Session I (November 24,2007)

Evolution of marketing from Production Era to relationship Era,

Marketing Concepts, Customer Value and Satisfaction
Marketing Environment analysis

Session II (November 24,2007)

Introduction to the Elements of Marketing Mix

Product classification
Understanding Consumer Behaviour

Session IV (November 25,2007)

Product Life Cycle Strategy(managing a growing product )

Product Life Cycle Strategy(managing a dying brand)

Session V(November25,2007)

Corporate Planning, Business Planning & Strategies Marketing Planning

including BCG, GE & Ansoff Models.
Case study

New Product Development Process

Session VI

Product Product mix ,line length and width

Pricing methods and factors
Promotion and communication mix
Distribution

Session VII

Students presentation
DEVELOPING A NEW PRODUCT

New product planning has been defined by the American Marketing

Association as "the act of making out and supervising the search,
screening, development and commercialization of new products; the
modification of existing lines; and the discontinuance of marginal or
unprofitable items". Simply stated, product planning decides the
nature and other related aspects of the articles produced and sold.
Product development is a more limited term but includes the technical
activities of product research, engineering and design. Product
planning and development is the result of the co-ordinated efforts of
large number of specialists - engineers, scientists, marketers, etc.
Product planning is usually described as 'Merchandising' and it covers
both, the existing and potential products. This activity, therefore, must
deal with the proper balance between the old and the new products.

New product planning is a very long and complex process, and it deals
with changes in :

1. The kinds of goods or services offered by a marketer for various

segments.
2. The number or kinds of products, or different lines, that the
company offers in various segments.
3. The width of product line offered.
4. The quality levels or levels acceptable to various classes of
consumers in various target markets.
5. The degree of distinctiveness.
6. Increased societal and governmental constraints.
7. The growing shortage of new product ideas in certain areas.
8. Shorter time spans between the emergence of the idea and the
physical launch of the product.
9. The costliness of the new product development process.

The following decisions are important in new product planning :

1. Improving the existing product lines and services,

2. Weeding out unprofitable items in the product line (simplification),
3. Expansion of the current product line (diversification),
4. New product development for the present customers, and
5. New product development for new customers (diversified products).

THE ROLE OF NEW PRODUCT DEVELOPMENT

Whatever may be the size and nature of operations of a firm, product
planning and development is necessary for its survival and growth in
the long-run. Every product has a life cycle and it becomes obsolete
after the completion of its life-cycle. Therefore, it is essential to
develop new products and alter or improve the existing ones to meet
the often-changing requirements of customers. The role of new
product development can be stated in terms of :
1. Ensuring that the product mix, matches changing environmental
conditions and that product obsolescence is avoided.
2. Enabling the marketer to compete in new and developing segments
of the market.
3. Reducing the marketer's dependence upon particular elements of
the product range or vulnerable market segments.
4. Filling excess capacity.
5. Achieving greater long-term growth and profit.

Introducing new product is rather difficult as it involves long-range

planning. Customers' need should be identified, competing and
substitute products should be evaluated and, above all, the strength of
the company should be examined before deciding to produce a new
product. Product failure defeats the very objectives of a firm. In a
survey conducted by Booze, Allen and Hamilton, it was revealed that
firms with well-organized product planning programmes have only 40-
50 percent product failures. When this percentage is compared with
the overall industry product failures (80 percent), one could easily be
convinced of the need for product planning.

STEPS IN NEW PRODUCT DEVELOPMENT

The following are the usual steps involved in the planning of new
products :

1. Idea generation,
2. Screening the ideas,
3. Business analysis,
4. Developing the product, and
5. Testing the product and commercialization of the product.

1. Idea Generation Stage

The first stage of the new product's evolution begins with an idea
for the product. Hence this stage is also termed as 'Idea
Generation'. Ideas may originate from the following sources :

- Marketing research,
- Distributors,
 - Competitors, and
- Professional inventors.

All the ideas may not have immediate market potential. At the
same time, a firm must always keep a collection of ideas ready in
stock, because the creation of new products is a condition for
survival in many industries. The specific activities performed in this
stage are :

A. Determining the product lines and ranges of interest to the

company,
B. Establishing a programme for planned idea generation, and
C. Collecting ideas through an organized network.

2. Screening the Ideas

At this stage, the ideas collected are scrutinized to eliminate those

inconsistent with the product policies and objectives of the firm.
Some ideas may already be protected by patents and some others
may not be it, for consideration because of the non-availability of
raw materials for production. Thus, most of the ideas screened
need not essentially be good. They may be further subjected to a
more detailed examination. The main intention of this phase is only
to eliminate unsuitable ideas as quickly as possible. The procedure
adopted includes :

A. Expanding each idea into full product concept and service,

B. Collecting facts and figures to decide whether the product idea
could be converted into a business proposition, and
C. Assessing each idea for its potential value to the company and
its impact on the overall profitability.

3. Business Analysis

It is a continuation phase of the above. At this stage, the product

features are analyzed and a rough programme for its development
is finalized. This stage emphasizes :

A. Further study on each idea in a detailed manner with

competitors' analysis.
B. Determining the desirable market features for the product and
its feasibility.
C. Developing specifications and establishing a definite programme
for the product.

4. Developing the Product

 During this stage, the 'idea-on-the-paper' is turned into a 'product-
on-hand'. In other words, the idea is converted into a product that
is productable and demonstrable. This stage is also termed as
'Technical Development'. It is during this period that all
developments of the product, from idea to final physical form, take
place.

The final decision whether a product should be developed on a

commercial scale or not is decided at this stage because the time-
lag required to attain this stage is a long one and it is possible that
some adverse developments might have taken place during this
period. Once the management decides to go ahead with the
product idea, the following activities are undertaken :

A. Establishing development projects for each product.

B. Building the product with the changed specifications, if
necessary, and
C. Completing laboratory evaluation and sending the product for
testing and then launching.

5. Testing the Product

It is at the stage of testing that one could testify the accuracy of the
information on the basis of which various stages were completed.
These commercial experiments are necessary to verify earlier
business judgements. Thus, the object of this stage is basically to
assess whether the product meets the technical and commercial
objectives at various levels in order to ascertain the product
acceptability. There are three types of tests usually conducted :

A. Concept Testing,
B. Product Testing, and
C. Test Marketing

Concept Testing

This is concerned with measuring customer reactions to the idea or

concept of a product. In fact, it is a kind of research in which the
product idea is screened before any money, time or labour are
committed to making the prototype products. The idea of a product
with as many details as possible is made known to the customers
either verbally or through the use of suitable blue prints. The
response of the customers is checked and only if it is found
encouraging, then the development of product prototype is taken
up. For instance, when the rest of the world had largely gone in for
synthetic detergent in the powder form, it was decided by the
Hindustan Lever Limited to test a detergent bar as a concept,
because in India most people do not use washing machines or even
buckets and are accustomed to using a bar to rub on the fabric.

Concept testing can tell whether the product is likely to be a

success or not. To achieve better results, however, the product
concept should include the finished product itself with all details,
viz. packaging, price range, the brand name, etc. On the basis of
these details, interviews are conducted to collect the opinion of the
would-be purchasers.

The major advantage of concept testing is that the management

could form early judgements on the likelihood of the market success
of the new ideas. The other objectives of concept testing could be :

A. To evaluate the relative merits of several new product proposals,

B. To determine whether the product idea is to be abandoned or
modified.
C. To determine the size of the potential market, and
D. To guide the management to adopt suitable marketing policies in
advance.

Concept testing has the following limitations or drawbacks : It

entails some risk of disclosing the company plans to competitors.
There is time-lag in obtaining and assessing the results.
Respondents may overstate their interest and encourage unsound
development. The validity of any measure of potential market size
obtained through early stage concept testing may often be dubious.
Findings may also be misleading if the test is not carried out
properly.

Product Testing

Once the concept test of the product is successful, the next step is
to put the real product into a few selected markets. This test will
prove whether the product performs as expected or whether it lives
up to the promise of the concept. Such a test enables the
management to pick out the likes and dislikes of the consumers
towards the product. It also gives an opportunity to the buyers to
compare the product with the competitive products.

The objectives of product testing are :

A. To assess proper product performance,

B. To minimize the risks attached to full-scale launching of a new
product,
C. To identify the most productive market segments, and
D. To collect necessary data about the responsiveness of the
customers.

However, this is not a foolproof system for predicting the future. It

cannot help to forecast the market size, sales volume, brand share,
repeat buying, etc. Correct pricing can also be assessed.

Test Marketing

Even the most favourable results from the two tests mentioned
above are not a conclusive evidence for the success of a new
product. For instance, even where the product is seen to possess a
high quality, market failure is still a possibility if other important
factors in the marketing mix show weakness. It is, therefore, logical
to examine how the company's total marketing mix may be tested
by conducting test marketing. Under test marketing, the product is
introduced in selected areas often at different prices in different
areas. These tests would provide the management, an idea of the
amount and elasticity of the demand for the product, the
competition it is likely to face, and the expected sales volume and
profits it might yield at different prices. Experience shows that the
chances of a new product being successful are 'significantly greater'
if it is first put into a controlled test market where it is exposed to
realistic competitive conditions.

The objectives of test marketing are :

A. To evaluate a complete marketing plan including advertising,

distribution, sales, pricing, etc.
B. To determine the promotional media mix, channels, etc., and
C. To forecast the likely sales volume.

Though test marketing has definite advantages, there are some

limitations as well :

A. Competitors' response and their defensive action may not allow

test marketing to provide a conclusive result.
B. Test marketing is a costly affair.
C. It is a time-consuming method. Many firms avoid test marketing
since they wish to be "the first in the market".

Though test marketing is not a perfect simulation of full-scale

production and distribution, yet it may provide very useful
information for better planning of the full-scale effort. It also
permits initial pricing mistakes to be made on a small rather than
on a large scale. "Test marketing does not eliminate risks, it only
improves knowledge, and reduces chances of expensive mistakes."
Therefore, most firms do resort to test marketing. For example, Liril
Soap, introduced by Hindustan Lever Limited, was originally tested
in two towns (Hyderabad and Lucknow). These towns were selected
because of their different characteristics, which make them
representative of a large spectrum of towns in India. The product
was distributed in all normal outlets, in the whole town and
supported by advertising to inform the improvements which were
successfully incorporated before the product was nationally
extended.

To make test marketing more fruitful, a 'post-launching' survey

should be conducted. The survey will reveal whether the earlier
satisfaction continues to be derived, whether people like the
product and make re-purchase, whether the advertising is
appealing, etc. On the basis of the findings, changes will have to be
incorporated before the product is finally launched in the market.

The following procedures may be adopted for test marketing :

1. For determining the number of cities, the two factors which must
be considered are :

i. representatives, and
ii. the cost of marketing

2. For selection of cities, they must essentially possess the

following characteristics :

i. Average competition,
ii. Presence of chain and departmental stores,
iii. Existence of various types of basic industries, and
iv. Optimum size of population.

3. The duration of testing - it depends upon the following factors :

i. Average purchase period

ii. The competitive situation, and
iii. Cost of testing.

4. Collection of necessary information - It is important to collect the

necessary information with respect to the nature of the product,
 the nature of customers, channels of distribution, buyers'
behaviour, etc.

5. Launching of the new product

Commercialization

In this stage, the product is submitted to the market, and thus,

commences its life-cycle. Commercialization is also the phase
where marketing is most active in connection with the new product.
This stage is considered to be a critical one, for any new product
and should, therefore, be handled carefully. For instance, it should
be checked whether advertising and personal selling have been
done effectively and whether proper outlets have been arranged for
the distribution. Despite the care with which the previous
development stages have been planned, unforeseen events can
impair commercialization seriously. The following activities are
usually undertaken during this stage :

1. Completing final plans for production and marketing,

2. Initiating co-ordinated production and selling programmes, and
3. Checking results at regular intervals.

It should be remembered that new products should be launched in

the market only stage-by-stage. In other words, introduction may
be restricted to a few regions in the first instance. This is to avoid
short-supply of the product due to initial gaps in production and
distribution. It is not prudent to extend a product nationally and
then not be able to meet demand or to come across some
unexpected deficiency. 'Gold Café' was heavily advertised
nationally in 1987 but it was not available at retail stores.

All the stage explained above stress the fact that the development
of a new product must pass through certain logical stages.
Innovation is necessarily an orderly and predictable process and
could be performed only in a sequence. For example,
commercialization cannot precede the development stage of a
product.

PRODUCT-LINE COVERAGE

The need for multiple products. The need for multiple products can
best be described in the words of Nickerson, who has compared the
product range of a company with a family in which all children are not
born with the same facility and aptitude. In the range of products
(strong brothers) help less profit-intensive products (weak sisters) to
survive and yet enable the company to earn a reasonable return on its
total investment consistent with the risk involved.

With the passage of time, a company may find it difficult to maintain

profitability with the existing range of products. A change in the
product-mix may very often help overcome the situation. In fact, a
change in the product-mix is one way of profit improvement.

The important data to help managerial decisions regarding changes in

product-mix are :

a. Detailed cost data relating to each product in the product-line.

b. Profitability and the contribution of each product.
c. Product-wise plant capacity and the alternative uses to which it
could be put in case a change in the product-mix is envisaged.
d. Product-wise demand - present and potential.
e. Prevailing market prices for similar products and the marketing
strategies adopted to promote their sales.

ADDING A NEW PRODUCT

Excess Capacity as a Reason for Expanding Product-line

The presence of excess production capacity is, perhaps, the most

important single factor leading to product-line diversification. Broadly
conceived, excess capacity is said to exist when it would cost the
multiple-product firm less to make and sell the new product than it
would cost a new company set up to produce only that product.

Excess capacity may occur for several reasons. It may be the result of
an unduly over-optimistic estimated market for the firm's products. In
such a case, if anticipated level of demand is not forthcoming, the firm
develops excess capacity.

Excess capacity may be due to seasonal variations in demand also, the

latter being a result of weather and custom, e.g., greeting cards, ice-
cream, etc. Companies faced with seasonal demand for their products
would certainly find it advisable to add to their product-line in off-
season a new product to make up for the loss because of idle capacity.
OCM, manufacturers of carpets, have taken up the manufacture of
synthetic fibre fabrics to avoid the disadvantage of seasonal sales of
worsted woollen fabrics.

Over-capacity may further be caused by cyclical fluctuations in sales.

Excess capacity may result from secular shifts in markets, tastes,
buying habits, etc., leaving the firm with underutilized capacity and
know-how. TISCO management was fully aware of the vulnerability of
the steel industry to business cycles. With this in view, the company
promoted a large number of industries in and around Jamshedpur with
a view to disposing of most of its steel at the minimum cost. In this
process, a number of companies including India Tube Company, Tata
Robins Fraser, TELCO and Tinplate Co. were established.

Finally, the existence of an excess capacity may be the result of

vertical integration. The reasons for vertical integration may, however,
be many. The most obvious reason is to get a strategic market
advantage. There may be an economic motive to integrate if fuller
utilization of plant capacity or managerial, marketing and research
capacities leads to lower production costs. Moreover, a purchasing
firm can supply its own needs of raw materials and semi-finished
components more economically through integration than by directly
purchasing them from the market. Sometimes, a firm may have to pay
lower prices if it purchases two or more products simultaneously.
Vertical integration makes this possible.

To utilize unused capacity, some units in the public sector have also
added to their product lines. The Mining and Allied Machinery
Corporation (MAMC), manufacturers of coal-mining equipment, have
taken up manufacture of earth-moving equipment and washeries for
the coal industry. Jessops, manufacturers of rail wagons, have added
specialized cranes in their product-line. West Bengal Scooters has
diversified into steel rolling.

Profit as Criterion of Optimum Product-line

Granted that there are sufficiently strong pressures on the part of the
firm to diversify its product line, the question is : what are the goals
sought to be achieved by the firm in increasing its product-line? In the
long-run, profit maximization may be the objective of optimum
product-line. In the short-run, however, income stability may be the
more important goal. Other short-run objectives are continued
existence of the firm, market share, volume growth, comfortable cash
reserves, cordial labour relations, etc. Even these objectives, however,
may merge with the long-run objective of the profit maximization.
Thus, profitability is the crucial test of adding to the product-line.

In fact, the decision about adding a new product is not different from
other managerial decisions. Incremental costs of adding the product
are to be compared with incremental returns. If the net return is more
than the returns provided by alternative investment opportunities, a
product may be added to the product-line, a forecast of the demand
for that product and the costs involved in the addition will have to be
made.

Diversification as Response to Change

Many companies find it profitable to diversity and add to their product-

line in response to change. Changes may occur in the demand for
their products, in the scope for further expansion or in the overall
economic, political or social environment in which the company
operates. Hindustan Lever started in the 18th century as a sales
organization and became a marketing company early in the 19 th
century. By 1930, it commenced manufacturing vanaspati and soaps.
Between mid-fifties and the mid-sixties, it diversified its activities into
synthetic detergents, convenience foods, animal feeds and dairy
products. By the late sixties and early seventies, it was evident to the
company that its future was more secure with further diversification
into the 'core sector'.

Facit India, manufacturers of adding machines and calculators, sensed

in time, that its market domination for these products is likely to be
eroded by electronic substitutes. Hence it took up the manufacture of
typewriters. It was easier to switch over to the production of
typewriters as some production techniques were overlapping. Due to
the prohibition policy of the Government, Mohan Meakins, brewers and
distillers, have taken to cement, steel products, dyes and chemicals,
hotels and packaging machinery.

Due to oil price hike and the resultant cost compulsion, Daimler-Benz
that built its reputation on limousines, had to introduce a compact car
for those who want "less the comfortable interior than the exciting
driving experience'. The objective was to lure customers away from
rivals such as BMW, Audi or Opel in Germany.

Diversification as Response to Restrictive Government

Regulations

To avoid the rigours of the various restrictive regulations, many

multinational companies and those belonging to big houses, have
decided to diversify. Associated Cement Companies have diversified
into high technology areas like castable refractories. BASF, German
multinational, has diversified to include leather chemicals in its
product-line because they were compatible with the technological and
marketing expertise of the company.

ITC has added the Marine Foods Division, the Hotels Division and the
General Exports Division to its traditional tobacco and cigarette
operations. It also promoted a paperboard project, as a separate
company.

The steadily increasing taxes and duties on major packaging raw

materials and the reservation of much of the packaging industry for
the small-scale sector, have led Metal Box to diversity into
manufacture of a variety of engineering products like off-set printing
machinery and automobile bearings.

Other Considerations

a. A company may take advantage of its own strong points, e.g.

sound distribution network. WIMCO's diversification into processed
food industry is an example of this type. Crompton Greaves took up
TVs because their household products, lights and fans, had given
them a lot of goodwill.

b. A company may look for backward or forward integration and

diversify into allied lines. OCM, manufacturer of woollen carpets
and worsted woollen fabrics, went in for production of synthetic
fibre fabrics. This also reduced the company's dependence on
seasonal products.

c. A company may go into totally unrelated products (i) because of

incentives given by the Government for the growth of a particular
industry or a region, or (ii) to provide a hedge against business
cycles and recession. Brooke Bond diversified rapidly into non-
beverage lines. Shriram Fabrics is taking up manufacture of auto-
ancillaries because of DCM-Toyota tie-up.

In product-line decisions, the management should also keep in view,

the following points:

1. The management should not introduce a new product if an

even better new product is available. Before taking a final decision,
all the available opportunities and alternatives should be explored
and examined and the best one chosen. In other words, the
opportunity costs of alternative uses of excess capacity must be
estimated.

2. The management should also appraise the impact of the new

product on the products already manufactured. If the product
complements the product-line, it will increase the sales of other
products. In such a case, the contribution to overheads and profits
by introducing the new product will be greater than the direct
 contribution of the product itself. If, however, the product competes
with existing items of the product-line, the contribution estimates
will have to be adjusted downward.

3. If the excess capacity is temporary, management must look

whether the product can be abandoned when demand for other
products recovers. For it may well be preferable to accept
temporary excess capacity than to create production bottlenecks
when the excess disappears.

4. Management must examine whether it has the requisite

know-how to produce and sell the product.

FACTORS DETERMINING THE SCOPE OF PRODUCT-LINE

The extent to which a company can add new products is not unlimited.
Very often, the scope for having new products is in some way related
to the existing conditions of the firm. The goods may be :

1. cost related
2. demand related
3. advertisement and distribution related
4. research related, and
5. raw materials related

1. Cost Related Goods

A company may decide to add a product which may be the result of

a common production process. For example, a company which
strikes oil may decide to produce petrol or mobil oil, kerosene, gas,
wax, etc. A company producing sugar may decide to produce
molasses.

2. Demand Related Goods

A firm may decide to add a product which is jointly demanded. For

example, manufacturers of Sulekha Ink have gone in for production
of other related items of stationery like sealing wax. Food
Specialities Ltd. added Maggi to their various food products.
Weston Electronics, manufacturers of tape recorders, colour TV
sets, two-in-ones, calculators, video games, audio duplicating
machines, video tapes and cassettes. They plan to enter into
medical electronics (e.g. blood pressure instruments).
 Sometimes, a firm having earned reputation for its products may
like to add to its product-line in the hope that people will continue to
patronize its goods because of the reputation established by it. For
example, Hindustan Lever Ltd., manufacturers of Dalda, went into
production of dehydrated vegetables, pure ghee and mustard oil in
the hope that consumers who are after quality will purchase ghee,
oil and other products manufactured by them.

Sometimes, manufacturers of quality products may add to their

product-line to utilize raw materials found sub-standard for their
quality product. While the quality product is sold under the
company's brand name to attract quality customers, the inferior
product may be sold under a different brand name without
emphasizing the name of the manufacturers. Production of
different brands of goods by the same manufacturer may be the
result of a number of factors : (i) Merger or amalgamation of firms
producing the same goods but under different brand names - the
different brand names may be retained to retain customer loyalty.
(ii) Known consumer preferences for different varieties - here the
firm may like to cater to the requirements of most of the customers
by producing different varieties according to the demand of the
customers. (iii) The keenness of the firm to cater to the
requirements of the customers who are choosy and want wide
variety of goods to select from. Some brand variety may appeal to
one class; the other variety to some others. Advertisement efforts
may also be geared accordingly, to appeal to different types of
customers. (iv) To retain dealer loyalty, a firm may produce goods
of different brands, though more or less of the same quality, one
brand being sold through exclusive dealers and the other one being
sold to all other dealers. Bata produces two types of goods : one
under the brand name of Bata to be sold exclusively at Bata shops,
the other BSC (standing for Bata Shoe Company) for distribution
through other dealers.

3. Commodities Related in Advertising and Distribution

Frequently, firms may find it advantageous to handle multiple

products because they are related in advertising or distribution. For
example, a number of travel goods can be conveniently advertised
together, say, holdalls, suitcases, etc. Likewise, one salesman can
conveniently sell tea, coffee, Bournvita, etc.

4. Commodities Related in Research

 Common research facilities may enable a company to produce an
additional product or commodity.

5. Common Raw Materials

Companies often decide to add products using the same raw

materials or its by-products. Sometimes, the basic source of raw
materials may be controlled by the companies and this also helps in
the addition of a particular product.

NEED FOR MARKET RESEARCH FOR PRODUCT ADDITION

If decisions regarding product addition are taken without adequate

planning, i.e. without adequate forecasting and market research, the
added product may turn out to be a money loser rather than a money-
spinner. It may be useful to cite here, the example of the introduction
of HIMA brand of packaged convenience goods by Hindustan Lever Ltd.
The products failed because of lack of demand forecasting and market
research. The launch of these products did not take into account, the
peculiar sociological features of the Indian consumer. The Indian
consumer, particularly the Indian housewife, perceived very little need
for such conveniences because of the following factors :

i. General preference for fresh foods in India.

ii. Easy availability of fresh foods in India unlike the West.
iii. High retail prices due to (a) avoidable packaging, and (b) lack of
economies of scale.
iv. Widely spread-out market segments posing distribution
problems, and
v. Diversified food tastes in India.

It may be noted that other companies in packaged foods industry like

Kissan and Dipy's have a small but established market constituting
bulk sale to hotels, restaurants and canteens. There is not much
demand for their products in the household sector due to high prices.

Very often a company may introduce a new, improved product to

justify a higher price tag. Very often this is done by changing its
composition. However, it should be after thorough research through
personal discussion with the consumers. If a change is made without
thorough research a lot of unnecessary and avoidable expenditure
would have to be incurred. Recently, Nestlé changed the composition
of its Maggi Noodles. Children who are the core customers for the
product did not like the taste of the improved (?) noodles. Nestlé had
to return to the original composition and is now spending a lot on
advertising to emphasize that everything is as before ----
Something similar was done by Coca-Cola in America in 1985 by
introducing New Coke. Americans did not like the taste of the new
coke. As a result the company had to revert to its original composition.

Marketers would be well-advised to take a more active role in finding

out what their customers want. Everytime they talk to their
customers, they would be more knowledgeable and get away smarter.

IMPROVE, BUY OR DROP A PRODUCT

If a product is not showing profitable performance, the company may

consider one of the alternatives, viz., improve, buy or drop the product.

Improve

If the firm continues to make the product, it may be required to make

improvement in its production or distribution so as to yield adequate
return. Improvement may mean re-designing the product or producing
it at a lower cost. Product improvement is particularly necessary when
the existing product has become apparently obsolete or out of fashion.
Indian companies need to continuously upgrade their products and
technology to withstand the pace of change in their business
environment and to meet the challenges thrown up by the emergence
of a buyer' market. Product improvement is very important in durable
goods, for example, automobiles, refrigerators, etc. This explains the
development of a camera with a built-in coupled exposure meter,
which proved to be a more saleable product than a camera with a
conventional exposure meter fitted to the outside case.

Adapt

Multinationals operating in India have found it necessary to adapt the

product to Indian tastes or to suit to Indian psyche. McDonald has
introduced McAloo tikki burger and vegetable nuggets. During
Navratras, they serve only vegetable stuff. The Pilsbury chakki-fresh
atta proposition illustrates the desi bug that has bitten the big white
man on the prowl in Indian markets. They have realized that not only
have the products to be tailor-made for local requirements with
modifications that may be necessary, but the entire tone and tenor of
the marketing mix seeks a distinct Indian identity. Harish Bijoor
columnist has termed it as a Desi Customisation.

Buy
A decision to buy the product rather than improve it, may be
appropriate where the ailing product makes positive strategic or
merchandising contribution. Buying the product is possible only if the
supplying firm can provide the product in sufficient volume and at
sufficiently low costs.

In general, buying instead of making and improving, gives a firm

certain flexibility, i.e. it can shop around and buy from the most
economical source. It can also change its quality standards, if
necessary. Further, buying gives the company the advantages of the
supplying firm's specialization and large-scale production.
For the buying firm, however, this decision may have the following
consequences :

1. It makes the firm dependent upon others, which may be a

disadvantage if the supply of the product is not assured and
continuous.
2. If the supplying firm is part of an oligopolistic industry, its pricing
practices may be erratic enough complicate profit, cost and sales
planning by the buying company.

Drop

A planned and systematic product elimination programme may

contribute substantially to the firm's profitability and future growth.
Profits can be enhanced by eliminating certain costs associated with
products in the later stages of their life as well as by increasing the
productivity of the resources released from the older products.

Very often product elimination is avoided out of sentiment and blinkers

are developed in connection with products, which have been in the
company's line of products for a large number of years. However,
deletion of products is as important a consideration as introduction of
new products. A sick product generally loses its market appeal. It
requires a disproportionately larger amount of executive time merely
to prop up the marginal product. Further, continuation of sick products
would affect a company's profitability. Also such product may even
spoil the company's reputation if they are unsuitable to the consumers.
Besides, capital is tied up in such a sick product which could be
released for more profitable products. Finally, if resources are scarce,
the company can ill-afford sick products in the product-mix. A
systematic approach is, therefore, required for considering the
question of elimination of marginal or unprofitable products. It is also
essential to first assign definite responsibility for selecting products
which are to be considered for elimination. The next step would be to
collect the necessary information and analyze it so that a final decision
can be taken regarding elimination.

There are certain indicators, which suggest a careful analysis to

determine whether or not to eliminate a particular product. These
include the following :

1. Reduction in product effectiveness;

2. Emergence of a superior substitute product;
3. Use of disproportionate executive time;
4. Declining sales trend
5. Decreasing price; and
6. Downward profit trend.

These indicators can help management to identify products which

should be considered for deletion. An analysis may, however, result in
a decision not to eliminate but may suggest further improvements in
the products.

Let us now consider these indicators in some detail. Over a period of

time, certain products lose their effectiveness for providing the
benefits for which they were produced originally. This particularly
happens in the case of pharmaceutical products and certain drugs may
have to be eliminated or substituted by other drugs. Where a
substitute product emerges which is a considerable improvement on
the old product, management must consider this seriously even though
the substitute product had been introduced by a competitor. A study
of the executive time devoted to various products in the product-mix
can highlight the product taking excessive time which may be due to
the product being sick. However, this must be distinguished form the
growing pains of a new product. A declining sales trend over a
reasonably long time period would require a careful analysis of the
product concerned. Similarly, decreasing price trend might indicate
that obsolescence state cannot be warded off much further.

A downward profit trend is a powerful indicator. The company may

even work out a practical minimum profit standard for each of its
products. However, all products need not show a profit, as at times a
product is included to provide a "full line" for the customers. If the
dropping of such a product forces the customer to purchase from
another supplier products, which constitute a profitable group of the
company, then elimination may not be justified. Again the declining
trend in profits can be arrested by other tactics such as analyzing
possible reductions in production costs, the use of more effective
marketing and even by increasing the marketing expense provided the
increased sale and profitability are greater than the extra marketing
expense involved. The decision to drop the product entirely, is
warranted if its long-run net profit is below what would be attained
from an alternative product using the same resources. In the long-run,
there may be new products which would produce a greater
contribution to overheads than the old product.

The Electronics Corporation of India Ltd. decided to suspend production

of certain microwave equipment on the ground of unremunerative
price, low demand, obsolete technology and stiff competition from
small-scale units. The Gramophone Company decided to phase out
gradually, the manufacture of consumer electronic products like
stereos and record players, as a part of re-adjustment and re-
alignment of operations. ICI in the UK, decided to close two
uneconomic plants and withdraw several unprofitable products in its
synthetic fibres division to reduce losses.

CONSUMER ADOPTION PROCESS

In the process of new product development, a large number of factors

are examined to know the reaction of consumers regarding adoption of
a new product. The process of accepting new product idea is known as
diffusion process. Diffusion is the process by which the acceptance of
an innovation (a new product, a new service, new ideas or new
practice) is spread by communication (mass media, sales people or
informal conversations) to members of the social systems.

Elements of diffusion process

1. The innovation
2. The channels of
communication
3. The social system

DIFFUSION OF INNOVATIONS

According to Rogers, the diffusion of innovations is “the process by which an innovation

is communicated through certain channels over time among the members of a social
system.”To understand that definition you must first understand some key
terms.Innovation is used more generally here to mean an item, thought, or process that is
new.Good examples of innovation would be automobiles, brain surgery, and a new kind
of running shoe.It is important to realize that something can be an innovation in one place
and have already been accepted in another.The other key term in the definition is
diffusion.Diffusion is the process by which innovations spread from one locale or one
social group to another.People do not just welcome into their homes every innovation that
is put in front of them.Every person reacts differently in the ways that they hear about,
understand, and finally accept or do not accept an innovation.Before we dive right into
the process of diffusion of innovations it is important to take a look at where the research
and theories began.
HISTORY
With this huge increase in interest on the subject diffusion research was being
done globally.At this point researchers saw similarities in all of the studies being done in
different fields and realized that it is one basic communication process.With all of this
research going on it made logical sense for marketing agencies to begin their own studies
involving adoption and diffusion of new products.These studies have continued on
through the past few decades answering many questions about the diffusion of innovation
process as well as coming up with new questions to be answered in the future.
ELEMENTS OF DIFFUSION
There are four main elements to the diffusion of innovations: (1) the innovation, (2) its
communication, (3) in a social system, (4) over a period of time.
• Innovation – any item, thought, or process that is viewed to be new by the
consumer
• Communication – the process of the new idea traveling from one person to
another or from one channel to the individual.
• Social System – the group of individuals that together complete a specific
goal (adoption)
• Time – how long it takes for the group to adopt an innovation as well as the
rate of adoption for individual
Innovation
When studying the diffusion of innovations it is important to understand that you
are not just looking at the spread of an innovation through a society but rather the spread
of different kinds of innovations through a society.As stated earlier, an innovation is an
item, thought, or process that is new to a certain area but not necessarily to the
world.There are three main types of innovations that are diffused in different ways.

• Continuous Innovation
This type of innovation is a simple changing or improving of an already existing
product where the adopter still uses the product in the same fashion as they had
before.An example of a continuous innovation is now seen in the automobile
industry as it continues to change and develop.
• Dynamically Continuous Innovation
Here the innovation can either be a creation of a new product or a radical change
to an existing one.Here the consumption patterns of people are altered some.An
example of this type of innovation would be compact discs.
• Discontinuous Innovation
This is a totally new product in the market.This is the big idea innovation.In this
situation, because the product has never been seen before, there are total changes
to consumers buying and using patterns.

After discussing the three types of innovations natural progression moves us straight to
the next topic of the five different characteristics if innovations. Each characteristic effect
the rate of adoption of a innovation differently. Like a lot of things in life, the innovation
does not have to be better or easier to use than the product it is competing with but only
be perceived to be better or easier to use by the consumer. This idea of perception is
stronger than information is seen throughout the advertising world.
• Relative Advantage
This characteristic expresses to what extent the new product is better than the one
it is replacing. Of course the first thought would be greater profit potential.
Although profit does fit into the equation, relative advantage can be judged on
other factors like ease of use and storage as well .
• Compatibility
No matter how superior or efficient an innovation is it will not be successful if it
does not take into consideration local values and customs of the adopters.
Compatibility is the level of which an innovation fits into the specific society. The
smoother the innovation fits into the culture, the faster the rate of adoption. The
diffusion of certain types of birth control pills in certain areas is unattainable due
to religious beliefs and cultural values.
• Complexity
This type of innovation is the extent of how difficult it is for an adopter to
understand and use an innovation. It is very logical to think that the harder an
innovation is to use, or at least perceived to use, the less likely that an adopter
would be to consume it. A contemporary example would be the Internet.
Although the Internet is easy to use, for someone who has never been on a
computer it is extremely intimidating.
• Divisibility
This refers to the ability of the consumer to give the innovation a test run before
deciding whether to adopt it or not. Being able to try out a product before
purchase helps increase the rate of adoption drastically.
• Communicability
This characteristic is simply stated as the idea that when an innovations benefit
does not directly or immediately solve or fix a consumers problem or need it will
not diffuse through a society as quickly compared to an innovation that is more of
solution to a problem. A fictional example that helps understand this principle
would be a new drug on the market that you would take everyday to ward off
headaches before they come. Although the drug may work, because the results do
not fit into our first problem then solution ideal, it would take more time for it to
be adopted.

It is important to note that these five characteristics are not the only ones that affect the
rate of adoption. Also the adoption of an innovation is not always a positive occurrence.
Over-adoption, where adopters act irrationally without all the information or without full
comprehension of an innovation can actually be harmful to the diffusion process.

PRODUCT PLANNING AND PRODUCT LIFE CYCLE

The consumer moves through five stages in arriving at a decision to
purchase or reject a new product :
i. Awareness
ii. Interest
iii. Evaluation
iv. Trial
v. Adoption (or rejection)

The stages in the adoption process can be described as follows :

1. Awareness : During the first stage of adoption process, consumers

are explained about the product innovation. It gives information
about the new product or service.

2. Interest : When consumers develop an interest in the product or

product category, they search for information about how the
innovation can benefit them.

3. Evaluation : The evaluation stage represents a kind of 'mental

trial' of the product innovation. Only if the consumers' evaluation of
the innovation is satisfactory, will they actually try the product. In
case the evaluation is unsatisfactory, the product is automatically
rejected.

4. Trial : At this stage, consumers use the product on a limited basis.

Their experience with the product provides them with the critical
information that they need to adopt or reject it.
Ap
rop
ose
dmo
difica
tio
ntoth
etria
lad
optio
npro
cess

1. Awareness
6. Rejection

Rejection
2. Interest

Purchase
5. Product
3. Evaluation
Evaluation
4. Trial 7. Adoption

Source: AdaptedfromJohnAntis, NewProduct or ServiceAdoption: Journal of Consumer Market

(Spring1988) .

A PROFILE OF THE CONSUMER INNOVATOR

Who is the consumer innovator? What characteristics set the
innovator apart from later adopters and from those who never
purchase? How can the marketer reach and influence the innovator?
These are key questions for the marketing practitioner about to

The relative importance of different typesof information

sourcesinthe adoptionprocess

High

Personal and inter-

personal sources
Importance

Impersonal mass
media sources

Low
Awareness Interest Evaluation Trial Adoption

introduce a new product or service.

THE LIFE CYCLE OF A PRODUCT

Many products generally have a characteristic known as 'perishable

distinctiveness". This means that a product which is distinct when new
degenerates over the years into a common commodity. The process
by which the distinctiveness gradually disappears as the product
merges with other competitive products, has been rightly termed by
Joel Dean as "the cycle of competitive degeneration". The cycle begins
with the invention of a new product and is often followed by patent
protection, and further development to make it saleable. This is
usually followed by a rapid expansion in its sales as the product gains
market acceptance. Then competitors enter the field with imitation
and rival products and the distinctiveness of the new product starts
diminishing. The speed of degeneration differs from product to
product. While some products fail immediately on birth or a little later,
others may live long enough. BPL's picture in picture TV was
eliminated at the introduction stage itself. The innovation of a new
product and its degeneration into a common product is termed as the
life cycle of a product.

There are five distinct stages in the life cycle of a product as shown
below :
1. Introduction. Research or engineering skill leads to product
development. The product is put on the market; awareness and
acceptance are minimal. There are high promotional costs.
Sometimes a product may generate a new demand, for example,
Maggi. Volume of sales is low and there may be heavy losses.

Sales Volume LIFECYCLEOFAPRODUCT

Introduction Growth Maturity Saturation Decline

2. Growth. The product begins to make rapid sales gains because of

the cumulative effects of introductory promotion, distribution, and
word-of-mouth influence. High and sharply rising profits may be
witnessed. But to sustain growth, consumer satisfaction must be
ensured at this stage.

3. Maturity. Sales growth continues, but at a diminishing rate,

because of the declining number of potential customers who remain
unaware of the product or who have taken no action. Also, the last
of the unsuccessful competing brands will probably withdraw from
the market. For this reason, sales are likely to continue to rise while
the customers for the withdrawn brands are mopped up by the
survivors. There is no improvement in the product but changes in
selling effort are common. Profit margins slip despite rising sales.

4. Saturation. Sales reach and remain on a plateau marked by the

level of replacement demand. There is little additional demand to
be stimulated.

5. Decline. Sales begin to diminish absolutely as the customers begin

to tire of the product and the product is gradually edged out by
better products or substitutes, for example, dial telephones and
petrol jeeps.
There are several reasons why the life-cycle of a product tends to be
short : (a) continuous research for product development, (b)
simultaneous attempts by several companies in the same direction,
and (c) tendency of a new idea to attract competitors. Improvements
offered by one company are likely to be met and, if possible, exceeded
by competitors in a relatively short period. If a competitor hits upon a
real improvement (perhaps based on an entirely new technology) and
he markets it well, both sales and profits of the original technology)
and he markets it well, both sales and profits of the original product
innovator may decline drastically.

It may be noted that products may begin a new cycle or revert to an

early stage as a result of (a) the discovery of new uses, (b) the
appearance of new users, and (c) introduction of new features.

As the distinctiveness of the products fade, the pricing discretion

enjoyed by their producers gradually declines. This is what happened
in the case of many products like ball-point pens, transistors, radios,
etc. Throughout the cycle, changes take place in price and
promotional elasticity of demand as also in the production and
distribution costs of the product. Pricing policy, therefore, must be
adjusted over the various phases of the cycle.

The following table shows the Product Life Cycle and its different
stages and the various characteristics, which they reflect, in the
varying stages.

Marketing strategies which are used at the various stages of PLC as

suggested by Prof. Philip Kotler are :

Product life-cycle concentrates only the life-cycle of a product

beginning with its introduction into the market to the post-marketing
phase. However, a series of processes are to be undertaken by the
management even prior to the introduction of a product in the market.
These processes include exploration, screening, analysis,
development, testing, etc. The concept of product life-cycle may be
used as a managerial tool.

Marketing strategies, however, have to be changed with changes in

the phase of the life-cycle of a product. An understanding of the cycle
is helpful to the managers for a rational understanding of the future
sales activities as also planning of marketing strategies. Hence, PLC is
synonymous with the pattern of demand for a product over time.

The length of time that a product spends at anyone stage varies from
product to product. A product might not pass through every stage in
the cycle. Some products, for instance, might not get past the
introductory stage, while others might not get past the growth or even
the maturity stage. There might be still other products that might pass
through the introduction to maturity stages but might take a longer
period to reach the saturation stage and hence might take a longer
period to reach the decline stage. Some products, for instance, might
not get past the maturity stage. There might be still other products
that might pass through the introduction to maturity stages but might
take a longer period to reach the saturation stage and hence might
take a longer period to reach the decline stage. Some products might
even hustle through the entire cycle in an amazingly short period. In
certain cases, there might even be a repositioning of a product, which
might trigger off a new growth cycle. Repositioning involves changing
basically the image or the perceived uses of a product.

STRATEGIC CONSIDERATIONS IN THE PLC CONCEPT

Competition

At the introductory stage, competition is given no importance. At the

growth stage, it is given a little importance while at the maturity stage,
there are many rivals in the market. Slowly, however, the number of
competitors or rivals get reduced with the declining stage.

Overall Strategic Focus

At the first stage, emphasis is laid on market establishment. At the

growth stage, market penetration and persuasion of mass market are
emphasized. Creation of brand loyalty and brand preferences is
focussed at the maturity stage. At the decline stage, the strategy aims
at overall preparation for renewal.

Profit

At the introductory stage, profits are negligible but at the growth

stage, they reach the peak levels as a result of growing demand. At
the maturity stage, they decline due to the increasing competition. At
the last stage, the declining volume pushes costs up and eliminates
profits.

Distribution Strategies

At the introductory stage, distribution is selective. However, at the

growth and maturity stages, it is intensive. At the decline stage, it
becomes selective and hence low-end strategies are used.
Advertising Strategies

At the introduction stage, advertising strategies aim at the needs of

early adopters; at the growth stage, an attempt is made to make the
mass market aware of brand benefits. At maturity stage, advertising is
used as a vehicle for differentiating among otherwise similar brands.
At the last stage, however, it emphasizes on low price of the product
and minimum advertising expenditure.

To realize how an innovation diffuses through a society you must first understand
how one person adopts an innovation.The adoption process is the steps a consumer
take as they accept a new product, idea, or service.The process can be broken down
into five stages.Keep in mind that these stages occur in all fields where adoption of
innovation occurs.The first stage of the adoption process is awareness.At this stage
the innovation is introduced to the person but there is no true knowledge of the
product.Because of this lack of information the person does not feel the need to run
out and find out more information, much less consider consuming it.The awareness
stage merely sets the groundwork for the following stages.It is argued that a person
often stumbles upon the innovation on accident during the awareness stage it will
provide little incentive to get more information.Others feel that for a person to
become aware, the innovation must fill a particular need in their life for them to
notice.The second stage is interest.Here the person decides to invest time and energy
into finding out more about the innovation.At this point the person feels good about
the innovation but does not really know how or if it can be useful in their own
life.The interest stage is purely to gather knowledge, not to decide whether to
adopt.The third stage is evaluation.Here the person firsts begins to make a decision
about the innovation.How could I use it?Do I really need it?Would it be to my
advantage if I had it?These are all question the consumers ask themselves during the
evaluation stage.Then if the innovation appears to be positive for their life they will
try it out.If the innovation has a negative connotation to the individual they may seek
the advice and knowledge of their peers.This leads into the next stage called the trial
stage.Here the individual physically gives the innovation a chance by trying it out for
a limited basis.What they are looking to find out during this trial stage is how the
innovation can fit into their needs and desires.Research proves that most people will
not adopt an innovation without personally testing it first to see if it really
“works”.The final stage is the adoption stage.Here the individual uses information
that they have gathered in the interest and evaluation stages and with the outcome of
the trial stage decides to adopt the innovation.At this point in the adoption process the
individual not only adopts the innovation but embraces it for the future.There is,
however, another possible stage to adoption process.After the individual adopts the
innovation they may decide to reject it for whatever reason.This decision to reject the
innovation after agreeing to adopt it is called discontinuance.

Adopters
Now it is time to turn our attention to the adopters’ side of the diffusion
process.Although this is not one of the four main elements of the diffusion of
innovation it does have importance to the process.Like the innovations side, there are
certain characteristics that break adopters down into categories, which help us
understand who they are and how they consume.It is very clear that people adopt
innovations at different times and for different reasons.An example of this for
everyone who ever attended high school is fads.Although fads are not necessarily
innovations it is a good example to begin to see the idea of adopters.When a fad starts
to become popular, not everyone is immediately involved.Only a few people adopt
the fad in the beginning.As time goes by, more and more people adopt the fad until
the majority is included.The point to be made with this example is not only do people
adopt a fad at different a time, each group affects the following group.Also it is
important to note that not everyone is involved.Complete adoption is not required for
the diffusion process to work.There are five main categories of adopters.
• Innovators – These are the risk takers.They are the ones who put
themselves up in front.Generally they are well educated and have a high income to
absorb a mistake.They are the smallest in size of only two and half percent.They
enjoy the rush of taking a risk but they also are willing to accept the consequences of
failure.
• Early Adopters – This group are the next thirteen and a half percent.They
are highly educated and wealthy like the innovators but are more visible and
respected among their peers.Early adopters play a key role in the adoption process
determining the time an innovation will be adopted by others and to what
extent.Because of this reason they are the best target market for new innovations.
• Early Majority – They constitute thirty-four percent of adopters.They do
not take the risk of being the first to adopt, like the innovators and early adopters, but
do accept an innovation before the average person.They generally take a long time to
 fully adopt an innovation.They are above average in education and income but are
followers in their social groups.
• Late Majority – They jump on right after the average person.Their
education and income are limited and they are not willing to take a chance unless the
majority has already fully adopted the innovation.Reasons for the late majority to
adopt are either economic or peer pressure but are constantly weary.This group also
contains thirty-four percent.
• Laggards – This is the final adoption group and it consists of the final
sixteen percent.They are more in-tuned with the past than the future.They are
skeptical of all new ideas and frequently by the time they adopt an innovation there is
a new one already beginning to take its place.Their educations are small and generally
laggards are socially surrounded by other laggards.
These five categories have developed through years of research and observation in the
diffusion process in many different fields.Although there are exceptions in each group,
this gives a good general breakdown of adopters of innovations.

THREE LEVELS OF STRATEGY :

SIMILAR COMPONENTS BUT DIFFERENT ISSUES

What is a Strategy?

Although strategy first became a popular business buzzword during the

1960s, it continues to be the subject of widely differing definitions and
interpretations. The following definition, however, captures the
essence of the term :
 A strategy is a fundamental pattern of present and planned
objectives, resource deployments, and interactions of an
organization with markets, competitors, and other environmental
factors.2

Our definition suggests that a strategy should specify (1) what

(objectives to be accomplished), (2) where (on which industries and
product-market to focus), and (3) how opportunities and threats and to
gain a competitive advantage).

The Components of Strategy

A well-developed strategy contains five components or sets of issues :

1. Scope. The scope of an organization refers to the breadth of its

strategic domain - the number and types of industries, product
lines, and market segments it competes in or plans to enter.
Decisions about an organization's strategic scope should reflect
management's view of the firm's purpose or mission. This common
thread among its various activities and product-markets defines the
essential nature of what its business is and what it should be.

2. Goals and objectives. Strategies also should detail desired levels of

accomplishment on or more dimensions of performance - such as
volume growth, profit contribution or return on investment - over-
specified time periods for each of those businesses and product-
markets and for the organization, as a whole.

3. Resource deployments. Every organization has limited financial and

human resources. Formulating a strategy also involves deciding
how those resources are to be obtained and allocated, across
businesses, product-markets, functional departments and activities
within each business or product-market.

4. Identification of a sustainable competitive advantage. One

important part of any strategy is a specification of how the
organization will compete in each business and product-market
within its domain. How can it position itself to develop and sustain
a differential advantage over current and potential competitors? To
answer such questions, managers and examine the market
opportunities in each business and product-market and the
company's distinctive competencies or strengths relative to its
competitors.

5. Synergy. Synergy exists when the firm's businesses, product-

markets, resource deployments, and competencies complement
 and reinforce one another. Synergy enables the total performance
of the related businesses to be greater tan it would otherwise be :
The whole becomes greater than the sum of its parts.

THE HIERARCHY OF STRATEGIS

EXHIBIT - 1.2

THE HIERARCHY OF STRATEGIES

Environmental Corporate
factors mission

Corporate
Strategy

Corporate goals Corporate Deployment

and development of
objectives strategy resources

Strategic
business unit 1 SBU 2 SBU n

Business
Strategy
Deploymentof
Business unit's Competitive resources across
objectives strategy product-markets and
functions

Marketing R&D Human Operations

strategy for strategy resources strategy
product-market and strategy and and
entry X plans plans plans
Functional
Strategy

Tactical marketing
plan for product-
market entry X

Explicitly or implicitly, these five basic dimensions are part of all

strategies. However, rather than a single comprehensive strategy,
most organizations have a hierarchy of interrelated strategies, each
formulated at a different level of the firm. The three major levels of
strategy in most large, multi-product organizations are (1) corporate
strategy, (2) business-level strategy, and (3) functional
strategies focussed on a particular product-market entry. These
three levels of strategy are diagrammed in Exhibit 1.2. In small single
product-line companies or entrepreneurial start-ups, however,
corporate and business-level strategic issues merge.

Exhibit - 1.3

KEY COMPONENTS OF CORPORATE, BUSINESS AND MARKETING

STRATEGIES

Strategy Corporate Strategy Business Strategy Marketing

Compone Strategy
nts

Scope • Corporate domain • Business domain - • Target market

-"Which businesses "Which product- definition
should we be in?" markets should • Product-line
we be in within depth and
this business or breadth
industry? • Branding
• Corporate development • Business policies
strategy development • Product-
Conglomerate strategy market
diversification Concentric development
(expansion into diversification plan
unrelated (new products • Line
businesses) for existing extension and
Vertical integration customers or product
Goals and Acquisition and new customers elimination
objectives divestiture policies for existing plans
products)

• Overall corporate • Constrained by

objectives aggregated corporate goals
across businesses • Objectives for a • Constrained
Revenue growth specific product- by corporate
Profitability market entries in and business
ROI (return on the business unit goals
investment) Sales growth • Objectives for
Earnings per share New product a specific
Contribution to other or product-
stakeholders market market entry
growth Sales
Allocation Profitability
of ROI Market share
resources Cash flow Contribution
Strengthening margi
bases n
of Customer
• Allocation among competitive satisfacti
businesses in the adva on
corporate portfolio ntage
• Allocation across
Sources of functions shared by • Allocation among
competitiv multiple businesses product-market • Allocation
e (corporate R&D, MIS) entries in the across
advantage business unit components of
• Allocation across the marketing
functional plan (elements
• Primarily through departments of the
superior corporate within the business marketing mix)
financial or human unit for a specific
resources; more product-
corporate R&D; better market entry
organizational processes • Primarily through
or synergies relative to competitive • Primarily
competitors across all strategy, business through
Sources of industries in which the unit's effective
synergy firm operates competencies product
relative to positioning;
competitors in its superiority on
industry one or more
components
• Shared resources, of the
technologies or marketing
functional competencies mix relative
across businesses within to
the firm competitors
• Shared resources within a
(including specific
favourable product-
customer image) market
or functional
competencies • Shared
across product- marketing
markets within an resources,
industry competencies
or activities
across
product-
market
entries
Our primary focus is on the development of marketing strategies and
programs for individual product-market entries, but other functional
departments - such as R&D and production - also have strategies and
plans for each of the firm's product-markets. Throughout this,
therefore, we examine the inter-functional implications of product-
marker strategies, conflicts across functional areas, and the
mechanisms that firms use to resolve those conflicts.

Strategies at all three levels contain the five components mentioned

earlier, but because each strategy serves a different purpose within
the organization, each emphasizes a different set of issues. Exhibit 1.3
on the previous page summarizes the specific focus and issues dealt
with at each level of strategy; we discuss them.

CORPORATE STRATEGY

At the corporate level, managers must co-ordinate the activities of

multiple business units and, in the case of conglomerates, even
separate legal business entities. Decisions about the organization's
scope and resource deployments across its divisions or businesses are
the primary focus of corporate strategy. The essential questions at
this level include - What business(es) are we in? What business(es)
should we be in? and What portion of our total resources should we
devote to each of these businesses to achieve the organization's
overall goals and objectives? Thus, new CEO Gerstner and other top-
level managers at IBM decided to pursue future growth primarily
through the development of Web-based services and software rather
than computer hardware. They shifted substantial corporate resources
- including R&D expenditures, marketing and advertising budgets and
vast numbers of salespeople - into the corporation's service and
software businesses to support the new strategic direction.

Attempts to develop and maintain distinctive competencies at the

corporate level focus on generating superior human, financial and
technological resources; designing effective organization structures
and processes; and seeking synergy among the firm's various
businesses. Synergy can provide a major competitive advantage for
firms where related businesses share R&D investments, product or
production technologies, distribution channels, a common salesforce,
and/or promotional themes - as in the case of IBM.

Business-Level Strategy

How a business unit competes within its industry is the critical focus of
business-level strategy. A major issue in a business strategy is that of
sustainable competitive advantage. What distinctive competencies
can give the business unit, a competitive advantage? And which of
those competencies best match the needs and wants of the customers
in the business's target segment(s)? For example, a business with low-
cost sources of supply and efficient, modern plants might adopt a low-
cost competitive strategy. One with a strong marketing department
and a competent salesforce may compete by offering superior
customer service.

Another important issue a business-level strategy must address is

appropriate scope; how many and which market segments to compete
in and the overall breadth of product offerings and marketing
programs to appeal to these segments. Finally, synergy should be
sought across product-markets and across functional departments
within the business.

Marketing Strategy

The primary focus of marketing strategy is to effectively allocate and

co-ordinate marketing resources and activities to accomplish the firm's
objectives within a specific product-market. Therefore, the critical
issue concerning the scope of a marketing strategy is specifying the
target market(s) for a particular product or product line. Next, firms
seek competitive advantage and synergy through a well integrated
program of marketing mix elements (primarily the 4 Ps of product,
price, place, promotion) tailored to the needs and wants of potential
customers in that target market.

THE NEW, IMPROVED INDIAN CONSUMER RAMA BIJAPURKAR

Consumer India has always been pretty tricky to double guess. Just when we believed
that consumer spending was firmly on a high growth trajectory - based on the wonder
years of 1993-98 - it spluttered and slowed to a crawl. For the next few years, marketers
tried everything they knew to speed it up again. They dropped prices while improving
product and service quality. "Buy-one-get-one-free", they offered. But that only helped
them get volume growth at the expense of operating margins. The fast-moving consumer
goods (FMCG) sector had a terrible time with some product categories actually shrinking
in size, while consumer durable manufacturers struggled to reconcile capacity with
demand. Sure, there was a fast growing yet minuscule population of the very rich, which
continued to lap up everything from plasma TVs to Mercedes cars - but that was cold
comfort for the majority of the marketers.

After much agonising, marketers came to the conclusion that the five-year boom of 1993-
98 was a one-time star burst, unlikely to be repeated in the near future. The growth spurt
of those years was attributed to a confluence of events - release of pent-up demand of the
rich who always had money but nothing much to buy before this; a television boom that
fuelled aspirations; a distribution boom that brought products and services within easier
reach; the discovery of the sachet strategy that made everything affordable to more
people; and, finally, a string of good monsoons.

They also shelved the idea of the huge homogeneous mass market made up by the great
Indian middle class, which would be a tireless engine of growth. And, having come to
terms with the new reality of the market, exhausted marketers worked hard on tactical
actions to stimulate growth even while turning their gaze inwards, focussing on
operational performance improvement and financial restructuring to keep the bottomline
growing.

Meanwhile, a lot of little changes were taking place in the market. Each change, when
viewed in isolation, could easily be rejected as not being particularly significant. But over
time, and taken together, they have provided a critical mass of change. And created a
deep and distinctive consumer market.

It is a market whose potential and desire to consume has perhaps moved ahead of the
marketer's mental model of it. It continues to be a multi-tiered market, with the bicycle
and the business class co-existing. It continues to require a portfolio of price/performance
points. But it is a market that is now unified by certain common demographic
characteristics and consumption desires. And which has enough mass to act as the
springboard for the next stage of the consumption cycle. The question is: are there
enough relevant products and services available to take advantage of this? In short, it
does appear that the Great Indian Consuming Class has arrived, and is waiting to be
served.

Before we get into what this new class looks like, a quick look at some of the important
changes that have taken place:
Income growth: Between 1996-97 and 2000-01, per capita income on an aggregate basis
grew by a compounded annual rate of 3.2%. But high-income households grew much,
much faster - by about 20% year after year - between 1995-96 and 1998-99, according to
the National Council for Applied Economic Research (NCAER). Upper-middle-income
households grew by 10% on a compounded annual growth basis during that period. In
urban India, the trend is even more pronounced (See 'Upper Classes On The Fast Track').

Affordability growth: Supply-side changes also shape a market's buying power, and
there have been a host of them - falling interest rates, easier consumer credit, increase in
variety and quality of products and services at every price point....

The liberalisation children grow up: The post-liberalisation generation is coming of

age. This year there are a 100 million, 17-21 year-olds in India, and six out of 10
households have a liberalisation child. This is a generation which has grown up with no
guilt about consumption.

The morphing of rural India beyond agriculture: Rural India has reduced its
dependence on agriculture. A little less than half of rural GDP is from non-agricultural
activities. This is creating a different kind of rural market. NCAER occupation data
shows a decline in cultivators and there is enough evidence of dual-sector households.
Add to this the exposure levels of the top end of rural society through television, and the
rural market is becoming closer in its mindset to the urban market. This is already
happening in the more developed higher-income states.

The rise of the self-employed: Rural India has always been largely self-employed. But
now the proportion of the self-employed in urban India has risen to 40% plus, replacing
the employed salary earner as the new 'mainstream market'. A Hansa Research Group
(HRG) study shows that even in the 'creamy layer', comprising the top two social classes
in towns of 10 lakh plus population in urban India, 40% of chief wage earners of
households are shopowners, petty traders, businessmen and self-employed professionals.

Unlike the salary earner, the self-employed use products much more to signal success and
are also fast adopters of any productivity tools, like cellphones and two-wheelers, that
can help them earn more.

Environmental changes drive aspiration: Better connectivity and communication, and

the literacy leap, are together increasing the aspiration of the Indian consumers at every
level. The reason why these changes drive aspiration is lucidly explained by the well-
known anthropologist, Arjun Appadurai, of Yale University: "Imagination is not about
individual escape. It is a collective social activity. Informational resources are needed for
people to even imagine a possible life, weave a story and a script around themselves, and
place products in emerging sequences. Imagination may not always lead to action, but it
is a prelude to action." Consumer India now has enough informational resources to
concretely imagine a better life. Plurality of income, singular mindset: When marketers
were waiting for the Great Indian Middle Class boom, its key trigger was expected to be
a significant number of households above a certain level of income, which would become
the critical mass of consumption. But what is being increasingly apparent now is that
what unifies Consumer India and gives it the consumption push is not so much its income
level, but its key characteristics. And these are:

Striving: Most Indian consumers, whether rich or poor, want to get ahead in a hurry.
From being destiny-driven and resigned, they are now destination-driven and striving to
grasp opportunities to earn more in order to construct a better life for themselves and
their children. If one were to segment the country into the Arriving, the Striving and the
Resigned, the proportion of Resigned has definitely decreased and become
geographically concentrated, rather than well-dispersed, as it was earlier.

" I can": The rise of the self-employed and the service economy requiring less capital
and more sweat has changed the mindset of the Indian consumers from one of demanding
social justice to one of grabbing economic opportunity.

"The rise of the women": Like
will," and emergingas partners in
income (a mere 23% of Indian
decreases as incomes increase)
nurturers of
the self-employed, women too are saying "I can and I
family progress. Not so much from earning the second
households have working wives and that proportion
but by being CEOs of households and intellectual
their children.

Education- and health-driven: Indian consumers are obsessed with giving their children
the education and skills that will provide the escape velocity to move to a higher station
in life - and they have seen enough evidence of this to know it is possible. Health is the
other magnificent obsession - probably because ill health adversely impacts earning
ability. (In fact, the less affluent are more concerned about staying healthy than the more
affluent.) A study conducted by HRG in 2003 for the Media Research Users Council
(MRUC) among 2,000 households in Mumbai shows interesting differences in household
expenditure between the top social class (SEC A) and the lowest social classes (SEC
D/E).

Education and clothing attract the same proportion of expenditure in both the income
groups, but the poor probably spend a bit more (proportionately) on medical expenses
than the rich. (This could indicate a big time bottom-of-the-pyramid opportunity for
nutrition and health building in the preventive rather than the curative area.)

Pragmatism in consumption and preference for 'real value' products and services: In the
past, marketers assumed that progress and evolution of a market meant adoption of 'feel
good' products, susceptibility to razzle-dazzle branding, a Westernised self-image and
identity, and bountiful days for FMCG categories. But the latest trends show that
consumers are going more for real, 'life quality' improvement products and services.

Consumer India wants a visibly better quality of life for themselves and their children,
described in terms of durables that make life better; education, healthcare; transportation
and communication. (NSS data shows that these are the three big growth areas in
consumption expenditure.) Other priorities seem to be owning decent homes, better
clothes (not necessarily better brands) and the like. Status is signalled through the things
that are visible to others.
They are not beguiled by brands that are low on functionality and high on image.
Pragmatism and functionality is the hallmark of their consumption expenditure. And the
threshold of their expectations of how this functionality is delivered is high: low-priced
motorcycles must look like motorcycles and deliver enough power. Basic cellphones
must be small, even if they aren't feature-rich. And low-priced garments and footwear
cannot get away with antiquated styles.

Entertainment: Entertainment is becoming big. The country has traditionally been

starved of family entertainment, with the only options being watching television or going
to places of religious worship. But family entertainment is becoming a big issue for
consumers as they try to find avenues of bonding in an era of nuclear families.
Comfort with borrowing to fund future consumption: Being in debt used to be an area of
high discomfort for everybody, but the very poor, who had no other choice but to borrow
for survival. Now, however, the concept of EMI (equalised monthly installment) is
legitimising borrowing in other groups too, especially to fund future consumption. EMI
provides a certain discipline with predictable and planned outflows, and that is probably
making indebtedness more acceptable.

Comfort with consumption: Economists talk about the wealth effect - wherein it takes
time before consumption decreases in response to decreasing income. Equally, it takes a
while for comfort with consumption to happen, and consumption typically lags income
increases. One reason for this could be that the country has celebrated abstemiousness for
so long that it takes a supply explosion to spark desire, and then translate that desire into
actual consumption. However, that has now happened.

Comfort with technology: Infotech awareness, whether it is infotech power (what a

computer can do to solve problems or improve life) or infotech-driven employment
opportunities, has sunk in to the lowest social classes and to much of the rural population.
It has happened through the demonstration effect of model projects of the NGO (non-
government organisation) kind. And it has happened by watching the rich use it and
prosper. It has also happened because of the mushrooming of call centres and other
computer-related services offering employment. As these are located in geographical
clusters they get noticed and talked about. Cyber grandmas from upper-middle and upper
classes, who have become email literate to communicate with their scattered flock, is one
example of this new comfort. Enough Of A Consumption Base Now Exists To Create
A Springboard For More Consumption.
Current levels of penetration influence the pace of future penetration. Penetration
increases are not linear, instead they accelerate as base penetration increases till a point
where saturation sets in. If only one out of 20 households in a given affluence grade have
a washing machine or a two-wheeler, adoption will be slow. But when one out of every
10 has it, it becomes something that gets on the radar screen of aspiration for the rest.
And when it gets to one in five families, it serves to rapidly penetrate the remaining
households because it now becomes a 'must have now' product for them.
For consumer durables, the top (in terms of affluence grades) 40 million households in
India - 24 million in urban India and 17 million in rural India - based on their penetration
levels would constitute the core consuming class. The magic number of 200 million
consumers (assuming five members to a household) has arrived at last! (See 'Consumer
Durables Reaching Saturation'.)

Within rural India, there are two different grades of overall affluence, which we can call
the developed and the developing states. The developed states comprise Punjab, Haryana,
Gujarat, Maharashtra, Karnataka and Kerala. They account for about one-third of the
rural population and have shown higher penetration in most categories (See 'Tale Of Two
Rurals').

The increase in penetration levels between 1997 and 2002 have been very impressive.
'Reaching Far And Wide' compares the two and shows the speed with which penetration
increases are happening in Consumer India across income groups, although, obviously,
differently for different products.

For FMCG, penetration is certainly not an issue. NCAER data shows that for 1998-99,
for a basket of 22 FMCG products it tracks, a total of over Rs 91,500 crore was spent. Of
this, 37% was spent by the two lowest-income groups in rural India, and only about 20%
by the top two income groups in urban areas. This is, perhaps, the best and only statement
of the structure and potential of the Indian market.

Changing Shapes Of Income Distribution Will Create A New Consumption Push By

2006-07

Why does the changing shape of income distribution herald a change in consumption
behaviour? A traditional bottom-heavy triangle with most people in the lower income
group and a few in the top indicates that the centre of gravity of market consumption and
of the reference group, which defines aspirations, is very low. As the shape of income
distribution starts bulging in the centre, both the centre of gravity of what is consumed,
and of who the 'majority' that defines aspirations should be, shifts.

NCAER income distribution data of what has happened so far and their modelling of the
future of income distribution is invaluable. It is the only 'single source' data that also
looks at inflation-indexed income and reliably shows shifts in shape. The projected shape
of urban India in 2006-07 (See 'Getting Top Heavy') shows that the centre of gravity will
be the upper-middle-income group and that there will be a large consumption push.

Taken as an aggregate, the projected shape of income distribution in 2006-07 suggests

that the centre of gravity of consumption and aspiration rests with those who have 'just
escaped poverty'.

To understand the full impact of the urban change, it is necessary to compute the
arithmetic of increase or decrease in each income group as well as the increase (or
decrease) in penetration in each group. Only when viewed together do we get the full
picture. In some categories, depending on supplier strategies and starkly lowering price-
performance points, the results could be counter-intuitive. However, for the rest, this is
likely to be the typical arithmetic. The tale goes like this. NCAER estimates the number
of households to increase by 8.6 million in the high-income group and 7.3 million in the
upper-middle-income group, while the middle-income number grows by 4.3 million and
the bottom two income groups will decrease by about 2.3 million and 7.5 million,
respectively. (The total number of urban households is set to increase from 49.1 million
to 60 million.) A 10% increase in the top income group penetration, a 15% increase in the
second income group, and a 10% increase in the third income group could give
incremental volumes of 7.5 million in the highest income group, 5 million in the next
income group and a mere 2.7 million in the third income group. The urban market is
indeed on the periphery of a huge consumption push.

Rural India will have two points of significant household increases - 4.6 million high-
income households and 13 million middle-income households will be added by 2006-07
(total number of rural households will increase from 122.8 million to 139 million). Let
me present a sampler of the same typical arithmetic for a well-penetrated category, which
has 45% penetration in the high-income group, 25% penetration in the upper-middle-
income group, and 10% penetration in the middle-income group. By 2006-07, a
reasonable estimate given the current penetration base and past patterns from urban areas,
is that it would increase to 60%, 30% and just 13%. Therefore, the incremental volumes
would be 3.3 million from the upper-income group, and 2.3 million from the middle-
income one.

Given the increasing urban exposure of rural India, the urban and the rural upper-income
groups can form an interesting continuum market, giving it a scale of 23 million
households, or 115 million population. In 2006-07, the consuming class, as we defined it
earlier, would be about 60 million households, or 300 million consumers.

However, a state-wise look at rural income shapes, show a totally different pattern (See
'Shape of Rural Income Distribution'). It shows that in states that account for about half
the rural GDP of the country (as defined by the Crisil Centre for Economic Research
Analysis), the centre of gravity of consumption and aspiration has already moved towards
the middle/upper-middle-income classes, again suggesting that there is another inflection
point of consumption that is about to happen. And that perhaps these states are far more
ready for sophisticated consumption than we imagine them to be. Implications For
Marketers
I have said in the beginning that there is a new Consumer India waiting to be served with
relevant products and services. Let us now look at some implications for marketers.
Required: Mature market strategies. Two-wheelers have penetrated about 12% of all
households. By this metric, it is clearly an underdeveloped market that should grow from
first-time buyers and should not be lapping up (or even accepting) higher-level features.

Yet half the sales in a year are from repeat buyers and half from first-time buyers, and
about half from small markets (with populations below 1 lakh). In many categories,
consumers exhibit 'plus one level up' behaviour - whatever you think they should be
buying given their affluence and the state of market development, they buy one level
better than that. Outdated tech, low performance and plain looks are rejected, no matter
how attractively priced. The answer to this puzzle is in the differential levels of
penetration. Urban penetration is about 24%. But in the top 30 million households by
affluence, penetration is 52%. And the trend of two-wheelers giving way to cars in this
top urban affluence grade is expected to be picked up by the second affluence grade as
prices of small cars drop further.

In the case of refrigerators, the overall penetration is 10.4%, suggesting an

underdeveloped market. But one out of every two of the top 30 million households have
one. Therefore, while many companies are focussing on bottom-of-the-pyramid strategies
to increase penetration and drive future growth, the current market, where much of the
value today resides, needs to be viewed with a new pair of lenses.

Maturing supply shifts the basis of competition and, hence, drivers of brand choice.
Improved supply, 'performance, features and quality' parity of all major brands and the
near price parity between them shifts the basis of competition to the augmented product
from the basic product. Add- on services (like removing pain points, and not piped music
in showrooms), and buying experience will be the driver of brand choice. Can the air-
conditioner be fixed without the usual hassle of chipped paint, five different contractors,
broken walls et al in just a day? Does your cellphone company view your bills online
when you call them so that it can advise you on what is the best tariff plan? Can the
family be given 12 lessons at home after the personal computer arrives? These will be the
issues based on which choices will be made.

Changing markets need new bases of segmentation. As the market matures, and is
subjected to multiple changes at the macro level and in related categories, segmentation
has to go beyond the product-centric paradigm. Instead of looking at 'premium, popular,
discount' price-performance bands, it is time to look at consumer groups, how they view
the market and what drives their choices. The question to ask of research is not 'how is
the market segmented?' (the answer to that is that it is segmented the way marketers have
segmented it so far), but what is the new way in which to cut it up so customers can be
served better? Take refrigerators. The context in which the category exists has changed.

There's more eating out, more phone call deliveries of food and groceries; women are
changing and reorganising their time and their household chores.... Clearly, there are
segments beyond the modern mum and the good health-conscious housewife, which need
to be identified (again on a functional usage and attitude basis rather than on whether she
wears her hair short or gives parties - the lifestyle kind of variables).

The same is true for almost any category. Usage patterns are now so different that they
form a good basis for segmentation, product design, pricing and service design. From a
mere psychographic point of view, Young and Rubicam has, in a cross-cultural study
done years ago, identified groups that we see clearly in Consumer India, which could
form a useful basis for segmenting the market. The study categorises people (and
consumers are people first!) into the Resigned, whose main goal is survival; the
Struggling, whose objective is improvement and escaping hardships; the Mainstreamers,
who are looking for security, conformity and honourably discharging family
responsibility (the archetypal provider); the Aspirers, who want to be seen as successful
and attain status and a lifestyle that they so envy in others; the Succeeders, for whom
material success and recognition are the key; and the Explorers (I am not sure we have
too many of those), who are in search of self-identity and self-satisfaction.

These categories are linked to income, of course, but not driven by it. The Mainstreamers,
Succeeders and Aspirers are correlated to occupation, to age and lifestage and to
geography. Qualitative researchers say cities can be characterised this way too, hence,
they show different consumption quantities and character even for a given income
distribution.

This is not just applicable to classical consumer goods. Doctors are also caught in a web
of change (e-empowered patients, more professional alternative medicine, changing
patient behaviour from the self-employed and younger generation). Within them, too,
there is the cutting-edge doctor who treats with leading-edge medicines; the conservative
curer who is into holistic healing; the 'time-saving effort-saving' add-on services,
computerised doctor.... And each requires a different strategy. The same logic applies to
B2B businesses too. Consumer value processing needs to be studied anew. The way
consumers process value inside their heads - benefit worth and cost worth and, hence,
overall worth - has changed. The EMI, the 'plus one level up' mentality, the self-
employed ROI processing ("Will this investment help me earn more?"), the family-
bonding need, the changing identities of women, the 'beyond farmers' market in rural
India, the maturing of evaluation parameters - all point to the fact that we need to
discover the new value processing, of different groups, anew.

In fact, it is time to revive the discipline of Consumer Behaviour, so little practised and so
little taught in the Indian Ivy League business schools. Market structures are easy to
figure out. Yet consumer behaviour, the second part of the puzzle, is far from understood.
This is, perhaps, because we look for changes in the model we know, while consumers
make much larger strides. New opportunities to serve. If one were to look at the new
Consumer India and the consuming class through the lens of 'what is not there but ought
to be', several gaps show up. Here are some examples:

Home utilities: I do not believe we have enough depth in offerings. Take the need for
better living. The new home is characterised by less space and more things. In the US
today are some interesting products: stoppers to place under beds to raise their height,
and storage receptacles that fit under the bed smoothly with castors, thereby acting as
extra cupboards! Tents with zips on the side, which become temporary cupboards when
relatives come visiting. Modular furniture. Event the humble pegs that can be stuck
behind doors. We need more of those here too.

Women's liberation: When frozen foods took off in the US long ago, it was because it
gave voice to a woman who saw her life being beyond the kitchen stove. We have a
similar situation here today. As an FCB Ulka study recently said: "This Annapurna hates
to cook." Yet we do not have a reasonanble ready-to-cook/ready-to-eat product range. It
is easy to blame consumers for not adopting. But now there's evidence that she is ready
for it because she has more productive things to do with her time. Watchmakers tell us
that wristwatch penetration is low among women - but conversations with women show
they are more time-bound and schedule-bound than we think they are. In urban India, in
the top three income groups, what can we do to help them get better organised? There is
technology comfort. Is there another durables revolution waiting to happen?

Self-employed: Are the financial services products we have varied enough, innovative
and comprehensive enough for this group? I suspect not. Are there enough products to
signal social and economic mobility? What can we offer them by way of productivity
devices? This market is probably deep for B2B services, but these are micro enterprises,
and need specially-designed services.

Health foods, educational toys, simple cheap computers for women and children - it's
time to revisit these again. Is there a large opportunity for functional, high-prestige, low-
cost hotels? Is it time for a boom in budget holidays, in domestic tourism with an
education focus for children? I would suggest that every idea that was dumped in the past
10 years because it was 'ahead of its time', and the 'consumer was not ready', be brought
out of the closet. The consumer may just be ready for it now - if he hasn't already gone
past that stage!

Conclusion
The market has enough scale to offer, and enough desire to consume. The consumer is
ready and waiting to be served. The new Consumer India will pose a huge challenge to
marketers because it offers a difficult revenue model of large but not enormous volumes,
modest prices and high benefit expectations. It will reward real innovators and ignore
marketing hype. Most of all, it will continue to comprise many markets at different stages
of evolution, demanding a complexity of strategy that is far in excess of its worth. And
yes, it will continue to throw up unexpected answers to the arithmetic of (medium
penetration) x (large size of consumer base) x (low price-willing to pay) x (modest per
capita consumption).

THE MARKETING ENVIRONMENT

Introduction
In the previous chapter, marketing orientation was defined in terms of a firm's
need to begin its business planning by looking outwardly at what its customers
require, rather than inwardly at what it would prefer to produce. The firm must be
aware of what is going on in its broader marketing environment and appreciate
how change in this environment can lead to changing patterns of demand for its
products.
An environment can be defined as everything that surrounds and impinges on a
system. Systems of many kinds have environments they interact with. A central
heating system operates in an environment where a key environmental factor will
be the outside temperature. A good system will react to environmental change, for
example by using a thermostat to increase the output of the system in response to
a fall in the temperature of the external environment. The human body comprises
of numerous systems which constantly react to changes in the body's
environment; for example, the body perspires in response to an increase in
external temperature.
Marketing can be seen as a system that must respond to environmental change.
Just as the human body may die if it fails to adjust to environmental change (for
example by not compensating for very low temperatures), businesses may fail if
they do not adapt to external changes such as new sources of competition or
changes in stakeholders' expectations of companies.
An organization's marketing environment is defined here as

the individuals, organizations, and forces external to the marketing management

function of an organization that impinge on the marketing management's ability
to develop and maintain successful exchanges with its customers.

Naturally, some elements in a firm's marketing environment are more direct and
immediate in their effects than others. Sometimes parts of the marketing
environment may seem quite nebulous and difficult to assess in terms of their
likely impact on a company. It is therefore usual to talk about a number of
different levels of the marketing environment.

The micro-environment describes those elements that impinge directly on a

company. The micro-environment of an organization includes customers,
suppliers, and distributors. It may deal directly with some of these, while there is
currently no direct contact with others, but they could nevertheless influence its
policies. Similarly, an organization's competitors could have a direct effect on its
market position and form part of its microenvironment.
The macro-environment describes things that are beyond the immediate
environment but can nevertheless affect an organization. A business may have no
direct relationships with legislators as it does with suppliers, yet legislators'
actions in passing new laws may have profound effects on the markets it seeks to
serve, as well as affecting its production costs. The macro-environmental factors
cover a wide range of nebulous phenomena-they represent general forces and
pressures rather than institutions, to which the organization relates directly.
As well as looking to the outside world, marketing managers must also take
account of factors within other functions of their own firm. This is often referred
to as an organization's internal marketing environment.

The micro-environment
The micro-environment of an organization can best be understood as comprising
all those other organizations and individuals that, directly or indirectly, affect the
activities of the organization.
The following key groups can be identified.

Customers
These are a crucial part of an organization's micro-environment. For a commercial
organisation, no customers means no business. An organization should be
concerned

about the changing requirement of its customer and should keep in touch with
these changing needs by Using an appropriate information gathering system. In
an ideal world, an organization should know its customers so well that it is able
to predict what they will require next, rather than wait until it is possibly too late
and then follow. Most of this book is devoted to studying the interface between a
company and its customers, for example in terms of customers' responses to
promotional messages and prices.
There is sometimes a strong argument that the customer is not always right in the
goods and services they choose to buy from a company, and that organizations
should act in a socially responsible manner by not exploiting customers. Taking
a long-term and broad perspective, companies should have a duty to provide
goods and services that satisfy these longer-term and broader needs rather than
immediately felt needs. There have been many examples where the long-term
interests of customers have been ignored by companies, either deliberately or
inadvertently. Regulatory authorities have recognized the wider interests of
customers, for example by requiring pensions companies to provide
compensation to customers who were sold a pension policy that was
inappropriate to their long-term needs.
There are many more examples of situations where customers' long-term
interests have been neglected by companies, including:
.In 2002 the Consumers' Association launched a campaign against financial
services companies which it claimed had mis-sold endowment policies to
individuals. Sales- people may have been tempted by a high level of commission
to sell a policy that the customer did not understand and was clearly not in their
best interest (for example, a policy that would payout only some time after the
customer's mortgage was due to be paid off).
Manufacturers of milk for babies should make mothers aware of the significant
long- term health benefits to children of using breast milk rather than
manufactured milk products.
Car manufacturers often add expensive music systems to cars as standard, but
relegate vital safety equipment to the status of 'optional extra'.
In each of these cases most people might agree that, objectively, buyers are being
persuaded to make a choice against their own long-term self-interest. But on
what moral grounds, can society say that consumers' choices in these situations
are wrong? According to some individuals' sense of priorities, an expensive in-
car music system may indeed be considered to offer a higher level of personal
benefit than an airbag.

Competitors
A competitor orientation is one of the defining characteristics of a marketing
orientation. In highly competitive markets, keeping an eye on competitors and
trying to understand their likely next moves can be crucial. Think of the
maneuvering and out-maneuvering that appears to take place between
competitors in such highly competitive sectors as soft drinks, budget airlines, and
mobile phones. But who are a company's competitors? Direct competitors are
generally similar in form and satisfy customers' needs in a similar way. Indirect
competitors may appear different in form, but satisfy a fundamentally similar
need. It is the indirect competitors that are most difficult to identify and to
understand. What is a competitor for a cinema? Is it another cinema? A home
rental movie? Or some completely different form of leisure activity which
satisfies a similar underlying need for entertainment.

Intermediaries
Companies must not ignore the wholesalers, retailers, and agents who may be
crucial interfaces between themselves and their final consumers. Large-scale
manufacturing firms usually find it difficult to deal with each one of their final
consumers individually, so they choose instead to sell their products through
intermediaries. In some business sectors access to effective intermediaries can be
crucial for marketing success. For ex- ample, food manufactures who do not get
shelf space in the major supermarkets may find it difficult to achieve large-
volume sales.
Channels of distribution comprise all those people and organizations involved in
the process of transferring title to a product from the producer to the consumer.
Sometimes products will be transferred directly from producer to final consumer-
a factory selling specialized kitchen units directly to the public would fit into this
category. Alternatively, the producer may sell its output through retailers; or, if
these are considered too numerous for the manufacturer to handle, it could deal
with a wholesaler who in turn would sell to the retailer. More than one wholesaler
could be involved in the process.

Intermediaries may need reassurance about the company's capabilities as a

supplier that is capable of working with them to supply goods and services in a
reliable and ethical manner. Many companies have suffered because they have
failed to take adequate account of the needs of their intermediaries. (For example,
Body Shop and McDonald's have faced protests from their franchisees, which felt
threatened by a marketing strategy that was perceived as being against their own
interests.)

Suppliers
These provide an organization with goods and services that are transformed by the
organization into value-added products for customers. For companies operating in
highly competitive markets where differentiation between products is minimal,
obtaining supplies at the best possible price may be vital in order to be able to
pass on cost savings in the form of lower prices charged to customers. Where
reliability of delivery to customers is crucial, unreliable suppliers may thwart a
manufacturer's marketing efforts.
In business-to-business marketing, one company's supplier is likely to be another
company's customer, and it is important to understand how suppliers,
manufacturers, and intermediaries work together to create value. The idea of a
value chain is introduced later in this chapter. Buyers and sellers are increasingly
co-operating in their dealings with each other, rather than bargaining each
transaction in a confrontational manner.
There is an argument that companies should behave in a socially responsible way
to their suppliers. Does a company favour local companies rather than possibly
lower priced overseas producers? (For example, Marks & Spencer prided itself on
sourcing nearly all of its supplies through long-standing supply arrangements with
a number of UK manufacturers, so many suppliers felt let down when it started
placing a high proportion of its orders with lower cost overseas producers.) Does
it divide its orders between a large number of small suppliers, or place the bulk of
its custom with a small handful of preferred suppliers? Does it favour new
businesses, or businesses representing minority interests, when it places its
orders?
Taking into account the needs of suppliers entails a combination of shrewd
business sense and good ethical practice.

Government
The demands of government agendas often take precedence over the needs of a
company's customers. Government has a number of roles to playas stakeholder in
commercial organizations:
Commercial organizations provide governments with taxation revenue, so a
healthy business sector is in the interests of government.
Government is increasingly expecting business organizations to take over many
responsibilities from the public sector, for example with regard to the payment of
sickness and maternity benefits to employees. It is through business organizations
that governments achieve many of their economic and social objectives, for
example with respect to regional economic development and skills training.
As a regulator that impacts on many aspects of business activity, companies
often go to great lengths in seeking favourable responses from such agencies. In
the case of many UK private-sector utility providers, promotional effort is often
aimed more at regulatory bodies than at final consumers. In the case of the water
industry, promoting greater use of water to final consumers is unlikely to have a
significant impact on a water utility company, but influencing the disposition of
the Office of Water Regulation, which sets price limits and service standards, can
have a major impact.
The financial community
This includes financial institutions that have supported, are currently supporting,
or may support the organization in the future. Shareholders, both private and
institutional, form an important element of this community and must be
reassured that the organization is going to achieve its stated objectives. Many
market expansion plans have failed because the company did not adequately
consider the needs and expectations of potential investors.

local communities
 Market-led companies often try to be seen as a 'good neighbours' in their local
communities. Such companies can enhance their image through charitable
contributions, sponsorship of local events, and support of the local environment.
Again, this may be interpreted either as part of a firm's genuine concern for its
local community, or as a more cynical and pragmatic attempt to buy favour
where its own interests are at stake. If a fast food restaurant installs improved
filters on its extractor fans, is it doing this genuinely to improve the lives of local
residents, or merely to forestall prohibitive action taken by the local authority?

Pressure groups
Members of pressure groups may have never been customers of a certain
company and may never likely be. Yet a pressure group can detract seriously
from the image of a com- pany that its marketing department has worked hard to
develop.
Pressure groups can be divided into those that are permanently fighting for a
general cause, and those that are set up to achieve a specific objective and are
dissolved when this objective is met. Pressure groups can also be classified
according to their functions; for example, sectional groups exist to promote the
common interests of their members over a wide range of issues (e.g. trades
unions and employers associations), while promotional groups fight for specific
causes (e.g., the Countryside Alliance campaigns for a range of countryside
issues).

Pressure groups can influence the activities of businesses in a number of ways:

Propaganda is used to create awareness of the group and its cause (e.g. through
press releases to the media).

The pressure group can seek to represent the views of the group directly to
businesses on a one-to-one basis. (Many environmental pressure groups seek to
advance their cause by 'educating' companies that may be ignorant of the pressure
group's concerns.)

Increasingly, pressure groups have resorted to direct action against companies,

which can range from boycotts to physical attacks on a company's property.
Campaigners for animal rights, or those opposed to the use of genetically
modified crops, have on occasions given up on trying to change the law and
instead have sought to disrupt the activities of organizations giving rise to their
concerns. Organizations targeted in this way may initially put on a brave face
when confronted with such activities by dismissing them as inconsequential, but
often the result is to change the organization's behaviour, especially where the
prospect of large profits is uncertain. Action by animal rights protestors
contributed to the near collapse of Huntingdon Life Sciences (an animal testing
laboratory), and many farmers have been discouraged from taking part in GM
crops trials by the prospects of direct action against their farms.
It should not be forgotten that businesses themselves are often active members of
pressure groups, which they may join as a means of influencing government
legislation that will affect their industry sector. The British Road Federation and
the Tobacco Advisory Council are two examples of high-profile industry-led
pressure groups.
Pressure groups themselves are increasingly crossing national boundaries to
reflect the influence of international governmental institutions such as the EO and
the increasing influence of multinational business organizations. Friends of the
Earth and Green peace are examples of multinational pressure groups.

The macro-environment
While the micro-environment comprises identifiable individuals and
organizations with whom a company interacts (directly and indirectly), the macro-
environment is more nebulous. It comprises general trends and forces which may
not immediately affect the relationships that a company has with its customers,
suppliers, and intermediaries, but sooner or later, as this environment changes,
will alter the nature of such micro-level relationships. As an example, change in
the population structure of a country does not immediately affect the way in
which a company does business with its customers, but over time it may affect the
numbers of young or elderly people with whom it is aiming to do business.
Most analyses of the macro-environment divide the environment into a number of
subject areas. The subject headings that are most commonly used are described
below. It must, however, be remembered that the division of the macro-
environment into subject areas does not result in water-tight compartments. The
macro-environment is complex and interdependent.

The macroeconomic environment

An analysis of many companies' financial results will often indicate that business
people attribute their current financial success or failure to the state of the
economy. For example, in 2002 the house builder Taylor Woodrow reported
increased profits, which it attributed to a buoyant housing market, based on a high
level of consumer confidence within the economy. Ten years earlier, a weak
economy and falling house prices had led to big losses for many house builders,
and some went out of business.

Economic growth and the distribution of income

Few business people can afford to ignore the state of the economy, because it
affects the willingness and ability of customers to buy their products. Marketers
therefore keep their eyes on numerous aggregate indicators of the economy, such
as Gross Domestic Product (GDP), inflation rates, and savings ratios. However,
while aggregate changes in spending power may indicate a likely increase for
goods and services in general, the actual distribution of spending power among
the population will influence the pattern of demand for specific products. In
addition to measurable economic prosperity, the level of perceived wealth and
confidence in the future can be an important determinant of demand for some
high-value services. If consumers' confidence is low, a high pro- portion of
income tends to be saved. If confidence is high, consumers are more likely to
borrow, so that their expenditure is greater than their income (Figure 2.5).
The effects of government policy objectives on the distribution of income can
have profound implications for marketers. During most of the post-war years, the
tendency has been for income to be redistributed from richer to less well-off
groups. Higher rate taxation and the payment of welfare benefits have been
instrumental in achieving this.

Multiplier and accelerator effects

Through models of national economies, firms try to understand how increases in
expenditure (whether by government, households, or firms) will affect their
specific sector. The multiplier effect of increases in government spending (or cuts
in taxation) can be compared to the effects of throwing a stone into a pond of
water. The initial spending boost will have an initial impact on households and
businesses directly affected by the additional spending, but through a ripple effect
will also be indirectly felt by households and firms throughout the economy.
A small increase in consumer demand can lead, through an accelerator effect, to a
sudden large increase in demand for plant and machinery as manufacturers seek to
in- crease their capacity with which to meet this demand. Demand for industrial
capital goods therefore tends to be more cyclical than for consumer goods, so
when consumer demand falls by a small amount, demand for plant and machinery
falls by a correspondingly larger amount, and vice versa.

Business cycles
Companies are particularly interested in understanding business cycles and in
predicting the cycle as it affects their sector. If the economy is at the bottom of an
economic recession, this may be the ideal time for firms to begin investing in new
production capacity, ahead of the eventual upturn in demand. In the past, firms
have often invested in new capacity only after overseas competitors have built up
market share, and possibly created some long-term customer loyalty too. Adding
new production capacity during a period of recession is also likely to be much
cheaper than waiting until an upturn in the economy puts upward pressure on its
input prices. During periods of economic boom, firms should look ahead to the
inevitable downturn that follows. A problem of excess capacity and stocks can
result when a firm fails to spot the downturn at the top of the business cycle.
Analyzing turning points in the business cycle has therefore
become crucial to marketers. To miss an upturn at the bottom of the recession can
lead to missed opportunities when the recovery comes to fruition. On the other
hand, reacting to a false signal can leave a firm with expensive excess stocks and
capacity on its hands. It is extremely difficult to identify a turning point at the
time when it is happening. Following the UK economic recession of the early
1990s, there were many false predictions of an upturn. When the predicted revival
in domestic consumer expenditure failed to transpire, marketers in product fields
as diverse as cars, fashion clothing, and electrical goods were forced to sell off
surplus stocks
Marketers at low
try to reactprices.
to turning points as closely as possible. Many subscribe to
the services of firms that use complex models of the economy to make predictions
about the future performance of their sector. Companies can be guided by key
lead indicators which have historically been a precursor of change in activity
levels for their business sector. For a company manufacturing process plant
equipment, the level of attendance at major trade exhibitions could indicate the
number of buyers that are at the initial stages in the buying process for new
equipment. An alternative to trying to predict the economic performance of their
sector a long way ahead is to manage operations so that a firm can respond almost
immediately to changes in its macroeconomic environment. The us~ of short-term
contracts of employment and outsourcing of component manufacture can help a
company to downsize rapidly at minimum cost when it enters a recession, and to
expand production when a recovery occurs. This approach is particularly
important when an organization needs to respond to an unforeseen shock to the
macroeconomic environment, as occurred following the terrorist attacks of 11
September 2001.

Market competitiveness
An analysis of the macroeconomic environment will also indicate the current and
expected future level of competitor activity. An over-supply of products in a
market sector (whether actual or predicted) results in a downward pressure on
prices and profitability. Markets are dynamic, and what may appear an attractive
market today may soon deteriorate as the market matures.

The political environment

The political environment can be one of the less predictable elements in an

organization's marketing environment. Marketers need to monitor the changing
political environment because political change can profoundly affect a firm's
marketing. Consider the following effects of politicians on marketing.
• At the most general level, the stability of the political system affects the
attractiveness of a particular national market. While western Europe is
generally politically stable, the instability of many governments in less
developed countries has led a number of companies to question the
wisdom of marketing in those countries.
• Governments pass legislation that directly and indirectly affects firms'
marketing opportunities. There are many examples of the direct effects on
marketers, for example laws giving consumers rights against the seller of
faulty goods. At other times the effects of legislative changes are less
direct, as where legislation outlawing anti- competitive practices changes
the nature of competition between firms within a market.
• Governments are responsible for protecting the public interest at large,
imposing further constraints on the activities of firms (for example
controls on pollution, which may make a manufacturing firm
uncompetitive in international markets on account of its increased costs).
• The macroeconomic environment is very much influenced by the actions
of politicians. Government is responsible for formulating policies that can
influence the rate of growth in the economy and hence the total amount of
spending power. It is also a political decision as to how this spending
power should be distributed between different groups of consumers and
between the public and private sectors.

• Government policies can influence the dominant social and cultural values
of a country, although there can be argument about which is the cause and
which is the effect. (For example, did the UK government's drive for
economic expansion and individual responsibility during the late 1980s
change public attitudes away from good citizenship and towards those of
'greed is good'?)
• Increasingly, the political environment affecting marketers includes supra-
national organizations, which can directly or indirectly affect companies.
These include trading blocs (e.g. the EV, ASEAN, and NAFTA) and the
 influence of worldwide intergovernmental organizations whose members
seek to implement agreed policy (e.g. the World Trade Organization).

The social and cultural environment

It is crucial for marketers to fully appreciate the cultural values of a society,
especially where an organization is seeking to do business in a country that is
quite different to its own. Attitudes to specific products change through time and
at anyone time can differ between groups in society.
Even in home markets, business organizations should understand the processes of
gradual cultural change and be prepared to satisfy the changing needs of
consumers. Consider the following examples of contemporary cultural change in
western Europe and the possible responses of marketers.
• Leisure is becoming a bigger part of many people's lives, and marketers
have responded with a wide range of leisure related goods and services.
• Attitudes towards the work/life balance are changing. The nature of work
relation- ships can affect companies profits; for example, the dotcom
bubble and dress-down Friday had a calamitous impact on the formal
clothing retailer Moss Bros' fortunes as consumers' attitudes to work
changed
• The role of women in society is changing as men and women increasingly
share ex- pectations in terms of employment and household
responsibilities. Examples of marketing responses include cars designed to
meet the aspirational needs of career women and ready prepared meals,
which relieve working women of their traditional role in preparing
household meals.
• Greater life expectancy is leading to an ageing of population and a shift to
an increasingly elderly culture. Or at this time with 60 % of the population
being in the age of 15-40 years the Indian market is considered a youth
market.
• The growing concern for the environment

Some indication of the minutiae of changing life-styles and their implications for
marketing was revealed in a report, Complicated Lives II: The Price of
Complexity [06], commissioned by Abbey National from the Future Foundation.
The report brought together quantitative and qualitative research with extensive
analysis of a range of trends affecting families and their finances. The findings
show that, between 1961 and 2001,
• the average time women spent in a week doing cleaning and laundry fell
from 12 hours and 40 minutes to 6 hours and 18 minutes;
• the average time that parents spent helping their children with homework
had increased from 1 minute a day to 15 minutes a day;
 • time spent caring for children increased from 30 minutes a day to 75
minutes a day; .the average amount of time spent entertaining went up
from 25 minutes to 55 minutes; .time spent cooking has decreased for
women, down from more than 1 hour and 40 minutes to just over an hour
(73 minutes) per day. At the same time, men marginally increased their
time in the kitchen, from 26 to 27 minutes per day.
There has been much discussion recently about the concept of 'cultural
convergence', referring to an apparent decline in differences between cultures. It
has been argued that basic human needs are universal in nature and, in principle,
capable of satisfaction with universally similar solutions. Many companies have
sought to develop one core product for a global market, and there is some
evidence of firms achieving this (for example Coca Cola, McDonald's). The
desire of a subculture in one country to imitate the values of those in another
culture has also contributed to cultural convergence. This is nothing new. During
the Second World War many people in western Europe sought to follow the
American life-style, and nylon stockings from the USA became highly sought-
after cultural icons by some groups. The same process is at work today in many
developing countries, where some groups are seeking to identify with western
cultural values through the purchases they make.
Critics of the trend towards cultural convergence point to a growing need for
cultural , identity which has been expressed, for example, in the rejection by some
Muslim t fundamentalist groups of the values of western society. This poses new
challenges for brand name and product offer will be the object of aspiration for
the dominant groups in a country, rather than a hated symbol of an alien system of
capitalism?
The demographic environment
Demography is the study of populations in terms of their size and characteristics.
Among the topics of interest to demographers are the age structure of a country,
the geographic distribution of its population, the balance between males and
females, and the likely future size of the population and its characteristics.
Changes in the size and age structure of the population are critical to many firms'
marketing. Although the total population of most western countries is stable, their
composition is changing. Most countries are experiencing an increase in the
proportion of elderly people, and companies who have monitored this trend have
responded with the development of residential homes, cruise holidays, and
financial portfolio management services aimed at meeting this group's needs. At
the other end of the age spectrum, the birth rate of most countries is cyclical,
resulting in a cyclical pattern of demand for age-related products such as baby
products, fashion clothing, and family cars
Consider the following changes in the structure of the Indian population and their
effects on marketers.
1. There has been a trend for women to have fewer children. There has also been a
tendency for women to have children later in life. In addition, there has been an
increase in the number of women having no children. Fewer children has resulted
in parents spending more per child (more designer clothes for children rather than
budget clothes) and has allowed women to stay at work longer (increasing
household incomes and encouraging the purchase of labour-saving products).
2. Alongside a declining number of children has been a decline in the average
house- hold size . There has been a particular fall in the number of large
households with five or more people and a significant in- crease in the number of
one-person households .

The growth in small or one-person households has had numerous marketing

implications, ranging from an increased demand for smaller units of housing to
the types and size of groceries purchased. A single person buying for him or
herself is likely to use different types of retail outlets compared with the
household buying as a unit.

Marketers also need to monitor the changing geographical distribution of the

population (between different regions of the country and between urban and rural
areas). The current drift towards rural and suburban areas has resulted in higher
car ownership levels and a preference for using out-of-town shopping centres.

The technological environment ..

The pace of technological change is becoming increasingly rapid, and marketers
need to understand how technological developments might affect them in four
related business areas:
• New technologies can allow new goods and services tb be offered to
consumers- internet banking, mobile telecommunications, and new anti-
cancer drugs for example.
• New technology can allow existing products to be made more cheaply,
thereby .widening the market for such goods by enabling prices to be
lowered. In this way, , more efficient aircraft have allowed new markets
for air travel to develop.
• Technological developments have allowed new methods of distributing
goods and services. (For example, amazon. com used the internet to offer
book buyers a new way of browsing and buying books.)
• New opportunities for companies to communicate with their target
customers have emerged, with many financial services companies using
computer databases to target potential customers and to maintain a
dialogue with established customers. The internet has opened up new
distribution opportunities for many services-based companies. The
development of mobile internet services offers new possibilities for
targeting buyers at times and places of high readiness to buy.
 Porters Model
Generic Competitive Strategies

In coping with the five competitive forces, there are three potentially successful
generic strategic approaches to outperforming other firms in an industry:

1. overall cost leadership

2 differentiation
3. focus.

Porte
Sometimes the firm can successfully pursue more than one approach as its
primary target, though
this is rarely possible as will be discussed further. Effectively implementing any of these

generic strategies usually requires total commitment and supporting organizational

arrangements that are diluted if there is more than one primary target. The generic

strategies are approaches to outperforming competitors in the industry; in some industries

structure will mean that all firms can earn high returns, whereas in others, success with

one of the generic strategies may be necessary just to obtain acceptable returns in an

absolute sense.

OVERALL COST LEADERSHIP

The first strategy, an increasingly common one in the 1970s be- cause of popularization
of the experience curve concept, is to achieve overall cost leadership in an industry
through a set of functional policies aimed at this basic objective. Cost leadership requires
aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions
from experience, tight cost and overhead control avoidance of marginal customer
accounts, and cost minimization in areas like R&D, service, sales force, advertising, and
so on. A great deal of managerial attention to cost control is necessary to achieve these
aims. Low cost relative to competitors becomes the theme running through the entire
strategy, though quality, service, and other areas cannot be ignored. Having a low-cost
position yields the firm above-average returns in its industry despite the presence of
strong competitive forces. Its cost position gives the firm a defense against rivalry from
competitors, because its lower costs mean that it can still earn returns after its competitors
have competed away their profits through rivalry. A low-cost position defends the firm
against powerful buyers because buyers can exert power only to drive down prices to the
level of the next most efficient competitor. Low cost provides a defense against powerful
suppliers by providing more flexibility to cope with input cost increases. The factors that
lead to a low-cost position usually also provide substantial entry barrier in term of scale
economies or cost advantage . Finally, a low cost position usually places the firm in a
favorable position vis-a-vis substitutes relative to its competitors in the industry. Thus a
low-cost position protects the firm against all five competitive forces because bargaining
can only continue to erode profits until those of the next most efficient competitor are
eliminated, and because the less efficient competitors will suffer first in the face of
competitive pressures.
Achieving a low overall cost position requires a high relative market share or other
advantages, such as favorable access to raw material. It may well require designing
products for ease in
manufacturing, maintaining a wide line of related products to spread costs, and serving
all major customer groups in order to build volume. In turn, implementing the low-cost
strategy may require heavy up-front capital investment in state-of-the art equipment,
aggressive
pricing, and start-up losses to build market share. High market share may in turn allow
economies in purchasing which lower costs even further. Once achieved, the low-cost.
position provides high margins which can be reinvested new equipment and modern
facilities in order to maintain cost leadership. Such reinvestment may well be a
prerequisite to sustaining a low-cost position.
The cost leadership strategy seems to be the cornerstone of Briggs and Stratton's success
in small horsepower gasoline engines, where it holds a 50 percent worldwide share, and
Lincoln Electric's success in arc welding equipment and supplies. Other firms known for
successful application of cost leadership strategies to a number of businesses are Emerson
Electric, Texas Instruments, Black and Decker, and Du Pont.
A cost leadership strategy can sometimes revolutionize an industry in which the historical
bases of competition have been otherwise and competitors are ill-prepared either
perceptually or economically to take the steps necessary for cost minimization.
Harnischfeger is in the midst of a daring attempt to revolutionize the rough-terrain crane
industry in 1979. Starting from a 15 percent market share,

Harnischfeger redesigned its cranes for easy manufacture and service using modularized
components, configuration changes, and reduced material content. It then established
subassembly areas and a conveyorized assembly line, a notable departure from industry
norms. It ordered parts in large volumes to save costs. All this allowed the company to
offer an acceptable quality product and drop price by15 percent. Harnischfeger's market
share has grown rapidly to 25 percent and is continuing to grow. Says Willis Fisher,
general manager of Harnischfeger's Hydraulic Equipment Division:

We didn't set out to develop a machine significantly better than anyone else but we did
want to develop one that was truly simple to manufacture and was priced, intentionally,
as a low cost ma- chine,'

Competitors are grumbling that Harnischfeger has "bought" market share with lower
margins, a charge that the company denies,

DIFFERENTIATION

The second generic strategy is one of differentiating the product ( or service offering of
the firm, creating something that is perceived industry wide as being unique. Approaches
to differentiating can take many forms: design or brand image(Fieldcrest in top of the line
towels and linens; Mercedes in automobiles ), technology (Hyster in lift trucks; Mac In
stereo components; Coleman in camping equipment), features (Jennair in electric ranges);
customer service (Crown Cork and Seal in metal cans), dealer network (Caterpillar
Tractor in construction equipment), or other dimensions, Ideally, the firm differentiates
itself along several dimensions. Caterpillar Tractor, for example, is known not only for its
dealer network and excellent spare parts availability but also for its extremely high-
quality durable products, all of which are crucial in heavy equipment (where downtime is
very expensive. It should be stressed that the differentiation strategy does not allow the
firm to ignore costs, but rather they are not the primary strategic target.
Differentiation, if achieved, is a viable strategy for earning above-average returns in an
industry because it creates a defensible position for coping with the five competitive
forces, albeit in a different way than cost leadership. Differentiation provides against
competitive rivalry because of brand loyality by customers and resulting in low price. It
also increases margins, which avoids the need for a low-cost position. The resulting
customer loyalty and the need for a competitor to overcome uniqueness t provide entry
barriers. Differentiation yields higher margins with which to deal with supplier power,
and it clearly mitigates buyer power, since buyers lack comparable alternatives and are
thereby less price sensitive. Finally, the firm that has differentiated itself to achieve
customer loyalty should be better positioned vis-a-vis substitutes than its competitors.

Achieving differentiation may sometimes preclude gaining a high market share. It often
requires a perception of exclusivity, which is incompatible with high market share. More
commonly, however, achieving differentiation will imply a trade-off with cost position if
the activities required in creating it are inherently costly, such as extensive research,
product design, high quality materials, or intensive customer support. Whereas customers
industrywide acknowledge the superiority of the firm, not all customers will be willing or
able to pay the required higher prices (though most are in industries like earthmoving
equipment where despite high prices,. Caterpillar has a dominant market share). In other
businesses, differentiation may not be incompatible with relatively low costs and
comparable prices to those of competitors.

FOCUS

The final generic strategy is focusing on a particular buyer group, segment of the product
line, or geographic market; as with differentiation. "focus may take many forms.
Although the low cost
and differentiation strategies are aimed at achieving their objectives industrywide, the
entire focus strategy is built around serving a particular target very well, and each
functional policy is developed with this in mind. The strategy rests on the premise that
the firm is thus able to serve its narrow strategic target more effectively or efficiently
than competitors who are competing more broadly. As a result, the firm achieves either
differentiation from better meeting the needs of the particular target, or lower costs in
serving this target, or both. Even though the focus strategy does not achieve low cost or
differentiation from the perspective of the market as a whole, it does achieve one or both
of these positions vis-a-vis its narrow market target. The difference among the three
generic strategies are illustrated in figure1
The firm achieving focus may also potentially earn above-aver- age returns for its
industry. Its focus means that the firm either has a low cost position with its strategic
target, high differentiation, or both. As we have discussed in the context of cost
leadership and differentiation, these positions provide defenses against each competitive
force. Focus may also be used to select targets least vulnerable to substitutes or where
competitors are the weakest.
For example, Illinois Tool Works has focused on specialty markets for fasteners where it
can design products for particular buyer needs and create switching costs. Although many
buyers are uninterested in these services, some are. Fort Howard Paper focuses on a
narrow range of industrial-grade papers, avoiding consumer products vulnerable to
advertising battles and rapid introductions of new products. Porter Paint focuses on the
professional painter rather than the do-it-yourself market, building its strategy around
serving the professional through free paint-matching services, rapid delivery of as little as
a gallon of needed paint to the worksite, and free coffee rooms designed to provide a
home for professional painters at factory stores. An example of a focus strategy that
achieves a low-cost position in serving its particular targets is seen in martin-brower, the
third largest food distributor in the United States. Martin-Brower has reduced its
customer list to just eight leading fast-food chains. Its entire strategy is based on meeting
the specialized needs of the customers, stocking only their narrow product lines, order
taking procedures geared to their purchasing cycles, locating warehouses based on their
locations, and intensely controlling and computerizing record keeping. Although Martin-
Brower is not the low-cost distributor in serving the market as a whole, it is in serving its
particular segment. Martin-Brower has been rewarded with rapid growth and above-
average profitability.
The focus strategy always implies some limitations on the over-all market share
achievable. Focus necessarily involves a trade-off between profitability and sales volume.
Like the differentiate strategy, it may or may not involve a trade-off with overall cost
position.

Stuck in the Middle

The three generic strategies are alternative, viable approaches to dealing with the
competitive forces. The converse of the previous discussion is that the firm failing to
develop its strategy in at least one of the three directions-a firm that is "stuck in the
middle"-is in an extremely poor strategic situation. This firm lacks the market share,
capital investment, and resolve to play the low-cost game, the industry wide
differentiation necessary to obviate the need for a low- cost position, or the focus to
create differentiation or a low-cost position in a more limited sphere.
The firm stuck in the middle is almost guaranteed low profitability. It either loses the
high-volume customers who demand low prices or must bid away its profits to get this
business away from low-cost firms. Yet it also loses high-margin businesses the cream-to
the firms who are focused on high-margin targets or have achieved differentiation
overall. The firm stuck in the middle also probably suffers from a blurred corporate
culture and a conflicting set of organizational arrangements and motivation system.
Clark Equipment may well be stuck in the middle in the lift truck industry in which it has
the leading overall U.S. and worldwide market share. Two Japanese producers, Toyota
and Komatsu, have adopted strategies of serving only the high-volume segments,
minimized production costs, and rock-bottom prices, also taking advantage of lower
Japanese steel prices, which more than offset transportation costs. Clark's greater
worldwide share (18 percent; 33 percent in the United States) does not give it clear cost
leadership given its very wide product line and lack of low-cost orientation. Yet with its
wide line and lack of full emphasis to technology Clark has been unable to achieve the
technological reputation and product differentiation of Hyster, which has focused on
larger lift trucks and spent aggressively on R&D. As a result, Clark's returns appear to be
significantly lower than Hyster's, and Clark has been losing ground.2
The firm stuck in the middle must make a fundamental strategic decision. Either it must
take the steps necessary to achieve cost leadership or at least cost parity, which usually
involve aggressive investments to modernize and perhaps the necessity to buy market
share, or it must orient itself to a particular target (focus) or achieve some uniqueness
(differentiation). The latter two options may well involve shrinking in market share and
even in absolute sales. The choice among these options is necessarily based on the firm's
capabilities and limitations. Successfully executing each generic strategy involves
different resources, strengths, organizational arrangements, and managerial style, as has
been discussed. Rarely is a firm suited for all three.
Once stuck in the middle, it usually takes time and sustained effort to extricate the firm
from this unenviable position. Yet there seems to be a tendency for firms in difficulty to
flip back and forth" over time among the generic strategies. Given the potential
inconsistencies involved in pursuing these three strategies, such an approach is almost
always doomed to failure.
These concepts suggest a number of possible relationships between market share and
profitability. In some industries, the problem of getting caught in the middle may mean
that the smaller (focused or differentiated) firms and the largest (cost leadership) firms
are the most profitable, and the medium-sized firms are the least profitable. This implies
a U-shaped relationship between profitability and market share, as shown in Figure 2.
The relationship in Figure 2 appears to hold in the U.S. fractional horsepower electric
motor business. There GE and Emerson have large market shares and strong cost
positions, GE also having a strong technological reputation. Both are believed to earn
high returns in motors. Baldor and Gould (Century) have adopted focused strategies,
Baldor oriented toward the distributor channel and Gould toward particular customer
segments. The profitability of both is also believed to be good. Franklin is in an
intermediate position, with neither low cost nor focus. Its performance in motors is
believed to follow accordingly. Such a U-shaped relationship probably also roughly holds
in the automobile industry when viewed on a global basis, with firms like GM (low cost)
and Mercedes (differentiate) the profit leaders. Chrysler, British Leyland, and Fiat lack
cost position, differentiation, or focus-they are stuck in the middle.
However, the U-shaped relationship in Figure 2 does not hold in every industry. In some
industries, there are no opportunities for focus or differentiation-it's solely a cost game-
and this is true in a number of bulk commodities. In other industries, cost is relatively
unimportant because of buyer and product characteristics. In these kinds of industries
there is often an inverse relationship between market share and profitability. In still other
industries, competition is so intense that the only way to achieve an above-average return
is

FIGURE 2

through focus or differentiation-which seems to be true in the U.S. steel industry. Finally,
low overall cost position may not be incompatible with differentiation or focus, or low
cost may be achievable without high share. For an example of the complex combinations
that can result, Hyster is number two in lift trucks but is more profit- able than several of
the smaller producers in the industry (Allis-Chalmers, Eaton) who do not have the share
to achieve either low costs or enough product differentiation to offset their cost position.
There is no single relationship between profitability and market share, unless one
conveniently defines the market so that focused or differentiated firms are assigned high
market shares in some narrowly defined industries and the industry definitions of cost
leadership firms are allowed to stay broad (they must because cost leaders often do not
have the largest share in every submarket). Even shifting industry definition cannot
explain the high returns of firms who have achieved differentiation industrywide and hold
market shares below that of the industry leader.
Most importantly, however, shifting the way the industry is defined from firm to firm
begs the question of deciding which of the three generic strategies is appropriate for the
firm. This choice rests on picking the strategy best suited to the firm's strengths and one
least replicable by competitors. The principles of structural analysis should illuminate the
choice, as well as allow the analyst to explain or predict the relationship between share
and profitability in any particular industry.
Risks of the Generic Strategies

Fundamentally, the risks in pursuing the generic strategies are two: first, failing to attain
or sustain the strategy; second, for the value of the strategic advantage provided by the
strategy to erode with industry evolution. More narrowly, the three strategies are
predicated on erecting differing kinds of defenses against the competitive forces, and not
surprisingly they involve differing types of risks. It is important to make these risks
explicit in order to improve the firm's choice among the three alternatives.

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, avoiding product
line proliferation and being alert for technological improvements. Cost declines with
cumulative volume are by no means automatic, nor is reaping' all avail- able economies
of scale achievable without significant attention.
Cost leadership is vulnerable to the risks, such as relying on scale or experience as entry
barriers. Some of these 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;
• inability to see required product or marketing change because of the
attention placed on cost;
• inflation in costs that narrow the firm's ability to maintain enough of a price
differential to offset competitors' brand images or other approaches to
differentiation.

The classic example of the risks of cost leadership is the Ford Motor Company of the
1920s. Ford had achieved unchallenged cost leadership through limitation of models and
varieties, aggressive backward integration, highly automated facilities, and aggressive
pursuit of lower costs through learning. Learning was facilitated by the lack of model
changes. Yet as incomes rose and many buyers had already purchased a car and were
considering their second, the market began to place more of a premium on styling, model
changes, comfort, and closed rather than open cars. Customers were willing to pay a price
premium to get such features. General Motors stood ready to capitalize on this
development with a full line of models. Ford faced enormous costs of strategic
readjustment given the rigidities created by heavy investments in cost minimization of an
obsolete model.
Another 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 was deteriorating 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;
• buyers' need for the differentiating factor falls. This can occur as buyers
become more sophisticated;
• imitation narrows perceived differentiation, a common occurrence as
industries mature.

The first risk is so important as to be worthy of further comment. A firm may achieve
differentiation, yet this differentiation will usually sustain only so much of a price
differential. Thus if a differentiated firm gets too far behind in- cost due to technological
change or simply inattention, the low cost firm may be in a 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.

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;
• the differences in desired products or services between the strategic target
and the market as a whole narrows; competitors find submarkets within
the strate