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BMMS5103

MARKETING
STRATEGY
Victor Ong

Project Directors:

Prof Dr Mansor Fadzil


Prof Dr Mohd Ghazali Mohayidin
Open University Malaysia

Module Writer:

Victor Ong

Moderator:

Dr Noraini Mohamed Sheriff


Universiti Teknologi MARA

Developed by:

Centre for Instructional Design and Technology


Open University Malaysia

Printed by:

Meteor Doc. Sdn. Bhd.


Lot 47-48, Jalan SR 1/9, Seksyen 9,
Jalan Serdang Raya, Taman Serdang Raya,
43300 Seri Kembangan, Selangor Darul Ehsan

First Printing, August 2009


Second Printing, April 2010
Third Printing, December 2010
Copyright Open University Malaysia (OUM), December 2010, BMMS5103
All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia (OUM).
Version December 2010

Table of Contents
Course Guide
Course Assignment
Topic 1

ix - xvii
xxi - xxv

Market-Driven Strategy
1.1 The Study of Strategic Marketing
1.2 Market-driven Strategy
1.3 Market Orientation as a Philosophy
1.3.1 The Three Dimensions of Market Orientation
1.3.2 Becoming a Market-oriented Organisation
1.3.3 Market-orientation Is it Beneficial?
1.4 Distinction Between Market Orientation and Marketing
Orientation
1.5 Strategic Orientation as a Second Concept
1.6 Why Strategy Development is Important
1.7 What is Strategy?
1.7.1 The Components of Strategy
1.8 Marketing Strategy
1.9 Marketing Strategy Process
Summary
Key Terms
References

1
2
3
5
5
5
6
7
8
8
9
10
11
12
15
16
17

Topic 2

Understanding Customers
2.1 Customer Focus
2.2 Customer Satisfaction or Customer Delight?
2.3 Customer Acquisition
2.4 Customer Retention
2.5 Customer Acquisition or Customer Retention?
2.6 Customer Loyalty
2.7 Relationship Marketing
Summary
Key Terms
References

19
23
25
27
28
29
30
34
36
37
38

Topic 3

Understanding Competitors
3.1 Who are Your Competitors?
3.2 Porters Five Forces

40
41
42

iv

TABLE OF CONTENT

3.2.1
3.2.2
3.2.3
3.2.4
3.2.5
Summary
Key Terms
References

Rivalry Among Existing Firms


Threats of New Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitute Products

43
45
48
49
50
52
52
53

Topic 4

Understanding Markets
4.1 Markets and Strategies
4.1.1 Markets Impact Strategy
4.1.2 Value Migration
4.2 Product-market Scope and Structure
Summary
Key Terms
References

55
56
57
59
61
64
64
66

Topic 5

Strategic Market Segmentation, Targeting and Positioning


5.1 Market Segmentation
5.2 Concept of Market Segment
5.3 Criteria for Effective Segmentation
5.4 How to Segment?
5.5 Finer Segmentation Strategies
5.5.1 Logic of Finer Segments
5.5.2 Finer Segmentation Approaches
5.6 Strategic Analysis of Market Segments
5.7 Market Targeting Strategy
5.8 Positioning Concept and Strategy
Summary
Key Terms
References

68
68
69
70
72
73
73
75
77
78
80
82
82
84

Topic 6

Strategic Brand Management


6.1 Challenges in Building Strong Brands
6.2 Strategic Role of Brands
6.3 Brand Equity
6.4 Brand Identity
6.5 Brand Image
6.6 Managing Brands

85
86
87
88
89
92
93

TABLE OF CONTENT

6.6.1 Product Improvement Strategies


6.6.2 Strategies for Brand Strength
6.6.3 Brand Leveraging Strategy
6.7 Global Brands
6.8 Internet Brands
6.9 Managing the Brand Portfolio
Summary
Key Terms
References

94
97
99
101
102
103
103
104
106

Topic 7

New Product Strategies


7.1 Marketing of New Products
7.1.1 What is New Product?
7.1.2 Market Entry Timing
7.1.3 Why do New Products Succeed or Fail?
7.1.4 Time to Market
7.2 New-product Development (NPD) Process
7.3 Innovation Success
7.4 The Intelligent Innovation Model
7.5 The Concept of Slow Haste
Summary
Key Terms
References

107
108
108
110
110
115
115
117
120
123
125
126
128

Topic 8

Pricing Strategy and Management


8.1 Price Vis-A-Vis Product
8.1.1 Positioning
8.1.2 Demand Curve
8.1.3 Cost of Goods Sold
8.1.4 Environmental Factors
8.2 Pricing Objectives
8.3 Calculating Price
8.4 Selecting Pricing Strategies
Summary
References

130
132
132
133
133
134
135
137
140
143
145

Topic 9

Value-Chain Strategy
9.1 Strategic Role of Distribution
9.2 The Distribution Function
9.3 Direct Distribution by Manufacturers

146
147
149
150

vi

Topic 10

TABLE OF CONTENT

9.4

Channel of Distribution Strategy


9.4.1 Types of Distribution Channels
9.4.2 Distribution Intensity
9.4.3 Channel Configuration
9.5 Managing the Channel
9.6 A Strategic Value-chain Perspective
Summary
Key Terms
References

152
153
155
156
157
161
161
162
164

Communications Strategies
10.1 Communications Objectives
10.2 The Elements of the Communications Mix
10.3 Determining the Communications Budget
10.4 Communications Strategies
10.4.1 Message and Media Strategy
10.4.2 The Product Life Cycle Strategy
10.4.3 The Push and Pull Strategies
10.4.4 The Internet Promotional Strategy
10.5 Integrating and Implementing the Communications Strategy
Summary
Key Terms
References

165
166
167
170
171
172
175
176
176
178
180
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COURSE GUIDE

viii

COURSE GUIDE

COURSE GUIDE

ix

Table of Contents

Welcome to BMMS5103

What will you get from doing this course?


Description of the course
Aim of the course
Objectives of the course

How can you get the most from this course?


Learning package
Course topics
Organisation of the course content

xi

How will you be assessed?


Assessment Format

xv

What support will you get in studying this course?


Tutorials
MyVLE Online Discussion
Facilitator/ Tutor
Library resources
Learner Connexxions

xvi

How should you study for this course?


Time commitment for studying
Proposed study strategy

xvii

COURSE GUIDE

WELCOME TO BMMS5103 MARKETING STRATEGY


BMMS5103 Marketing Strategy is one of the required courses for the Masters in
Business Administration and Masters in Management programmes. The course
assumes you have little or no previous knowledge of strategic marketing theories
but you are required to tap into your experiences and relate them to the strategic
marketing theories, concepts and principles that will be discussed in the course.
This is a three-credit hour course conducted over a semester of 14 weeks.

WHAT WILL YOU GET FROM DOING THIS COURSE?


Description of the Course
The Module is divided into ten well integrated topics. Topic 1 will cover the
market-driven strategy in organisational performance. This topic will discuss the
philosophy of market orientation and the development of strategy. Topic 2 will
expose the concepts and ways to understand customers. Topic 3 will discuss who
are the industry competitors and introduce Porters five forces. Topic 4 will cover
product markets and examine the nature and scope of defining product-market
structure.
In Topic 5, the module will discuss the concept of market segmentation strategy,
market targeting strategy and market positioning strategy. Topic 6 will describe
the role of branding. Some of the explanations available in this topic include
brand equity, brand identity and brand image. It also will include brand global
and internet brands. Topic 7 will be addressing several concepts and models of
new-product strategies. Topic 8 will discuss the objectives and strategies in
pricing strategy. This topic will also introduce several methods used to calculate
price. Topic 9 will discuss the role and strategy in distribution channels that link
value-chain members with end-users. The last topic in this module, Topic 10 will
focus the concepts and strategies in promotion marketing that relate to marketing
communications, although less important in four Ps in the marketing mix but it
plays a key role in ensuring an organisations market success.

Aim of the Course


The objective of the course is to enhance students understanding and application
of economic analysis to managerial decisions. We believe this goal can best be
accomplished by providing a clear and brief statement of the principles of
microeconomic decision making and supplementing this material with problems,
examples and cases that illustrate how such principles are applied.

COURSE GUIDE

xi

Course Learning Outcomes


After completing this course, you should be able to apply strategic marketing
concepts together with the appropriate methodology related strategic marketing.
Specifically, you should be able to:
1.

Apply strategic marketing concepts and techniques in the real business


decisions;

2.

Determine industry customers, competitors, and markets.

3.

Conduct relevant market segmentation, targeting, positioning and branding


strategies to existing and new product.

4.

Determine price and value-chain strategy of market structures; and

5.

Adopt special four Ps in marketing mix.

HOW CAN YOU GET THE MOST FROM THIS COURSE?


Much of what we discuss here is not too difficult if you put some thought into
your study of it. One way to sharpen your strategic marketing IQ is to keep an
eye on the news and business and strategic marketing preriodicals such Business
Times, Malaysian Business and The Wall Street Journal. I believe that critical
thinking, creative thinking and analytical reading would be a good start to many
students. You will find, as we have, that the success or failure of many business
undertakings hinges on how well strategic marketing has understood many of
the concepts we discuss in the topics to follow. All of this, we hope, will help you
to play yours well in the future.

Learning Package
In this Learning Package you are provided with THREE kinds of course materials:
1.

The Course Guide you are currently reading

2.

The Course Content (consisting of 10 topics) and

3.

The Course Assessment Guide (which describes the assignments to be


submitted and the examinations you have to sit for) will be given to you in
a separate folder.

Please ensure that you have all of these materials.

xii

COURSE GUIDE

Table of Content
Topic 1

Market-Driven Strategy

Topic 2

Understanding Customers

Topic 3

Understanding Competitors

Topic 4

Understanding Markets

Topic 5

Strategic Market Segmentation, Targeting and Positioning

Topic 6

Strategic Brand Management

Topic 7

New Product Strategies

Topic 8

Pricing Strategy and Management

Topic 9

Value-Chain Strategy

Topic 10

Communication Strategies

Course Content
This course is divided into ten integrated topics.
Topic 1:

Provides an introduction to market-driven strategy in organisational


performance.

Topic 2:

Explore the concepts and ways to understand customers.

Topic 3:

Discusses the industry competitors and introduces Porters five forces.

Topic 4:

Discusses the product markets and examines the nature and scope of
defining product-market structure.

Topic 5:

Introduces the concept of market segmentation strategy, market


targeting strategy and market positioning strategy.

Topic 6:

Examines the role of branding and focuses on brand equity, brand


identity and brand image. It includes brand global and internet
brands.

Topic 7:

Introduces several concepts and models of new-product strategies.

Topic 8:

Discusses the objectives and strategies in pricing strategy.

COURSE GUIDE

Topic 9:

xiii

Examines the distribution channels that link value-chain members


with end-users.

Topic 10: Discusses the concepts and strategies in marketing promotion that
relate to marketing communications.

Organisation of Course Content


In distance learning, the module replaces the university lecturer. This is one of
the main advantages of distance learning where specially designed materials
allow you to study at your own pace, anywhere and at anytime. Think of it as
reading the lecture instead of listening to a lecturer. In the same way that a
lecturer might assign something for you to read or do, the module tells you what
to read, when to read and when to do the activities. Just as a lecturer might ask
you questions in class, your module provides exercises for you to do at
appropriate points.
To help you read and understand the individual topics, numerous realistic
examples support all definitions, concepts and theories. Diagrams and text are
combined into a visually appealing, easy-to-read module. Throughout the course
content, diagrams, illustrations, tables and charts are used to reinforce important
points and simplify the more complex concepts. The module has adopted the
following features in each topic:

ACTIVITY
These are situations drawn from situations to show how knowledge of
the principles of learning may be applied to real-world situations. The
activities illustrate key points and concepts dealt with in each topic.

SELF-CHECK
Questions are interspersed at strategic points in the topic to encourage
review of what you have just read and retention of recently learned
material. The answers to these questions are found in the paragraphs
before the questions. This is to test immediately whether you
understand the few paragraphs of text you have read. Working
through these tests will help you determine whether you understand
the topic and prepare you for the assignments and the examination.

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COURSE GUIDE

The main ideas of each topic are listed in brief sentences to provide a review of
the content. You should ensure that you understand every statement listed. If
you do not, go back to the topic and find out what you do not know.

Key terms discussed in the topics are placed at the end of each topic to make you
aware of the main ideas. If you are unable to explain these terms, you should go
back to the topic to clarify.

At the end of each topic, a list of articles and topics of books is provided that is
directly related to the contents of the topic. As far as possible, the articles and
books suggested for further reading will be available in OUMs Digital Library
which you can access and OUMs Library. Also, relevant Internet resources are
available to enhance your understanding of selected curriculum concepts and
principles as applied in real-world situations.

COURSE GUIDE

xv

Assessment Format
Please refer to myVLE.

WHAT SUPPORT WILL YOU GET IN STUDYING THIS


COURSE?
Seminars
There are 15 hours of seminars or face-to-face interaction supporting the course.
These consist of THREE seminar sessions of five hours each. You will be notified
of the dates, times and location of these seminars, together with the name and
phone number of your facilitator, as soon as you are allocated a seminar group.

MyVLE Online Discussion


Besides the face-to-face seminar sessions, you have the support of online
discussions. You should interact with other students and your facilitator using
MyVLE. Your contributions to the online discussion will greatly enhance your
understanding of course content, how to go about doing the assignment and
preparation for the examination.

Facilitator
Your facilitator will mark your assignment. Do not hesitate to discuss during the
seminar session or online if:

You do not understand any part of the course content or the assigned
readings.

You have difficulty with the self-tests and activities.

You have a question or problem with the assignments.

Library Resources
The Digital Library has a large collection of books, journals, thesis, news and
references which you can access using your student ID.

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COURSE GUIDE

Learner Connexxions
This is an online bulletin which provides interesting and relevant information to
help you along the programme. There are many useful study hints and you can
read about the experiences of other distant learners.

HOW SHOULD YOU STUDY FOR THIS COURSE?


1.

Time Commitment for Studying


You should plan to spend about six to eight hours per topic, reading the
notes, doing the self-tests and activities and referring to the suggested
readings. You must schedule your time to discuss online. It is often more
convenient for you to distribute the hours over a number of days rather
than spend one whole day per week on study. Some topics may require
more work than others, although on average, it is suggested that you spend
approximately three days per topic.

2.

Proposed Study Strategy


The following is a proposed strategy for working through the course. If you
run into any trouble, discuss it with your facilitator either online or during
the seminar sessions. Remember, the facilitator is there to help you.
(a)

The most important step is to read the contents of this Course Guide
thoroughly.

(b)

Organise a study schedule. Note the time you are expected to spend
on each topic and the date for submission of assignments as well as
seminar and examination dates. These are stated in your Course
Assessment Guide. Put all this information in one place, such as your
diary or a wall calendar. Whatever method you choose to use, you
should decide on and jot down your own dates for working on each
topic. You have some flexibility as there are 10 topics spread over a
period of 14 weeks.

(c)

Once you have created your own study schedule, make every effort to
stick to it. The main reason students are unable to cope is because
they get behind in their coursework.

(d)

To begin reading a topic:


Remember in distance learning much of your time will be spent
READING the course content. Study the list of topics given at the
beginning of each topic and examine the relationship of the topic
to the other nine topics.

COURSE GUIDE

xvii

Read the topic overview showing the headings and subheadings


to get a broad picture of the topic.
Read the topic learning outcomes (what is expected of you). Do
you already know some of the things to be discussed? What are
the things you do not know?
Read the introduction (see how it is connected with the previous
topic).
Work through the topic. (The contents of the topic has been
arranged to provide a sequence for you to follow)
As you work through the topic you will be asked to do the self-test
at appropriate points in the topic. This is to find out if you
understand what you have just read.
Do the activities (to see if you can apply the concepts learned to
real-world situations)

(f)

When you have completed the topic, review the learning outcomes to
confirm that you have achieved them and are able to do what is
required.

(g)

If you are confident, you can proceed to the next topic. Proceed topic
by topic through the course and try to pace your study so that you
keep yourself on schedule.

(h)

After completing all topics, review the course and prepare yourself for
the final examination. Check that you have achieved all topic learning
outcomes and the course objectives (listed in this Course Guide).

FINAL REMARKS
Once again, welcome to the course. To maximise your gain from this course you
should try at all times to relate what you are studying to the real world. Look at
the environment in your institution and ask yourself whether the ideas discussed
apply. Most of the ideas, concepts and principles you learn in this course have
practical applications. It is important to realise that much of what we do in
education and training has to be based on sound theoretical foundations. The
contents of this course provide the principles and theories explaining human
learning whether it be in a school, college, university or training organisation.

We wish you success with the course and hope that you will find it interesting,
useful and relevant in your development as a professional. We hope you will
enjoy your experience with OUM and we would like to end with a saying by
Confucius Education without thinking is labour lost.

xx X

COURSE GUIDE

COURSE ASSIGNMENT
GUIDE

xx

COURSE ASSIGNMENT GUIDE

COURSE ASSIGNMENT GUIDE

xxi

Table of Contents

Introduction

xxiv

Academic Writing
(a) Plagiarism?
(b) Documenting Sources
(i)
What is Plagiarism?
(ii) How Can I Avoid Plagiarism?
Direct Citation
Indirect Citation
Third-party Citation
(c) Referencing
Journal Articles
Online Journal
Webpage
Book
Article in Book
Printed Newspaper

xxiv

Details about Assignments

xxvi

xxii

COURSE ASSIGNMENT GUIDE

INTRODUCTION
This guide explains the basis on which you will be assessed in this course during
the semester. It contains details of the facilitator-marked assignments, final
examination and participation required for the course.
One element in the assessment strategy of the course is that all students should
have the same information as facilitators about the answers to be assessed.
Therefore, this guide also contains the marking criteria that facilitators will use in
assessing your work.
Please read through the whole guide at the beginning of the course.

ACADEMIC WRITING
(a)

Plagiarism
(i)

What Is Plagiarism?
Any written assignment (essays, project, take-home exams, etc)
submitted by a student must not be deceptive regarding the abilities,
knowledge or amount of work contributed by the student. There are
many ways that this rule can be violated. Among them are:

Paraphrases: A closely reasoned argument of an author is paraphrased but


the student does not acknowledge doing so. (Clearly, all our
knowledge is derived from somewhere, but detailed arguments
from clearly identifiable sources must be acknowledged.)
Outright
plagiarism:

Large sections of the paper are simply copied from other


sources, and the copied parts are not acknowledged as
quotations.

Other
sources:

These often include essays written by other students or sold by


unscrupulous organisations. Quoting from such papers is
perfectly legitimate if quotation marks are used and the source
is cited.

Works by
others:

Taking credit deliberately or not deliberately for works


produced by others without giving proper acknowledgement.
These works include photographs, charts, graphs, drawings,
statistics, video clips, audio clips, verbal exchanges such as
interviews or lectures, performances on television and texts
printed on the Web.

Duplication

The student submits the same essay for two or more courses.

COURSE ASSIGNMENT GUIDE

(ii)

(b)

xxiii

How Can I Avoid Plagiarism?

Insert quotation marks around copy and paste clause, phrase,


sentence, paragraph and cite the original source.

Paraphrase clause, phrase, sentence or paragraph in your own


words and cite your source

Adhere to the APA (American Psychological Association) stylistic


format, whichever applicable, when citing a source and when
writing out the bibliography or reference page

Attempt to write independently without being overly dependent


of information from anothers original works

Educate yourself on what may be considered as common


knowledge (no copyright necessary), public domain (copyright
has expired or not protected under copyright law), or copyright
(legally protected).

Documenting Sources
Whenever you quote, paraphrase, summarise, or otherwise refer to the
work of another, you are required to cite its original source documentation.
Offered here are some of the most commonly cited forms of material.

Direct Citattion

Simply having a thinking skill is no assurance


that children will use it. In order for such skills to
become part of day-to-day behaviour, they must
be cultivated in an environment that value and
sustains them. Just as childrens musical skills
will likely lay fallow in an environment that
doesnt encourage music, learners thinking skills
tend to languish in a culture that doesnt
encourage thinking (Tishman, Perkins and Jay,
1995, p.5)

Indirect Citation

According to Wurman (1988), the new disease of


the 21st century will be information anxiety,
which has been defined as the ever-widening gap
between what one understands and what one
thinks one should understand.

xxiv

(c)

COURSE ASSIGNMENT GUIDE

Referencing
All sources that you cite in your paper should be listed in the Reference
section at the end of your paper. Heres how you should do your Reference.
Journal Article

DuFour, R. (2002). The learning-centred principal:


Educational Leadership, 59(8). 12-15.

Online Journal

Evnine, S. J. (2001). The universality of logic: On the


connection between rationality and logical ability
[Electronic version]. Mind, 110, 335-367.

Webpage

National Park Service. (2003, February 11). Abraham


Lincoln Birthplace National Historic Site.
Retrieved
February
13,
2003,
from
http://www.nps.gov/abli/

Book

Naisbitt, J. and Aburdence, M. (1989). Megatrends


2000. London: Pan Books.

Article in a
Book

Nickerson, R. (1987). Why teach thinking? In J. B.


Baron & R.J. Sternberg (Eds). Teaching thinking
skills: Theory and practice. New York: W.H.
Freeman and Company. 27-37.

Printed
Newspaper

Holden, S. (1998, May 16). Frank Sinatra dies at 82:


Matchless stylist of pop. The New York Times, pp.
A1, A22-A23.

DETAILS ABOUT ASSIGNMENT


Facilitator-Marked Assignment (FMA)
There are ONE facilitator-marked assignment in this course. The assignment
counts for 50% of your total course marks. The assignment questions for the
course are listed next. You must will be able to complete the assignment from the
information and materials contained in your suggested readings and course
content. However, it is desirable in graduate level education that you are able to
to demonstrate that you have read and researched more widely than the required
minimum. Using other references will give you a broader perspective and may
provide a deeper understanding of the subject. When you have completed the
assignment, submit it together with a FMA form to your facilitator. Make sure
that your assignment reaches the facilitator on or before the deadline.

COURSE ASSIGNMENT GUIDE

xxv

General Criteria for Assessment of FMA


In general, your facilitator will expect you to write clearly, using correct spelling
(please use your spell checker) and grammar. Your facilitator will look for the
following: That
You have critically thought about issues raised in the course
You have considered and appreciated different points of view, including
those in the course
You have given your own views and opinions
You have stated your arguments clearly with supporting evidence and
proper referencing of sources
You have drawn on your own experiences

TOPIK 2 KAEDAH DAN TEKNIK

17

Topic X Market-Driven

Strategy

LEARNING OBJECTIVES
By the end of this topic, you should be able to:
1.

Define market orientation;

2.

Identify the difference between market orientation and marketing


orientation;

3.

Describe the characteristics of a market-oriented organisation; and

4.

Explain concepts of strategy, strategy development, and marketing


strategy planning process.

X INTRODUCTION

Figure 1.1: Proton brand name and product.

X TOPIC 1

MARKET-DRIVEN STRATEGY

The performance of companies like Proton, MAS and DiGi are always duly
reported in our newspapers, and we become fascinated and intrigued by their
success or failure. All of these companies will surely claim to be supporters of
market-driven strategy. However, at the end of the day, their performance will
indicate the truth because market-driven strategy can indeed bring success, while
the lack of it will be detrimental to the companies.

1.1

THE STUDY OF STRATEGIC MARKETING

These and other companies are all part of a business landscape that is changing
very quickly. Globalisation and technology are just two of the many drivers that
are transforming the business world as we know it. As such, companies must
always be alert and be more than ready to respond to an ever-changing
environment that is filled with constant uncertainty.
In this consumer-directed environment, you, as a consumer are constantly
searching for new products, always looking for wider product choice in this daily
quest to satisfy your own needs and wants, and on top of this, also expecting
superior value. Therefore, marketing plays a very important role in this
consumer-centric environment.
On the other hand, companies are finding themselves competing in an
increasingly crowded marketplace with many competitors vying to sell similartype products to the same consumers. Therefore, the search for the right strategy
or strategies to use, in order that they can get consumers to choose their product
over their competitors products is becoming very important. In fact, the
companies prosperity and even survival depends on them finding the correct
strategy or strategies.
As such, the study of strategic marketing will essentially embrace the marketdriven strategy that is being planned for and developed by a market-oriented
organisation.
Strategic marketing is a market-driven process of strategy development,
taking into account a constantly changing business environment and the need
to deliver superior customer value (Cravens and Piercy, 2006, p 30).
The focus of strategic marketing is on organisational performance.

TOPIC 1

MARKET-DRIVEN STRATEGY W

ACTIVITY 1.1
Research a Malaysian company that you believe has been adopting
market-driven strategies. Identify those strategies. Why do you consider
this company to be successful?

SELF-CHECK 1.1
In your own words, define strategic marketing.

1.2

MARKET-DRIVEN STRATEGY

Market-driven strategy has, as its starting point, the market and its customers
and is driven to deliver superior customer value. Ramly Burgers successful
market-driven strategy is illustrative. Ramly Burgers marketing-mix strategy
profitably caters to its customers. It is able to whip up very tasty burgers at very
affordable prices, available through word-of-mouth promotion, and found at
strategic locations, mostly near 7-Eleven stores in residential neighbourhoods
throughout the country.

Figure 1.2: A Ramly Burger stall.

X TOPIC 1

MARKET-DRIVEN STRATEGY

AirAsia is another success story established in December 2001 from a fleet of


just two aircraft and expanding to twenty eight as of September 2007. Its marketdriven strategy is based on the Everyone Can Fly philosophy and its low-fare,
no frills model has been well-received by the masses, even earning it the Best
Low Cost Airline in Asia 2007 Award from Skytrax, an air transport research
organisation.

Figure 1.3: The AirAsia brand name

Market-driven strategy employs a long-term approach. Companies that use this


approach know that short-term cost savings and profit enhancements will
negatively impact their strategic goals and the building of superior customer
value.

SELF-CHECK 1.2
1.

Looking at your own organisation, do you believe that it promotes


a market-driven strategy?

2.

Is the market-driven strategy relevant to governmental and nonprofit organisations? Explain.

TOPIC 1

1.3

MARKET-DRIVEN STRATEGY W

MARKET ORIENTATION AS A
PHILOSOPHY

Market orientation is a central tenet of marketing.


By and large, market orientation is seen as a set of information-based activities
(Kohli and Jaworski, 1990) and related behaviours (Narver and Slater, 1990) that
portray the marketing concept, as we know it, as a business philosophy within an
organisation.
A business is market-oriented when its culture is systematically and entirely
committed to the continuous creation of superior customer value (Narver
and Slater, 1994, p 22).

1.3.1

The Three Dimensions of Market Orientation

Kohli and Jaworski (1990) define market orientation in terms of three


dimensions:
(a)

Market orientation is viewed in terms of current and future needs of


customers as well as the effect external factors such as competition and
technology have on those needs.

(b)

The dissemination of such information among all the organisational


functions.

(c)

The development and implementation of strategies in response to this


information.

1.3.2

Becoming a Market-oriented Organisation

The primary objective is to deliver superior customer value. To fulfil this


objective, the organisation must engage in the following tasks:
Information Acquisition

An organisation must be alert to changing market conditions and


demonstrate an understanding of its markets and its customers.

To have this understanding, the organisation must have the initiative to


collect and analyse all relevant information.

X TOPIC 1

A learning organisation that fosters open-minded enquiry, the quick


dissemination of information and the extensive use of market input from
well-informed managers across all business.

Every function (not just sales and marketing) will most definitely, assist in
information acquisition.

MARKET-DRIVEN STRATEGY

Cross-Functional Assessment

The active engagement of all business functions within an organisation for


the purpose of sharing information and working together is a great facilitator
in promoting superior customer value.

Shared Diagnosis and Action

Beyond this obvious need for information, is deciding what actions are to be
taken.

This involves everyone bringing together ideas and having shared


discussions, again, across all business functions.

Cross-functional collaboration facilitates issue-identification and coordinated


decision-making and implementation.

From the above, it becomes obvious that for an organisation to embrace market
orientation, management must make use of superior organisational skills to help
them understand and satisfy customers.

1.3.3

Market-orientation Is It Beneficial?

Does market orientation benefit organisations?


Empirical research in this area generally seems to support the pursuit of market
orientation as a correct market-driven strategy:

Kohli and Jaworski (1990) found that a market orientation provides a


unifying focus for the efforts and projects of individuals, thereby leading to
superior performance.

Similar results were found by Narver and Slater (1990) who concluded that a
market orientation has, in some cases, a substantial positive effect on
profitability.

A subsequent study by Narver and Slater (1994) found that a market-oriented


culture provides the foundation for value-creating capabilities that enable
businesses to consistently deliver superior value to customers.

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MARKET-DRIVEN STRATEGY W

SELF-CHECK 1.3
1.

In your own words, define market orientation.

2.

State the three dimensions of market orientation.

3.

State the three tasks that a market-oriented organisation is


involved in.

1.4

DISTINCTION BETWEEN MARKET


ORIENTATION AND MARKETING
ORIENTATION

Market orientation is different from marketing orientation. If you can recall,


marketing orientation is when an organisation puts its total focus on the
customer, and where the delivery of customer satisfaction at a profit, is their
primary motivation.
On the other hand, a market-oriented organisation is much more than just
acknowledging the importance of customers as a key driver to deliver superior
customer value.
More than that, it encourages the methodical collection and sharing of market
information from customers, competitors and other stakeholders, in order for the
organisation to interpret and devise appropriate responses to changing
conditions.
This serves the purpose of promoting an organisation-wide priority that allows
identifying and exploiting of opportunities as well as neutralising threats in the
marketplace.
In other words, market orientation captures an organisations ability to
anticipate, react to, and capitalise on changes that are bound to occur in the fastmoving marketplace.
Just as you now know that market orientation is concerned with organisationwide issues, marketing orientation reflects a functional focus. We can add that
marketing orientation as a philosophy extends beyond the marketing function in
an organisation.

X TOPIC 1

MARKET-DRIVEN STRATEGY

SELF-CHECK 1.4
Identify the two main distinctions between market orientation and
marketing orientation.

1.5

STRATEGIC ORIENTATION AS A SECOND


CONCEPT

Market orientation is fine as a philosophy but to actualise this, we will need to


introduce strategic orientation as a second concept.
Strategic orientation is defined as how an organisation uses strategy to adapt
and/or change aspects of its environment for a more favourable alignment
(Manu and Sriram, 1996, p 79).
This term can also be characterised as competitive strategy, strategic fit, strategic
thrust and strategic choice.

1.6

WHY STRATEGY DEVELOPMENT IS


IMPORTANT

Porter (1996) states, that through the years, managers have been focusing too
much on operational effectiveness rather than strategy development.
Management tools such as Total Quality Management (TQM), benchmarking and
outsourcing have taken the limelight away from strategy. Granted that both
operational effectiveness and strategy are important for superior organisational
performance both play different roles.
Operational effectiveness is performing similar activities better than competitors,
while strategy requires us to perform different activities from competitors or
performing similar activities in different ways.
Companies are mainly interested in always pushing productivity as high as
possible and although this is admittedly necessary for superior performance it
is surely not adequate for overall competitiveness.

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MARKET-DRIVEN STRATEGY W

Therefore, strategy is equally, if not more important. Why? Strategy is important


because organisational goals can only be achieved satisfactorily through the
correct use of strategies.

ACTIVITY 1.2
Do you agree with Porters contention that managers have forsaken
strategy in favour of operational effectiveness? Provide an example of a
company to illustrate your agreement or disagreement.

1.7

WHY STRATEGY?

Grant (1995) defines strategy as the overall plan for deploying resources to
establish a favourable position.
The task of strategy, in Grants view, is to determine how the organisation will
deploy resources within its environment and satisfy its long-term goals and how
it will organise itself to implement that strategy.
Adding a competitive dimension, Fifield and Gilligan (1998) define strategy as
the broad statement of the way in which the organisation sets out to achieve its
objectives. Included within this would be a series of decisions on the markets in
which the organisation will operate, the type of products/services it will offer
and the basis of the competitive stance. To put it simply, a strategy is a roadmap
that directs the organisation towards the attainment of its long-term goals and
objectives.
Strategic planning involves examining and evaluating the conditions prevailing
in the marketplace and planning accordingly toward operationalising the
strategy.

SELF-CHECK 1.5
In your own words, define strategy.

10 X TOPIC 1

1.7.1

MARKET-DRIVEN STRATEGY

The Components of Strategy

A well-developed strategy consists of five components, or sets of issues (Figure


1.4):

Figure 1.4: Components of Strategy

Scope

The scope of an organisation refers to the breadth of its strategic domain the
number and types of industries (e.g. tourism, hospitality, health, education
industries), product lines (e.g. processed food, pet food, dairy products,
frozen meals), and market segments (e.g. tweens, teens, young adults, senior
citizens) it competes in or plans to enter.

Decisions about an organisations strategic scope should


managements view of the organisations purpose and 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.

reflect

Goals and Objectives

Strategies should also detail the levels of accomplishment on one or more


dimensions of performance e.g. volume growth, market share, return on
investment (ROI), profit contribution over specified time periods (e.g. 10

TOPIC 1

MARKET-DRIVEN STRATEGY W

11

years, 5 years) for each of those businesses and product-markets and for the
organisation as a whole.
Resource Deployments

Every organisation has limited financial and human resources.

Designing a strategy means deciding on how these resources are to be


allocated and distributed across businesses, product-markets, functional
departments and activities within each business or product-market.

Sustainable Competitive Advantage (SCA)

An important part of any strategy is a specification of how the organisation


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 customers?

To answer this question, managers must examine the market opportunities in


each business and product-market and the companys unique competencies
or strengths

Synergy

Synergy exists when the organisations businesses, product-markets, resource


deployments and competencies complement and reinforce each other.

Synergy enables the total performance of the related businesses to be greater


than it would otherwise be: The whole is greater than the sum of its parts.

The choice of strategy is influenced firstly by objectives and secondly by the


resources available.
For example developing superior products depends on having excellent research
and development facilities and skilled manpower or at least it depends on having
the money to buy facilities and also the time to recruit and build an R&D team.

1.8

MARKETING STRATEGY

A marketing strategy expects decisions about the specific customers the


organisation wants to target and the marketing mix the organisation wishes to
develop to appeal to the said target market.
We can of course organise many combinations of marketing mix decisions and
target markets but the idea is not just to come up with any strategy.

12 X TOPIC 1

MARKET-DRIVEN STRATEGY

The real challenge is to zero in on the best strategy.


Here is an example of three competitors with three different marketing strategies
in the tyre market:
(a) Goodyear chose a strategy of mass volume, and adopting low cost market
leadership.
(b) Michelin chose a product development strategy and invested in new
technology and research and development to develop the radial tyre. This
eventually redefined customer needs and made the cross-ply tyre obsolete.
(c) Armstrong Rubber adopted a third strategy: exploring specialist
application by focusing on special tyres for agricultural, aviation and civil
engineering market segments.

SELF-CHECK 1.6
Marketing strategy is a combination of what type of decisions?

ACTIVITY 1.3
Research one Malaysian company that you are familiar with, and
identify its target markets and the marketing mix strategies that it uses
to further its organisational goals.

1.9

MARKETING STRATEGY PROCESS

The marketing strategy analysis, planning, implementation and management


process is illustrated below:

TOPIC 1

MARKET-DRIVEN STRATEGY W

13

Figure 1.5: The marketing strategy process.


Source: Cravens, David and Piercy, Nigel (2006), Strategic Marketing, Eighth edition,
McGraw-Hill/irwin: New York, p 30.

The strategic situation analysis examines market and competitor analysis, market
segmentation and continuous learning about markets. Designing marketing
strategy allows us to look at customer targeting and positioning strategies,
marketing relationship strategies and planning for new products.
Marketing programme development consists of product, price, distribution, and
promotion strategies designed and executed to meet the value requirements of
targeted customers. Strategy implementation and management look at
organisational design and marketing strategy implementation and control.
From the above (Figure 1.5), we can see that the marketing strategy process
involves strategic planning for the marketing activities of the organisation.
Marketing has a key role to play in strategy planning, because it is the job of
marketing management to understand and manage the links between the
business and its environment.
A good way of looking at marketing strategy planning is as a narrowing-down
process. This marketing strategy process is illustrated below:

14 X TOPIC 1

MARKET-DRIVEN STRATEGY

Figure 1.6: Overview of the marketing process.


Source: Website http://highered.mcgraw-hill.com/sites/dl/free/0072525231/
127665/pt15ch02v2.pdf, retrieved 07 September 2007

Effective marketing strategy planning aims to match opportunities to the


organisations resources and its objectives.
The single most important factor for a successful marketing strategy is a clear
understanding of who your customers are and what their needs are. It is your
ability to satisfy these customers needs better than your competitors that can
help you build customer loyalty and increase your sales.

SELF-CHECK 1.7
What are the four main steps outlined in a marketing strategy process?

TOPIC 1

MARKET-DRIVEN STRATEGY W

15

We start off by talking about the subject of strategic marketing as a process of


developing market-driven strategy that is needed to confront a competitive
marketplace and a fast-changing environment, as an approach to deliver
superior customer value.

The focus of strategic marketing is rightly on organisational performance.

We also introduce market orientation as a business philosophy that is


developed to explain organisational performance.

We explain that market orientation is about creating and fostering an


organisation-wide culture that encourages us to not only focus on customers
and delivering that superior customer value, but also in gathering and
distribution market information across all business functions within that
organisation for the purpose of coming out with suitable responses as a way
of exploiting opportunities that we have identified as well as to counter any
threats that may have arisen.

We make the distinction between market orientation and marketing


orientation

Market orientation is already explained above, but marketing orientation on


the other hand, essentially adopts a functional approach even if the focus is
still on the customer as well as the necessity of delivering superior customer
value.

Therefore, to become a market-oriented organisation, the organisation itself


will engage in three primary tasks: information acquisition, cross-functional
assessment and shared diagnosis and action.

We have noted that generally-speaking, empirical research seems to validate


the positive impact of a market orientation approach.

The concept of strategic orientation (or competitive strategy, as it is more


popularly known) is introduced, and we refer this as the strategy or strategies
developed by the organisation, upon which market orientation philosophy
rests.

We explain the importance of strategy development, particularly in relation


to the over-emphasis on operational effectiveness in reality both are
important to an organisations success.

We acknowledge that strategy brings in the business to the organisation.

16 X TOPIC 1

MARKET-DRIVEN STRATEGY

We re-acquaint you with the concept of strategy and talk about the
components of a strategy: scope, goals and objectives, resource deployments,
identification of a sustainable competitive advantage and synergy.

We refer to marketing strategy in terms of marketing mix decisions as well as


the target market that we are focusing on.

The challenge is in finding the correct strategy that can actually deliver
superior customer value.

Finally, we talk about the strategic marketing process as consisting of four


steps: strategic situation analysis, designing marketing strategy, marketing
programme development, and implementing and managing marketing
strategy.

The purpose of marketing strategy planning is to match market opportunities


to the organisations goals and resources.

Market orientation
Marketing strategy

Strategic orientation

TOPIC 1

MARKET-DRIVEN STRATEGY W

17

Major music producers entered the new millennium facing a strategic


dilemma. High-quality music downloads from the Internet is already seen as
undermining the market for their recorded CDs throughout the world. The
challenge then is to find a business model that would allow these traditionbound companies to profit from digital music downloading from the Internet.
The breakthrough came from Steve Jobs Apple Computer Inc. with the
development of the iPod, a small elegantly designed easy-to-use handheld
device that can store 10,000 songs in a unit that is smaller than a deck of
cards, and sells for around $300. The consumer can store collections of
downloaded music on the iPod (or burn the music onto a blank CD disk).
Strategic leverage came from Jobs unprecedented success in persuading all
the major record labels to make their music available legally on a single
website. This site is Apples online music store iTunes, with approximately
700,000 songs available for download. A million songs were sold in iTunes
first week, and in the first 7 months of iTunes existence, more than 30 million
songs were downloaded from Apples store.
Source: Wingfield, Nick, Online Musics Latest Tune, The Wall Street
Journal, 27 August, 2004, pp B1-B2.
QUESTIONS
1.
What is Apples market-driven strategy in the music business?
2.
Apples success can be attributed to a market orientation approach
why is that?
3.
In what way is Apple delivering superior customer value?

Cravens, D. (1994). Strategic marketing. New York: McGraw-Hill


Cravens, D. & Piercy, N. (2006). Strategic marketing. (8th ed.). New York:
McGraw-hill/Irwin Chapters 1 & 2.
Kohli, A.K., & Jaworski, B. J. (1990). Market orientation: The construct, research
propositions and managerial implications, Journal of Marketing, Volume
54, pp 1-18.

18 X TOPIC 1

MARKET-DRIVEN STRATEGY

Morgan, Robert, & Strong, Carolyn (1998). Market orientation and dimensions of
strategic orientation. European Journal of Marketing, Volume 32, Number
11/12, pp 1051-1073.
Narver, J.C., & Slater, S.F., (1990). The effect of a market orientation on business
profitability. Journal of Marketing, Volume 54, Number 4, pp 20-35.
Narver, J.C., & Slater, S.F., (1994). Does competitive environment moderate the
market orientation-performance relationship? Journal of Marketing,
Volume 58, pp 46-55.
Narver, J.C., & Slater, S.F., (1994). Market Orientation, Customer Value, and
Superior performance. Business Horizons, March/April, pp 22-27.
Porter, Michael (1996), What is strategy?, Harvard Business Review, pp 61-78.
West, Douglas; Ford, John & Essam, Ibrahim (2006). Strategic marketing. Oxford
University Press, Chapter 2.

Topic X Understanding

Customers

LEARNING OBJECTIVES
By the end of this chapter, you should be able to:
1.

Explain why the customer is important;

2.

Contrast between customer satisfaction and customer delight;

3.

Discuss the twin concepts of customer acquisition and customer


retention;

4.

Appraise customer loyalty; and

5.

Explain relationship marketing.

X INTRODUCTION
WHY IS THE CUSTOMER IMPORTANT
Companies spend millions trying to understand and influence customers to get
their attention, to retain them and to encourage them to spend more.
A good understanding of your customers is one of the keys to running a
successful business. Understanding your customers can surely help you make
your product or service better.
Let us start by addressing the fundamental question: Why is the customer so
important?
1.

Organisations need customers to buy their products and services for


revenue-generation (and for businesses, profit) without them, the
organisation would not survive.

20 X TOPIC 2

UNDERSTANDING CUSTOMERS

2.

In most cases (especially for service organisations), organisational activities


and processes would cease altogether without customers (and end-users)
you cannot provide a service if theres no one to provide it to.

3.

Customers supply feedback to organisations by providing essential


information that enables the latter to develop and adapt their business and
marketing strategies.

In todays globalised business economy, customers can have access to widening


product choices. This means that increasingly, it is getting very difficult to lure
customers and get them to buy your product(s) because there are very many
other similar-type products on offer.
Say for example you are the marketing manager for Combi Cola. How do you
ensure that potential customers choose you over other cola drinks (see Figure 2.1)
such as the No. 1 beverage in the world?

Figure 2.1: Brands of cola drinks in the market

And one brand, Coca-Cola can offer plentiful choices it has created so many
line extensions, that even buying a Coke is no longer that simple (Figure 2.2).

TOPIC 2

UNDERSTANDING CUSTOMERS W

21

Figure 2.2: A sample of Coca-Cola line extensions.


In order for companies to capture customers given the scenario painted above
we must first understand the customers.
Lets talk about Coke again. The company has always thought in terms of
traditional drink categories like cola or juice. In the past, innovation meant
incremental line extensions such as new flavours (e.g. Vanilla Coke, Diet Coke
Black Cherry Vanilla, Diet Coke with Lemon, Diet Coke with Lime, Diet Coke
with Citra, Diet Coke Sweetened with Splenda).
But Coke is now realising that the soda market is indeed declining and that it
has to do something to stem this slump, particularly as consumption patterns
show the continued shifting away from non-carbonated drinks to juices, energy
drink, water and flavoured water.
As such, Cokes marketers will now have to think more creatively about
consumers' needs. That has led Coke to create drinks that cater to, for example,
the desire to feel healthy. E.g. Diet Coke Plus which is Diet Coke fortified with
vitamins and minerals, was introduced into selected markets in April 2007.
So, why is it important that we understand customers?
For a start, we are a learning marketing. In marketing, it always comes back to
understanding the customer. Remember the marketing concept and its customercentric proposition? If you understand why your customer uses your product,
you have information that can help you market to that customer. If you

22 X TOPIC 2

UNDERSTANDING CUSTOMERS

understand how your customer feels about your product or company, that's
additional information to help you market the product better.
Understand your customer. Identify ways to understand not only how the
customer buys but why he or she buys. Learn not only how satisfied the
customer is but why. Understand what types of marketing efforts the customer
responds to and why. It's one step closer to marketing the right product at the
right price through the right channel and using the right method that the
customer is most likely to accept and buy it.
To embark on this journey to understand the customer we will introduce
concepts such as:
(a)

Customer focus;

(b)

Customer satisfaction/customer delight,

(c)

Customer acquisition,

(d)

Customer retention,

(e)

Customer loyalty, and

(f)

Relationship marketing.

To achieve this, we must be aware that it is more than just focusing on quality
offerings it is equally important to work on interacting with customers through
personalised and intelligent transactions. As I have said earlier it is about
focusing on the customer.

SELF-CHECK 2.1
1.
2.

Why is the customer important?


Why is it important that we understand customers?

ACTIVITY 2.1
Conduct a research on a Malaysian company that is struggling and that
the primary cause of this, is its inability to properly understand
customers needs and therefore, unable to meet customers expectations.
Identify the customer issues and make recommendations on how to
reverse the companys fortune.

TOPIC 2

2.1

UNDERSTANDING CUSTOMERS W

23

CUSTOMER FOCUS

It is common to find organisations today claiming to be in the business of serving


customers. Upon closer inspection, however, we realise that their focus is
actually on serving themselves.
Most businesses are in fact, consumed by task-focus, and customer focus is at
best, superficial. Customer focus is definitely not about wearing smiley badges
(Figure 2.3).

Figure 2.3: A smiley badge

Customer focus is a strategic business concept that expects the customer to


become an integral part of the thinking of everyone in an organisation.
As Macdonald (1995) said, To attain world-class status in the eyes of the
purchaser will require businesses to envisage themselves continuously in the
mind of the customer. Customer focus can certainly help the organisation to
achieve a sustainable competitive advantage.
When a company becomes customer focused, everything starts to look different.
This is because everything in a business can be viewed from a customer
perspective.

24 X TOPIC 2

UNDERSTANDING CUSTOMERS

Figure 2.4: Colourful iPods

Apples iPod (figure 2.4) is a great example of the power of customer focus. By
being in tune with its customers, and by sensing an unmet need, Apple could
assemble its creative people to work towards meeting consumers desire for an
electronic device that produces personal, portable and flexible music (Hassan,
2006).
Why is customer focus becoming so important?
It is necessary to be customer-focused to keep an organisation close to its market.
In this world you have to understand your customers better not just to listen to
their needs but often to anticipate them.
Another good example of a customer-focused organisation is Unipart, a UK
logistics company. This company was born out of the old motor industry, where
customers were not the prime concern in the average employees thinking.
However, Unipart changed and became a leader in embedding customer-focus
throughout the business. It gives awards each month to staff who have excelled
in this area, and is not shy about giving them to individuals who have exceeded
their authority to solve customer problems. Probably most significantly, the chief
executive regularly talks on the subject on the staff induction programme (Cox,
1997).
Therefore, we acknowledge that an organisation practising the marketing
concept will indeed practise customer focus.
Customer focus will surely produce customer satisfaction the question we wish
to address below is: Is this enough?

TOPIC 2

UNDERSTANDING CUSTOMERS W

25

SELF-CHECK 2.2
Restate customer focus in your own words.

2.2

CUSTOMER SATISFACTION OR CUSTOMER


DELIGHT?

Customer satisfaction involves determining the degree to which a companys


products or services meets the requirements of the customer as an end user.
Satisfaction is an overall customer attitude towards a service provider
(Levesque & McDougall, 1996, p 14), or an emotional reaction to the difference
between what customers anticipate and what they receive (Zineldin, 2000),
regarding the fulfilment of some need, goal or desire (Oliver, 1999).
Customer satisfaction provides these benefits: Satisfied customers are less pricesensitive, buy additional products, are less influenced by competitors and stay
loyal longer (Zineldin, 2000).
Still, the concept of customer satisfaction is dicey, and in fact, it is being robustly
challenged (e.g. Fournier & Mick, 1999; Jones & Sasser, 1995; Lemon et al, 2002;
Spreng et al, 1996; Schneider & Bowden, 1999). E.g. If consumers have low
expectations to start with, then they can easily be satisfied by an average if not a
poor performance. That is, this concept predicts that a consumer who expects
and receives poor performance will be satisfied which we know is not really
valid.
Appiah-Adu (1999) declared that there is a difference between satisfaction and
total satisfaction, and that the goal should be to achieve the latter.
Mascarenhas, Kesavan & Bernacchi (2004) reiterated the belief that today's
knowledgeable customers look beyond the mere satisfaction of their
expectations. They seek fulfilment of their desires (Spreng et al, 1996). They seek
unique experiences from their buyer-seller interactions (Vandenbosch & Dawar,
2002). They also look for the unique experience of co-creating the product with
producer-consumer engagement (Prahalad & Ramaswamy, 2003). Simply put, it
means that consumers today, look for more than a product or service, or even a
brand or the company to satisfy them; they want an engagement, an experience,

26 X TOPIC 2

UNDERSTANDING CUSTOMERS

an excitement and in sum, they want consumer delight (Keiningham et al, 1999;
Keiningham & Vavra, 2002; Schneider & Bowden, 1999).
Customer delight, in simple language, really means total customer satisfaction
it is not about meeting consumers expectations, but exceeding those
expectations.
Customer delight is the reaction of customers when they receive a product that
provides unexpected value or unanticipated satisfaction (Chandler, 1989).
Customer delight is a strong, positive and emotional reaction to a product or
service (Schlossberg, 1990).
It is the key to the more evasive goals of loyalty, positive referrals, and loyaltydriven profit (Oliver et al, 1997).
Over 20,000 customer surveys conducted in 40 countries by InfoQuest (Refer to
website http://wiki.ittoolbox.com/index.php/What_is_the_process_for_ measuri
ng_customer_relationships_and_customer_satisfaction%3F, retrieved 18 September
2007)drew these interesting conclusions:
1.

A Totally Satisfied Customer contributes 2.6 times as much revenue to a


company as a Somewhat Satisfied Customer.

2.

A Totally Satisfied Customer contributes 14 times as much revenue as a


Somewhat Dissatisfied Customer.

3.

A Totally Dissatisfied Customer decreases revenue at a rate equal to 1.8


times what a Totally Satisfied Customer contributes to a business.

So from the above, we can say that whether a customer is totally satisfied or not,
does have a bearing on the companys business performance.
We repeat:
Customers are the critical component for business success.

SELF-CHECK 2.3
Distinguish between customer satisfaction and customer delight.

TOPIC 2

2.3

UNDERSTANDING CUSTOMERS W

27

CUSTOMER ACQUISITION

Customer acquisition is the marketing goal of acquiring new customers selling


to people who were not already customers (Refer to website http://
www.adobe.com/products/vdp/glossary.html, retrieved 25 September 2007)
Another way of putting it is that customer acquisition is about expanding the
number of customers for existing products (Refer to website http://wps.
pearsoned.co.uk/wps/media/objects/1513/1550326/glossary/glossary.htm
l, retrieved 25 September 2007).
Many businesses have traditionally depended on the acquisition of new
customers as the primary means of growth. This could involve finding
customers:
(a) who previously were not aware of your product;
(b) were not candidates for purchasing your product (e.g. baby diapers for new
parents), or
(c) customers who in the past have repeatedly bought from your competitors.
Customer acquisition cost is the cost associated with acquiring a new customer.
Some companies are willing to spend hundreds, even thousands of ringgit to
acquire a customer, while others spend virtually nothing at all. E.g. Hotmail
acquired new users through viral marketing (also called word-of-web, or wordof-mouth marketing), and therefore, spent very little on marketing. E-commerce
sites usually pay tens of ringgit to acquire customers, whereas brokerage firms
are willing to spend hundreds of ringgit on customers.
A 1999 Soft-Letter publication reported an Intermarket Group study which
revealed that Barnesandnoble.com spent US$42 to sign up a new customer,
compared to Amazon.com's US$27.60, Priceline's US$32.30, and Beyond.com's
US$29.30. Especially in low-margin businesses, numbers like this immediately
show who's running the most efficient marketing operations and who might be
dangerously at risk (Refer to website http://www.allbusiness.com/
sales/customer-service/313438-1.html?yahss=114-2974554-313438, retrieved 25
September 2007).
And according to Optimize Magazine, at one point CDnow Online was spending
about US$40 to acquire each customer, although the average lifetime value of a
customer to them was only about US$25. The Optimize article suggested that it
does not make business sense at all to spend more on acquiring a customer than
the amount that customers will net the company in return (Refer to website

28 X TOPIC 2

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http://searchcrm.techtarget.com/sDefinition/0,,sid11_gci942906,00.html, retrieved
25 September 2007).
Obviously, it makes sense to spend money on customers who are most likely to
keep buying the same firms products and services this is where the concept of
customer retention comes in. If new customers are just one-off buyers or if there
aren't any follow-on products to sell, upfront acquisition costs can be terribly
expensive and this is something we would want to avoid in the first place.

SELF-CHECK 2.4
Under what conditions would customer acquisition be considered a
primary source of corporate growth?

2.4

CUSTOMER RETENTION

Retention can be defined as a commitment to continue to do business or


exchange with a particular company on an ongoing basis (Zineldin, 2000, p 28).
According to PODi, an association for Digital Printing Service Providers, the rule
of thumb is that it costs five to ten times less to keep a customer than it does to
acquire a new one.
Then there is the debate about the link between customer satisfaction and
retention; the popular belief that a satisfied customer is a retained customer and
the other arguing the opposite.
The former brought in the concept of relationship when explaining why
customers choose to stay when they are satisfied. This is supported by Eriksson
& Lofmarck Vaghult (2000), who argued that relationships depend on
satisfaction.
Also, a common experience was that a satisfied customer is not necessarily a
retained customer, which is defended by Reichheld and Aspinall (1993). The
arguments were that customers could be offered something better elsewhere and
they then elect to switch support even though they might be satisfied with what
they have. This is also consistent with Lowensteins (1995) finding, that a
satisfied customer may suddenly switch provider for no important reason.
Customer retention doesnt just happen. Indifferent customer service for
example, can undermine even the best retention programme. For customer

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29

retention to work, the company must look at its total operation to ensure that
every aspect of its business is targeted at keeping the customers they already
have. Perhaps the receptionist takes his own sweet time to attend to you. Or the
salesperson is abrupt and easily angry. Every single contact with your customer
has to be positive for customer retention to work.

SELF-CHECK 2.5
1.

A satisfied customer is a retained customer. Discuss.

2.

A satisfied customer is not a retained customer. Discuss.

ACTIVITY 2.2
1.

Does your organisation possess a retention strategy?

2.

Is your organisation devoting a portion of your marketing budget


to keeping current customers?

2.5

CUSTOMER ACQUISITION OR CUSTOMER


RETENTION?

Customers are assets that need to be acquired before they can be managed for
profit (Levitt, 1986).
Customer retention is clearly an important objective in competitive and mature
markets. But customer acquisition is still hugely important to companies in many
contexts:

For new business start-ups;

When entering new geographic or customer market segments;

When launching a new product;

When exploiting new applications for an existing product or service;

When marketing low involvement products and services;

When repeat purchases are infrequent; and

When switching costs are low.

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Also, when markets show growth potential it is strategically important for all
players to grow the aggregate market size rather than protect their own customer
base, through customer retention efforts. There are some businesses in which the
constant acquisition of new customers is the only way to survive. Examples
include funeral parlours, private hospitals dedicated to procedures such as
hernia repairs or cataract removal, and MBA programmes.
Customer acquisition is important even when customer retention is a well-used
strategy. Studies have shown that 25 percent or more of customers will need
replacing yearly (Sellers 1989; Hanan 2003; Buttle 2004).
In a B2C (business-to-consumer) context, this may be due to customers shifting
out of a targeted demographic, or their personal circumstances have changed
such that they no longer find value in an offering. In a B2B (business-to-business)
context, corporate customers may be lost due to acquisition by a hungrier
organisation. It is clear that without a well-developed and successful customer
acquisition strategy, customer retention and development loses its importance.
Against this inclination towards a retention bias, there has been good support for
customer acquisition as a valid strategy. Dowling (2002) suggested that
customers have little time, energy or interest in establishing strong brand
relationships. Some customers are serious brand switchers while others are
simply fanatical about need fulfilment, rather than on continuity. Goodwin &
Ball (2003) indicated that there may be considerable economic gain from focusing
on customer acquisition. They demonstrated that a firm having a 16.7 percent
share of market enjoys five times the revenue impact from a 1 percent increase in
acquisition than from a 1 percent increase in retention.

SELF-CHECK 2.6
Even though customer retention is a well-used strategy, under what
conditions are customer acquisition still important to a company?

2.6

CUSTOMER LOYALTY

There is no one universally accepted definition of loyalty. Some would base it on


the customer retention rate; others measure it by their share of the purse; still
others promote frequency as the best measure; and those that claim its the
customers attitude towards the company that best describes loyalty.

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31

I saw this definition that I believe comes closest to what customer loyalty is.
Customer loyalty refers to the degree to which customers are predisposed to
stay with one company and resist competitive offers (Refer to website
http://www.bitpipe.com/tlist/Customer-Loyalty.html, retrieved 24 September,
2007).
If we can recall from the previous chapter, we would remember the consumer as
being the focal point of all marketing activities. Once this customer-centric vision
has truly been established, the individual customer can truly begin to be
understood and valued, and loyalty can therefore, be earned.
For us to develop loyalty, we will need to pinpoint what it is that your customers
define as value, understanding what is important to them and making sure that
their expectations are met and even exceeded.
The path to customer loyalty is not as easy and simple. When your customers
dont really care about their relationship with you then you will soon realise
that loyalty is short-lived. They may want to be recognised and appreciated, but
they will never be loyal in the true sense of the word. They are not loyal to you
as they may be to a life partner, or their political party or even their employer.
Just ask yourself: Are you really loyal to your bank (Figure 2.5) or your petrol
station (Figure 2.6)?

Figure 2.5: A Maybank branch

Figure 2.6: A Petronas petrol station

Still it doesnt really matter. We still have to focus on the customer. Even though
your customers dont want a relationship with you, they do want you to
remember who they are. They want you to communicate to them that their
business means something to you and they want you to do it in a relevant way.

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Another aspect of loyalty is that it is not merely measured in behavioural terms


(e.g. total spend, number of years as a customer, frequency of purchase), but
rather, more importantly, it must be seen in emotional terms.
But why, would many businesses define loyalty essentially if not exclusively, in
behavioural terms? The answer is as simple as thats what we can measure most
easily. In fact, many companies capture this sort of information automatically
every time a customer interacts with the organisation. Just to determine who are
our most loyal customers, we can simply look for this information from the
customer database. Loyalty defined behaviourally is also a simpler concept to
understand, without having to learn about the intricacies of consumer
psychology.
We may find it difficult to differentiate between functionally loyal customers and
emotionally loyal customers just by checking the customer database. For instance
both types of customers may regularly patronise the same hypermarket. They
visit Giant stores almost as often and buy about the same amount of
merchandise. Their loyalty is driven by the fact that the stores are conveniently
located, opening hours are long, they have many checkout counters and parking
is freely available.
But customers whom we categorise as emotionally loyal, are still different at least
in one aspect. They may value the access and convenience factors, but so too is
the fact that they feel comfortable in the stores, are made to feel welcome, can
chat with the person at the checkout counter and generally like the experience of
shopping there.

Figure 2.7: Giant ads

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33

What is obvious is the fact that both groups demonstrated very similar patterns
of behavioural loyalty and very similar levels of satisfaction. The functionally
loyal customers, however, reflect a much more vulnerable form of loyalty. They
are likely to switch as soon as a competitor offers a more functionally-attractive
option this can be a more rewarding promotion, e.g. Carrefour giving out RM5
vouchers for every RM50 worth of purchases, will see these same Giant patrons
making a beeline for Carrefour. The emotionally loyal customer, on the other
hand, has an attachment to the organisation or the brand that transcends
functional attributes. This is a loyalty that is likely to be sustainable, even in the
face of competition that offers a more functionally-attractive alternative.
Furthermore, customer loyalty implies an emotional commitment to a brand,
over and above customer retention (CIM, 2005). In short, we can easily get
emotional about a brand, but not so for a product.
When we say tea, we automatically think of Lipton (Figure 2.8). Likewise,
when we say toothpaste, we think of Colgate (Figure 2.9). These reflect our
own emotional commitments.

Figure. 2.8: Lipton print ad

Figure. 2.9: Colgate print ad

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SELF-CHECK 2.7
Customer loyalty is seen in both behavioural and emotional contexts.
Explain.

2.7

RELATIONSHIP MARKETING

It is widely accepted that relationship marketing is the opposite of transaction


marketing.
Thus to begin to understand what relationship marketing is, we will first need to
distinguish between the two concepts of a transaction and a relationship.
The most important distinction we can make is the duration of the exchange
relationship. A transactional exchange involves a single, short time exchange
with a known beginning and ending (Gundlach & Murphy, 1993; Bagozzi, 1979).
In contrast, a relationship exchange invovles multiple linked exchanges
extending over a period of time and usually encompasses both economic and
social bonds (Lehtinen & Mittila, 1995; Wilson & Jantrannia, 1994).
As such, we can define relationship marketing as all marketing activities
directed towards establishing, developing, and maintaining successful relational
exchanges (Morgan & Hunt, 1994).
Relationship marketing creates a mutually beneficial exchange, in that it benefits
both the buyer and seller in the relationship. The customer benefits from a valued
quality product or service, and the firm benefits from increased and predictable
income streams.
When we talk of customer value we should remember Charles Revson,
Revlons founder who was a strong advocate of customer value. He realised that
what was important to his customers was not so much the physical product that
he created, which can change ever so often, but rather the emotions that
surrounded it. He is famously quoted with the phrase: I do not sell cosmetics, I
sell hope (Figure 2.10).

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35

Figure 2.10: Cindy Crawford and Halle Berry appear in Revlon's ads

Relationship marketing grew in importance when customers become more


demanding and competition becomes even more difficult. Building long-term
relationships with customers and other partners (e.g. marketing channel
members, suppliers, competitor alliances and internal teams) offer companies a
way to provide superior customer value.
Furthermore, relationship marketing offers two perspectives:
1.

That the focus is on the customer how to attract, develop and keep
customers

2.

That we look at customers as people first and consumers second.

Amd as Reichheld & Sarrer (1990) highlighted: As a customers relationship


with the company lengthens, profits rise. And not just a little. Companies can
boost profits by almost one hundred percent by retaining just five percent of their
customers.

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SELF-CHECK 2.8
1.

Distinguish between
marketing.

transaction

marketing

and

relationship

2.

How is relationship marketing a mutually beneficial exchange?

3.

Does your organisation practise relationship marketing as opposed


to transaction marketing? How? Has it benefited your
organisation?

ACTIVITY 2.3
Identify and research two companies: one company that practises
transaction marketing and another that practises relationship
marketing.
Compare their performances in respect to market share and
profitability.

We focused on the customer and understand its role as an integral


component of the marketing process.

We discussed customer satisfaction and/or customer delight as the final


outcome(s) of the marketing process.

We examined customer acquisition and customer retention strategies, and


how the latter impacts on customer loyalty.

We saw the growing importance of relationship marketing and acknowledge


that relationship marketing recognises the importance of customer focus, and
requires the organisation to view customers as people first and consumers
second.

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Customer acquisition

Customer retention

Customer delight

Customer satisfaction

Customer focus

Relationship marketing

37

Customer loyalty

AirAsias Tony Fernandes expects to fly four million passengers this year,
twice as many as in 2003. His success heralds a revolution in the airline
industry in Asia. Although Americans and Europeans have benefited from
low-cost air travel for years, tight regulation, powerful national-flag carriers
and a dearth of airports have kept budget airlines at bay in Asia. But finally
the region's long-suffering travellers are able to join in. Five years ago, Asia
had only one low-cost airline; today there are 13 either already in the air or
due to launch later this year. The boom is lowering airfares across the region,
increasing competition for major airlines and making air travel accessible to
tens of millions who otherwise could never have afforded to fly. Boasts
Fernandes: "We have transformed the way people think about flying."
He's not exaggerating. The cheap fares are luring Asians away from rickety
buses, inefficient trains and traffic-choked highways. Laykha Boonlerd, 26, a
bank employee in Kuala Lumpur, could never before afford to fly to Bangkok
to see her family and instead made an excruciating 24-hour pilgrimage by bus
and train. But with a one-way ticket on AirAsia costing only $26, she took
wing in July for the first time. "I will travel much more with AirAsia," she
says. Indeed, about half the travellers on Asia's budget airlines are first-time
flyers like Boonlerd.
Source: Schuman, Michael (2004), Air Raiders Time, October 17.
QUESTIONS
1.

AirAsia has earned the loyalty of many flyers. What type of loyalty
would this be?

2.

Do you believe AirAsia delivers customer satisfaction or customer


delight? Explain your answer.

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Books
Cravens, D. & Piercy, N. (2006). Strategic marketing, (8th ed.). New York:
McGraw-Hill/Irwin, Chapter 2.
Journals
Ang, L., & Buttle, F. (2004), Managing for Successful Customer Acquisition: An
Exploration, Journal of Marketing Management, October.
Cox, G. (1997), Customer focus a commercial imperative, Managing Service
Quality, Volume 7, Number 1, pp 27-30.
CRMUK & SECOR Consulting (n.d.), Customer Relationship Management:
Creating Customer Loyalty White Paper.
Goodwin, R & Ball, B. (2003), What marketing wants the CEO to know,
Marketing Management, Volume 12(5), pp 18-23.
Hansemark, O., & Albinsson (2004), Customer satisfaction and retention: the
experiences of individual employees, Managing Service Quality, Volume
14, Number 1, pp 40-57.
Macdonald, J. (1995), Customer care is not good enough, The TQM Magazine,
Volume 7, Number 4, pp 5-8.
Mascarenhas, O., Kesavan, R., & Bernacchi, M. (2004), Customer value-chain
involvement for co-creating customer delight, Journal of Consumer
Marketing, Volume 21, Number 7, pp 486-496.
Rao, S. & Perry, C. (2002), Thinking about relationship marketing: Where are we
now? Journal of Business & Industrial Marketing, Volume 17, Number 7,
pp 598-614.
Online
Beaudoin, T. (2004-2005), How to Keep Your Customers Coming Back
Understanding Customer Retention at website http://www.advancing
women.com/customerservice/28032.php, retrieved 14 September 2007.
Hassan, F. (2006), Customer Focus A Prescription for Driving Innovation
Remarks for inaugural CEO Innovation Lecture Series, 23 February, at
website http://view.fdu.edu/files/ceoinnovationfhscript2.pdf, retrieved
27 September 2007.

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39

Vogt, H. (2004), Putting the Customer First! Managing Customer Satisfaction,


at
website
http://www.public-libraries.net/html/x_media
/pdf/customers%20satisfaction_040220.pdf, retrieved 18 September 2007.
Woolf, B. (2002), What is Loyalty? The Wise Marketer, July at website
http://www.thewisemarketer.com/features/read.asp?id=13,
retrieved
September 21, 2007.
Website
http://wiki.ittoolbox.com/index.php/What_is_the_process_for_measuring_custom
er_relationships_and_customer_satisfaction%3F, retrieved 18 September, 2007.

Topic Understanding

Competitors

LEARNING OBJECTIVES
By the end of this chapter, you should be able to:
1.

Show why we need to understand the competition;

2.

Restate who our competitors are;

3.

Describe Porters Five Forces;

4.

Examine the five forces individually and describe how they may
impact the firm; and

5.

Evaluate the usefulness of this model to the firm.

INTRODUCTION
UNDERSTAND YOUR COMPETITION
Any business plan that aims to be successful must consider the competition. Who
competes with you for the same customers? Are they directly selling competitive
products and services, substitutes, or possible substitutes? What are their
strengths and weaknesses? How are they positioned in the market?
Lets return to the Coke example. A 14 October 2005 Time report had highlighted
Cokes continued slide in regular-cola consumption, which is falling by more
than 6 percent annually.
Coke is also losing momentum because consumers are turning not only to other
competitive products (e.g. according to an 8 March 2007 Beverage Marketing
report, Cadbury Schweppes saw growth in carbonated soft drink volume all
together, its 7Up, Dr Pepper and other soft drink brands experienced growth of
1.3 percent in 2006), but more to the alternative beverage market (dominated by a

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41

vast array of products from energy drinks, bottled water, and flavoured teas to
fruity milk, canned coffee, and yoghurt drinks as shown in Figure 3.1).

Figure 3.1: A sample of beverage products that are in competition with Coke

It is no wonder that for Coke to remain relevant it has to take into account all
forms of competition, in order that it can devise strategies to respond to this
threat.
Understanding the business's competitors and developing ways to differentiate it
from them, is an important driver that influences the development of the
business's competitive strategy. Understanding the competitive market in which
the business operates will help managers make informed decisions about
business development.

3.1

WHO ARE YOUR COMPETITORS?

From the Coke example above we can see that your competitors are not always
who you think they are.
We have seen previously that if you are a manufacturer of cola drinks; then your
direct competitors are likely to be other brands of cola in the market. But what
about other carbonated drinks with their many different flavours? And what
about water, juices, herbal drinks and other beverages identified above? What

42 TOPIC 3

UNDERSTANDING COMPETITORS

about cendol, tau foo-fah, ais kacang, ice-cream and other desserts? The target
customer may be making a choice among all these items for a "drink" purchase,
including cola! Or this target customer may even be considering buying a soup
as an alternative to a "drink".
Therefore, understanding the dynamics of competitors within an industry is
important for two reasons:
1.

It can help us to assess the potential opportunities for your new business,
especially when you are entering this industry as a fresh player.

2.

It can also be a critical step to better differentiate you from others that offer
similar products and services.

One well-known framework that assists with this analysis is Porters Five Forces
Model. This model, created by Michael Porter and described in his 1980 book
Competitive Strategy: Techniques for Analyzing Industries and Competitors,
has proven to be useful for both business and marketing-based planning.

SELF-CHECK 3.1
Why is it important to understand the dynamics of competitors
within an industry?

3.2

PORTERS FIVE FORCES

Porters Five Forces (Figure 3.2) refers to the five competitive forces that shape
every industry and every market. These forces determine the intensity of
competition and hence the profitability and attractiveness of an industry.
These five forces are rivalry among present competitors, threat of new entrants
into the industry, the bargaining power of suppliers, the bargaining power of
buyers, and the threat of substitute products.

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43

Figure 3.2: Porters Five Forces Model

This framework may be used as a tool to better develop a strategic advantage


over competing firms within an industry in a healthy and competitive
environment.

SELF-CHECK 3.2
Sketch Porters 1980 model and briefly describes the five competitive
forces outlined in this model.

3.2.1

Rivalry Among Existing Firms

Rivalry takes place among firms that create products that are approximate
substitutes to each other and this is especially when one rival firm acts to
advance its standing or safeguard its position.
Therefore, firms are mutually dependent that is, when one firm does
something, it will affect the others, and vice versa.
The following are conditions under which we will witness greater rivalry (see
table 3.1):

44 TOPIC 3

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Table 3.1: Conditions for greater rivalry

Conditions for rivalry


Highcostpersale
Decreasingsalesvolumesandrevenues
Highcompetition
Limitedproductdifferentiation
Lowswitchingcost
Preemptiveaction
(a)

High cost per sale When the cost of capital required to produce a ringgit
of sales is higher, firms will operate at or near capacity as much as possible,
in order to be cost-efficient and cost-effective. This in turn, will cause
downward pressure on prices when market demand slows. This makes
these businesses less profitable when compared to those businesses with
lower capital outlay.

(b)

Decreasing sales volumes and revenues This compels the firms to


zealously fight for market share.

(c)

High competition In an industry where we will find many small or


average-sized firms or where there are no dominant firms competition is
intense because they compete for the same customers. Likewise when there
are big firms that are of similar size and stature, these firms will be
aggressive and ready to compete for business. E.g. the restaurant industry.

(d)

Limited product differentiation Where products tend to be similar and


when they offer the same functional attributes. E.g. major appliances and
passenger car tyres.

(e)

Low switching cost When it is relatively easy for customers to switch


from one firms products to other firms products. E.g. chewing gum and
sweets.

(f)

Pre-emptive action When one firm behaves in a manner that will result in
retaliation from other firms. E.g. Singapores Tiger Airways fired the first
shot by offering one-way tickets to three Thai destinations, including
Bangkok for 59 cents, and Thai Air Asia retaliated with a 29-cent one-way
ticket to Bangkok (USA Today, 13 September 2004).

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45

These conditions will make competing within the industry more challenging,
often leading to frequent price wars, advertising wars (Figure 3.3), and new
products flooding the market.

Figure 3.3: AirAsia Print Ads

We can conclude that the greater the competitive rivalry in an industry, the less
attractive it is to existing firms or would-be entrants. In terms of profitability, it
will decrease as rivalry increases.

SELF-CHECK 3.3
Select and explain any three conditions that promote rivalry among
existing firms.

3.2.2

Threats of New Entrants

New competitors add capacity to the industry and along with them is the need to
earn market share, thereby making competition very intense.
When the threat of new entrants is greater, the industrys attractiveness
diminishes.

46 TOPIC 3

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The key is to assess how easy it is for a new player to enter an industry. The most
attractive segment has high entry barriers and low exit barriers. Although any
firm should be able to enter and exit a market, every industry usually presents
varying levels of difficulty, commonly driven by economics. For instance,
manufacturing-based industries are more difficult to enter than many servicebased industries.
The definable conditions present in each industry help protect the firms
profitability as well as restrain new players from entering the market. Therefore,
the key concept in analysing the threat of new entrants is the inhibitive
characteristics that we commonly refer to as barriers to entry.
Barriers to entry are created to stop potential entrants from entering a market
profitably. They seek to defend the dominant power of existing firms in an
industry and therefore maintain superior profits in the long run. Barriers to entry
have the effect of making a market less contestable.
Entry is difficult under the following conditions:
(a)

Cost factor When learning and economies of scale have not yet
materialised, and it takes some time to obtain the volume and learning
required to yield a low relative cost per unit this can easily discourage
any would-be entrants. Furthermore, if existing firms are vertically
integrated, entry becomes even more expensive. Also, if the existing firms
share their output with their related businesses, the issue of reversing the
cost disadvantage is made even more difficult.

(b)

High capital investment If the industry itself requires huge capital outlays
to set up shop, this can become a big disincentive for aspiring new entrants.

(c)

Product differentiation If existing firms demonstrate strong product


differentiation, this will be problematic for potential entrants to come in
because they will not possess any differentiator.

(d)

Distribution If gaining distribution is especially difficult, this may deter


entrants from coming in.

Other factors that will dissuade new entrants are falling prices, future
expectations of price declines, prices being kept artificially low, huge or
unpredictable start-up spending, and other extreme uncertainties.

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47

Summary of barriers to entry


Costfactor
Highcapitalinvestment
ProductDifferentiation
Distribution

Fallingprices
Futureexpectationofpricesdecline
Priceskeptartificiallylow
Huge/unpredictablestartupspending
Barriers to entry arise from several sources:

Patents and proprietary knowledge

Asset specificity E.g. specialised technology.

Economies of scale

Government.

Barriers to entry can be built or utilised to enhance a firm's competitive


advantage.
Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of
a firm to leave the market and can worsen rivalry unable to leave the industry,
a firm must compete.
Some of an industry's entry and exit barriers can be summarised in this
statement: When both entry and exit barriers, profitability potential is high when
both entry and exit barriers are high.

SELF-CHECK 3.4
Identify four sources of barriers to entry and provide an example
each.

48 TOPIC 3

3.2.3

UNDERSTANDING COMPETITORS

Bargaining Power of Buyers

The bargaining power of buyers describes the impact customers have on an


industry. An industrys customers regularly watch for reduced prices, improved
product quality, and added services and thus can affect competition within an
industry.
The extent to which buyers succeed in their bargaining efforts depends on the
following factors, such as:
(a)

The extent of buyer concentration, as when a few large buyers can obtain
concessions because they account for a large portion of industry sales.

(b)

Switching costs that decrease the buyers bargaining power.

(c)

The products importance in relation to the performance of the buyers


product the greater the importance, the lower their bargaining power.

(d)

The threat of backward integration, thereby eliminating the need for the
supplier.

Figure 3.4: Singapore Airlines is a leading customer for new aircraft for both Airbus and
Boeing (Annual Report 2006-07, p 16).
Source: www.rianlloyd.com

The greater the power of the high-volume customers served by an industry, the
less attractive will be that industry.

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49

To mitigate the power of buyers, sellers can opt to select buyers with less power
to negotiate, switch suppliers, or develop superior offers that even strong buyers
cannot refuse.

SELF-CHECK 3.5
Discuss the three approaches that help to mitigate the bargaining
power of buyers.

3.2.4

Bargaining Power of Suppliers

An industry that produces goods will need suppliers. Depending on where the
power lies, suppliers may be able to impose their influence on the producing
industry. They may be able to dictate price and influence availability.
E.g. DeBeers (Figure 3.5) ability to wield influence within the diamond industry
means it has a high level of control over some of the most productive diamond
mines in the world giving them great power within the industry.

Figure 3.5: De Beers Print Ads

50 TOPIC 3

UNDERSTANDING COMPETITORS

A segment is unattractive when a firms suppliers have the ability to:


(a)

Increase prices without seeing a decrease in volume;

(b)

Organise formally or informally;

(c)

Reduce the quantity supplied;

(d)

Compete in an environment with relatively few substitutes;

(e)

Provide a product/ingredient/component that is an important part of the


end product or service;

(f)

Impose switching costs on their customers when they leave; and

(g)

Integrate downstream by controlling the distribution channels.

The greater the bargaining power of the key suppliers to an industry, the less will
be the overall attractiveness of the industry.
The best defence in mitigating the power of suppliers is to build win-win
relationships with suppliers or arrange to use multiple suppliers.

SELF-CHECK 3.6
Discuss the two approaches that help to mitigate the bargaining power
of suppliers.

3.2.5

Threat of Substitute Products

Substitutes are alternative product types (not brands) that perform essentially the
same functions, as plastic bottles versus aluminium cans, margarine versus
butter, and the faxing of documents versus overnight express delivery.
As more substitute products avail themselves and become affordable, the
demand becomes more elastic because customers have more alternatives. These
substitutes may limit the ability of firms within an industry to raise prices and
improve margins.
E.g. the price of aluminium cans is constrained by the price of glass bottles, steel
cans, and plastic containers. These containers are substitutes, yet they do not
compete in the same industries.

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51

Substitutes are a bigger threat when:


(a)

Your product doesnt really offer any real benefit compared to other
products.

(b)

Customers possess limited loyalty. When price is the customers principal


motivator, the threat of substitutes is stronger (see Figure 3.6).

(c)

Easy for customers to switch. For example, a supermarket operator can


easily switch from plastic to paper bags for its customers.

Figure 3.6: Hotlink like the other telco providers use price to lure customers
Source: http://www.kennysia.com/archives/2005/03/kuching_is_owne.php

Porters Five Forces can help us to better understand these dynamics in a more
objective manner and hopefully from this, we can make better strategic decisions.
This framework is based on the idea of competition. It makes the assumption that
a firm tries to strive for competitive advantage over other firms in the market as
well as over customers and suppliers. As a result of this focus, it does not really
take into account strategies such as strategic alliances, electronic linking of
information systems of all firms along a value chain and others.
Other weaknesses of this framework include:
(a)

In an economic sense, the framework assumes a classic perfect market. The


more regulated an industry becomes, the less insightful the framework will be.

(b)

The framework works best for analysing simple market structures. When
an industry becomes complex, with multiple interrelations, product groups,
by-products and segments analysis of all five forces becomes similarly
problematic.

52 TOPIC 3

UNDERSTANDING COMPETITORS

SELF-CHECK 3.7
Under what conditions do substitutes become a bigger threat?

ACTIVITY 3.1
Identify a Malaysian company that you are familiar with. Describe the
five forces that belong to Porters 1980 framework by relating each of
these forces to the firm and its products and/or services.

We discussed that firms need to know who their competitors are.

We introduced the Porters Five Forces model and discuss at length the five
forces that impact the competitive space in an industry.

We noted the usefulness of this model but acknowledge that it bears


weaknesses as well.

Barriers to entry
Porters Five Forces

Substitutes

TOPIC 3

UNDERSTANDING COMPETITORS

53

Chewing gum is at the centre of a retail battle between Wrigley, the dominant
player in Britain for decades, and Cadbury, the world's biggest confectionary
company. At stake is the 250m a year the British spends on gum.
Cadbury launched four Trident products in Britain in February. They
appeared on newsagents shelves alongside the 32 gum products sold by
Wrigley. Wrigley says it anticipated Cadbury's move into its territory. "We've
been expecting it for a number of years, since they've been buying gum
companies around the world," says Gharry Eccles, managing director of
Wrigley UK.
And Mr Eccles says he would relish the prospect of increased competition.
"If you're running a race, running it on your own is actually no fun," he says.
"When you're running against someone it becomes a whole new ball game,
and a lot more fun."
Source: Miller, Charles, The chewing gum war, BBC News, 24 May 2007.
QUESTIONS
1.

How would you relate the bargaining power of a) suppliers, and b)


buyers to the gum industry in the UK?

2.

The entry of Cadbury into the gum market reflects the ease by which
new entrants can enter this market. Do you agree? Justify your answer.

Books
Cravens, D., & Piercy, N. (2006). Strategic marketing. (8th ed.). New York:
McGraw-hill/Irwin, Chapter 3.
Walker, O., Mullins, J., Boyd Jr., H., & Larreche, J. C. (2006). Marketing strategy.
(5th ed.). NY: McGraw-Hill/Irwin.

54 TOPIC 3

UNDERSTANDING COMPETITORS

Journals
Karagiannopoulos, G. D., Georgopoulos, N., and Nikolopoulos, K (2005),
Fathoming Porters five forces model in the internet era, info, Volume 7,
Number 6, pp 66-76.
Online
Website http://www.bplans.com/ma/article.cfm/156, retrieved 26 September
2007.
Business Owners Toolkit (2007) at website http://www.toolkit.com
/small_business_guide/sbg.aspx?nid=P03_2011, retrieved 26 September 2007.

Topic Understanding

Markets

LEARNING OBJECTIVES
By the end of this chapter, you should be able to:
1.

Define what a market is;

2.

Understand that informed


understanding the market;

3.

Describe how markets impact strategy;

4.

Discuss the concept of value migration; and

5.

Inspect the value of product-market scope and structure.

marketing

decisions

come

from

INTRODUCTION
DEFINING THE MARKET
All businesses operate in markets.
But what is a market? How do we start to define it?
A market is a set of all actual and potential customers of any product or
service.
This definition suggests that a market represents the total value and/or volume
of products that satisfy the same customer need.
E.g. If the customer needs is to have breakfast, then the market which we are
going to refer to, could be defined as the breakfast food market. Many
products would be relevant to measuring and analysing such a market, as
illustrated below (Figure 4.1):

56 TOPIC 4

UNDERSTANDING MARKETS

Figure 4.1: The breakfast food market

Markets serve as the best forum to exchange goods and services.


Understanding markets help us to make informed marketing decisions, knowing
when to buy or sell and capturing opportunities to capitalise on a fast-changing
market.
Therefore, knowledge about the market is important in guiding business and
marketing strategies.

4.1

MARKETS AND STRATEGIES

Strategies and markets are interrelated, and companies will be at a competitive


disadvantage if they do not have any understanding of their markets and how
they are likely to change in the future.

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4.1.1

UNDERSTANDING MARKETS

57

Markets Impact Strategy

We shall first examine how markets impact strategy.


The market is very fluid and dynamic. We are looking at industries being
transformed, and this transformation is altering the structure of markets and the
nature of competition. This massive change is driven by global competition, new
technologies, mergers and acquisitions, global excess capacity, changing
customer expectations, changing life and work styles, and so on.
All of these provide new opportunities for businesses and at the same time
posing threats to the present order.
A good example is the neighbourhood Chinese coffee shop which has been
under threat from aggressive competitors such as cafes and fast-food joints for
some time now. It is not just the reason of competition but that the latter has been
luring young people and even working adults who are not just looking for good
food, but who also have a need for comfort and ambience. So one coffee-shop
operator, Kedai Kopi Hai Peng in Jalan Sulaiman, Kemaman did just that by
transforming itself in order to meet changing customer expectations. Even if the
original Kemaman shop still remained the same, in certain cities like Petaling
Jaya, the owner established the Kemaman Classic Kopitiam (Figure 4.2). Some
people refer to this modern-day kopitiam which offers basic coffee-shop fare,
as the coffee shops of the 21st century with their air-conditioning, Wi-Fi and
most importantly, comfort and ambience.

Figure 4.2: The kopitiam in Section 14, Petaling Jaya


Source: http://www.hot-screensaver.com/2006/02/15/chap-goh-meh-mcdonaldspopular-bookstore-kemaman-classic-kopitiam/

58 TOPIC 4

UNDERSTANDING MARKETS

A second example is the idea behind the creation of herbal energy drinks (such as
Power Root, Alicafe, Pearl and Nnergy) from Power Root (M) Sdn. Bhd. the
realisation that lifestyles were changing towards more instant drinks that came
with health benefits (Figure 4.3).

Figure 4.3: Power Root poster and print ad, 2007

Market-driven companies will change strategies as and when market changes


make demands on them to change these said strategies.
In the US, PepsiCo was quick to cater to changing tastes. To exploit a growing
market for health drinks, PepsiCo acquired SoBe (Figure 4.4) beverages in 2001
and extended the brand into an energy drink for the school-age market SoBe
No Fear and SoBe Fuerte aimed at the Hispanic market, an increasingly
important demographic (Cravens & Piercy, 2006, pp 72-73).

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UNDERSTANDING MARKETS

59

Figure 4.4: SoBe beverages

SELF-CHECK 4.1
The market is changing and industries are being transformed.
Identify one driver behind this massive change. Explain and illustrate
with an example.

4.1.2

Value Migration

Secondly, we shall look at the concept of value migration, and how it affects
market opportunities.
Value migration describes the process of customers shifting their purchase
away from the products generated by outmoded business designs to new ones
that offer superior value (Slywotzky, 1996).
Examples include value migration from conventional typewriters to word
processing and computers, fixed-line phones to cell phones, full service airlines
to budget airlines and petrol-guzzling cars to environmentally-friendly cars.
A critical aspect of any market-driven strategy is in anticipating value migration
threats. Sadly, many companies still do not see beyond their own productmarkets.

60 TOPIC 4

UNDERSTANDING MARKETS

As far back as 1960, Levitt had already started to talk about it: Every major
industry was once a growth industry. But some that are now riding a wave of
growth enthusiasm are very much in the shadow of decline. Others, which are
thought of as seasoned growth industries, have actually stopped growing. In
every case, the reason growth is threatened, slowed or stopped is not because the
market is saturated. It is because there has been a failure of management.
This, he referred to as Marketing myopia this illustrated the product focus
that many companies adopted, rather than being customer-focused. This was his
way of alerting the marketing profession to the dangers of a limited, blinkered
view of the market and its future potential.
For example, a button manufacturer who believed that its market was the
button market would likely to have drawn up poor strategies, unless this
producer had seen the arrival of products such as zips and Velcro which also
satisfy the same need to fasten clothes.
A good example of a company that has avoided falling into this trap is HarleyDavidson (Figure 4.4). They saw that being in the motorcycle industry was far
too limiting, and opted to be in the brand image industry while still focusing
on the motorcycles. They sell their bikes through the image the bike portrays so
as to differentiate themselves from regular motorcycles and competition from
Japan and elsewhere.

Figure 4.4: Harley rider


Source: http://www.flickr.com/photos/rzen/328888822/

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UNDERSTANDING MARKETS

61

SELF-CHECK 4.2
In your own words, explain the concept of value migration.

4.2

PRODUCT-MARKET SCOPE AND


STRUCTURE

The activities that are involved in gaining an understanding of markets are


shown below:

Figure 4.5: Gaining an understanding of markets

As we have defined in figure 4.5, markets are groups of qualified people who
have the ability and willingness to buy something because they have a need for
it. A product-market essentially matches people with the desired needs.
In determining the scope of the product-market, it is helpful to identify:
(a)

The basis for identifying buyers in the product-market of interest (e.g.


geographical area and buyer characteristics such as age group);

(b)

The market size and characteristics, and

62 TOPIC 4

(c)

UNDERSTANDING MARKETS

The brand and/or product categories competing for the needs and wants of
the buyers included in the product-market.

A simplified example of the product-market structure that includes the fast food
market is shown below (Figure 4.6):

Figure 4.6: Illustrative Fast-Food Product-Market Structure

A fast food chain such as 1901 should consider more than just regular customers
and direct competitors in its market opportunity analysis. The consumption need
being satisfied is fast and convenient preparation of food. The buyer has many
ways of meeting this need not only purchasing fast foods, but also buying
prepared food from supermarkets, microwaving preparation at home,
patronising coffee shops and food stalls, and even ordering take away.
After the product-market boundaries and structure have been determined, the
next step involves developing end user buyer profiles. Here, buyers are
identified, described, their value requirements indicated and external
environmental influences (e.g. interest rate trends) determined.

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UNDERSTANDING MARKETS W

63

Characteristics such as age, gender, income, family size, occupation, and


geographical location are helpful when identifying buyers in the consumer
markets.
The third step in market opportunity analysis is about developing a strategic
vision about the future and how markets are expected to change. Increasingly,
we will find that change and turbulence, rather than stability, characterise many
product-markets.
Still, the firm that choose to invest a lot of time and effort in anticipating the
future, will in turn, create an opportunity for competitive advantage.
The final step in the product-market analysis is estimating the market potential
and forecasting sales. The forecasts often used in product-market analysis
include estimates of market potential, sales forecasts of total sales by firms
competing in the product-market, and the sales forecast for the firm of interest.
This information is collated for different units of analysis such as product
category, brands and geographical areas.

SELF-CHECK 4.3
1.

In your own words, explain the concept of value migration.


Give an example to illustrate this.

2.

Select an industry and describe its characteristics, participants


and structure.

ACTIVITY 4.1
Suppose your company is competing in a rapid growth market. What
recommendations can you make to your company management to help
it identify new competitive threats early enough so that counterstrategies can be properly developed?

64 TOPIC 4

UNDERSTANDING MARKETS

This chapter examines the meaning of a market because knowledge about the
market is important in guiding business and marketing strategies.

We look at how markets change and how strategies are developed to respond
to these changes.

We consider the process of customers shifting their purchase to new products


that can better cater to their needs a process called value migration and
how it should be met and counter-strategies developed.

Finally, we examine at the nature and scope of defining product-market


structure by examining the four activities that provide us with an
understanding of markets are shown below:

Market
Marketing myopia

Value migration

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UNDERSTANDING MARKETS

HP, which supplanted Dell Inc. last year as the No. 1 seller of PCs
worldwide, is better known for its PCs and extremely profitable
printer ink than its handheld devices.
Still, HP is a major player in the PDA world, ranking second behind
market-leader Palm Inc. in worldwide PDA sales for the first half of
2007, according to market research firm IDC. More than 22 percent of
the 1.6 billion PDAs sold in that period were HP products, according
to IDC.
But the rise of smart phones has pressured PDA makers. The success
of gadgets like Research In Motion Ltd.'s BlackBerry and Palm's Treo
and now Apple Inc.'s iPhone is prodding handheld device makers
to beef up their offerings in an increasingly Internet-connected world.
PDAs are increasingly seen as companions to cell phones and smart
phones instead of the all-in-one device they were once were, said
Gene Wang, vice president of marketing for HP's handhelds unit.
When it comes to smart phones, HP is clearly still the newcomer. Less
than one percent of the 53 million smart phones shipped during the
first six months of the year were HP products, according to IDC.
Analysts said the company is facing an uphill battle as it fights
entrenched competitors in the market of mobile devices sold to
businesses.
But it also has deep pockets and tight relationships with customers
who for years have relied on HP servers, PCs and services, analysts
said.
Source: Robertson, Jordan (2007), HP Deepens Push Into Cell Phone
Market Red Orbit, September 05.

QUESTION
Discuss the important issues that should be considered in defining the
product-market for HPs smart phones.

65

66 TOPIC 4

UNDERSTANDING MARKETS

Books
Cravens, D., & Piercy, N. (2006). Strategic marketing. (8th ed.). New York:
McGraw-Hill/Irwin, Chapter 3.
Journals
Levitt, T. (1960), Marketing Myopia Harvard Business Review, 38, July-August,
pp 24-47.

Topic

Strategic
Market
Segmentation,
Targeting and
Positioning

LEARNING OUTCOMES
By end of this topic, you should be able to:
1.

Judge the importance of the role of market segmentation;

2.

Define market segmentation;

3.

Describe the concept of a market segment;

4.

Evaluate the criteria for effective segmentation;

5.

Identify the bases for segmentation;

6.

Assess the finer segmentation strategies;

7.

Identify the major areas of analysis of market segments;

8.

Gain knowledge about market targeting strategy; and

9.

Explain the meaning of positioning and understand the relationship


between positioning concept and positioning strategy.

68

TOPIC 5

STRATEGIC MARKET SEGMENTATION, TARGETING AND POSITIONING

INTRODUCTION
Customers are increasingly demanding and discriminating in their product
choices. When we consider the worlds population, we become aware that every
one of them is a customer in the real sense of the word, and that these customers
have needs and buying practices are as different as they are varied.
On the other hand, companies are already recognising that they cannot appeal to
all customers in the marketplace or at least not to all customers in the same way.
These companies do not serve their markets in an equitable manner and they are
likely to end up serving different segments of their markets. By just focusing on
one or more segments, these companies can then focus their efforts on targeting
those segments where they can change customer perception or meet unmet
needs.
Therefore the idea of treating all customers equally is really a myth. It contradicts
modern business principles such as customer orientation and customer
intimacy. We can put it that customers are not a homogeneous mass, but that
they are really individuals.
And there is this realisation that to do that, they must first understand customers
needs and wants. Only then can they design the right kind of strategies.
Therefore, segmenting markets is indeed very important to developing and
implementing market-driven strategy. Segmenting markets sets the foundation
for superior company performance.

5.1

MARKET SEGMENTATION

Just as you can divide an orange into slices or segments you can divide the
marketplace into many different groups of people or segments that have
something in common.
Market segmentation is the process of identifying and analysing subgroups of
buyers in a product-market with similar response characteristics (Cravens &
Piercy, 2006 p 97).
It is basically about aggregating prospective and qualified customers into groups
that have common needs and who will respond similarly to a marketing action.
The purpose of market segmentation is two-fold: to divide a market into
homogeneous sub-markets or segments, and to design a proper marketing mix
strategy for the segment (McCartney, 1981).

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STRATEGIC MARKET SEGMENTATION, TARGETING AND POSITIONING

69

It is recognising differences between market segments, and how they change,


better and quicker than their competitors, that makes this an important source of
competitive advantage for companies.
Segmenting the market makes it easier to identify groups of people with the same
consumer needs and wants. Marketers therefore look for categories they can use
to divide up this population.

SELF-CHECK 5.1
Use a real-life example to illustrate market segmentation.

5.2

CONCEPT OF MARKET SEGMENT

Market segment can be defined as:


A particular group that has its own distinct customer profile and buyer
characteristics so that for marketing purposes, it can be targeted separately from
other segments of the market (Bitpipe.com at website http://www.bitpipe.
com/tlist/Market-Segments.html, retrieved October 10, 2007).
An example of market segmentation can be seen in the athletic shoe industry.
Major manufactures of athletic shoes (e.g. Reebok, Adidas, and Nike) have
several segmented markets. One segment can be based on gender (Figure 5.1 and
5.2). and another segment is based on the type of sport or activity. They have
different promotional campaigns for each market segment.

Figure 5.1: A Nike print ad that is targeted at women

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STRATEGIC MARKET SEGMENTATION, TARGETING AND POSITIONING

Figure 5.2: A Nike print ad that is male-focused

A good market segmentation will have segment members that are internally
homogeneous and externally heterogeneous; that is, as similar as possible within
the segment, and as different as possible between segments.

SELF-CHECK 5.2
Examine the budget airline industry and consider the probable market
segments that may constitute this industry. In what way are they
similar and/or different?

5.3

CRITERIA FOR EFFECTIVE SEGMENTATION

There are many ways to segment markets, but not all segmentations are effective.
Segmentation effectiveness depends on identifying segments that are measurable,
accessible, substantial, differentiable and actionable (Roberts, 1961).
Measurable segments It should be possible to identify customer groups by
measuring size and purchasing power of the segments. E.g. It is estimated that
one in ten people are left-handed (Reuters, 01 May 2007 at website
http://www.reuters.com/article/healthNews/idUSCOL14739020070501,
retrieved 12 October 2007) yet very few products are really targeted towards
this left-handed segment, the problem being that it is difficult to identify and
measure this segment. Malaysian Census does not monitor left-handedness in its
surveys hence there is no data on the demographics of lefties.

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71

Accessible segments It should be possible to effectively reach and serve market


segments. E.g. Specific advertising media, such as magazines (Figure 5.3) or
websites, the target audience is likely to use or make use of.

Figure 5.3: Malaysian magazines that reach out to specific market segments

Substantial segments These market segments should be large and profitable


enough to serve. A segment should be the biggest possible concentration of
people with homogeneous needs and buying patterns that is worth paying
attention to, and being addressed to with a tailored marketing programme. For
instance, it does not make sense for bedding manufacturers such as Dreamland
and Slumberland to mass-produce mattresses for people whose height is greater
than 7 feet when the standard length of Malaysian mattresses is only 6.3 feet.
Differentiable segments The market segments are diverse and therefore,
distinguishable and they respond differently to different marketing actions. For
example, if married and unmarried women respond equally to shopping sales,
we cannot consider them as separate segments because they are not
differentiable.

Figure 5.4: Sales ads, 2006

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STRATEGIC MARKET SEGMENTATION, TARGETING AND POSITIONING

Actionable segments Effective marketing programmes can be designed to


attract and serve these market segments. So although one small airline identified
seven market segments, its staff maybe too limited to develop separate marketing
programmes for each of these segments.

SELF-CHECK 5.3
Under what circumstances may it not be possible to break up a
product-market into segments?

ACTIVITY 5.1
Describe the student market segments for your university. To what
extent are these segments measurable, accessible, substantial,
differentiable, and actionable?

5.4

HOW TO SEGMENT?

There is no one way to segment a market. Therefore, we should try different


variables to see which can give us the best segmentation opportunities. Our
challenge is in really identifying the most effective market segments.
Kotler (1997) proposed that consumer markets should be divided according to
geographic, demographic, psychographic and behavioural variables.
Business marketers use many of the same variables used by consumer marketers.
Additionally, business markets can also be segmented by business consumer
demographics, operating characteristics, situational factors, purchasing
approaches, and personal characteristics.
Cravens & Piercy (2006, p. 108) provides another perspective Below, we can
view a summary of segmentation variables and shows examples of segmentation
bases and descriptors for consumer and organisational markets:

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STRATEGIC MARKET SEGMENTATION, TARGETING AND POSITIONING

73

Table. 5.1: Illustrative Segmentation Variables


Consumer markets

Characteristics of
people/organisations

Use situation

Buyers
needs/preferences

Organisational markets

Age, gender, race

Type of industry

Income

Size

Family size

Geographic location

Lifecycle stage

Corporate culture

Geographic location

Stage of development

Lifestyle

Producer/intermediary

Occasion

Application

Importance of purchase

Purchasing procedure

Prior experience with product


User status

New task, modified


straight rebuy

Brand loyalty status

Performance requirements

Brand preference

Brand preferences

Benefits sought

Desired features

Quality

Service requirements

rebuy,

Proness to make a deal


Purchase behaviour

Size of purchase

Volume

Frequency of purchase

Frequency of purchase

Segmenting a market involves identifying the bases of segmentation, forming


segments, describing each segment, and analysing and evaluating the segment(s)
of interest.

5.5

FINER SEGMENTATION STRATEGIES

As customers become more sophisticated and discriminating, and customers


own preferences veer towards unique products we will see a need to consider
increasingly smaller segments even to the extent of having segments of one.

5.5.1

Logic of Finer Segments

Let us consider the logic of finer segments:


(a)

Customised Offers The information capabilities of firms have expanded


by leaps and bounds that it is possible for them to offer cost-effective
customised offerings. The driver behind all of these capabilities is

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STRATEGIC MARKET SEGMENTATION, TARGETING AND POSITIONING

information technology database information, computer-aided product


design, and manufacturing and distribution systems (e.g. just-in-time
inventory) provide opportunities for us to cater to very small segments.
E.g. Levi Strauss (Figure 5.5) began making measure-to-fit womens jeans in
1994 under its in-store Personal Pair programme. Needless to say, customer
response was so well-received that Levis developed an expanded in-store
customisation concept called Original Spin letting customers create their
own jeans from scratch or modify an existing pair. The idea is to produce
jeans cost-effectively one pair at a time to fit each consumers's body
measurements, satisfy other personal preferences, and offer a positive,
memorable shopping experience. This is a radical departure for any
company in the retail textile industry, which is wedded to mass production
and squeezing out costs through plant efficiency and low overheads.
(Armstrong & Kotler, 2005, p 204).

Figure 5.5: Levis is going for individual market

(b)

Diverse customer base Customers seek uniqueness, even novelty in their


products. They are looking to be different. Hence, products that can appeal
to a diverse customer base are likely to do very well.
E.g. Heinz is billing itself as the first ketchup designed just for kids. Heinz
EZ Squirt comes in a kid-friendly 24-oz squeeze bottle that dispenses either
traditional red-coloured ketchup or, new ketchup colours: Blastin' Green

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STRATEGIC MARKET SEGMENTATION, TARGETING AND POSITIONING

75

and Funky Purple (see Figure 5.6). After all, kids are the Number 1
consumers of this condiment.

Figure 5.6: Heinz goes green and purple too

(c)

Close customer relationships Firms recognise the benefits of close


relationships with their customers. By identifying customer value
opportunities and creating cost-effective customised offers, these
relationships will bring profitability to these firms.

5.5.2

Finer Segmentation Approaches

We will look at three approaches for finer segmentation opportunities, as follows:


(a)

Micro segmentation This segmentation approach seeks to identify


narrowly defined segments, using any one or more of the variables
mentioned in 5.4. This approach sees a great number of very small
segments.
E.g. RJ Reynolds once tried to test-market a brand with a less-pronounced
menthol taste called Uptown (see Figure 5.7), targeted at low-income
African Americans in 1989 in Philadelphia. It quickly dropped the brand in
the face of massive opposition, particularly from community groups
(Balbach, Gasior & Barbeau, 2003). The identified narrowly-focused
segment in this case is low-income African American menthol smokers.

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STRATEGIC MARKET SEGMENTATION, TARGETING AND POSITIONING

Figure 5.7: Uptown targets a demographic segment that still has growth potential

(b)

Mass customisation This segmentation approach introduces customised


products at prices not much higher than mass-produced items.
E.g. Dell creates customer-configured computers, Reflect.com formulates
customised beauty products, and Mars M&Ms allows you to order their
candies in whatever combination of colours, plus the option of putting
personalised messages onto them (Figure 5.8) (Armstrong & Kotler, 2005,
pp 204-205).

Figure 5.8: www.mymms.com gives you a chance to choose colours and


personalise messages
Source: http://yumsugar.com/250126

(c)

Variety-seeking strategy This product strategy is meant to offer customers


opportunities to vary their choices in contrast to making unique choices.

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77

The rationale behind this is that customers who are given choice-varieties
may increase their total purchases of a brand.

SELF-CHECK 5.4

5.6

1.

Is considering the segment of one buyer a reality or a myth?


Discuss.

2.

Does the use of mass-customisation negate the need to segment a


market?

STRATEGIC ANALYSIS OF MARKET


SEGMENTS

Each market segment needs to be studied to establish its potential attractiveness


as a market target.
The major areas of analysis include customers, competitors, positioning strategy
and market and financial attractiveness.
(a)

Customer analysis
When forming segments, it is relevant to find out as much as possible about
the customers in each segment.
The objective is to obtain descriptive characteristics that can be correlated to
the variables used to form these segments.
An important aspect of customer analysis is to establish how satisfied the
customers in the segment are.

(b)

Competitor analysis
Here we consider the key competitors that are presently active in the
identified market where the segment is located, as well as any potential
segment entrants.
We can use value-chain analysis to examine competitive advantage at the
segment level, and/or Porters Five-Forces to determine segment
attractiveness.

(c)

Positioning analysis
Segment analysis involves positioning strategy choices. Positioning analysis
shows how we can combine the four Ps in order to favourably position the
firm or brand with customers in that segment.

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78 X

(d)

STRATEGIC MARKET SEGMENTATION, TARGETING AND POSITIONING

Estimating segment attractiveness


The market and financial attractiveness of each segment will have to be
evaluated. Included are specific estimates of cost, revenue, and segment
profit contribution over a specific time frame.
Market attractiveness can be determined by using market growth
projections, and attractiveness assessments made by management.
Financial analysis depends on sales, cost, and profit estimates for each and
every segment that we are eyeing. Since it is difficult to forecast accurately if
our projections are too far ahead, detailed projections commonly extend 2 to
5 years ahead.
Also we must see whether the above shows compatibility with the firms
objectives and resources.
The firm should only enter into segments in which it can offer superior
value and if it possesses a competitive advantage over its rivals.

SELF-CHECK 5.5
Discuss the major areas of analysis of market segments.

ACTIVITY 5.2
Undertake a review of TD Cars, the Malaysian-Australian JV that
produces the retro-classic lifestyle car called the TD2000. Do you
believe that TD Cars has built a sustainable niche or segment strategy,
or is the car just a fashion item with limited lasting appeal to car buyers,
like other retro attempts?

5.7

MARKET TARGETING STRATEGY

Choosing the right market targeting strategy does impact on the firms
performance. The targeting decision plays an important role in guiding the
positioning of a brand or firm in the marketplace.
Targeting and positioning strategies consist of the following:

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79

Identifying and analysing the market segment(s);


Deciding which segment(s) to target; and
Designing and implementing a positioning strategy for each
target.

Armstrong & Kotler (2005, p 185) illustrates the above as follows (see Figure 5.9):

Figure 5.9: Steps in Market segmentation, Targeting and Positioning

The targeting decision involves the selection of customer group(s) the firm will
serve. We may select one or a few segments or go for a more complete coverage
of the product-market by targeting most of the segments. A specific marketing
effort (positioning strategy) is then directed toward each target that we have
decided to serve.
E.g. Pfizers targeting strategy for the 2003 introduction of its drug Relpax is as
follows:

Pfizer for the first time launched a new product Relpax (see Figure 5.10)
without any TV advertising at all. Relpax is a prescription medicine for migraine
headache relief. Pfizer identified active young mothers as the prime target group
for Relpax and adjusted its media mix accordingly. They are listening to the
radio in the car, [going] on the Internet late at night, or reading a magazine in a
quiet moment, says Dorothy L. Weitzer, a Pfizer marketing vice-president.
They are not watching TV.

Figure 5.10: Relpax

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Pfizers market targeting strategy is guided by market segmentation based on


buyers characteristics active mothers (Cravens & Piercy, 2006, pp 169-170).
Market targeting strategies fall into two categories: segment targeting and
targeting through product differentiation.
Segment targeting can be targeting from a single segment to targeting all or most
of the segments.
Proton for example has many different brands/models and styles of cars (Figure
5.11) Perdana (luxury saloon), Arena (multi-purpose utility), Waja (family
sedan), Satria Neo (sporty hatchback), Gen-2 (5-door hatchback), Chancellor
(executive limousine), Juara (minivan), and Savvy (sub-compact).

Figure 5.11: Proton practises segment targeting

Targeting through product differentiation is recommended when customers


preferences are diffused and customers needs and wants vary significantly
making it difficult to identify segments. Specialisation involves offering a
differentiated product, designed to satisfy customers whose needs and wants
cannot be presently satisfied by competitors.

5.8

POSITIONING CONCEPT AND STRATEGY

Once a company has decided which segment(s), it wants to serve it must then
decide on its positioning strategy on which position(s) to occupy in its selected
segments.
Positioning may focus on the company, product, and brand although
positioning works very well on the brand.

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The positioning concept is the company managements desired positioning of the


product/brand in the minds of consumers.
Positioning is a statement of what the product or brand means guided by the
value requirements of the buyers in the target market (Whan Park, Jaworski &
Macinnis, 1986).

Figure 5.12: Positioning Task

The brands full positioning is called its value proposition the full mix of
benefits on which the brand is positioned.
Positioning is meant to deliver the value proposition that is suitable for each
target market that the company intends to serve.
E.g. Gatorade (Figure 5.13) is targeted at active people experiencing hot and
thirsty situations. The drink is therefore positioned as the best thirst quencher
and replenisher, backed by scientific tests.

Figure 5.13: Gatorade print ad

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Doyle (1983) describes positioning strategy as: The choice of target market
segment which describes the customers a business will seek to serve and the
choice of differential advantage which defines how it will compete with rivals in
the segment.
The positioning strategy is the combination of marketing mix strategies used to
show the desired positioning to its customers. It is how the company uses the
four Ps: product, price, distribution and promotion to map out and communicate
a clear position in the marketplace.
Positioning effectiveness considers how well this position equals to buyers own
perception of the product/brand itself. It is important that the positioning
strategy meets buyers value preferences.

This chapter recognises the role of market segmentation in the development


and implementation of market-driven strategy.

We examine the concepts of market segmentation and market segment.

We also discuss the issues that concern the segmenting of a market


requiring us to identify the bases for segmentation, forming segments,
describing each segment, and analysing and evaluating the identified
segment(s).

We also learned about market targeting and positioning strategies.

Market segmentation

Positioning concept

Market segment

Positioning effectiveness

Mass-customisation

Value proposition

Micro segmentation

Variety-seeking strategy

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Motorcycle icon, Harley-Davidson is world-renowned for its sale of


distinctive dream machines high price, high performance
motorcycles. It sells more than 300,000 machines a year, and in many
locations, demand outstrips supply, so dealers can charge a price
premium.
The core market for the hogs is middle-aged male baby-boomers.
The CEO once stated: What we sell is the ability for a 43-year old
accountant to dress up in black leather, ride a motorcycle through
town, and make people instantly afraid of him. However, this is an
aging customer base.
The challenge for the company is to broaden its market and attract
female customers and younger users of the bikes, without
undermining its positioning in its core market.
The gamble is that new product features and services aimed to
attract new types of customer will not alienate existing customers.
Product features on new Harleys to appeal to the broader market
targets include: smaller handlebar grips, an easier-pulling clutch,
and lower seats; new materials and engine technology will make the
bikes more powerful but easier to handle; Harley dealers are
providing riders education classes to help novices learn to ride and
get licensed.
Source: Abramson, Michael (2003), Hurdles on the Road to Hog
heaven, BusinessWeek, November 10, pp 60-62.
QUESTION
In the quest to gain new business from new segments with different
needs, Harley is faced with the issue of reconciling this new
direction with its current positioning in its core market segment.
How can Harley resolve this dilemma?

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Books
Cravens, D., & Piercy, N. (2006). Strategic marketing. (8th ed.). New York:
McGraw-Hill/Irwin, Chapter 4.
Kotler, P. (1997). Marketing management analysis, planning, implementation,
and control. (9th ed.). Prentice-Hall International: Englewood Cliffs, NJ,
Chapter 6.
Journals
Brooksbank, R. (1994), The Anatomy of Marketing Positioning Strategy,
Marketing Intelligence & Planning, Volume 12, Number 4, pp 10-14.
Lin C. F. (2002), Segmenting customer brand preference: demographic or
psychographic, Journal of Product & Brand Management, Volume 11,
Number 4, pp 249-268.
Kara, A., & Kaynak, E. (1997), Markets of a single customer: exploiting conceptual
developments in market segmentation, European Journal of Marketing,
Volume 31, Number 11/12, pp 873-895.

Topic Strategic

Brand
Management

LEARNING OUTCOMES
By end of this topic, you should be able to:
1.

Define product and brand as well as make distinctions;

2.

Explain the functions of brands for both buyers and sellers;

3.

Discuss brand equity, brand identity and brand image;

4.

Explain strategies for managing brands;

5.

Define global brands and Internet brands; and

6.

Learn how to manage the brand portfolio.

INTRODUCTION
Companies produce a portfolio of products and services. These products and
services are revenue earners and profit generators for the companies. In a world
of intense competition amidst the onslaught of globalisation, we are beginning to
see the commoditisation of these products and services. Just look at
telecommunication services how do we choose between Maxis and other
telecommunication providers like Celcom and DiGi? Or computers can we
really differentiate between Panasonic and Lenovo (Figure 6.1)? Or banking
services what separates Maybank from CIMB, Public Bank, AmBank and EON
Bank? When you remove the brand name can you identify and differentiate
all these products?

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I dont think so. We will be hard-pressed to answer the above questions because
the truth of the matter is that it is branding that provides us with some degree of
differentiation.
Brands therefore add value to a basic product or service.

Figure. 6.1: Does it matter if we switch the brand names in these two ads?

Therefore, the exercise in branding is a continuous affair that aims to identify the
products of one company, and to differentiate them from those of other
competing companies.
This chapter on strategic brand management examines the challenges in
building strong brands.

6.1

CHALLENGES IN BUILDING STRONG


BRANDS

Lets start by understanding the terms product and brand.


A product is anything that is of value to a customer because it can satisfy the
needs and wants of this customer. In this case, a product is not just something
physical a good but it can also be a service, an idea or even an organisation.
A brand on the other hand, is a company-specific identity it gives to the
companys product.
According to the American Marketing Association, a brand is a name, term,
sign, symbol, or design, or a combination of them, intended to identify the goods
or services of one seller or group of sellers, and to differentiate them from those
of competitors.

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Figure 6.2: A sample of Malaysian brands

6.2

STRATEGIC ROLE OF BRANDS

A strategic brand approach expects the company to be very clear about what role
brands play for the company in developing customer value and also shareholder
value. An understanding of this expectation will determine the brand
investments that are needed to direct and sustain the companys portfolio of
products.
Berthon, Hulbert & Pitt (1997) promoted one approach that makes distinctions
between the functions of brands for both buyers and sellers.
For buyers, brands can:
(a)

Assist customers to identify and locate products efficiently and promptly.

(b)

Assist to reduce the perceived risk that buyers take when they purchase a
product by providing an assurance of quality.

(c)

Assist to reduce the social and psychological risks associated with buying,
owning and/or using the product, by being able to transfer psychological
benefits such as prestige and status.

For sellers, brands can:


(a)

Assist companies to enhance financial viability through repeat purchases


because the customer can identify and re-identify the product(s) compared
to its competitors.

(b)

Assist to launch new product(s) because the customers previous buying


experience allows them to be familiar with the brand and become very
accepting of these branded products.

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STRATEGIC BRAND MANAGEMENT

(c)

Become a point of reference so that promotion of these brands becomes


effective.

(d)

Facilitate market segmentation, by communicating a clear message to its


target audience that this brand is intended for whom and whom it is not.

(e)

Promote premium
competitors.

(f)

Nurture brand loyalty, particularly in product categories where loyal


buying is a known characteristic of buying behaviour.

pricing

by

differentiating

themselves

from

its

The potential contribution of brand strength to building customer value and


competitive advantage has resulted in companies talking about the concept of
brand equity.

ACTIVITY 6.1
Proton is a Malaysian automobile brand. Consider Berthon, Hulbert &
Pitts (1997) distinctions between the functions of brands for both
buyers and sellers, relate these directly to the Proton brand in
determining their validity and/or relevance.

6.3

BRAND EQUITY

Brand equity is a set of brand assets and liabilities linked to a brand, its name,
and symbol that add or subtract from the value provided by a product or service
to a firm and/or to that firms customers (Aaker, 1991, p 15).
These assets which affect brand equity include

Brand loyalty (e.g. When we fly, do we always fly on MAS, or do we also


choose SIA, KLM, Thai or Cathay Pacific?);

Name awareness (e.g. Do we know who the yellow man represents?);

Perceived quality (How does Proton compare to Perodua, Honda, Hyundai


and Kia in terms of quality?);

Brand associations (e.g. Ogawa is associated with healthy lifestyle); and

Proprietary brand assets (e.g. Protons patent for the Campro engine).

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Strong brand equity provides the following advantages:


(a)

Increases cash flow by the brand increasing sales and expanding market
share, allowing for premium pricing, and even redoing promotional costs.

(b)

Facilitates a more regular and steady income stream.

(c)

Allows for a brand to be sold or leased.

Therefore, brand equity is all about the worth of brand names. Top brands (e.g.
Coca-Cola, Microsoft, Toyota, and GE) have high net worth because of three
reasons:
(a)

New product introductions and new brand names are expensive.


Supposedly, the costs of new product introductions can reach $100 million
and failure rates can reach 75 percent meaning it can cost a company $400
million to produce a successful brand.

(b)

The marketplace is becoming very crowded. Aaker (1991) has mentioned


750 nameplates of cars (Consider this Proton alone has more than 10
models in Malaysia), 150 names of lipstick, and 93 different brands of cat
food. Added to this is a realisation that consumers in general, are very
reluctant to try new products.

(c)

Successful brands are well-established and normally, they have long life
spans and therefore, they will contribute higher returns to their respective
companies. These old brands include Coca-Cola, Kellogg, Eveready and
Gillette among others.

ACTIVITY 6.2
Identify two Malaysian companies that you believe have high brand
equity. Why do you suggest so? Give reasons to support your answer.
How does having high brand equity help them compete against
competing companies?

6.4

BRAND IDENTITY

Brands bring to us a whole range of communication, learning, history, feelings


about a product or company with just a simple name and logo. But although the
name by itself may be simple the meanings that the name carries are multifaceted.

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Some examples:
(a)

Perodua (Figure 6.3) is an acronym of Perusahaan Otomobil Kedua and is a


brand that is synonymous with quality, affordability and fun-to-drive cars.
It is a brand leader in the Malaysian car market because it has earned mass
acceptance from a demanding customer base, and proof of this is the fact
that as many as 1.3 million Perodua vehicles have been sold since August
1994 when the first Kancil was rolled out (BizWeek, The Star, 17 November
2007, p SS24). The recent introductions of MyVi and ViVA have further
cemented the Perodua name as a dependable and advanced compact car
manufacturer that produces high quality cars at reasonable prices. Perodua
is a brand that aims to deliver a happy motoring ownership experience.

Figure 6.3: A Perodua promotion that is bound to make you happy!


Source: http://www.perodua.com.my/index.php?section=promotion
&page=details&id=14, November 18, 2007.

(b)

1901 (Figure 6.4) is a hotdog franchise, whose name refers to the year the
term hotdog was coined in the United States. Yet it is a home-grown
business, with ambitions to compete with the likes of McDonalds, A&W
and others in the fast-food industry. Its tagline Food for friendship says a
lot about this brand, as it aims to become a friendship icon via its products,
conduct and aspirations. The 1901 website proclaims: We are famous for
our hotdogs, but the food we sell is merely a vehicle. What we actually offer
is a celebration of friendship and a sense of togetherness. (www.1901.com,
16 November 2007)

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91

Figure 6.4: 1901 is famous for its hotdogs


Source: http://www.1901.com/friends.html, 18 November 2007

(c)

Genting (Figure 6.5) is a company and brand that encompasses many


businesses. But Genting Highlands Resort stands out it is the premier
integrated family leisure and entertainment resort that pulled in over 18
million visitors in 2006 (BizWeek, The Star, 17 November 2007, p SS28). Its
success is not just due to its heritage and history. More than that, it is also
the fact that it is constantly transforming. This can be attributed to the
understanding of what the brand stands for since its inception. After all, it is
a brand that subscribes to the idea of wanting to be the premier resort for
the entire family.

Figure 6.5: Genting Theme Park is one of the many attractions


Source: http://www.genting.com.my/en/themepark/index.htm,
18 November, 2007

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Therefore, a brands identity means the sum of all the ways a (brand) chooses to
identify itself to all its publics (Marguiles, 1977, p 66). Another way of putting it
is How marketers want the brand to be perceived.

SELF-CHECK 6.1
Take a brand such as Proton describe the ways in which Proton
chooses to identify itself to the public.

6.5

BRAND IMAGE

Brand image is defined as the set of beliefs held about a particular brand
(Kotler, 1988, p 197). Or another way of putting it is that image is the perception
of the (brand) by these publics (Marguiles, 1977, p 66).
The term "brand image" became popular when it was evident that the feelings
and images associated with a brand are powerful purchase influencers, through
brand recognition, recall and brand identity. It is based on the proposition that
consumers buy not only a product (here we see the product as a commodity), but
also the image associations of the product, such as power, wealth, lifestyle, and
most importantly identification and association with other users of the brand.
Brand images come to mind when we start asking consumers the first
words/images that come to their mind when a brand is called (we can refer this
to "top of mind"). When responses are significantly variable, or there are no
responses, or responses are directed toward non-image attributes such as cost
this is an indicator of a weak brand image.
When I think of AirAsia, the first sentence that comes to mind is now everyone
can fly, suggesting affordability. Another is the colour red (Figure 6.6) that is
used to identify AirAsia this signifies (positive) aggression, in the sense that it is
a very competitive organisation, daring to confront market challenges in order to
win business.

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Figure 6.6: Brand image can be reinforced by brand communications such as advertising

In fact, brand image has been argued to be the key to answer the question of
how the consumer chooses among alternative brands (Ataman & Ulengin, 2003,
pp 237-250).

SELF-CHECK 6.2
Take a brand such as DiGi how does its brand image address the
question of how consumers choose among alternative brands?

6.6

MANAGING BRANDS

Analysing performance serves the purpose of establishing how well current


brand strategies are performing, helps management to identify new-products
needs, and shows where current strategies should be modified.
The established brands that have been successful for a very long period of time
produce useful information about product strategies. Brands such as Milo,
Nescafe, and Colgate continue to stake strong claims in sales and market share in
our country. The superior performances of these well-established brands can be
said to be the result of:
(a)

Marketing proficiency/skills.

(b)

Product quality.

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(c)

STRATEGIC BRAND MANAGEMENT

Strong brand preference


advertising.

developed through years of successful

The evidence suggests that choosing and implementing good brand strategies
pays off. Cravens & Piercy (2006) mention that research findings have
demonstrated that the top brands in many product categories are at least 50
percent more profitable than their nearest competitors (p 280).

6.6.1

Product Improvement Strategies

These include decisions for each product, product line, and the product portfolio.

Figure 6.7: Strategies for improving product performance

Once we know that there is a need to change the strategy for an existing product,
we can examine the following options for responding to this situation:
(a)

Additions to the product line This means adding a new product to the
existing product line. For instance, Proton added new models after its first
model, Proton Saga, was launched such as Persona, Satria Neo and Savvy.
Additionally, a strong performing brand may permit the company to
leverage its strengths by adding a new related line or product category. For
instance, Proton went into bikes, both the mountain bike and road bike
varieties (Figure 6.8).

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95

Figure 6.8: A T-Bike by Proton

(b)

Cost reduction Low costs can give a company a major advantage over its
competitors. For example Proton Saga, the first model to be launched in the
mid 1980s continues to bring in sales, even in 2007 because of its low pricing
and the over-the-top success of the SAGA Merdeka promotion (Figure 6.9):

Figure 6.9: The basic Proton only requires a monthly repayment of RM248

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(c)

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Product Improvement Products can be improved by changing their


quality, features, and even their styling (Figure 6.10). Car features and styles
are continually improved upon.

Figure 6.10: A new styling version for Proton Savvy

(d)

Market strategy alteration We may need to use different strategies in


different markets. E.g. In the area of market targeting and positioning.
Proton had said that the Arena model (called Jumbuck in Australia and UK
see Figure 6.11) was developed in Malaysia to feed the needs of 25,000
small businesses, combining a car cabin with a work-or-play tail
(CARSguide, 4 April 2003). In Australia especially, it caters more to the
weekend warriors needing space for toys such as bicycles, dirt bikes and
surf boards.

Figure 6.11: Proton Jumbuck is positioned in Australia as a freedom machine

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(e)

Product elimination Getting rid of a problem product may be necessary


when other strategies fail. This usually occurs during the introduction or
decline stages of the product life cycle.

(f)

Environmental effects of products In todays world, environmental issues


go hand in hand with business. It is important to recognise that
environmental care involves a set of trade-offs among social, economic,
political and technology factors.

Figure 6.12: Eco-friendly cars from Volvo

6.6.2

Strategies for Brand Strength

Management must always strive to achieve optimal performance when managing


their companys brand portfolio.
Strategies for building brand strength and sustaining this strength for the brand
portfolio require careful attention to understanding the following:
(a)

Brand-building strategies Herein lies the recognition to build, maintain,


and manage brand equity (Aaker, 1996, p 35). Critical to this process of
brand-building is the undertaking of initiatives that promote brand identity
and image.

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(b)

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Brand revitalisation Important mature brands that still have positive


impact on a companys overall strategy do require revitalisation. E.g. Apple
Computers transformed the companys position with the launch of iMac
and its 1997 Think Different (see Figure 6.13) campaign directed at the
loyal group of Macintosh users (Marketing News, 04 January, 1999, p 1).

Figure 6.13: The very successful Think Different ads

(c)

Strategic brand vulnerabilities Managers need to be aware of their brands


vulnerabilities. For instance, when Skoda cars were first launched in the UK
(Figure 6.14), with a heritage of low-quality vehicles assembled in part by
convict labour in the then-Communist country, consumer tests had shown
that the perceived value of this brand was much lower than if the brand
identification was removed from the cars (Cravens & Percy, 2006, p 283).
Thats why even today, Skoda car ads inevitably highlight their association
with the VW brand.

Figure 6.14: A Skoda print ad

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STRATEGIC BRAND MANAGEMENT

99

Brand Leveraging Strategy

Established and well-known brand names can introduce other products by using
their names and linking the new products to the existing brand name(s).
The primary benefit is instant brand recognition for the new product. The
strategies used to capitalise on this form of brand leveraging are:

(a)

Line extension This strategy consists of offering additional products in the


same product class or category as the core brand. Extensions may include
new flavours, colours and package sizes. The primary danger is
overextension, and which can dilute the core brand, i.e. weaken brand
equity.

(b)

Stretching the brand vertically This form of line extension means


stretching the product line either upwards, downwards, or even both ways.
E.g. BMW 300, 500 and 700. The benefit of this strategy is to provide the
company with expanded opportunities, shared costs, as well as leveraging
distinctive capabilities. For example the successful introduction of the
Infiniti, Lexus and Acura brands represent an upward movement of the
respective Nissan, Toyota and Honda core brands. On the other hand, the
Mercedes C-Class cars represent downward stretching of the Mercedes line.
Still, we do have to be aware of the possible disadvantages damage to the
core brand when moving lower (especially lower quality/price versions of a
premium brand) or difficulty in moving the brand to a higher quality/price
level.

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Brand extension This type of leveraging strategy benefits from consumers


familiarity with an existing brand name in a product class to launch a new
product line in another product class. For example, Honda uses its company
name to cover different products such as its cars, motorcycles, marine
engines, lawn mowers, snowmobiles and snow blowers. In any case, a
brand extension strategy does carry risks. E.g. the failures of Bic pantyhose,
Heinz pet food and Clorox laundry detergent.

(d) Co-branding This strategy is when two established brands of different


companies are working together to promote their products (see Figure 6.15).
E.g. Airlines co-branding with credit card companies. The advantage is
leveraging the customer bases of the two brands. If at all there is a
weakness, it is that any negative association(s) afflicting one brand may
affect the other brand.

Figure 6.15: A Public Bank Manchester United MasterCard

(e) Licensing This strategy involves selling the core brand name to
another company for use on a non-competing product. E.g. PepsiCo
employees licensing as a strategic tool to enhance and build the
identification of the brand and generate additional revenue stream the
use of the Pepsi logo on young mens and womens apparel is intended to
reflect the lifestyles of Pepsi drinkers (BusinessWeek, 10 September 2001,
p 84). The main disadvantage is that the licensee may create an
unfavourable image for the core brand.

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(f) Overleveraging Because of the huge costs in brand building, managers


may be under intense pressure to leverage their brands over a large
number of products.

SELF-CHECK 6.3
Consider the following brand extensions and evaluate how well the
brands associations fit the new product: Proton extending from cars
into batteries; HELP extending from education into management
consultancy; and 1901 extending from hotdogs into breakfast cereal.

ACTIVITY 6.3
Take a brand such as Milo investigate and explain why it is so
successful in Malaysia. Is it likely to continue to be a success in the
future? Why?

6.7

GLOBAL BRANDS

Companies moving abroad will face branding challenges. In most cases,


companies attempt to build global brands that can compete in a majority of
markets worldwide. E.g. Marlboro, Disney, Nokia and Coca-Cola.
Aaker & Joachimsthaler argue that a global brand strategy is more often than not
misguided and that companies should be working to create global brand
leadership as a first priority strong brands in all markets supported by effective
strategic global brand management (2000, p 309). E.g. P&G has traditionally
stressed individual product brands instead of promoting its corporate identity.
But in some overseas markets such as Japan, the company uses the corporate
umbrella identification of P&G to create value because Japanese consumers
want to know the company behind the brands that they buy (Financial Times, 05
June 1998, p 22).
Also multinational corporations face the prospect of competing in markets with
global, regional and local brands. E.g. If we look at Nestls 4-level brand
portfolio, we will notice that Nestle and Carnation are worldwide corporate
brands; KitKat and Polo are worldwide strategic brands; Stouffers and Findus are
regional strategic brands; and Texicana and Rocky are local brands.

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Closer to home, the Association of Accredited Advertising Agents of Malaysia


(4As) have worked with Interbrand to develop world-standard benchmarks
thereby allowing both established and growing Malaysian brands to question
what they are doing and see if they are actually making a difference or just be
contented to be mere observers from afar. Hence the Malaysias Most Valuable
Brands project, and which 4As believe it is a start towards putting Malaysian
brands on the global map.

SELF-CHECK 6.4
Can you name any Malaysian brands that can be considered as global
brands? Support your answer(s).

6.8

INTERNET BRANDS

It has been noted that successful online brands are adopting brand strategies that
depend on the traditional, offline forms of communications (Cravens & Piercy,
2006, p 286). E.g. the career website, Monster.com (Figure 6.16) makes successful
use of sponsoring the halftime report at the Super Bowl backed by advertising
spots in the pre-game and during the game. Monsters target is men and women
aged 18 to 49, and the Super Bowl gives excellent coverage, which coincides with
that time of the year when people are normally thinking of changing jobs
(Marketing News, 01 May 2004, p 6).

Figure 6.16: Monster.com website

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STRATEGIC BRAND MANAGEMENT 103

The Internet can enhance brand relationships and corporate reputation by


offering customers not just convenience and speed, but also interactivity.

SELF-CHECK 6.5
Can you identify any Malaysian online brands? Are they similarly
adopting the traditional, offline brand strategies or are they different?
Explain.

6.9

MANAGING THE BRAND PORTFOLIO

Managers are today concerned with the system or network of brands in the
portfolio. Each brand should contribute to the portfolio as well as benefitting
from it. The goal should be to coordinate strategies across the system rather than
managing each brand independently.
According to Aaker (2004), The brand portfolio strategy specifies the structure of
the brand portfolio and the scope, roles and interrelationships of the portfolio
brands. The goals are to create synergy, leverage, clarity within the portfolio and
relevant, differentiated, and energised brands.

A key concept that guides the management of the brand portfolio is that
individual brands play different roles in this system. One brand may take on a
leading role, whereas other brands in the system play supportive roles.

SELF-CHECK 6.6
Discuss the underlying logic of managing brand systems.

Strategic brand management makes us aware of the challenges in brandbuilding.

It examines the role of branding and focuses on three components: brand


equity, brand identity and brand image.

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It studies the strategies for managing brands by examining strategies for


improving product performance, strategies for brand strength, and brand
leveraging strategy.

And it also looks at global brands and Internet brands and their relevance in
todays business landscape.

Finally, we follow up with a discussion on managing the brand portfolio.

Brand

Brand image

Brand equity

Co-branding

Brand identity

Product

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STRATEGIC BRAND MANAGEMENT 105

Excerpts from a CNN interview with Richard Branson.


LONDON, England (CNN) Leaving school at 16 is not normally the route
to success. But Richard Branson did just that, setting up a magazine and
then entering the record business. Now his brand is behind more than 300
companies -- from cola to trains, from phones to planes making Virgin a
global name. Soon Virgin will reach galactic proportions. In 2009 Richard
Branson hopes to take tourists into space.
CNN's Todd Benjamin caught up with Branson and asked what drives him
to create such a diverse enterprise.
Branson: What drives me to create a lot of different businesses is simply a
feeling that we can, most likely, do it better than other people in particular
areas. We won't create a business if somebody else is doing it really well;
the only time we'll create one is if it's not being done well.
Benjamin: Without your persona do you think the Virgin brand could have
ever become what it became?
Branson: I think the particular Virgin brand perhaps needed me, in the past, to
get out there and be adventurous, and therefore to give the brand an
adventurous feeling; take on the big guys, which we did, and beat the big
guys and that's what's created the Virgin brand. I think now if my balloon
pops, or the space ship just continues to go into space, or whatever, I think the
brand is strong enough to withstand all that and it'll continue to grow.
Source: Webpage http://edition.cnn.com/2007/BUSINESS/09/06/boardroom.
branson/index.html, November 18, 2007.

QUESTION
Branson uses the same Virgin brand name for all of his diverse businesses.
What is the underlying logic of this strategy? Do you agree or disagree
with this approach notwithstanding that Branson has achieved major
success thus far?

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Books
Aaker, D. (1996). Building strong brands. New York: The Free Press.
Aaker, D. (2004). Brand portfolio strategy. New York: The Free Press.
Aaker, D., & Joachimesthaler, E. (2000). Brand leadership. New York: The Free
Press.
Cravens, D., & Piercy, N. (2006). Strategic marketing. (8th ed.). New York:
McGraw-Hill/Irwin, Chapter 9.

Journal
Leiser, M. (2004), Understanding brands value: advancing brand equity tracking
to brand equity management, Handbook of Business Strategy, Volume 5,
Number 1, pp 216-222.
Reports
Berthon, P., Hulbert, J., & Pitt, L.(1997), Brands, Brand Managers and the
Management of Brands: Where To Next? Boston, MA : Report No. 97-122,
Marketing Science Institute.

Topic

New Product
Strategies

LEARNING OUTCOMES
By end of this topic, you should be able to:
1.

Describe the six types of new product categories;

2.

Explain why new products are important;

3.

Discuss why new products succeed or fail;

4.

Discuss how product innovations equip companies with a sustainable


business advantage;

5.

State what are the criteria for innovation success; and

6.

Assess what we mean by intelligent innovation and the concept of


slow haste.

INTRODUCTION
We have read in the preceding chapter that companies are willing to spend
millions to create market dominance through branding. This is especially so
when we talk about dominating existing product categories.
But as rapid change comes upon us and markets become even more dynamic and
competitive, companies must now look beyond their present product portfolio.
As Stalk, Evans & Shulman (1992, p 62) point out: Dominating existing product
segments becomes less important than being able to create new products and
exploit them quickly.
It is becoming very obvious that it is not just marketing, but that innovation is
recognised as the other key platform that enables an organisation to establish and
maintain a competitive edge over the other market players and thereby, to also

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ensure economic viability by producing sustainable growth over the mid- to


long-term.
According to Rainey (2005), product innovation as represented by new product
development (NPD) is the way to maximise customer value. If done correctly, not
only the customer but also the company and perhaps even society in general will
benefit. Product innovation should therefore be regarded as a strategic issue for a
business and not just as a matter of supplementing the product line. Hence this
chapter looks at this issue separately and hopes to complement the lessons from
the previous chapter.
Product innovation is ... the creation of a new good which more adequately
satisfies existing or previously satisfied needs (Schumpeter, 1934). Another
definition comes from Utterback & Abernathy (1975) who define product
innovation as a new technology or combinations of technologies introduced
commercially to meet a user or a market need.
Davenport & Prussak (1993) suggest that innovation and speed to launch
products into the market are essential for business success and that this is
increasingly critical for the future of these companies.
Yet just as product innovation is important for business success we must also
acknowledge that failure can indeed be very costly.
Notable market failures include New Coke, Premier Smokeless cigarettes, RCAs
Selectavision a $400 million loss, Polaroids Instant Motion Picture Camera, and
Federal Express Zapmail a cumulative $600 million loss (Block & MacMillan,
1999).

7.1

MARKETING OF NEW PRODUCTS

Here we will consider four issues concerning the marketing of new products.

7.1.1

What is New Product?

The first and most fundamental issue that we must clarify is the meaning of new
product.
Management consultants Booz, Allen and Hamilton (BAH) (1982) argue that a
new product can be considered along two dimensions newness to the market
and newness to the company.

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109

Based on these two dimensions, six categories of new products can be


determined (see Figure 7.1):
(a)

New-to-the-world products These innovations are brand-new to the


company and create a new market or market segment. These companies are
considered market pioneers.

(b)

New product lines These products allow a company to enter an already


established market for the first time. These companies can be labelled
market followers or late (market) entrants.

(c)

Repositioned products These existing products create new applications


and/or they enter new markets or market segments.

(d)

Revisions and improvements to existing products These products


undergo change in order to produce improved performance or provide
greater perceived value and/or replacing existing products.

(e)

Additions to existing product lines These products supplement an


existing product line.

(f)

Cost reductions These involve product modifications to enable them to


still produce similar performance but at a lower cost.

Figure 7.1: Categories of New Products


Source: Cooper (2000)

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Market Entry Timing

The choice of market-entry timing is one of the major reasons for new product
success or failure (Hopkins & Bailey, 1971; Crawford, 1977; Booz, Allen &
Hamilton, 1982).
Where products are being developed for new markets or new market segments,
should the organisation be a pioneer and take first-mover advantage, or should it
be a follower or even a late entrant?
Market entry timing decisions are not so easy to arrive at. The organisation will
need to evaluate the many internal and external conditions affecting it before
deciding whether to enter a market with a new product (Lieberman and
Montgomery, 1991).
The decision to enter a market should be timed to balance the risks of premature
entry (entry that is too early) and the issue of missed opportunities (entry that is
too late).

7.1.3

Why Do New Products Succeed or Fail?

The third issue is to examine why some new products succeed and others fail.
A popular generalisation is the fact that fewer than 10% of all new
products/services produce enough return on the company's investment to
survive past the third year. In fact, a 1994 study conducted by Kuczmarski &
Associates indicated that new products/services fared better it reported a 56
percent success rate (for new products/services).
So why do some products succeed while others fail?
These are many reasons but the following is a checklist of a number of possible
causes:
(a)

No discernible benefits When Pepsi introduced "Crystal Pepsi,"(Figure


7.2) a clear cola, in 1992 it saw encouraging sales before it quickly flopped.
Presumably this is because consumers cannot discern any benefits from
drinking a clear cola! After all, when is a cola not a cola? Answer: When it
looks more like a 7-Up than a Pepsi!

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111

Figure 7.2: Crystal Pepsi bombed

(b)

Poor match between features and customer needs/wants Premier (Figure


7.3), a RJ Reynolds brand of smokeless cigarette lasted only 5 months in the
market when it was launched back in 1988. The main grouses for this
cigarette are that it only looked like a customary cigarette, when it is really
not a cigarette. The features one associate with smoking a cigarette are not
evident. It burned charcoal rather than tobacco, and drawing warm vapour
across the tobacco flavourings to create the illusion of tobacco smoke. The
vapour smoke dissipated instantly and it left little smell and no ashes.
Moreover, this smoke is characterised by harsh taste (some say, a charcoal
after-taste) and hard draw. But cigarette smokers want smoke, tobacco taste,
and easy draw which Premier does not provide in a cigarette.

Figure 7.3: Premier, the smokeless cigarette

(c)

Problematic or inferior product In 2000, Bridgestone-Firestone got itself


caught in a crisis situation caused by the manufacture and sale of defective
tyres for the Ford Explorer. The result was a tendency for the vehicle to

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overturn when a tyre blew out due to detaching of the tyres threads. At the
same time, the Explorer was also accused of having design faults that,
together with the tyre problem, could prove a fatal combination for the
driver.

Figure 7.4: Burst Firestone tyre

(d)

Poor market timing Kimberley-Clarks Avert Virucidal Tissues (Figure


7.5) lasted only 10 months in the New York test market before it was pulled
from the shelves back in 1985. The tissue contained vitamin C derivatives
and was the first tissue scientifically designed to kill cold and flu germs
when sneezing, coughing, or blowing your nose into them. Unfortunately
for Kimberly-Clark, people didn't believe the claims and they were
frightened by the name. In reality, this product failed because it was too far
ahead of its time.

Figure 7.5: The market may now accept Avert tissues

(e)

Overestimation of Market Size In 1982, Atari, the licensee for the Pac-Man
video game console (Figure 7.6) rights, created twelve million cartridges of
the Atari 2600, the highly-popular Pac-Man arcade game in hopes of huge
sales. Atari did sell close to seven million cartridges, but consumers and

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113

critics alike gave it low ratings. The game was rushed to make the 1982
Christmas season but the high number of unsold units (over 5 million),
coupled with the expense of a large marketing campaign, led to large losses
for Atari. Shortly after the disappointment of Pac-Man, Atari reported a
huge quarterly loss, prompting parent company, Warner Communications
to sell the division off in 1984.

Figure 7.6: Pac-Man for the Atari 2600

(f)

Incorrect Positioning In 1974, Clairol introduced a shampoo in test


markets that made promises no one wanted: "The Look of Buttermilk"
(Figure 7.7). Why would anyone call a shampoo "The Look of Buttermilk"?
As far as the consumers are concerned, buttermilk does not have anything
to do with cleaning or conditioning. Many people don't even like to drink
buttermilk. Perhaps Clairol's marketers wanted to associate this shampoo
with farm life. The bottle showed an appealing farm-like scene. But the
connection between buttermilk, farms, freshness and hair was a stretch few
shampoo buyers could make. Promises your brand may offer to consumers
must make a connection in their minds but it must be the right connection,
or your product will go off in the wrong direction.

Figure 7.7: What exactly is the Look of Buttermilk?

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(g)

Inadequate distribution Sometimes, a new product may fail when it does


not receive the proper distribution support. In the tobacco industry, it is a
well-established fact that distribution is the key to any brands success. A
national brand such as Marlboro enjoys almost 100 percent distribution in
the Malaysian marketplace, while a brand such as Sampoerna A Mild will
only see limited distribution hence the latters success is likely to be
limited as compared to the former brand. Distribution is usually a reflection
of market demand.

(h)

Price too high or too low McDonalds 1996 introduction of the Arch
Deluxe Burger (Figure 7.8) was the result of its wish to market McDonalds
fine cuisine to the adult demographic. Unfortunately, adults werent
interested in paying significantly more for slightly different burgers.

Figure 7.8: Arch Deluxe didnt make it

(i)

Poor promotion In the mid-1970s, Heublein, a US wine and liquor


importer and distributor, introduced an upscale easy-to-make product
simply called "Wine & Dine Dinners" and this product came with pasta and
sauce mix and a mini bottle of salted wine that was intended for creating
the sauce. However, this rather important instruction wasn't properly
explained, and consumers assumed the wine was for drinking. This
misunderstanding left a bitter taste in the mouths of the unforgiving
consumers.

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7.1.4

NEW PRODUCT STRATEGIES

115

Time to Market

The fourth issue concerns time to market.


In business, time to market is the length of time it takes from a product being
conceived or developed until it becomes available for sale in the marketplace.
In the fast-paced intensively competitive industries, time to market is invariably a
success driver.
For instance, HP has shortened the time for designing a new printer from 54 to 22
months and Netscape has a policy of introducing new products every 6 months,
reducing the time interval between one innovation and the next (Giaretta, 2005).

SELF-CHECK 7.1
Can you name three Malaysian products which have failed in the
marketplace? Why do you consider them as product failures? Also
identify the reason(s) for the failure(s).

7.2

NEW-PRODUCT DEVELOPMENT (NPD)


PROCESS

One common description of new product development is the process that


transforms technical ideas or market needs and opportunities into a new product
on to the market (Walsh et al, 1992).
For innovation to occur, it must go through an organisational process that is put
into proper place. Developing successful new products needs systematic
planning and organisational support in order that all business decisions,
resources, activities, and functions are well-coordinated to move a new-product
idea right through to commercial success.

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Figure 7.9: New-Product Development Model


Source: Cravens, David & Piercy, Nigel (2006), Strategic Marketing, Eighth edition, NY:
McGraw-Hill/Irwin, p 227.

Lets briefly examine the steps in this new-product development process (Figure
7.9):
(a)

Customer needs analysis: From a marketing perspective, we should always


start with an understanding of customer needs. And this needs analysis can
even generate new-product ideas, or if not, can at least point the direction to
which new ideas can be developed.

(b)

Idea generation: Finding promising new ideas is the starting point in the
new-product development process these ideas can come from customers,
suppliers, employees, competitors, own R&D laboratories, external
inventors, acquisitions and other value-chain members.

(c)

Screening and evaluating: Management needs to screen and evaluate ideas


so that it can dismiss those unpromising ones as soon as possible while
ensuring the risks of rejecting good ideas are kept at reasonable levels. We
have to recognise that having too many ideas all at once, is both not feasible

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117

and viable from a purely economic standpoint. The purpose of this stage is
to get rid of as many of the unpromising ideas as quickly as possible before
the company has invested in huge sums of time, effort and money.
(d)

Business analysis: Before the product idea goes into the product
development stage, a P&L for developing and commercialising the new
product is to be undertaken. Financial projections that map out cost and
revenue forecasts are important for the company to help it decide on
whether to proceed as well as basing on the expected return on
investment and the time span taken to yield this return.

(e)

Product development: This process includes product design, industrial


design (ease-of-use and style), process (manufacturing) design, packaging
design as well as building prototype(s) and use testing of the said product.

(f)

Marketing strategy development: Here, we examine the need to develop an


appropriate marketing strategy, how this new product will impact our
current product portfolio, and if the product is new to the company, we
must also look at positioning and targeting strategies.

(g)

Testing: Once the product is deemed ready, then we will need to embark on
market testing. Market tests measure customer response to the new product
and even evaluate the positioning strategy assigned to the product. This
method of market testing introduces the new product under actual market
conditions in one or more test cities.

(h)

Commercialisation: The stage of introducing the new product into the


market proper and this is achieved through finalising the marketing plan,
coordinating market entry activities with business functions, implementing
the marketing strategy, and monitoring and control of the actual product
launch.

7.3

INNOVATION SUCCESS

How do we measure innovation success? Would a company like the Coca-Cola


Company be considered innovative? Yes, it created Coke in 1886 a single
product that has become the No. 1 refreshment in the world. And since then,
Coke has evolved into many flavours (e.g. Coca-Cola with Lemon, Coca-Cola
Raspberry, Coca-Cola Vanilla, Coca-Cola BlK, Coca-Cola Cherry, Coca-Cola
Black Cherry Vanilla, Coca-Cola C2, Diet Coke/Coke Light, Coca-Cola Light
Sango, Coca-Cola Zero). Rightly so, all these are innovations, but were they all
successful?
What about a company such as 3M? Is it not an example of innovation success
given that its primary purpose in life is to bring forth innovations? This

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intelligent innovator has produced thousands of innovative products such as


emergency exit markings (e.g. 3M photo luminescent film), corrosion protection
products (e.g. 3M Scotchkote Fusion Bonded Epoxy Powders and Scotchkote
Liquid Epoxy Coatings), automotive-related products (e.g. Scotchgard Paint
Protection Film), personal safety products (e.g. 3M Scotchlite Reflective Material)
and infection prevention solutions (e.g. 3M TempaDOT disposable thermometry
system).
A Booz Allen Hamiltons Global Innovation 1000 study which was released in
November 2006 pinpointed 94 companies that were described as high-leverage
innovators these companies have consistently achieved better returns on their
innovation investments.
The study had revealed that there was not one single formula for innovation
success at these companies. These companies came up with R&D strategies that
not only provided them with a competitive advantage but also became successful
because of the following four criteria (Figure 7.10): strengths in the innovation
value chain, involvement of senior management in the innovation process, close
attention to end-user input and feedback, and flatter and more responsive
management structures.

Figure 7.10: The Four Criteria of Innovation Success

(a)

Strengths in the value chain


The innovation value chain consists of four interdependent elements
ideation, project selection, product development, and commercialisation.
Each stage sets a foundation upon which the next stage can be built. The
BAH study had shown that the 94 high-leverage innovators did not
necessarily employ significantly different innovation processes. However,
in general, each one had indeed built sufficiently strong capabilities along
all areas of the value chain and seamlessly integrated them in order to
provide a high level of performance over time.

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119

In addition to competency across the value chain, high-leverage


innovators are typically well-known for their exceptional skill in any one
particular stage. E.g. Google excels at ideation, generating new ideas at
super-speed. Googles 70-20-10 Rule encourages staff, especially
engineers, to spend 70 percent of their time on core business, 20 percent on
related business, and 10 percent on areas entirely of their own choosing
(Visions, March 2007).
(b)

Involvement of senior management in the innovation process


Strong support from senior management is essential in driving a project to
success. For instance, we know that Apple is very good at project selection
and commercialisation, backed by a very keen understanding of its
customers. But its success is often attributed to a systematic ideation process
that involves senior management most famously Steve Jobs in the
conception and definition of new ideas.

(c)

Close attention to end-user input and feedback


High-leverage innovators tend to pay close attention to end-user input
and feedback. Black & Decker for example, adopts this approach: To spend
a lot of time focusing on where (end users) work, where they play, where
they buy, and where they learn. According to its Chief Financial Officer,
Michael Mangan, Understanding and developing those relationships really
increases the efficiency of our new product introductions (Visions, March
2007).

(d)

Flatter and more responsive management structures


High-leverage innovators are in favour of flatter and more responsive
management structures because they make the innovation process more
transparent to the executive team. Steve Jobs keeps Apples product
development structure unusually flat so he can observe and direct the
innovation process. Black & Decker keeps costs down partly by keeping
R&D focused and closely aligned with its business units. Worldwide design
is coordinated from its headquarters in USA, but Black & Decker maintains
no centralised R&D function (Visions, March 2007).
The BAH study concluded that the steps companies will need to take in
order for them to operate more like a high-leverage innovator would be
to invest in capabilities across the innovation value chain knowing how to
make the right bets to maximise returns on innovation investments and,
once a product is selected, to ensure that it is developed as efficiently as
possible.

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SELF-CHECK 7.2
After reading this section and in your own words, how would you
define innovation success?

SELF-CHECK 7.3
Discuss whether your organisation fulfils the four criteria that define
innovation success.

7.4

THE INTELLIGENT INNOVATION MODEL

Although this statement itself can provoke debate, there are those who believe it
to be a truism: That innovation will supplant cost reduction and mergers and
acquisitions as the competitive battleground in the near future. In fact, a BAH
study had claimed that ninety percent of executives believe that the introduction
of new products and services is crucial to an organisations profitability (Visions,
March, 2007).
So, how do we locate these innovations? Many companies have been focusing on
tighter control of the innovation process and innovation costs.
Innovation success does not come about from just the analytical rigours of the
innovation process. In fact, it is very necessary to balance this rigour of the
control regime with a softer side that includes creativity, curiosity, pattern
recognition, cultural sensitivity, leadership, agility and transforming itself into a
learning organisation.
Dehoff & Jaruzelski (2007) identify this approach as the Intelligent Innovation
model and they believe strongly that this is the only way that companies can
hope to exploit the four major sources of advantaged innovation, as illustrated
below (see Figure 7.11):

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W 121

Figure 7.11: The Four Sources of Intelligent Innovation


Source: Booz, Allen & Hamilton (2005), The Four Sources of Intelligent Innovation:
Winning the Race for Profitable Growth in webpage http://www.leadinginnovations.com/lic05-home/lic03, retrieved 25 November, 2007.

(a)

Customer Insight
Procter & Gamble obtains valuable customer insight by keeping many
channels open to gather information about and from customers, and convey
this information widely throughout the organisation. They also provide
opportunities for customers to participate directly in the innovation
process.

(b)

Future Foresight
Progressive companies do engage in scenario planning, yet, few use it to
drive Intelligent Innovation. Identifying tomorrows market opportunities
and risks is not anybodys solo effort but it requires working in concert with
senior management to evaluate the strategic and tactical implications of
market trends, and then sharing this information with everyone in the
organisation. For example, Siemens drew pictures of the future to
discover market opportunities and create a roadmap for its R&D strategy.

(c)

Innovation Organisation
Not many organisations recognise the tremendous innovation potential
residing in an organisations employees. Intelligent innovators such as 3M
have developed key principles and install them into their organisations
DNA to unlock this potential. These principles must include senior
managements commitment to innovation as a corporate philosophy,

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accepting the opportunities for autonomy, encouraging cross-functional


teaming and allowing for aligned incentives.
Let us examine the value that can be obtained from just one of these
principles the cross-functional team. It is well-accepted that successful
innovation requires a seamless integration of all elements in the product
development process. Firms which are successful in realising the full
returns from their technologies and innovations are able to match their
technological developments with complementary expertise in other areas of
their business, such as manufacturing, marketing, and human resources. To
lead these expertise development efforts, cross-functional teams, either
formal or informal, need to be formed. These teams can also find new
businesses in the white spaces between existing business units. Multifunctional teams are prepared to act quickly and flexibly to meet an
organisations changing needs. Aside from providing speed, crossfunctional work teams can help solve complex problems, provide customer
focus, encourage creativity, promote organisational learning and serve as a
single point of contact. All of these are condusive to creating an innovative
environment.
(d)

Global Network
Whilst innovation can be nurtured in both centralised and decentralised
organisations, it is generally accepted that the former, especially those with
a headquarters knows best mentality are at a disadvantage. Intelligent
innovators know how to leverage knowledge that may be dispersed across
the globe, and that may be either inside or outside the
organisation. Intelligent innovators integrate each site or partner into a
seamlessly managed innovation network. E.g. When General
Electric entered the wind energy market, it put together a team of people
from not just USA, but also from Canada, Germany, India and China to
develop an energy-generating equipment (Visions, March, 2007).
Although the four Sources of Intelligent Innovation model is particularly
suitable in industries these include high technology, pharmaceuticals,
automotive, and consumer goods, among others where growth through
innovation is critically important, in truth, innovation is applicable for all
industries.

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123

SELF-CHECK 7.4
1.

Innovation will supplant cost reduction and mergers and


acquisitions as the competitive battleground in the near future.
Do you agree or disagree? Support your answer with examples.

2.

Do you know of any Malaysian organisations that uphold the


four Sources of Intelligent Innovation model?

3.

Does your own organisation practise any one, if not all of the four
Sources of Intelligent Innovation? Explain.

7.5

THE CONCEPT OF SLOW HASTE

Whilst we recognise the many bountiful benefits that come from new products,
questions have been raised about on whether continuous and faster product
innovation can be reconciled with ethical business practice? What about
innovations that not only provide no tangible benefit to consumers but may even
bring harm? After all, all this while we have been assuming that new products
bring only positive benefit to consumers and to society in general.
It is not just a question of the marketplace being littered with product failures,
but it is not uncommon to also see products that failed because they are defective
and/or dangerous. A case in point is Nintendos Virtual Boy (Figure 7.12) the
first portable game console capable of displaying true 3D graphics. Released in
July 1995 in Japan and then in North America in August of the same year it met
with poor sales, and the product was discontinued barely a year later. Most
parties blamed the failure to issues related to players getting eye strain and
headaches when trying to play it.

Figure 7.12: The short-lived Virtual Boy

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Todays companies are experiencing significant pressures from increased levels


of competition, rapidly changing market requirements, higher rates of technical
obsolescence, shorter product lifecycles and the heightened importance of
meeting the needs of increasingly sophisticated customers (McGrath et al, 1992).
All the above can be attributed to globalisation pressures. This means that
companies are pressured to gear up to the speed of change which in turn may
compel them to produce rapid and constant innovations, but that at the same
time, the market is also insisting on the ethical conduct of business.
Still, we can also agree that embarking on innovative approaches characterised
by speed would not seem to be wholly without negative consequences (Giaretta,
2005). This speed of change reduces the time available for proper
evaluation/testing. As a result, increased risk of errors will creep in that will then
have dire consequences for the consumers who use the said product.
For example the Mercedes-Benz Class A cars, saw the first batch of cars recalled
between 1997 and 1998. External Elk tests carried out showed the cars
propensity to rollover when it zigzags on the road. This case has been attributed
by some to the increased speed with which the new model has been developed,
marketed and sold.
Giaretta (2005) introduced the concept of slow haste (she also used the Latin
term festina lente) to advocate a new approach towards innovations saying that
companies should actually slow down the pace of innovations, so that less errors
and defects will occur, and also out of respect for the public that (they are)
interacting with and with the consumer in particular.
Overall, this is a very simple and straightforward idea that makes a lot of sense.
Just look at the mobile phone as a good example of continuous and unceasing
product innovation. Manufacturers have been bombarding the market with new
models every other week surely this is not all positive? The utility of a product
expires with the introduction of new models in other words, every time a new
model appears on the market, another previous model becomes obsolete, either
in technological terms or in terms of fashion. This is referred to as programmed
obsolescence the life of the product is thus deliberately planned in line with the
needs of the company, and not the consumers! The ethical issues are not only in
regard to economic wastage, and the manipulative conditioning of the individual
consumers choice, but also in terms of the environmental problems associated
with disposing the old models. And there are those who believe that consumers
insatiable appetite for new products and new models promote consumerism

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125

which is itself a threat to the freedom of the individual to make an informed and
free choice.
As Giaretta (2005) have said that the challenge to the businesses of the future will
therefore be to embrace slow haste to proceed at a pace that is in harmony
with the needs of the multifarious voices speaking to the business (es).

SELF-CHECK 7.5
Do you think the concept of slow haste makes sense in todays
world of unrelenting innovations, or do you think consumers want as
many product innovations as they can get, without considering the ill
effects? Explain.

We start this Chapter by making a proposition that product innovation is an


important driver for companies to build a competitive advantage over their
competitors, as well as sustaining business competitiveness over the mid- to
long-term period.

We use the BAH Model and look at the six categories of new products,
consider market-entry timing, examine the reasons for new-product failures
and time to market.

We then consider the new-product development process.

Also we know there is no one single formula for success in innovation and a
study of high-leverage innovators came up with four criteria of innovation
success: strengths in the innovation value chain, involvement of senior
management in the innovation process, close attention to end-user input and
feedback, and flatter and more responsive management structures.

We look at the concept of intelligent innovation, which basically combines the


rigours of the innovation process with the softer side of creativity and
sensitivity.

Finally, we note the necessity of introducing an ethical dimension to the


whole issue of new product development, and we introduced Giarettas
concept of slow-haste which means to slow down the pace of product
innovation, so that consumers can actually benefit from the innovations that
came about, rather than be bombarded with continuous product innovation,
that may bring harm and wastage to consumers and to society.

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Consumerism

Programmed obsolescence

Intelligent Innovation

Slow haste

New product development

Time to market

Product innovation

TOPIC 7

NEW PRODUCT STRATEGIES

New product development is a vital part of the marketing mix for


the UK's biggest retailer, Tesco.
Seaneen O' Neill is one of the product development managers
with the chain. She's responsible for the chilled food products, and
is constantly on the lookout for the latest trends in eating that can
be developed into a new line at the store.
Each year, there are 1,000 new product launches in chilled foods alone.
Seaneen is part of team of nine who work in this category. For
most products, the process is the same.
People like Seaneen have to be one step ahead of the game trying
to spot what is new and fashionable in food, with the potential to
appeal to a broad market. Researching new product ideas takes
Seaneen all over the world. For one new range, she actually spent
time in a cookery school in Italy because she wanted the products
to have a real taste of Italy.
Once Seaneen is taken with an idea she'll write up a brief for her
supplier who then in turn does his or her own research before
making the product in their kitchens.
Helen Fraser is the product development manager with Katsouris
Fresh Foods, one of Tescos's suppliers.
When we get the brief we go out into market and buy the
products that are already out there, or are similar to the ones
which fit the brief," says Helen.
"We log the prices of similar lines and see what price range we
should be working to. Then we start putting something together."
Each food product goes through many different tastings before it's
actually launched on the market.
With each new product there is always an element of risk
involved. The failure rate with new products is very high.
"Success and failure is part of the job," says Helen.

127

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"For every 10 new products developed only one or two are launched, and
probably half of those fail.
Of course the deciding factor for the success rate of a product is how well
it sells.
"It's much harder to innovate now than it was four years ago," says
Helen.
But with the average product life cycle only 18 months, it means that
people like Seaneen will be kept busy for some time to come.
Source: Lunch Lesson 12 New product development, BBC News, 27
November 2002
QUESTIONS
1.

Why is new product development important to a supermarket


operator like Tesco?

2.

Why do you think it is increasingly harder to innovate?

Books
Cooper, R.G. (2000). Product leadership: Creating and launching superior new
products. Cambridge, MA.,: Perseus Books
Cravens, D., & Piercy, N. (2006). Strategic marketing. (8th ed.). New York:
McGraw-Hill/Irwin, Chapter 8.
Rainey. D. (2005). Product innovation. New York: Cambridge University Press
Online
Dehoff, K. & Jaruzelski, B. (2007), Heres what high-leverage innovators do
differently, Visions, PDMA, March, at webpage http://www.pdma.org/
visions/march07/npd-trends-booz.php, retrieved 25 November, 2007.

TOPIC 7

NEW PRODUCT STRATEGIES

129

Jaruzelski, B., Dehoff, K., & Bordia R. (2007), Smart Spenders: The Global
Innovation
1000,
Visions,
PDMA,
March
at
webpage
http://www.pdma.org/visions/march07/npd-trends-booz.php, retrieved
05 December, 2007.
Kotelnikov,
V.,
New
Product
Development
at
webpage
http://www.1000ventures.com/business_guide/new_product_developme
nt.html, retrieved 25 November 2007.
Journals
Giaretta, E. (2005), Ethical product innovation: in praise of slowness, The TQM
Magazine, Volume 17, Number 2, pp 161-181.
Lilien, G. & Yoon, E. S. (1990), The Timing of Competitive Market Entry: An
Exploratory Study of New Industrial Products, Management Science,
Volume 36, Number 5, May.
Salavou, H. (2002), Profitability in market-oriented SMEs: does product
innovation matter? European Journal of Innovation Management, Volume
5, Number 3, pp 164-171.
Shepherd, C. & Pervaiz, A. (2000), From product innovation to solutions
innovation: a new paradigm for competitive advantage, European Journal
of Innovation Management, Volume 3 Number 2, pp 100-106.

Topic

Pricing
Strategy and
Management

LEARNING OUTCOMES
By end of this topic, you should be able to:
1.

Elaborate on the strategic role of pricing;

2.

Relate pricing to product in the areas of positioning, demand curve,


cost of goods sold, and environmental factors;

3.

Discuss the importance of pricing objectives;

4.

Calculate price; and

5.

Select pricing strategies.

INTRODUCTION
From a marketers perspective, the price is what the consumer is willing to pay
for the value of the good or service that is being offered. And the value of the
resources and efforts put in by the company to produce this good or service
represents the price that it is willing to charge the consumer. In this respect, price
serves an economic function and it becomes a monetary exchange of value.
Price is therefore, an important strategic issue because it has a direct impact on a
companys profitability.
In understanding the concept of value, we should remember that price is the
value placed on what is exchanged. Price represents the value at which the seller
is prepared to exchange and the value at which the customer is prepared to
purchase in a transaction. Something of value, usually buying power (expressed
in monetary terms), is exchanged for satisfaction or utility.

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Still, it is worth remembering that with price, the focus should be on the
customer, not the company. If the customer does not buy nothing else matters
whether it is the companys cost structure, sales/market share goals, and so on.
Therefore, the price represents what the consumer is willing to pay in order to
gain the value of the product or service. When the consumer is making this
sacrifice, then we can see how important this marketing mix is. This is because
price is the only P which is a revenue generator; all other Ps are cost drivers.
Also, it can be said that price, like the other marketing programme components,
is a means of generating market response although price can be deployed much
faster than other marketing mix components (Figure 8.1).
Two significant patterns are evident in the use of pricing as a strategic variable.
Firstly, companies are designing far more flexibility into their pricing strategies in
order to cope with changing conditions in a challenging business environment.
Secondly, price is used as an active rather than a passive element of corporate
and marketing strategies.

Figure 8.1: This advertisement uses price as an effective marketing tool

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PRICE VIS-A-VIS PRODUCT

Certainly, a difficult decision for a companys management to make is the


question of how much to charge for your product or service. While there is no
one correct way to determine your pricing strategy, we can still refer to the given
guidelines that may help us with our price-setting decision (see Figure 8.2):

Figure 8.2: Guidelines to determine price strategy

8.1.1

Positioning

Firstly, we need to establish how we intend to position a product or service in the


marketplace. Also, we need to establish if price is going to be an important and
key component in positioning. If a mass-market car manufacturer is launching an
entry level car, definitely this company is going to always try to use low price as a
tool to attract consumers to choose this model over other competing brands and
models.
On the other hand, if a high-end car manufacturer is positioning its new model as
an exclusive luxury model, then the price that is set for this car model will surely
be really expensive. A price that's too low may actually hurt its image as a luxury
carmaker.
In other words, price must be consistent with the positioning. It is true that
people really do hold strongly to the popular belief that you get what you pay
for.

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PRICING STRATEGY AND MANAGEMENT 133

Demand Curve

The law of demand states that, if everything else remains equal, then the higher
the price, the lower the quantity demanded; consequently, the lower the price,
the higher the quantity demanded. The quantity of a good that
buyers/consumers purchase at a higher price is less because as the price of a
good goes up, so does the opportunity cost of buying that good; and vice versa.
What this means is that people will naturally avoid buying a product that will
force them to give up the consumption of something else that they value more.

Figure 8.3: A demand curve

If you wish to spend your time and money to watch a movie on a free Saturday,
you obviously cannot spend that time at home reading this module, and you also
cannot spend the money on something else. If your next-best alternative to seeing
the movie is reading this module, then the opportunity cost of seeing the movie is
the money spent (i.e. the cost of a movie ticket) plus the knowledge you have to
forgo by not reading the book during your limited spare time.
This demand curve (Figure 8.3) is helpful because it demonstrates that at say, $A,
A1 quantity will be demanded; at $B, B2 quantity will be purchased, and so on. In
other words, price affects demand.

8.1.3

Cost of Goods Sold

Cost of goods sold refers to the costs that go into manufacturing the products that
a company sells; therefore, the actual costs calculated are those that are
directly associated to the manufacture of the products. This cost is the cost of the
materials used in producing the good along with the direct labour costs used to

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produce the good, but excludes indirect expenses such as distribution costs and
costs for salespeople.
For instance, the cost of goods sold for Proton (Figure 8.4) would include
the material costs for the parts that go into making say, Proton Saga, along with
the labour costs used to put this car together. The cost of sending the cars to
dealerships and the cost of the labour used to sell the car would be excluded.

Figure 8.4: Production of a Proton Saga

A companys gross margin is determined by deducting the cost of goods sold


from the price. In order for the company to make a profit, it has to ensure that the
cost more than covers its fixed overheads.

8.1.4

Environmental Factors

Here, we will have to examine the external factors that can influence price.
Consider whether there are political and/or legal issues governing the setting of
prices (e.g. Price controls on essential goods like flour and cooking oil); and
competitors actions and how they affect you (e.g. Will a price reduction trigger a
price war with your competitors?) are just two issues to contemplate.

SELF-CHECK 8.1
Considering Peroduas and Protons prices for its range of cars, what
are the likely environmental factors that play a role in influencing
their prices? Elaborate in relation to what you have learnt about
pricing.

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PRICING STRATEGY AND MANAGEMENT 135

PRICING OBJECTIVES

The next step is to determine your pricing objectives.


It can be noted that there are times; a company may have more than one pricing
objective. These objectives may conflict with one another as well. If so,
adjustments are needed on one of the conflicting objectives and management
must decide which objective is more important, or if both are equally important,
to achieve a balance between two different objectives.
Take for instance, if one objective is to increase market share by 40 percent and
the second objective is to improve the profit margin to 30 percent, management
must decide if both are feasible. If they are not, yet both these objectives are
equally important as well then one approach would be to cut back on the
ambitious objectives, in order that both can be realistically achieved say, expand
market share by only 20 percent and profit margin to only 18 percent.
Pricing objectives vary according to the companys own (corporate) objectives, as
well as situational factors that may influence the type of objectives set.
Examples of pricing objectives are:
(a)

Gain market position Low prices to gain sales and market share can be a
popular and even useful objective for many companies. Perodua has seen
increasing sales and improving market share because prices for its models
are generally seen as comparatively low.

(b)

Achieve financial performance The selection of prices to ensure that


financial objectives are met. These objectives may be improving cash flow
and profit contribution.

(c)

Stimulate Demand Price is a useful tool to encourage consumers to try a


new product or to consider switching to another competing brand, or
even to get consumers to make purchases when sales are slow.

(d)

Product Positioning Price may be used to enhance a products image, a


companys reputation, create awareness, promote a products use, and
other positioning objectives. Figure 8.5 is an example of how this can be
achieved.

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Figure 8.5: This advertisement creates awareness of the Suzuki T-500 by highlighting both
price and durability

(e)

Influence competition The objective of price is as a tool to influence


existing and potential competitors. For example, Intel has had to respond to
competition from inexpensive semiconductors that offered rapid graphics
processing and which became a real threat to Intels flagship Pentium chip.
Intel was not keen to lower the Pentium price to meet the competitors price
head-on, which can then result in a dilution of the premium chip brand.
Intel created the Cirrus chip based on the Pentium platform, and which
eliminated additional design and tooling costs. Also some of the Pentium
capabilities were not activated in the new chip, and so it can be priced to
compete with competitors products. The outcome was that Intel stimulated
demand without lowering the price of its premium chip (Cravens & Piercy.
2006, p 321).

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PRICING STRATEGY AND MANAGEMENT 137

SELF-CHECK 8.2
With regard to the two Proton models, the Persona and the Saga
what do you think are the companys pricing objectives? Do you think
the company will or has achieved its objectives?

ACTIVITY 8.1
Check out the prices of food items in KFC and Marrybrown. Discuss
the role of price in the marketing strategy for KFC. Compare
Marrybrowns pricing strategy with KFCs strategy in respect to
objectives.

8.3

CALCULATING PRICE

Once we are clear about what we intend to achieve, we are now ready to take a
look at methods used to calculate price, as described below:
(a)

Cost-plus pricing Set the price by determining a certain profit margin


mark-up, which you add on to your production cost (including both cost of
goods sold and fixed costs at your current volume). E.g. your product costs
$40 in raw materials and production costs, and at current sales volume (or
anticipated initial sales volume), your fixed costs come to $20 per unit. Your
total cost is $60 per unit. You decide that you want to operate at a 30%
mark-up, so you add $18 (30% x $60) to the cost and come up with a price of
$78 per unit. So long as you have your costs calculated correctly and have
accurately predicted your sales volume, you will always be operating at a
profit.

(b)

Target return pricing Set your price to achieve a certain target return-oninvestment (ROI). Lets assume that you have $10,000 invested in the
business. Your expected sales volume is 1,000 units in the first year. You
want to recover all your investment in the first year, so you need to make
$10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price
of $70 per unit.

(c)

Value-based pricing - Set the price of your product based on the value it
creates for the customer. If it is a viable proposition, value-based pricing is
definitely the most profitable form of pricing, if you can achieve it. The
most extreme variation on this is "pay for performance" pricing for services,
in which you charge on a variable scale according to the results you

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achieve. Let's say that your product above saves the typical customer $1,000
a year in, say, energy costs. In that case, $70 seems like a bargain maybe
even too cheap. If your product reliably produced that kind of cost savings,
you could easily charge $200, or more for it, and customers would gladly
pay it, since they would get their money back in a matter of months.
(d)

Psychological pricing Psychological pricing encourages purchases based


on emotional rather than rational responses. You must also take into
account, the consumer's perception of your price, usually incorporating any
one of these three components:
(i)

Positioning If you want to be the "low-cost leader", you must be


priced lower than your competition. If you want to signal high
quality, you should probably be priced higher than most of your
competition.

(ii)

Popular price points There are certain "price points" (specific prices)
at which people become much more willing to buy a certain type of
product. For example, a popular price-point is "under $100". Meals
under $5 are still a popular price point, as are entree or snack items
under $1 (see Figure 8.6 and 8.7). It may seem that dropping your
price to a popular price point might mean a lower margin, but if it is
well accepted, the increase in sales can more than offset the lower
margins.

Figure 8.6: This US promotion from the Del Tacos Macho value menu
promoting seven items for under $1
Source: http://www.foodfacts.info/blog/2007/10/del-tacos-machovalue-menu.html, retrieved January 27, 2008.

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PRICING STRATEGY AND MANAGEMENT 139

Figure 8.7: Taco Bells focus on its Big Bell Value Menu
Source: http://www.usatoday.com/money/industries/food/2006-01-11-valuemenu-usat_x.htm, retrieved January 27, 2008.
(iii)

Fair pricing Sometimes it doesn't really matter what the value of the
product is, even if you don't have any direct competition. There is
always a limit to what consumers perceive as "fair", and are prepared
to pay. If it's obvious that your product only cost $20 to manufacture,
even if it delivered $10,000 in value, you'd have a hard time charging
two or three thousand dollars for it people would just feel like they
were being cheated. Market testing will help you determine the
maximum price consumers will perceive as fair.

Pricing is a tricky business. Like all businesses, we are entitled to make a fair
profit on our product(s), and even bigger profits if we create value for our
customers. But it is worth remembering that something is ultimately worth only
what someone is willing to pay for it.
Methods for calculating price is summarised in Figure 8.8:

Figure 8.8: Price calculating methods

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SELF-CHECK 8.3
Considering the impact of psychological pricing, provide a local
example that illustrates each of the three components.

8.4

SELECTING PRICING STRATEGIES

Once we have completed the above, we can begin to develop a pricing strategy
for a product or category of products, whether for current or new products. We
will choose current because the market dynamics may have changed so much
that prices of current products need to be re-visited, and possibly re-aligned to
match the changed market conditions. However, new will be chosen because
determining the correct price for a new product may either help a new product to
survive and prosper, or may doom the product to failure.
Prior to developing pricing strategies, marketers need to begin analysing
customer price sensitivity, cost, competition, product substitution, and even legal
and ethical considerations. These analyses will indicate the extent of pricing
flexibility, by identifying the price band between cost and potential demand for
the good or service being analysed.
Cravens & Piercy (2006, p 331) contends that the pricing strategy selected
depends on how the companys management decides to position the product
relative to competitors products, and also whether price performs an active or
passive role in the marketing programme.
Whether a price is classified as active or passive in turn depends on whether a
company highlights pricing in its advertising and promotion.
An examination of the five pricing strategies:
(a)

Neutral Strategy Many companies employ neutral pricing strategies (at or


near the prices of key competitors), focusing on non-pricing factors in their
marketing initiatives. The neutral pricing strategy seeks to take out price as
the basis of selecting among competing brands. Many FMCG (fast-moving
consumer goods) brands use a neutral pricing strategy.

(b)

High-Active Strategy This strategy uses high price in its promotions to


inform consumers that because the brand is expensively-priced, it therefore
offers superior value to customers (Figure 8.9).

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PRICING STRATEGY AND MANAGEMENT W 141

This Mercedes ad demonstrates a high-active strategy by suggesting that


buying this Mercedes car is not just about the high price, but that it offers
exceptional value in road handling as well.

Figure 8.9: High-Active Strategy

(c)

High-Passive Strategy This strategy promotes high-priced brands by


emphasising non-price factors, rather than using high-active strategies Product
features and performance can be highlighted when consumers themselves are
concerned about high-quality and high-performance (Figure 8.10). This Jaguar
ad does not use price, but stresses on styling and technology

Figure 8.10: High-Passive Strategy

(d)

Low-Active Strategy When price is an important consideration for a large


segment of the population, the low-active pricing strategy can be very

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effective. AirAsia (Figure 8.11) successfully employs a low-active strategy;


this strategy is effective because the company has cost advantages and a
strong leadership position in the product-market. AirAsia ads almost
always feature price very prominently in its ads

Figure 8.11: Low-Active Strategy

(e)

Low-Passive Strategy This strategy is popular with SMEs whose products


have lower-cost features. By not emphasising on low price, these companies
run less risk of having consumers making assumptions that their products
are of lower quality because their prices are generally lower.

The pricing strategies are summarised in Figure 8.12

Figure 8.12: The five pricing strategies

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PRICING STRATEGY AND MANAGEMENT 143

ACTIVITY 8.2
Check out the prices of food items in KFC and Marrybrown. Check
out the prices of food items in KFC and Marrybrown. Discuss the role
of price in the marketing strategy for KFC. Compare Marrybrowns
pricing strategy with KFCs strategy in respect to objectives.
Compare Marrybrowns pricing strategy with KFCs strategy in
respect to objectives.

We start off by talking about the strategic role of pricing not just as a
revenue generator but that price represents value and used as a means of
generating market response.

A strategic pricing perspective mandates how price is viewed and understood


by consumers.

Pricing objectives or goals give direction to the whole price-setting process.

After selecting a pricing objective you will need to determine a pricing


strategy. This will be helpful when the time arrives for you to actually price
your products.

You want to select objectives and strategies that will position your product for
business success.

Choosing an objective and strategies that are appropriate for your business at
the current time does not prevent you from changing objectives or employing
different strategies in the future as business dynamics change in an everchanging environment.

Pricing approaches include high-active, high-passive, low-active, low-passive


and neutral strategies.

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Microsofts drastic price cut for its Xbox comes into effect on Friday.
The UK sees prices for the new games console drop from 300 to 199.
The new price matches Sony's PlayStation 2, the market leader in
Europe and in the rest of the world, although it is more expensive
than Nintendo's GameCube, which launches next week and has
already slashed its price.
A HMV spokesman said that early indications show that Xbox sales
had picked up, but that the weekend would be a better test to see if
public interest had increased after the price cut.
The Xbox was launched in a blaze of publicity in March, but sales
have not met Microsoft's expectations. Last week the firm said that by
the end of June it expects to have shipped 3.5 million to 4 million
Xbox consoles worldwide, down from an earlier estimate of 4.5
million to 6 million.
Game players who bought the Xbox at its original price will be offered
a "thank you" package worth about 110.
Chris Lewis from Microsoft told BBC News Online that the company
is very happy with Xbox's progress so far. He said: "We are in this for
the long term sales and success.
"We are extremely happy with our games. Halo has sold more than a
million units worldwide. But we must remain competitive and this
pricing strategy is about more gamers gaining access to the Xbox."
Official UK Xbox Magazine editor James Ashton said the price cut
shows that Microsoft are serious about gaining a foothold in a
competitive market.
He said: "The fact that Microsoft is selling the games console at a huge
loss shows how determined they are. They will need to make their
money back from selling games.
"I think the big winner here are the gamers.
The games industry is worth $20bn (13.7bn) and the history of
consoles has been littered with expensive failures like Sega's
Dreamcast.
Source: BBC News Online, 26 April 2002.

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PRICING STRATEGY AND MANAGEMENT 145

QUESTION
Develop a list of pricing issues faced by Microsoft. Are there arguments
that can be made for avoiding the price-cutting option?

Books
Cravens, D., & Piercy, N. (2006). Strategic marketing. (8th ed.). New York:
McGraw-Hill/Irwin, Chapter 11.
Reed, P. (2003), Strategic marketing planning. Australia: Nelson. Chapter 7.
Online
Allen, S., Pricing Strategy. Retrived from http://entrepreneurs.about.com
/od/salesmarketing/a/pricingstrategy.htm, retrieved January 26, 2008.
Journals
Rowley, J. (1997), Principles of price and pricing policy for the information
marketplace, Library Review, Volume 46, Number 3, pp 179-189.

Topic

Value-Chain
Strategy

LEARNING OUTCOMES
By end of this topic, you should be able to:
1.

Understand the importance of the value-chain as opposed to just


understanding physical distribution;

2.

State the activities that make up the distribution function;

3.

Recognise the factors that influence the distribution decision (i.e.


going direct);

4.

Discuss the steps in channel strategy selection; and

5.

Discuss aspects of managing the channel.

INTRODUCTION
The value-chain is basically a network of distribution channels that link valuechain members with end-users.
There are two relevant issues to consider here.
Firstly, the term value-chain is used because the focus of any marketing text
should still centre on the customer. Therefore, value-chain is preferred as a more
appropriate description because we intend to talk about this aspect of the
marketing mix that serves to provide superior customer value. The terms
physical distribution, supply chain management, and logistics that are
usually referred to in most texts, are all part and parcel of the value-chain
described in this chapter.

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Secondly, distribution channels are nevertheless still important and they will
remain a pivotal issue in managing the value-chain. A distribution channel that is
efficient and effective provides the organisation with the important means to
reach its target market(s), and as such, it gives this organisation, a strategic
advantage over its competitors. As with other aspects of the marketing mix, a
competitive organisation that resolves to deliver higher quality products and
services will have to first perform its value chain activities better than its
competitors.
This activity of differentiating itself through a value-chain means that the
organisation will have to focus attention on the processes, activities,
organisations, and structures that combine to create value for customers as
products move from their point of origin to the end user (Cravens & Piercy,
2006, p 292).

9.1

STRATEGIC ROLE OF DISTRIBUTION

As I have mentioned earlier, a good distribution network is important because it


creates a strong competitive advantage for the organisation. Distribution, being a
vital component of the marketing mix, plays an important role in the marketing
process for both goods and services marketing. Without proper distribution,
products and services will have no way of reaching the consumer.
E.g. In the financial services industry, mutual fund companies have found that
third party distributors such as brokers, advisors and banks exert great influence
on consumers decisions regarding mutual funds. Similarly, insurance companies
sell their policies predominantly through agents and brokers in the retail
environment because they recognise the economic and logistic efficiencies gained
by using these intermediate channels.
Also, the Internet is increasingly being used as a distribution channel. Airlines
such as AirAsia and MAS (Figure 9.1) allow us to do online bookings, and thus
bypassing third party distributors such as travel agents.

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Figure. 9.1: Online bookings through MAS

Yet, this does not spell the end for third-party operators. Online search engines
can instantly search available flights of any airlines at the lowest fares that are
linked to e-commerce-enabled websites operated by online travel agents (e.g.
Orbitz.com (Figure 9.2) and UKs Expedia.co.uk where we can book our holidays,
find cheap flights and browse through great hotel deals). After all, the Internet is
not just the playground of the worlds airlines. Travel agents and other
companies representing a myriad of industries from cars to music, books to
apparel and banking to flowers have all made full use of the Internet.

Figure 9.2: Online bookings through Orbitz.com

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Therefore, the core of the value-chain is the distribution channel.

SELF-CHECK 9.1
When we talk about Internet shopping, this also includes shopping for
groceries. But unlike other businesses, groceries that are ordered online
must be delivered, generally at a time and place convenient for the
consumer. Also given the nature of the product, especially fresh and/or
frozen items, delivery must be done promptly and with careful control
of temperature and other conditions during shipment.
This then produces a real and significant fixed cost per delivery.
Without a sufficient number of items to be delivered, to offer economies
of scope distribution costs can be high.
How does this impact on the consumer as well as on the retailer in them
adopting the Internet as a distribution channel?

9.2

THE DISTRIBUTION FUNCTION

The distribution channel consists of interdependent and interrelated


organisations that function as a network, cooperating together to move products
from manufacturers to end-users.
Value-added activities that distribution organisations are engaged in include:

Buying and selling (by marketing intermediaries);

Assembly of products into inventory (to meet buyers time-of-purchase and


variety-seeking needs);

Transportation (the physical distribution activity);

Financing (to facilitate the actual transaction process);

Processing and storage (to break bulk into individual units, maintain
inventory and put together orders for shipment);

Advertising and trade promotion (to communicate product availability,


features, and location);

Pricing (to set the basis of exchange in the transactions that are occurring);

Risk reduction (e.g. insurance, returns policies);

Personal selling (to provide sales, information, support activities and


relationship-building);

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Communications (to facilitate buyer-seller contacts, written orders and


confirmations); and

Servicing and repairs (the after-sales aspect of selling).

SELF-CHECK 9.2
List five value-chain activities that make up the distribution function.

9.3

DIRECT DISTRIBUTION BY
MANUFACTURERS

The choice between company distribution to end users and the use of
intermediaries is guided by end user needs and characteristics, product
characteristics, competitive considerations and financial and control
considerations.
(a)

Buyer Considerations Manufacturers look at the amount/size and


frequency of purchase by buyers, as well as the margins over
manufacturing costs to establish the feasibility of direct distribution or the
continued use of intermediaries. Also, they look for customers need for
adequate information, and applications guidance to determine whether the
companys sales force or the distributor network is able to best-manage this
process.

(b)

Product characteristics Complex or sophisticated products will require


close contact between the customer and the manufacturer. This means that
the latter is likely to provide professional as well as after-sales support.
Also, qualified intermediaries may not be easily available, given the
complexity of the product and the exacting requirements of the customer.
Furthermore, one should not forget that rapidly changing technology
means that a direct sales approach may make this whole manufacturercustomer interface less complicated since the manufacturer or technology
provider is also looking to receive regular feedback on new product needs,
problem areas, and other concerns from its customer(s). On the other hand,
FMCG (fast-moving consumer goods)-type products may not be economical
unless they can command bulk purchases, or if the manufacturer has a large
portfolio of products, since the cost of direct sales for a single product may
be prohibitive.

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Competitive considerations Distribution channels may be how a company


differentiates itself and its products from its competitors, and this usually
means adopting a direct channel model. For instance, PT Sampoerna JL in
Malaysia (prior to its acquisition by Philip Morris) relies on the direct sales
and distribution approach (as opposed to the conventional method of using
dealers sales force) to build and grow its Sampoerna A Mild sales (Figure
9.3) and it did well enough to churn out profits in a relatively short time
period, in spite of its niche market positioning.

Figure 9.3: Sampoerna A Mild billboard in Indonesia

(d)

Financial and control considerations It may be important to assess a


companys financial capability to undertake direct distribution. Both the
costs and benefits must be evaluated. Direct distribution of course gives the
manufacturer control over distribution since intermediaries cannot be
managed in the same manner as company employees.

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Figure 9.4: Factors favouring direct distribution


Source: Cravens, David & Piercy, Nigel (2006), Strategic Marketing, Eighth edition, NY:
McGraw-Hill/Irwin, p 298.

9.4

CHANNEL OF DISTRIBUTION STRATEGY

We will now examine the decisions that are required in developing a channel of
distribution strategy.
These decisions are shown below (Figure 9.5):

Figure 9.5: Steps in Channel Strategy Selection


Source: Cravens, David & Piercy, Nigel (2006), Strategic Marketing, Eighth edition, NY:
McGraw-Hill/Irwin, p 299.

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153

Types of Distribution Channels

The two major types of channels are conventional channels and vertical
marketing systems.
Conventional channels of distribution are a grouping of vertically-linked
independent organisations, each trying to look out for itself, with limited concern
for the total performance of the channel (Cravens & Piercy, 2006, p 298).
These channel relationships are generally informal the focus of the channel
organisations is on the buyer-seller transactions rather than on fostering close
cooperation throughout the distribution channel.
Vertical marketing systems (VMS) can be defined as the channel systems
consisting of horizontally coordinated and vertically aligned establishments that
are professionally managed and centrally coordinated to achieve optimum
operating economies and maximum market impact (MarketingPower.com).
A primary characteristic of the VMS is the management (or coordination) of the
distribution channel by one organisation. This said organisation is in effect, the
channel manager as it programmes and coordinates all channel activities.
There are essentially three types of VMS: ownership, contractual and
administered.
(a)

Ownership VMS Also referred to as corporate VMS, this refers to


successive stages of distribution that comes under a single ownership. In
highly competitive markets, the need for control of distribution may make
channel ownership an attractive proposition.
In the case where a manufacturer owns an intermediary at the next level
down in the channel, this practice is called forward integration. Padini
Holdings (Figure 9.6) for instance, manufactures apparel under various
brand names such as Padini, Seed, P & Co, and PDI, and also owns retail
stores. Alternatively, a retailer may own a manufacturing operation this is
called backward integration. While Kroger supermarkets from the US
operate manufacturing facilities that produce everything from aspirin to
cottage cheese, for sale under the Kroger label (Kerin et al, 2005, p 272).

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Figure 9.6: Padini Holdings is an example of an ownership VMS

(b)

Contractual VMS This type of VMS groups channel participants in formal


arrangements. The concept behind this type of VMS is to combine resources
on a contractual basis to obtain greater functional economies and marketing
impact than they could achieve if they go it alone. Contractual programmes
may be initiated by manufacturers, wholesalers or retailers. There are the
wholesaler-sponsored retail chains, retailer-sponsored cooperatives (e.g.
Ace Hardware and Associated Grocers in the US), and franchising entities
(e.g. Malaysias 1901 (Figure 9.7) and England Optical).

Figure 9.7: 1901 is an example of contractual VMS

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155

Administered VMS This type of VMS exists because one channel member
can exert considerable influence over the other participants. This may be
due to strong financial clout, well-established brand image, expertise of a
specialised nature (e.g. product innovations). For example, DeBeers (Figure
9.8) not only managed the worldwide distribution of rough diamonds
through its marketing cartel, but since 2000, it has also moved down the
value chain, to participate in the finished jewellery business (Cravens &
Piercy, 2006, p 301).

Figure 9.8: DeBeers is an example of an administered VMS

9.4.2

Distribution Intensity

Distribution intensity is best seen in reference to how many retail outlets (or
dealers, if in an industrial context) carry a particular brand in a specific
geographical area.
There are three forms of distribution intensity:
(a)

Intensive distribution A form of market coverage in which a product is


distributed through all available wholesalers or retailers that stock and sell
the product in a given market area (MarketingPower.com). Tobacco
companies in Malaysia employ an intensive distribution strategy for their

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products since to these companies, it is not uncommon to regard


distribution as equal to sales.
(b)

Selective distribution A form of marketing coverage in which a product is


distributed through a limited number of outlets in a given market area. One
example is Rolex watches. In Malaysia, these watches are only distributed
in selected outlets such as The House of Woo Hing, The Hour Glass,
Watatime and Cortina Watch.

(c)

Exclusive distribution A market coverage approach which uses only one


dealer in a relatively large geographic area to distribute a product. In
Malaysia, Ducati is exclusively distributed by Next Bike Sdn. Bhd., a
member of the Naza Group of Companies.

Choosing the right distribution intensity depends on the companys targeting and
positioning strategies as well as product and market characteristics.

9.4.3

Channel Configuration

The final step in selecting the appropriate distribution strategy is making


decisions with regard to:
(a)

How many levels of organisations to include in the vertical channel, and

(b)

The specific kinds of intermediaries to be selected at each level

For example, a private college might choose between appointing placement


agencies and independent recruitment agents (who receive commissions on
recruitment sales) to contact prospective students.
The following may influence the choice of one of the channel configurations (as
shown in figure 9.6):

End-user considerations The determination of the type of intermediary


depends on where the targeted end user can be found and/or expected to
purchase the product of interest.

Product characteristics The type of product, in terms of its complexity, its


application requirements and after-sales needs are useful in guiding the
choice of the type of intermediary.

Manufacturers Capabilities and Resources Large organisations with


expansive resources have a great deal of flexibility in choosing their
intermediaries since they possess bargaining power.

Required Functions The nature of the distribution function(s) to move


products and services from manufacturer to end-user e.g. warehousing,

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157

transportation, servicing will guide companies to ascertain the appropriate


intermediary. Hence, a direct-selling company is likely to depend on
independent agents.

Availability and Skills of Intermediaries The capabilities and resources of


intermediaries that are under consideration to become channel members need
to be properly evaluated.

SELF-CHECK 9.3

9.5

1.

Why would a manufacturer choose to enter a conventional


channel of distribution?

2.

Why do some large, financially strong manufacturers choose not


to own their dealers but instead establish contractual
relationships with them? Examine this in light of Proton
appointing EON in the early years before it began its own
Proton Edar operations.

MANAGING THE CHANNEL

Once an organisation has done its work and has identified the appropriate
intermediaries it has to sit down to look at managing the channel.
Channel management activities include the following: Choosing how to assist
and support intermediaries, developing SOPs, providing incentives, selecting
promotional programmes and assessing channel results. It must be noted that
these management issues are just as important as the earlier activities since once
established, the channel design may be difficult to modify, or worse, very
expensive to rectify.
We are now going to focus on the individual issues that have an influential
impact on the management of the channel(s):
(a)

Channel Leadership The bigger or stronger organisation will usually


exercise its authority and power to assume leadership over other channel
members. This leadership role is taken up because of this organisations
size, financial strength, experience, environmental factors and its ability to
capitalise on these said factors. Of course, this organisation will make
decisions that promote its own self-interest.

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158

(b)

Management Structure and Systems Channel coordination and


management are often the responsibility of the sales function of an
organisation. E.g. A manufacturers sales force is responsible for developing
buyer-seller relationships with wholesalers and/or retailers.

(c)

Physical Distribution Management This activity, also referred to as


logistics, is to enhance and improve the distribution of supplies, goods in
process and finished products. Physical distribution is a primary channel
function, and as such it is an important part of channel strategy and
management.

(d)

Channel Relationships Relationships between channel members are


influenced by these issues:
(i)

Degree of collaboration Channel relationships are usually


transactional in conventional channels, but are collaborative in VMSs.
The extent of this collaboration depends on the potential benefits of
collaboration, the willingness of channel members to work together
for mutual benefit and the type and complexity of the product or
service.

(ii)

Commitment and trust among channel members This is likely to be


higher in VMSs as compared to conventional channels. Effective
collaborations necessitate high levels of commitment and trust
between the channel partners since this type of arrangement will see
exchange of information and processes that may be confidential (e.g.
market data and confidential product plans).

(iii) Power and dependence Power in conventional channels is not so


obvious unless any one of the organisations in this distribution
relationship dwarfs all other channel members. In VMSs, power is
concentrated in the hands of one organisation and other channel
members are dependent on this channel member.
(e)

Channel Globalisation We are also witnessing the growing power of


consumer goods suppliers and retail chains as they expand their operations
globally. For example, WalMart and Carrefour. Given this new-found
ability to source and merchandise globally, plus the development of
efficient supply chains, and the power of information technology, major
retailers have more bargaining power than many of their suppliers.
Increasingly, industry-wide forms include online exchanges on the Internet.
In retail there are Sears Roebuck (US), Sainsbury (UK), Metro (Germany)
and Carrefour (France) have come together to form GlobalNet
Exchange/GNX (Cravens & Piercy, 2006, p 307). The concept is to link key
retailers with their suppliers throughout the world to compete with each
other through a single Web portal with complete price transparency.

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159

(f) Multi-channelling An important trend in distribution is using multiple


channels to access end-users. For instance, the Hong Kong-based Dairy
Farm operates multiple formats (see Figure 9.9):

Figure 9.9: Dairy Farms retail formats in Malaysia and Singapore

(g)

Conflict Resolution Conflicts do occur between channel members and in


multichanneling because of differences in objectives, corporate cultures, and
priorities. One of channel managements focus should be to foster effective
communications before and after establishing channel relationships in order
to reduce, if not eliminate channel conflict.
In extreme cases, conflict may even require resolution in a court of law. For
example, Levi Strauss won a decision in the European Court of Justice
against UKs Tesco in 2001 Levis had refused to supply their Levis 501
jeans to the discounter supermarket, but Tesco had used their global
sourcing to buy 501s from outside Europe, imported them, and sold them in
Tesco outlets for around $40 (the recommended price for the premium
Levis 501 is around twice the US price). Levis view was that the retailer
was undermining its brand and that it had the right to determine where its
products were sold (Daily Telegraph, UK, 21 November, 2001, p 7).

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Figure 9.10: A Levis 501 print ad

(h)

Channel Performance The performance of the channel is important


because (1) Each member is interested in how well the channel is meeting
the members objectives, and (2) the organisation that is managing or
coordinating the channel is concerned with its performance and the overall
performance of channel members. Aiming to reduce distribution costs and
the time in moving products to end users are high-priority action areas for
many companies after all, companies gain a strategic advantage by
improving distribution productivity.

(i)

Legal and Ethical Considerations Legal issues whether in the areas of


restrictive contracts that govern products and/or geographical coverage,
pricing practices, arrangements between channel members that inhibit
competition, laws, etc all can affect channel management. Besides legal
matters, channel decisions that impact other channel members may create
ethical situations. As such many companies have established internal
standards on how business should be conducted (e.g. Target Corporations
Standards of Vendor Engagement).

SELF-CHECK 9.4
What do you believe are the benefits brought about by multichannelling?

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SELF-CHECK 9.5
Distribution analysts indicate that costs for supermarkets equal about
98 percent of sales. What influence does this high breakeven level
have on supermarkets diversification into delis, cheese shops,
seafood shops and flowers?

9.6

A STRATEGIC VALUE-CHAIN PERSPECTIVE

A strategic perspective for value-chain management requires that the


organisations management regularly review the adequacy of their channel
strategy, and consider the impact of major market and technological changes.
This perspective emphasises the entire value-chain and the companys strategic
positioning in its markets those issues of cost efficiency in supply should not be
allowed to undervalue the overall importance of market strategy. In addition,
value-chain strategy and channel decisions should be regarded as variable not
fixed. Importantly, a strategic value-chain perspective should compel the
organisation to constantly examine its channel systems in order that they can be
realigned and restructured as an important source of competitive differentiation.

The value chain consists of the organisation, systems and processes that add
to customer value in moving goods and services to end-users.

The core of the value-chain is the distribution channel.

A strong distribution channel can give the organisation a competitive


advantage over its competitors.

The choice between company distribution to end-users and the use of


intermediaries is guided by end-user needs and characteristics, product
characteristics and financial and control characteristics.

Manufacturers select the type of channel to be used, determine distribution


intensity, design the channel configuration, and manage various aspects of
channel operations.

The choice of a channel strategy begins when the organisation decides


whether to manage the channel or to assume a participant role.

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Strategic analyses examines and assess channel alternatives, by considering


access to the target market, channel functions to be undertaken, financial
considerations, and legal and control considerations.

A strategic value-chain perspective aims to align and modify/rectify the


companys value-chain depending on customer and competitive
requirements amidst a changing marketplace.

Administered VMS

Intensive distribution

Backward integration

Multi-channelling

Contractual VMS

Ownership VMS

Conventional channel of distribution

Selective distribution

Exclusive distribution

Value-chain

Forward integration

Vertical marketing system (VMS)

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The husband and wife team of Lawrence Liew and Nancy Chan are
the new names to watch in the international fast food franchising
fraternity. Their rapidly growing Marrybrown Fried Chicken system is
the first Malaysian fast food company to go international via the
franchising system.
The Johor, Malaysia-based company, founded in 1981, now has over
100 company-owned and franchised fast food restaurants in Malaysia,
China, Singapore, Brunei, India and the United Arab Emirates (UAE).
There are 95 company-owned and franchised outlets throughout the
peninsula. Overseas, it has 16 franchises in China, seven in southern
India, two in Brunei, three in the UAE and one in Singapore.
The company had also been negotiating with several parties interested
in becoming master franchisees in Afghanistan, Australia, Cambodia,
Iran, Indonesia, Laos, Myanmar, Russia, South Africa, Thailand and
Vietnam.
According to Liew, the company has laid a five-year programme
starting from this year to open franchised outlets in these places.
"Initially, it is not easy to convince foreigners to take up our master
franchisee deal as they always compare us with the US-based fried
chicken company," Chan said. But at the same time, she said, they
were quite impressed with MarryBrown's overseas expansion
programme since 1986 despite having to compete with the fast food
giants, especially from the US.
Chan said that sealing the contract for the master franchisee was not
just a matter of getting money from the licensee but also included help
finding the right location, recruiting frontline staff, logistics, lining up
the menu and investigating the existing players in the market. She also
went onto say that whenever they were on business trips overseas
they would patronise as many fast food joints as they could, in order
to see what other players were offering to their customers in terms of
pricing and serving portions, and tailor their own offerings
accordingly.
Source: Extracted from article Malaysian Marrybrown Fried Chicken
Goes International, July 2004 by www.FranchiseZ.com, at webpage
http://www.franchiseek.com/Malaysia/news0704_MaryLand_
Chicken.htm, retrieved 03 February, 2008.

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QUESTIONS
1.

Why might Marrybrown choose to enter a contractual VMS, as


opposed to ownership VMS or administered VMS?

2.

What are the benefits to Marrybrown from adopting the contractual


VMS?

Books
Cravens, D., & Piercy, N. (2006). Strategic marketing. (8th ed.). New York:
McGraw-Hill/Irwin, Chapter 10.
Kerin, R., Hartley, S., & Rudelius, W. (2005). Marketing: The core, McGrawHill/Irwin, Chapter 15.
Pelson, L., Strutton, D., & Lompkin, J. (1997). Marketing channels. Chicago:
Richard Irwin, Chapters 6 & 7.
Articles
Hobbs, M. & Wilson, H. (2004), The Multi-Channel Challenge, Marketing
Business, February, pp 12-15.
Meehan, R. (2000), Create, Revise Channels for Customers, Marketing News, 23
October, p 48.

Topic

10

Communications
Strategies

LEARNING OUTCOMES
By end of this topic, you should be able to:
1.

Explain the many roles of communications;

2.

Describe the key elements of the communications mix;

3.

Explain the key issues surrounding budgeting;

4.

Explain the key issues surrounding some of the more important


communications strategies; and

5.

Explain how the integration of marketing communications can


improve the effectiveness of communication.

X INTRODUCTION
Promotion is one of the key four Ps in the marketing mix and it is the last to be
discussed in this module. Although last, it is by no means, less important than the
other Ps; instead it plays a key role in ensuring an organisations market success.
There was this description on promotion marketing from the General Mills
website (www.generalmills.com) which aptly summarises the concept of
promotion marketing:

The role of promotion marketing is to deliver marketing innovation


for our brands by creating ideas and strategies that motivate
consumers to use our products, elevate brand relevance, and generate
volume growth for our company.
Promotion marketing not only creates short-term impact for the
brand, but also positions the brand for the future by creating
motivating tactics that actively involve the consumer. Motivation can

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be anything from online games to reward programmes to free toys in


the box. No matter what the tactic, promotion marketing works with
the brands objectives to find the right promotion to help build the
brand and connect with consumers.
Again, the above links us back to the customer which is what marketing is all
about: the focus on the customer.
Also, to realise promotion marketing, communication must happen. Hence the
use of the term communications is apt because all promotions must be
communicated. Promotions as a term is alright, but it can sometimes be confusing
because it can be mistaken for sales promotion when we are actually referring
to the forms of promotion, what we call the promotional mix.
Therefore, the term communications is more all-embracing and it defines what
promotions is all about. In any case, we will use the two terms communications
and promotion interchangeably.

10.1 COMMUNICATIONS OBJECTIVES


Cravens & Piercy (2006, p 339) highlights the purpose of promotion in the
marketing programme is to achieve the companys communications objectives
with each audience.
The above statement is clear about the communication function. The implication
of this is that promotion is the channel through which company/product/brand
messages are communicated to the target audience.
Still, promotion is concerned with making sure that customers become aware of
the products that the organisation makes available to customers. More precisely,
the objectives of any promotional strategy or rather, communications strategy
(since the central idea behind it, is to communicate) will be drawn from an
appropriate combination of the following; to:

Inform and educate the target market;

Persuade customers to consider the companys offerings;

Grow sales;

Maintain or expand market share;

Develop and enhance brand recognition;

Reinforce customers that the companys brands are still good value;

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167

Create a favourable climate for future sales;

Produce a competitive advantage, in relation to competitors product


portfolio or market position; and

Improve promotional efficiency and effectiveness.

Figure .10.1: An ad that informs prospective customers of the benefit of this 3M product:
that the scotch tape is good (i.e. strong) enough for even Spiderman to depend on!

SELF-CHECK 10.1
Select any two ads from a newspaper or magazine. What
communications objectives do these ads fulfil? Explain.

10.2 THE ELEMENTS OF THE


COMMUNICATIONS MIX
The communications mix is a combination of different communications
/promotional channels that is used to communicate a promotional message. This
will involve a suitable selection from the range of tools that are available for use
as part of the communications mix/promotional mix. The communications
mix/promotional mix tools include:

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Advertising This is any paid form of non-personal presentation and


promotion of ideas, goods or services by any identifiable sponsor.
Advertisements are found in the pages of newspapers, and magazines, as
well as on the television and radio, among other media.

Sales promotion A type of promotion that uses short-term incentives to


encourage end-user trial or purchase of a product or service (e.g. samples,
coupons, price-off deals), and to persuade the trade to stock up on the
product as well as to push the product (e.g. competitions, delayed
invoicing, loyalty bonuses).

Public relations and publicity These are not-directly-paid-for activities


designed to promote and/or protect a companys image or reputation.
The central idea here is to proactively work toward getting positive
coverage in the media.

Personal selling This involves direct or face-to-face interaction with one


or more prospective customers, with the intention of closing sales. This 2way interaction gives the organisation the opportunity to check out the
needs of the buyer more closely as well as having the flexibility to
adjust/modify the presentation and (product) offering to meet these
needs.

Direct marketing The use of mail, telephone or other non-personal


contact tools to communicate with or solicit a response from named
customers and prospects. E.g. Mail shots and leaflets inserted in
newspapers and magazines are used to promote goods and services.
Now, the meaning of direct marketing has gone beyond its distributionbased roots to include direct communications.

Internet marketing This refers to computer-and-electronic-based


activities that provide and respond to information through the medium of
the computer and other forms of new media. The Internet is increasingly
becoming popular. For the consumer, Internet marketing offers
convenience, a source of objective and abundant information about
product choices and a relatively hassle-free shopping environment.

The communication/promotion mix is summarised in Figure 10.2:

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169

Figure 10.2: The Comunication/promotion mix

Effectiveness of methods

Advertising - becomes less effective over time

Sales promotion - gives added incentive for buyer action

Publicity - more effective at awareness stage

Personal selling - more effective when a more personal relationship is needed

Direct marketing also a personalised approach. Bird (1993) describes:


Direct marketing is not a mass-medium; it communicates with consumers as
individuals, rather than as a group of segments

Internet marketing a 24/7 availability that crosses borders, besides the fact
that this medium is extremely popular in usage.

Typically, organisations will use a combination of these strategies and the type
of strategy that is used, depends on the communication objectives.
Also, the advances in communications technologies have led to more person-toperson contacts meaning, this has placed a heavy focus on establishing a
trusting relationship with the consumer. Hence, the type of communications tools
(in this case, the Internet) being favoured by organisations will witness a seismic
shift e.g. Internet marketing is bound to become much more important in this
century.
Schultz and Schultz (1998) theorise that marketing as a process has gone through
two distinct phases in the past 40 years of so.

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The first phase was dominated by manufacturers (production orientation


essentially) who were able to dominate markets, or at least to have the strongest
influence on them. The second phase was the turn of the retailers, who because
they are the closest to the market, decide which products are offered to
consumers, and which are not. The third phase is brought about by the growing
use of IT by consumers themselves this means the consumer will dominate the
market. This is because the consumer is being empowered information is freely
available and consumers can source any product from any corner of the globe,
and therefore they need not be obliged to any selling organisation.

SELF-CHECK 10.2
What effect will the rise in individualism have on marketing
communications?

SELF-CHECK 10.3
1.

How and to what extent is the Internet likely to be useful in the


companies communications strategies?

2.

Discuss whether the Internet may replace conventional


catalogues and direct mail methods of communications.

10.3 DETERMINING THE COMMUNICATIONS


BUDGET
Determining how much to spend on communications activities can be a difficult
decision. The common practice would appear to rely on rules of thumb that may
have little justification. Judgmental decisions can very easily fall into the trap of
personal biasness. The following four popular methods to consider are:
(a)

Percentage of sales method This is the most common method, where the
promotion budget is set at a seemingly arbitrary percentage (e.g. 3 percent
or 4 percent, or 5 percent at the case may be) of current or expected sales.
There is no rationale in the percentage selected. This method is based on a
false premise that sales cause promotion, rather than the other way round.
Logically, if sales fall, promotion expenditure should be increased to bring
back the customers.

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171

(b)

Competitive parity This second approach (some texts also refer this as
comparative parity) is to spend the same percentage as the competition. By
matching expenditure, the firm does not lose out, or so we are led to
believe. This creates the illusion of safety in numbers that it is the right
amount to spend because it represents the collective wisdom of the
industry. Still this method does not take into account changes in the
marketplace or even opportunities that may come by.

(c)

Affordable method This is another common method and the idea is to


base spending on what the company thinks it can afford. In other words,
the company will spend whatever money that can be spared from other
activities. Again, there is no rationale underlying this method changes are
not related to the profit opportunities that can be exploited by promotion.

(d)

Objective and task approach This method claims to be more scientificbased, meaning it is logic-driven. The company identifies its objectives to be
achieved, then determines the costs and effort required to achieve those
activities. The effectiveness of the objective and task method still relies on
the judgment as well as experience of the marketers. After all, it is rather
difficult to calculate the necessary spending to achieve the said objectives.

(e)

Budgeting in practice Research sponsored by the Marketing Science


Institute indicates that in practice, promotion budgeting in consumer
products firms involves an approach that is a combination of rational,
political and expedient actions (Low & Mohr, 1992).

Thus, even if we adopt an objective and task approach, we may start off by
looking at what the competition are spending (competitive parity approach) if
only to determine what is our likely spend.

SELF-CHECK 10.4
What are the important considerations in determining a promotion
budget?

10.4 COMMUNICATIONS STRATEGIES


The selection of the appropriate strategies will largely depend on the
communications objectives in the first place. Frequently, it is about structuring
the communications mix to suit the objectives and also to ensure that it can
produce the desired outcomes.

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Developing effective communications/promotions follows a 5-step process:


(a)

Identify the target audience In other words, we will have to decide to


whom is the message directed to.

(b)

Determine the response sought What is the marketers response


expectation(s)? What is the consumer expected to do upon receiving the
message?

(c)

Select the message Decide on the message in terms of content (or copy)
and the appropriate (pictorial) image.

(d)

Select the promotion channel Choose between newspapers, magazines,


television, radio, Internet or any other medium that will effectively convey
then message to its target audience.

(e)

Select the sources attributes Decide what is it about


company/product/brand message that is to be communicated.

the

Some texts suggest a sixth step that is, collecting feedback. Feedback includes
carrying out market research to find out how effective the message was.
A sample of strategies to consider:

10.4.1 Message and Media Strategy


An effective communication campaign should consist of a well thought out
message strategy. What message are you trying to convey to your target
audience? How do you intend to deliver this message? Will it be through
branding, logos, slogans or imagery? The message should always sell benefits but
more importantly, it should also help the company in developing a positioning
strategy.
Companies with effective message strategies include:

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COMMUNICATIONS STRATEGIES

Figure 10.3: Nike Just do it

Figure 10.4: BMW The Ultimate Driving Machine

173

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Figure 10.5: The cowboy personifies Marlboro

Figure 10.6: The golden arches logo represents McDonalds

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175

Media strategy, on the other hand, refers to how the organisation is going to
deliver their message. Which promotional medium will the company use to
deliver their message strategy? Clearly the company must take into account the
target audience and also the general characteristics of their target audience before
they select their media strategy. What newspapers do their target market read?
What TV programmes do they watch? Which radio station do they tune in?
Effective targeting of their media campaign could ensure cost-effective
promotion.

10.4.2 The Product Life Cycle Strategy


Products go through the four stages of the product life cycle (PLC), and this
therefore, requires that different promotional strategies be employed at the
different PLC stages to ensure the products viability and eventual success.
Stages and promotion strategies employed are as follows (see Figure 10.7):

Introduction For a new product, the organisations primary objective will be


to inform and educate the target audience of its entry and availability.
Television, radio, magazines, coupons, cents-off deals, etc may be used to
promote the product during this introduction stage of the PLC. (Push and
Pull Strategies will be used at this critical stage).

Growth As the product gains market acceptance, the organisation at this


stage of the lifecycle, works on the strategy of further consolidating and also
increasing brand awareness to encourage loyalty.

Maturity Given the increased competition, the organisation employs


persuasive tactics to push their product to consumers. Any differential
advantage will be clearly communicated to the target audience to inform
consumers of their benefit over their competitors.

Decline As the product reaches the decline stage, the organisation will rely
on the strategy of reminding consumers of the product in an attempt to slow
down the inevitable.

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Figure 10.7: Promotion through PLC

10.4.3

The Push and Pull Strategies

Communication by the manufacturer is not only directed towards consumers to


create demand. A push strategy is where the manufacturer concentrates their
marketing efforts on promoting their product to the trade to convince them to
stock the product. A combination of promotional mix strategies are used at this
stage aimed at the trade, including personal selling, and direct mail. A pull
strategy is based around the manufacturer promoting their product and directing
it to the target market to create demand. Consumers pull the product through the
distribution channel(s), and compelling the trade to stock it. Organisations tend
to use both push and pull strategies to create demand from retailers and
consumers.

10.4.4

The Internet Promotional Strategy

The development of the World Wide Web has changed the business environment
forever. The Dot com landscape has changed the way business is done. The ecommerce model promises to deliver a more efficient way of conducting
business. Shoppers can now purchase from the comfort of their homes 24 hours a
day, 7 days a week, all year round and from anywhere in the world.
Owning a website is a now a crucial ingredient to the marketing mix strategy of
any organisation. Consumers can now obtain instant information on products or
services to guide them in their crucial purchase decision. Sony Japan took preorders of their popular Playstation 2 console over the net, which topped 1 million
after just a few days, European football stars are now issuing press releases over

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177

the web with the sites registered under their own names and hit rates are
phenomenal.
Arnott & Bridgewater (2002) studied the extent to which organisations are
capitalising on the interactive potential of the Internet. It is this interactive
potential that will spell the difference between success and failure of the
technology in marketing terms, for it holds the power to facilitate and develop
one-to-one long-term relationships with customers on a global scale. This
capability is, as yet, little used since the primary purpose of the Internet is still
used by most people for informational reasons. Transactional functions of the
Internet are increasingly becoming common but again, this is not pervasive. Just
look at the Malaysian websites. If at all, there is some level of marketing
sophistication the use of relationship marketing this is currently limited to
large multinationals that are serving the global marketplace via the Internet.
Dutta and Segev (1999) reinforce our position that organisations have a long way
to go to exploit the potential of the Internet. They divide Internet activity into
three stages:
(a)

Publishing corporate information;

(b)

Conducting electronic commerce; and

(c)

Business transformation.

According to their data only around one third of firms have reached the second
stage of Internet activity and less than 20 per cent of firms stimulate any
interaction, let alone intra-community interactions.

Figure 10.8: The road to online success

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The above (Figure 10.8), by no means, represents all the strategies in our arsenal
but that they should be seriously considered when organisations formulate and
execute strategies to compete. These strategies complement the generic strategies
that will be employed, e.g. a public relations strategy, a sponsorship strategy, an
advertising strategy. At the end of the day, if organisations are serious about
long-term sustainability in terms of market share and sales, they are useful. All
too often, businesses focus only on the short- to medium-term granted that if
there is no short- or medium-term, there wouldnt be a long-term. Still, a business
must be brave to have a long-term view in this highly-competitive and extremelycrowded marketplace. Many businesses come and go, but only the daring few
will last for the long haul. Think:

The Coca-Cola Company.

Disney.

Kraft Foods.

PepsiCo.

General Electric.

Nestle.

SELF-CHECK 10.5
What are the main strategic issues that arise for marketers in this
century?

10.5 INTEGRATING AND IMPLEMENTING THE


COMMUNICATIONS STRATEGY
In practice, communications mix components more often than not, operate
independently. The various strategies, whether exhibitions, or direct marketing,
or advertising, have different sets of priorities which means that we will also
face strategies that come into conflict with one another. For example,
coordination between advertising and personal selling can be difficult especially
for organisations involved in B2B marketing, where the latter is critical in
building customer relationships based on a reliance on personal-selling-driven
strategies. Additionally, we will face the unpleasant issue of an overlap of
spending because of this lack of coordination.
Therefore, an important marketing management issue is how to integrate the
various communications strategy components that can still work toward
achieving the organisations stated objectives.

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179

Blythe (2006) suggests nine types or levels of integration:


Table 10.1: Levels of Integration
Level of integration

Explanation

Awareness stage

Those responsible for communications realise that a


fragmented approach is not the optimum one

Planning integration

The coordination of activities. There are two broad


approaches: functional integration, which coordinates
separate tools to create a single message where
appropriate, and instrumental integration, which
combines tools in such a way that they reinforce one
another (Bruhn, 1995)

Integration of content

Ensuring that there are no contradictions in the basic


brand or corporate messages. At a higher level,
integrating the themes of communication to make the
basic messages the same

Formal integration

Using the same logo, corporate colours, graphic approach


and house style for all communications

Integration between planning


periods

Basic content remains the same from one campaign to the


next. Either basic content remains the same, or the same
executional approach is used in different projects

Intra-organisational integration

Integration of the activities of everyone involved in


communication functions (which could mean everybody
who works in the organisation)

Inter-organisational integration

Integration of all the outside agencies involved in the


firms communications activities

Geographical integration

Integration of campaigns in different countries. This is


strongest in large multinationals that operate globally, e.g.
The Coca-Cola Corporation (Hartley & Pickton, 1997)

Integration of publics

All communications aimed at one segment of the market


are
integrated
(horizontal
integration)
or
all
communications aimed at different segments are attuned
(vertical integration)

Source: Blythe, Jim (2006), Essentials of Marketing Communications, Third edition,


Harlow, Essex: Pearson Education, pp 55-56.

Note, that these do not necessarily constitute a process, or represent stages of


development and considerable overlap between the levels can occur.

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Integrated Marketing Communications (IMC) strategies are now replacing the


individual advertising, publicity, sales and other communications activities
which used to be done autonomously.
The IMC approach is different from the traditional approach:
IMC activities are comprehensive so we must consider every one of the
promotional mix in our planning to determine which of the components will help
us achieve our objectives.
IMC activities focus on the coordinated planning and execution of the
components of the promotional mix.
IMC activities are unified given an organisations limited resources through
better coordination, we will select IMC strategies that are reliably cost-effective
since we can avoid duplication in resource usage, and take advantage of the
synergy among the various promotional tools.
IMC activities are targeted the advertising strategy, the direct marketing
strategy and other type of strategies all share the same set of target audience.
The move toward integrated marketing communications is a significant
development. To compete efficiently and effectively, IMC shows the way
forward.

SELF-CHECK 10.6
What are the main advantages and disadvantages of integrated
marketing communications strategies?

This chapter introduced the concept of promotion marketing and relate this to
the overarching subject of marketing communications.

We also explained the preferred use of communications to describe the


various activities, usually categorised as promotional activities.

We discussed the importance of objectives to guide us in formulating


appropriate strategies, and acknowledged that there are many
communications tools available to the marketer and not just limiting to the
traditional promotional mix components of advertising, public relations,

sales promotion, and


communications budget.

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COMMUNICATIONS STRATEGIES

personal

selling,

as

well

as

deciding

181

the

We selected some important strategies to consider, in the light of a


competitive and crowded marketplace, and accepted that a combination of
strategies is probably more useful than just executing strategies in singular
fashion.

The lines between the various communications activities are disappearing to


such an extent that the consensus view is that marketing communications
should be integrated as much as possible, if not completely hence the
concept of integrated marketing communications (IMC).

Advertising

Personal selling

Direct marketing

Publicity and public relations

Integrated marketing communications

Sales promotion

Internet marketing

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COMMUNICATIONS STRATEGIES

Want to Buy A Violin?


West Country Violins was set up in 1999 to supply local violin students
in rural Devon, UK with good quality violins. The violins themselves
were often antiques, from the nineteenth century, but the market
quickly became saturated and West Country Violins needed to look
further afield.
The key to West Country Violins business approach is that each violin
is individual to its owner: the company does not deal in massproduced, cheap instruments, but in high-quality instruments from
well-regarded manufacturers. The obvious solution for this tiny
company was to use the Internet but how could it maintain its
personal service when using such an impersonal medium?
Realising that it is the sound of the violin more than anything which
sells the instrument, West Country Violins decided that having
pictures and descriptions of instruments on the website was
insufficient. The company therefore created recordings of each and
every violin in the store, and put these on the website. The recordings
are not mere sound bites, either each violin is named, and the
recording lasts for 30 seconds, more than enough to make a judgment
about the sound quality. The pictures and descriptions of the violins
are detailed and comprehensive, and in fact some customers have even
said that the company tries to make the flaws in the violins look as
obvious as possible, but it is the recordings that make all the difference.
Customers can place their orders over a secure encrypted link, so that
credit card details are safe, but this is standard practice for online
purchases. Where Violin Country Violins scores is in the way the
company maintains contact with is customers. Each customer is
regularly contacted with an update on the progress of the order, and
the company prides itself on being accurate about delivery dates.
The violins are delivered set up ready to play, the customers have a
guarantee that they can return the violin free of charge if it does not
match to the description, or indeed for the shipping costs only if the
simply change their minds. Customers from all over the world buy
from West Country Violins, and the company has added a Japanese
page to the website to facilitate purchases from customers in the Far
East.

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COMMUNICATIONS STRATEGIES

183

West Country Violins applies the same standards whether the customer is
buying a violin for 200 or one for 4,000. When one Australian customer
visited the store in 2002, the managing director, Brian Ward-Smith,
collected her from the station and dropped her off again afterwards. This
level of customer service has generated amazing loyalty a layperson
might imagine that few violinists would buy violins regularly, but many of
West Country Violins sales are actually repeat purchases, as students
upgrade or as professional musicians add to their range of instruments.
Everyone from beginners to virtuosos, from classical concert violinists to
country fiddle players, has been able to find a suitable instrument at West
Country Violins. As one customer wrote:
Brian is more than a seller of violins, he is a friend to those who are
looking for the right violin.
Brian Ward-Smith comments: Customer satisfaction must remain at the
heart of overall business strategy and weve endeavored to keep this in
mind as we build our website and integrate e-commerce with our business
operations.
Source: Blythe, Jim (2006), Essentials of Marketing Communications, Third
edition, Harlow, Essex: Pearson Education, pp 303-304.
QUESTIONS
1.

What role does new technology have in building customer


relationships?

2.

To what extent is Brian Ward-Smiths approach transferable to other


companies?

3.

Are there other communications strategies that West Country Violins


can use to build on its current success?

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COMMUNICATIONS STRATEGIES

Books
Blythe, J. (2006). Essentials of marketing communications (3rd ed). Harlow, Essex:
Pearson Education
Cravens, D., & Piercy, N. (2006). Strategic marketing. (8th ed.). New York:
McGraw-Hill/Irwin, Chapters 12 & 13.
Doyle, P. (2002). Marketing management and strategy (3rd ed). Harlow, Essex:
Pearson Education. Chapter 9.

Journals
Arnott, D., & Bridgewater, S. (2002), Internet, interactions, and implications for
marketing, Marketing Intelligence & Planning, Volume 20, Number 2, pp
86-95.
Kitchen, P. (1996), Public relations in the promotional mix: a three-phase analysis,
Marketing Intelligence & Planning, Volume 14, Number 2, pp 5-12.
Rowley, J. (1998), Promotion and marketing communications in the information
marketplace, Library Review, Volume 47, Number 8, pp 383-387.
Schultz, D. E., & Schultz, H. E. (1998), Transitioning marketing communication
into the twenty-first century, Journal of Marketing Communications, 4(1),
pp 9-26.
Website
Webpage
http://www.generalmills.com/corporate/careers/promotion_marketing.a
spx, retrieved February 05, 2008.

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