own separate marketing mix; you have enough resources to support many market segments Demand > supply not meeting customer demand, = no need for market segmentation; just focus on producing more; people will adjust their wants/needs in accordance with what you offer Product adjustment versus marketing mix adjustment o If you pursue concentrated/differentiated marketing, you must adjust marketing mix adapt product and mix as you go from one market segment to another o If you pursue multiple marketing segments, you need to have different marketing mixes

ECONOMIC FORECASTING - Marketing strategy depends on your forecast of the state of the economy - GDP gross domestic product; total value of goods produced in the country annually; tells you what is going on in the economy - Use economic indicators for economic forecasting: lead-lag approach ECONOMIC INDICATORS - Leading economic indicators index that tells you if economy will do better/worse in the future o Stock prices if stock price increases, investors are optimistic about the future and they will buy stock today) if stock price decreases, investors are pessimistic and expect economy to get worse - Coincident economic indicators tells you the present state of economy; economy and the indicator have a positive relationship o Personal income increasing personal income = good economy; decreasing personal income = bad economy also employment - Lagging economic indicators tells you what happened to the economy in the past; there is slow movement between economy and the indicator takes time for the change to affect indicator o Consumer debt if economy is doing well, consumer debt will not increase immediately the debt is accumulated from the past and requires time to pay off DIY ECONOMIC FORECAST - You cannot calculate these lead, coincident, lag economic indicators yourself, but you can analyze some industries to gauge how economy is doing - Cardboard boxes more production/availability of cardboard boxes = businesses do well (90% o products we buy are shipped) = high demand for boxes = high consumer activity = good economy - Mac & cheese and spam buying more mac & cheese and spam = bad economy = people have no money to eat out IMPROVING FORECAST: DEMAND ELASTICITIES - Elasticity of demand the sensitivity of changing demand when exposed to certain factors - Three types: price, income, cross - Price elasticity if product is elastic to a change in price, people will react strongly and it will affect their decision to buy the product (e.g. Disneyland tickets are not price elastic because people will still buy them even if price increases) - Income elasticity if product is elastic to a change in income (e.g. eating out is income elastic because lower income affects peoples decision to go to restaurants) - Cross elasticity if there is a change in the price of a competing product, it will affect how people react to your product if competitor changes price, it will affect demand of your product o Natural gas is more common today because of recent technology = decrease in price

o Utility companies switch from coal to natural gas the switch in utility companies resource depends on the price of another product Relationship between elasticity and demand need to know if variables are related o Positive elasticity and demand move in same direction o Negative elasticity and demand move in opposite directions o Neutral no relationship between elasticity and demand Inferior goods when an increase in income lead to a decrease demand for certain products o High income = less demand for spam and mac & cheese

TYPES OF DEMAND - New versus replacement demand o New demand when you buy the product for the first time and it is a brand new concept; less price elastic (you need the product = price does not matter) o Replacement demand when you replace a product you already have in lieu of a newer one; more price elastic (you already have it = no immediate need = wait till price is lower) - Short run versus long run demand adjust consumption behavior over short/long-term when there is a chance in price o Short-run demand = less price elastic (no time to adapt consumption) o Long-run demand = more price elastic (more time to change/adapt behavior) - Nondurable versus durable product o Durable = less price elastic; like replacement demand; e.g. house, car o Nondurable = more price elastic; like new demand; e.g. food, clothes, shoes TYPES OF INCOME - Personal income all sources of income (e.g. salary, investments) - Disposable income income you can spend, after-tax income - Discretionary income income you use at discretion (whatever you want to buy luxuries, entertainment, eating out) o Discretionary = necessities (fixed costs: bills, rent, food, utilities) disposable income TYPES OF COMPETITION (MARKET STRUCTURES) - Monopoly one large, dominant supplier who controls the whole industry and overall market; can abuse power by overcharging people and rising prices; e.g. PG&E for electricity - Oligopoly few large suppliers who control and divide the market; companies have similar prices can control the market and dictate the price; e.g. phone companies, airline industry - Pure/perfect competition many small companies/producers/suppliers, none of which are big enough to control the market; more freedom when pricing your product o Need to use product differentiation fabricate a different in your product and use marketing to advertise that difference to the consumer o Examples: laundry detergent, toilet paper, paper towels - Marketing assumes monopolistic competition many buyers and sellers with a degree of product differentiation - Monopolies are the most common in the market PERSPECTIVES ON CONSUMER BEHAVIOR - Marketing = economics, psychology, sociology, biology - Psychological factors unit analysis is the individual; includes motivation, learning, perception, attitude, personality - Social factors unit of analysis is the group (culture, family); includes reference group, family life cycle, social class, culture, subculture - Social biology genetics

PSYCHOLOGICAL FACTORS - Motivation you want to know the reason behind consumers choice to purchase a product; a potent motive that drives people to buy the product o Two types of buying motives: rational/objective/logical and irrational/subjective/emotional o Consumers carefully spend money on a certain product to get the highest quality and maximize utility and happiness/satisfaction - Learning all our behavior (consumption) is learned, not based on instincts o Drive cue response reinforcement o Drive strong, internal, general stimulus; signifies that you have a certain need that is not being met and that you need to act to satisfy that need o Cue weaker, external, but specific stimulus; an ad tells you what to do to satisfy need o Response reaction/action you take based on the drive and cue o Reinforcement reward; based on your choice of action, if your response to the drive/cue makes you happy, you will take that same action again - Perception different than sensation; our five senses are initial; for sensation to become perception, we need to add meaning/interpretation to it o Selective perception humans cannot perceive everything they encounter because it is too overwhelming; they only choose to focus on something that interests them o Subjective perception when you perceive something, you are never neutral; each person has their own bias, prejudice, personality, and background that affects their perception o *Perception is related to product positioning - Attitude learned tendency to respond to an object in a consistently favorable or unfavorable way; tendency/predisposition to act/react in a certain way o Attitude is not self-generated (learned phenomenon) or neutral o Attitude is consistent and enduring once you develop an attitude, it is stable and does not change quickly o Attitude mood mood changes quickly in an instant o Three components of attitude: cognition, affect, conation/intention o Cognition affection of something about the object in question; your belief/understanding that the object is a certain thing; neutral because it is based on sensation o Affect affection of the product; making a judgment about it; not neutral (opinion) o Conation/intention what you are going to do about the product; buying intention - Personality the method of a person; individual characteristic that makes a person unique and consistent in adjustment to environment o Personality gives you uniqueness a certain reaction to different stimuli o Creates consistency within the individual predictable behavior and reaction o No link between personality and product branding marketers do not emphasize personality as a factor to consider in consumer behavior o Personality is a general observation only used to predict overall behavior can predict behavior regarding a certain product category, not a specific product brand (e.g. type of car to purchase, not the specific brand or model) *PRODUCT POSITIONING - Product positioning the product occupies an attractive, distinct space in the consumers mind; related to perception - Single-benefit positioning only one benefit the consumer derives from product (e.g. toothbrush) - Multiple-benefit positioning product has many purposes for the consumer (e.g. toothpastes extended use to whitening, cavity prevention, teeth cleaning) - Repositioning extending the appeal of a product by giving it more uses (e.g. orange juice)

SOCIAL FACTORS - Reference group o Group members in the group have something similar to each other; humans cannot survive alone not solitary animals) o Do not need to be a member of reference group to be influenced by them can be influenced by multiple groups (e.g. school, workplace, home) o The people you associate with can shape your behavior also influences the product brand you choose as well o Public consumption products you use in public (e.g. car) are most likely to be influenced by reference group you want a conspicuous product brand (expensive, easily visible) o Example: family the behavior of one member will affect the life of others - Family and life cycle (life stage) as you cycle through 6 stages, your personal/disposable/discretionary income and consumption habits fluctuate o Bachelor young, single person low personal income, highest discretionary income (no obligations or responsibilities) o Newlywed couple young couple recently married; high personal income (two sources), high discretionary income (no children yet) o Full nest I family with small, young dependent children low discretionary income (take care of children education, health) low personal income (one spouse needs to quit job to take care of children temporarily one source of income) highest debt o Full nest II family with older, teenage, dependent children higher personal income (child takes part-time job, both husband/wife return to work because children are older) o Empty nest children grow up and move out higher discretionary income (only two people to care for less obligations); highest personal income (settle into job more experience promotion and higher salary) o Solitary survivor one spouse passed away (only one person left); receive pension and social security benefits; income not as high as in empty nest, but not as poor either - Social class bigger groups than family and reference group; some people are above/below others; social class is not related to income class people in lower-upper class make more money than upper-upper class, but are not seen with same level of respect/admiration as the class above them have money but not status; what matters most is where money comes from each occupation and social class has different interests and lifecycles social class impacts your behavior and consumption to some extent o Upper class Upper-upper socially prominent families that have money from a long time ago (e.g. Rockefellers, Kennedys) Lower-upper newly rich; new money; first generation of wealth; well-known but not exactly accepted into high society feel need to publicly display wealth conspicuous consumption in order to gain acceptance (e.g. businessmen, CEOs) o Middle class Upper-middle successful, but not as rich as those in lower-upper class; professionals and managers (e.g. professors, engineers) Lower-middle non-managerial white collar workers (e.g. staff, secretaries) o Lower class Upper-lower semi-skilled blue collar workers (e.g. plumbers, electricians) Lower-lower unskilled workers; least educated; if economy is bad, they are the first to be laid off - Culture something you learn and acquire; not innate (born with)

Subculture within the large culture you have smaller groups of people that have something in common with the large culture, but also have a unique characteristic with a smaller group (e.g. America is a culture, Hispanic is a subculture) Social biology genetics (inherited genes from parents, nut not really automatic)

IMPORTANCE OF INTERNATIONAL MARKETING - Overseas growth if you want to survive, you must continue growing; U.S. market is not growing fast anymore (saturated in terms of fast food and soda, e.g. Coca Cola) - Consumer welfare international marketing makes people better off because they have more product choices for better prices/deals o More people = more ideas = more innovative products o Big market = economies of scale production scale increases as you produce more o International labor force = cheap labor overseas = more production = lower prices - Understanding of marketing process should focus on other international countries/markets, not just ourselves; U.S. market is the exception, not the norm INTERNATIONAL MARKET ENTRY STRATEGIES - Deciding which strategy to use (direct versus indirect) depends on the risk, profit, reward - Exporting manufacture product at home then send/sell to other countries; low risk = low profit o Simple and easy no need to establish label/reputation or build new production facilities o Countries like to export not import market entry is difficult (must overcome international boundaries to introduce your product in the international market) - Licensing/franchising give license to a local company to use your intellectual property (trademark, patent, trade secret) and produce the product for you; low risk = low profit o Less risk do not need new equipment or plants; no losses on your part o Low profit only collect the licensing fee because local company keeps most of the profit o Low cost do not produce anything; no transportation cost, tariffs (export tax) o Quick expansion local company has better chance of marketing the product - FDI (Foreign Direct Investment) go to the country with capital (lands/buildings) to set up factory and produce the product locally; popular today; high risk = higher profit o Sole venture you are the only one operating the business; provide the finances and investments high risk, but you keep all earnings (high profit) o Joint venture split the costs and investments with a partner; minimizes your risk; using a local partner helps you maintain a good relationship with the local government lower risk, lower profit; split control and profit with your partner INTERNATIONAL MARKETING MIX STRATEGIES - Standardization continue the product/concept you have been using at home o Similar to mass marketing (one marketing mix); assumes homogeneous market o Force other cultures to adapt to your marketing mix o Efficient but not effective does not maximize consumer happiness/satisfaction - Localization adapt/localize marketing mix to satisfy the local market; change advertising/prices o Similar to market segmentation (separate marketing mix for each subgroup) o Assumes heterogeneous market (income level, culture, language, history) people are not alike and you cannot satisfy everyone in the same way o Effective but not efficient costly (production costs) CULTURE - Broad term; anything you pass from one generation to another (e.g. language, customs) - Characteristics of culture: prescriptive, learned, subjective, enduring but dynamic

o Prescriptive culture prescribes the acceptable behavior in society; the social norm that people will adhere to o Learned humans are not born with culture; it is learned/acquired from people around you; social, not biological o Subjective not objective like science; highly subjective because people have differing opinions/views on certain issues; culture is arbitrary o Enduring but dynamic culture can last for decades (follow/practice same traditions), but can also change (adapts to new technology and innovations) Culture affects how you communicate with people around you nonverbal/verbal communication (e.g. language, eye contact in U.S. versus Asian culture) Culture affects consumption (e.g. food) o Determines what kind of meat is acceptable to eat in culture certain ethnic foods that used to be limited to one ethnicity are not broadened and adapted into American culture o Beef Americans love steak; Hindus view cows as sacred and do not eat beef Subculture different countries have geographic areas and ethnic groups; they hold something in common with overall society but also have something unique of their own o Ethnicity is not the only way to classify people into subculture o Many demographic variables to define subculture geography (North/South), age (slang)