Marketing Management: An Asian Perspective [7 ed.] 129208958X, 9781292089584

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Vice President, Business Publishing: Donna Battista Editor-in-Chief: Stephanie Wall Managing Editor, Asian Perspective: Steven Jackson Associate Acquisitions Editor, Asian Perspective: Ishita Sinha Senior Project Editor, Asian Perspective: Daniel Luiz Program Manager Team Lead: Ashley Santora Program Manager: Jennifer Collins Editorial Assistant: Daniel Petrino Vice President, Product Marketing: Maggie Moylan Director of Marketing, Digital Services and Products: Jeanette Koskinas Executive Product Marketing Manager: Anne Fahlgren Field Marketing Manager: Lenny Ann Raper Senior Strategic Marketing Manager: Erin Gardner Project Manager Team Lead: Judy Leale

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Pearson Education Limited KAO Two KAO Park Harlow CM17 9NA United Kingdom and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2018 The rights of Philip Kotler, Kevin Lane Keller, Swee Hoon Ang, Chin Tiong Tan, and Siew Meng Leong to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. Authorized adaptation from the United States edition, entitled Marketing Management, 15th edition, ISBN 978-0-13-385646-0, by Philip Kotler and Kevin Lane Keller, published by Pearson Education, Inc © 2016. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN 10: 1-292-08958-X ISBN 13: 978-1-292-08958-4 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. 10 9 8 7 6 5 4 3 2 1 14 13 12 11 10 Typeset in Utopia Std by S4Carlisle Publishing Services. Printed and bound by Vivar, Malaysia.

About the Authors Philip Kotler is the S. C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg Graduate School of Management, Northwestern University. He received his M.A. from the University of Chicago and his Ph.D. from the Massachusetts Institute of Technology. He is the author of over 20 books, including Principles of Marketing, Marketing: An Introduction, and Strategic Marketing for Nonprofit Organizations. He has contributed over 100 articles to leading journals, including Harvard Business Review, Sloan Management Review, Management Science, Journal of Marketing Research, and California Management Review. He is the only threetime winner of the Alpha Kappa Psi award for the best annual article published in the Journal of Marketing. Professor Kotler has also received the Paul D. Converse Award, Distinguished Marketing Educator Award, and Charles Coolidge Parlin Award. He has served as chair of the College of Marketing of The Institute of Management Sciences, a director of the American Marketing Association, and a trustee of the Marketing Science Institute. He has consulted for such major companies as AT&T, Bank of America, Ford, General Electric, and IBM.

Kevin Lane Keller is the E. B. Osborn Professor of Marketing at the Tuck School of Business, Dartmouth College. He has degrees from Cornell, Carnegie-Mellon, and Duke universities. Previously, he was on the marketing faculty of the Graduate School of Business, Stanford University, the University of California at Berkeley, and the University of North Carolina at Chapel Hill. He was also Visiting Professor at Duke University and the Australian Graduate School of Management. His widely-cited research on branding has been published in the Journal of Marketing, Journal of Marketing Research, and Journal of Consumer Research. He has also served on the editorial boards of these journals and has received numerous research awards from his over 50 publications. He is author of Strategic Brand Management. He is also an academic trustee for the Marketing Science Institute. Professor Keller has consulted for such leading businesses as Accenture, American Express, Bank of America, Disney, Intel, Levi Strauss, Kodak, Shell, and Unilever.

Swee Hoon Ang is an Associate Professor at the National University of Singapore (NUS) Business School. She received her PhD from the University of British Columbia. She was a Visiting Professor at the University of California, Berkeley, Aalto University (then Helsinki School of Economics and Business Administration), and the China–Europe International Business School. She excels as an educator as evident by she receiving the university’s Teaching Excellence Awards thrice consecutively, putting her on the Honour Roll. Administratively, Professor Ang manages the curriculum for the Marketing Department at NUS. Her sharing of knowledge has seen her undertake several consultancy projects and executive education seminars, some of which involved service quality evaluation, customer profiling, and feasibility studies. Her clients include Caterpillar, Citibank, Johnson & Johnson Medical, Ministry of Health, Singapore Pools, and Wipro-Unza. Beyond this, she also advises the Corporate Communications team of NUS Business School that has seen the School in the media with research commentaries and features. Professor Ang is also the co-author of Principles of Marketing: An Asian Perspective. She has published in Journal of Advertising, Journal of Cross-Cultural Psychology, Marketing Letters, and Social Indicators.

Chin Tiong Tan is a Professor in Marketing and Senior Advisor to the President of the Singapore Management University. He was the founding Provost of Singapore Management University and the founding President of Singapore Institute of Technology. Professor Tan received his PhD in Business from the Pennsylvania State University. He had taught in various programmes globally over the years and was a Visiting Scholar at the Stanford Business School. He has published in Journal of Consumer Research, Journal of International Business Studies, Journal of Business and Industrial Marketing, International Marketing Review, European Journal of Marketing, and other international journals and conference proceedings. Professor Tan is also the co-author of Principles of Marketing: An Asian Perspective, New Asian Emperors: The Business Strategies of the Overseas Chinese, The Chinese Tao of Business: The Logic of Successful Business Strategy, and Strategic Marketing Cases for 21st Century Asia. He was on the board of Citibank Singapore Ltd and other publicly listed companies in Singapore.

Siew Meng Leong (1956–2013) was a Professor at the National University of Singapore (NUS) Business School. He received his MBA and PhD from the University of Wisconsin, Madison. As a prolific researcher, he has published in the Journal of Consumer Research, Journal of Marketing, Journal of Marketing Research, Journal of International Business Studies, Marketing Letters, and other international journals and conference proceedings. During his battle with cancer, he showed tenacity and care for students by continuing to share his knowledge in his usual witty manner till two weeks before his passing. We at Pearson appreciate his professionalism, good nature, and collaboration. He will be missed.

iv About the Authors

Brief Contents About this Book Preface xxi

xviii

PART 1

Understanding Marketing Management

Chapter 1 Chapter 2

Defining Marketing for the New Realities 2 Developing Marketing Strategies and Plans 36

PART 2

Capturing Marketing Insights

Chapter 3 Chapter 4

Gathering Information and Forecasting Demand Conducting Marketing Research 112

PART 3

Connecting with Customers

Chapter 5 Chapter 6 Chapter 7 Chapter 8

Creating Customer Value, Satisfaction, and Loyalty Analyzing Consumer Markets 172 Analyzing Business Markets 214 Identifying Market Segments and Targets 246

2

74 74

142 142

PART 4

Building Strong Brands

Chapter 9 Chapter 10 Chapter 11

Creating Brand Equity 274 Crafting the Brand Positioning Competitive Dynamics 344

PART 5

Shaping the Market Offerings

Chapter 12 Chapter 13 Chapter 14

Setting Product Strategy 384 Designing and Managing Services 422 Developing Pricing Strategies and Programs

PART 6

Delivering Value

Chapter 15 Chapter 16

Designing and Managing Marketing Channels and Value Networks Managing Retailing, Wholesaling, and Logistics 545

274 316

384 458

500 500

PART 7

Communicating Value

Chapter 17 Chapter 18

Designing and Managing Integrated Marketing Communications 580 Managing Mass Communications: Advertising, Sales Promotions, Events, and Public Relations 612 Managing Digital Communications: Online, Social Media, and Mobile 656 Managing Personal Communications: Direct and Database Marketing and Personal Selling 678

Chapter 19 Chapter 20

580

PART 8

Creating Successful Long-Term Growth

Chapter 21 Chapter 22 Chapter 23

Introducing New Market Offerings 714 Tapping into Global Markets 758 Managing a Holistic Marketing Organization

Appendix A1 Endnotes E1 Glossary G1 Image Credits C1 Name Index I1 Company, Brand, and Organization Index Subject Index I13

I11

802

714

Contents About this Book Preface xxi

xviii

PART 1

Understanding Marketing Management

Chapter 1

Defining Marketing for the New Realities 2

1.1

The Importance of Marketing 4

1.2

The Scope of Marketing

1.2.1

What is Marketing?

4

1.2.2

What is Marketed?

5

1.2.3

Who Markets?

1.3

Core Marketing Concepts

1.3.1

Needs, Wants, and Demands

1.3.2

Target Markets, Positioning, and Segmentation 11

4

Offerings and Brands

1.3.4

Value and Satisfaction

1.3.5

Marketing Channels

1.3.6

Supply Chain

12

1.3.7

Competition

12

10

1.7.7

Communicating Value

1.7.8

Creating Successful Long-Term Growth

Summary

26

26 26 26

27

Applications

29

MARKETING LESSON

Modern Creation München (MCM) 30

MARKETING LESSON

Google

Chapter 2

11 12

33

Developing Marketing Strategies and Plans 36

2.1

Marketing and Customer Value

2.1.1

The Value Delivery Process

2.1.2

The Value Chain

MARKETING INSIGHT

12

Marketing Environment

1.4

The New Marketing Realities

1.4.1

Major Societal Forces

1.4.2

New Company Capabilities

1.4.3

Marketing in Practice

13 13

15

Company Orientation Toward the Marketplace 17

1.5.1

The Production Concept

17

1.5.2

The Product Concept

17

1.5.3

The Selling Concept

1.5.4

The Marketing Concept

1.5.5

The Holistic Marketing Concept

1.6

Updating the Four P’s

17 18

22

Understanding The 4 A’s of Marketing 23

1.7

Marketing Management Tasks

24

1.7.1

Developing Marketing Strategies and Plans 24 Marketers’ Frequently Asked Questions 25

The Central Role of Strategic Planning

MARKETING MEMO

41

What Does it Take to Be a Successful CMO? 41

Corporate and Division Strategic Planning 42

2.2.1

Defining the Corporate Mission

2.2.2

Establishing Strategic Business Units (SBUs) 44

2.2.3

Assigning Resources to Each SBU

45

2.2.4

Assessing Growth Opportunities

46

2.2.5

Organization and Organizational Culture

2.2.6

Marketing Innovation

42

Creating Innovative Marketing

Business Unit Strategic Planning

2.3.1

The Business Mission

2.3.2

SWOT Analysis

MARKETING MEMO

48

50

2.3

51

52

52

52

Checklist for Performing Strengths/ Weaknesses Analysis 54

2.3.3

Goal Formulation

2.3.4

Strategic Formulation

2.3.5

Program Formulation and Implementation

2.3.6

Feedback and Control

Product Planning: The Nature and Contents of a Marketing Plan 58

1.7.2

Capturing Marketing Insights and Performance 25

1.7.3

Connecting with Customers

MARKETING MEMO

1.7.4

Building Strong Brands

25

40

2.2

2.4

25

The Value of WhatsApp to Facebook 39

Core Competencies

MARKETING INSIGHT 17

38

2.1.4

15

Reinventing Marketing At Coca-Cola 16

38

38

2.1.3

13

1.5

MARKETING MEMO

Delivering Value

10

1.3.8

MARKETING INSIGHT

Shaping the Market Offerings

1.7.6

8

1.3.3

MARKETING MEMO

2

1.7.5

55 56 57

58

Marketing Plan Criteria

59

2.4.1

The Role of Research

2.4.2

The Role of Relationships

2.4.3 Summary

60 60

From Marketing Plan to Marketing Action

60

61

Applications

63

MARKETING LESSON

TWG Tea

MARKETING LESSON

Yum! Brands

64

Political-Legal Environment

3.4

Forecasting and Demand Measurement

3.4.1

The Measures of Market Demand

3.4.2

A Vocabulary for Demand Measurement

3.4.3

Estimating Current Demand

3.4.4

Estimating Future Demand

Summary 66

PART 2

Capturing Marketing Insights

Chapter 3

Gathering Information and Forecasting Demand 74

95 97

Components of a Modern Marketing Information System 76

3.2

Internal Records and Marketing Intelligence 77

3.2.1

The Order-to-Payment Cycle

3.2.2

Sales Information Systems

3.2.3

Databases, Data Warehousing, and Data Mining 77

100 102

106

MARKETING LESSON

Microsoft

MARKETING LESSON

Uber

107

109

77 77

Making Big Data Work for You

Chapter 4

Conducting Marketing Research

4.1

The Marketing Research System

114

4.2

The Marketing Research Process

115

4.2.1

Step 1: Define the Problem, the Decision Alternatives, and the Research Objectives 115

4.2.2

Step 2: Develop the Research Plan

116

MARKETING MEMO

Conducting Informative Focus Groups 117

MARKETING MEMO

Questionnaire Do’s and Don’ts 120

MARKETING INSIGHT

Getting into Consumers’ Heads With Qualitative Research 121

MARKETING INSIGHT

Understanding Brain Science

78

The Marketing Intelligence System

3.2.5

Collecting Marketing Intelligence on the Internet 79

3.2.6

Communicating and Acting on Marketing Intelligence 80

4.2.3

Step 3: Collect the Information

3.3

Analyzing the Macroenvironment

4.2.4

Step 4: Analyze the Information

3.3.1

Needs and Trends

4.2.5

Step 5: Present the Findings

4.2.6

Step 6: Make the Decision

4.3

Marketing Research in Asia

4.4

Measuring Marketing Productivity

4.4.1

Marketing Metrics

4.4.2

Marketing-Mix Modeling

4.4.3

Marketing Dashboards

Ten Forces Forging China’s Future 81

Identifying the Major Forces

3.3.3

The Demographic Environment

82 82

Finding Gold at the bottom of the Pyramid 84

3.3.4

Economic Environment

3.3.5

Social-Cultural Environment

3.3.6

Natural Environment

3.3.7

80

80

3.3.2

MARKETING INSIGHT

78

112

3.2.4

MARKETING INSIGHT

MARKETING INSIGHT

87 90

92

The Green Marketing Revolution 93

Technological Environment

98

74

3.1

MARKETING INSIGHT

97

104

Applications

Sample Marketing Plan: Pegasus Sports International 69

MARKETING INSIGHT

3.3.8

94

Summary

122

125 125

125 125 126 128

128 129 129

Marketing Dashboards to Improve Effectiveness and Efficiency 130

132

Applications

134

MARKETING LESSON

Nestlé Malaysia: Lactogen 4

MARKETING LESSON

Procter & Gamble

135

139

Contents

vii

PART 3

Connecting with Customers

Chapter 5

142

Creating Customer Value, Satisfaction, and Loyalty 142

6.2.3

Learning

186

6.2.4

Emotions

187

6.2.5

Memory

6.3

The Buying Decision Process: The Five-Stage Model 190

188

5.1

Building Customer Value, Satisfaction, and Loyalty 144

6.3.1

Problem Recognition

5.1.1

Customer Perceived Value

6.3.2

Information Search

5.1.2

Total Customer Satisfaction

6.3.3

Evaluation of Alternatives

5.1.3

Monitoring Satisfaction

6.3.4

Purchase Decisions

5.1.4

Product and Service Quality

6.3.5

Postpurchase Behavior

5.2

Maximizing Customer Lifetime Value

6.3.6

5.2.1

Customer Profitability

Moderating Effects on Consumer Decision Making 197

5.2.2

Measuring Customer Lifetime Value

153

6.4

5.2.3

Attracting and Retaining Customers

153

Behavioral Decision Theory and Behavioral Economics 198

6.4.1

Decision Heuristics

6.4.2

Framing

6.4.3

Mental Accounting

MARKETING MEMO

144 149

149 150 152

152

Calculating Customer Lifetime Value 154

MARKETING INSIGHT

Seven Lessons from Samsung’s Note 7 Crisis 155

5.2.4

Building Loyalty

5.2.5

Win-Backs

5.3

Cultivating Customer Relationships

5.3.1

Customer Relationship Management (CRM)

158 160

166 Food Scandals in Taiwan: The Case of Tin Hsin International Group 167

MARKETING LESSON

Tesco

170

Chapter 6

Analyzing Consumer Markets

6.1

What Influences Consumer Behavior?

6.1.1

Cultural Factors

6.1.2

Social Factors

MARKETING INSIGHT

172

174

Face-saving and the Chinese Consumer 177

6.1.3

Personal Factors 178

6.2

Key Psychological Processes

6.2.1

Motivation: Freud, Maslow, Herzberg

6.2.2

Perception

MARKETING MEMO

viii

Contents

174

175

181

183 The Power of Sensory Marketing 183

181

198

199 200

205

MARKETING LESSON

Hello Kitty 206

MARKETING LESSON

Gold Misses

Chapter 7

The Behavioral Targeting Controversy 161

MARKETING LESSON

195

209

160

164

Applications

191

194

201

Applications

160

MARKETING INSIGHT Summary

Summary

190 190

Analyzing Business Markets

214

7.1

What is Organizational Buying?

7.1.1

The Business Market versus the Consumer Market 216

216

7.1.2

Buying Situations

7.2

Participants in the Business Buying Process 218

7.2.1

The Buying Center

7.2.2

Buying Center Influences

7.2.3

Targeting Firms and Buying Centers

7.3

The Purchasing/Procurement Process

217

218 219 219

7.4

Stages in the Buying Process

7.4.1

Problem Recognition

7.4.2

General Need Description and Product Specification 222

7.4.3

Supplier Search

MARKETING INSIGHT

221

221

222

The Asian B2B Environment

7.4.4

Proposal Solicitation

7.4.5

Supplier Selection

MARKETING MEMO

220

223

224 224

Developing Compelling Customer Value Propositions 225

MARKETING INSIGHT

7.4.6

Order-Routine Specification

7.4.7

Performance Review

7.5

Developing Effective Business-to-Business Marketing Programs 227

7.5.1

Communication and Branding Activities

7.5.2

Systems Buying and Selling

MARKETING MEMO

226

227

227

228

Role of Services

7.6

Managing Business-to-Business Customer Relationships 230

7.6.1

229

Rules of Social and Business Etiquette 230

The Benefits of Vertical Coordination

MARKETING INSIGHT

231

Establishing Corporate Trust, Credibility, and Reputation 232

7.6.2

Business Relationships: Risks and Opportunism 233

7.7

Relationship Marketing in the Keiretsu and Chaebol 234

7.8

Institutional and Government Markets 234

Summary

237

Applications

239

MARKETING LESSON

Tagit

MARKETING LESSON

Accenture

Chapter 8

240 244

Applications

269

MARKETING LESSON

PT Heinz ABC

MARKETING LESSON

Fulla Dolls: The Alternative Barbie 272

PART 4

Building Strong Brands

Chapter 9

Creating Brand Equity

270

274 274

9.1

How Does Branding Work?

9.1.1

The Role of Brands

9.1.2

The Scope of Branding

9.2

Defining Brand Equity

9.2.1

Brand Equity Models

9.3

Building Brand Equity

9.3.1

Choosing Brand Elements

MARKETING INSIGHT

276

276 278 278

281 284 285

Driving Deeper Brand Connection in China 289

9.3.2

Designing Holistic Marketing Activities

9.3.3

Brand Communities

9.3.4

Leveraging Secondary Association

9.4

Measuring Brand Equity

MARKETING INSIGHT

The Brand Value Chain

294

MARKETING INSIGHT

What is a Brand Worth?

296

Managing Brand Equity

9.5.1

Brand Reinforcement

Bases for Segmenting Consumer Markets 248

9.5.2

Brand Revitalization

9.6

Devising a Branding Strategy

8.1.1

Geographic Segmentation

9.6.1

Branding Decisions

8.1.2

Demographic Segmentation

9.6.2

Brand Portfolios

8.1.3

Psychographic Segmentation

9.6.3

Brand Extensions

302

8.1.4

Behavioral Segmentation

9.7

Customer Equity

305

8.2

Bases for Segmenting Business Markets 258

8.3

Market Targeting

8.3.1

Effective Segmentation Criteria

8.3.2

Evaluating and Selecting the Market Segments 261

MARKETING INSIGHT

250 253

255

259 260

Segmentation Strategy for China 263

292

294

9.5

249

290

291

Identifying Market Segments and Targets 246

8.1

265

267

Spreading the Word With Customer Reference Programs 229

7.5.3

MARKETING INSIGHT

Summary

Chasing the Long Tail

MARKETING MEMO Summary

296

296 297 298

299

300

21st Century Branding

306

307

Applications

310

MARKETING LESSON

Malaysian Airlines

MARKETING LESSON

McDonald’s

311

314

Contents

ix

Chapter 10 Crafting the Brand Positioning

316

10.1

Developing and Communicating a Positioning Strategy 318

10.1.1

Understanding Positioning and Value Propositions 318

10.2

Determining a Competitive Frame of Reference 319

10.2.1

Identifying Competitors

10.2.2

Analyzing Competitors

10.2.3

Identifying Optimal Points-of-Parity and Pointsof-Difference 320

10.2.4

Choosing Specific POPs and PODs

10.3

Brand Mantras

10.3.1

Role of Brand Mantras

320

324

326

Designing a Brand Mantra

10.4.1

Communicating Category Membership

327 328 328

Constructing a Brand Positioning Bull’s-eye 329

10.4.2

Communicating POPs and PODs

10.4.3

Monitoring Competition

10.5

Alternative Approaches to Positioning

10.5.1

Brand Narratives and Storytelling

330 331

331

Cultural Branding

10.6

Positioning and Branding a Small Business 332

332

334 336

MARKETING LESSON

Under Armour

MARKETING LESSON

Nike China

337

339 344

11.1

Competitive Strategies for Market Leaders 346 Pokémon Go: A Game-Changer for Nintendo? 346

11.1.1

Expanding Total Market Demand

11.1.2

Protecting Market Share

MARKETING INSIGHT

Sun Tzu Bing Fa: Modern Strategy Insights from Ancient China 350

Increasing Market Share

11.2

Other Competitive Strategies

x

Contents

360

Niche Specialist Roles

361

11.3.1

Product Life Cycles (PLC)

11.3.2

Style, Fashion, and Fad Life Cycles

11.3.3

Marketing Strategies: Introduction Stage and the Pioneer Advantage 363

362 362

Understanding Double Jeopardy 364

11.3.4

Marketing Strategies: Growth Stage

11.3.5

Marketing Strategies: Maturity Stage

366

11.3.6

Marketing Strategies: Decline Stage

11.3.7

Evidence for the Product Life-Cycle Concept 370

11.3.8

Critique of the Product Life-Cycle Concept 371

11.3.9

Market Evolution

11.4

Marketing in a Slow-Growth Economy 372

11.4.1

Explore the Upside of Increasing Investment 372

11.4.2

Get Closer to Customers

11.4.3

Review Budget Allocations

11.4.4

Put Forth the Most Compelling Value Proposition 373

11.4.5

Fine-tune Brand and Product Offerings

367 369

371

372 372

373

374 377

MARKETING LESSON

Tata Salt (A)

378

MARKETING LESSON

Tata Salt (B)

382

PART 5

Shaping the Market Offerings

Chapter 12

Setting Product Strategy

12.1

Product Characteristics and Classifications 386

12.1.1

Product Levels: The Customer-Value Hierarchy 386

12.1.2

Product Classifications

384

347

349

11.1.3

359

Product Life-Cycle Marketing Strategies 361

Applications

Competitive Dynamics

Counteracting Counterfeiting

11.3

Summary

Chapter 11

356 358

Market-Nicher Strategies

330

10.5.2

MARKETING INSIGHT

MARKETING INSIGHT

MARKETING INSIGHT

326

Establishing Brand Positioning

Applications

Market-Follower Strategies

MARKETING MEMO

319

10.4

Summary

Market-Challenger Strategies

11.2.2

11.2.3

10.3.2

MARKETING MEMO

11.2.1

354 355

387

384

12.2

Differentiation

12.2.1

Product Differentiation

389

12.2.2

Services Differentiation

391

12.3

Design

12.4

Luxury Products

12.4.1

Characterizing Luxury Brands

12.4.2

Growing Luxury Brands

12.4.3

Marketing Luxury Brands

12.5

Environmental Issues

MARKETING MEMO

389

393 394 395 395 397

A Sip or A Gulp: Environmental Concerns in the Water Industry 398

Product and Brand Relationships

12.6.1

The Product Hierarchy

12.6.2

Product Systems and Mixes

12.6.3

Product-Line Analysis

12.6.4

Product-Line Length

MARKETING INSIGHT 12.6.5

MARKETING MEMO

398

398

402

405

Product-Bundle Pricing Considerations 407

Co-Branding and Ingredient Branding

12.7

Packaging, Labeling, and Warranties and Guarantees 409

12.7.1

Packaging

12.7.2

Labeling

12.7.3

Warranties and Guarantees

407

409 412 412

413

Applications

416

MARKETING LESSON

Nintendo

MARKETING LESSON

Toyota

Marketing Excellence

13.3.2

Technology and Service Delivery

417

419

Designing and Managing Services

13.1

The Nature of Services

13.1.1

Service Industries Are Everywhere

13.1.2

Categories of Service Mix

13.1.3

Distinctive Characteristics of Services

13.2

The New Service Realities

13.2.1

A Shifting Customer Relationship

MARKETING INSIGHT

422

424 424

424 426

430 430

The Japanese Philosophy of Service 432

434

Tapping Technology for Service Excellence: Henn-na Hotel 434

Service in Asia

13.3.4

Best Practices of Top Service Companies 436

MARKETING MEMO

435

Service Excellence: Five Pointers from SIA 436

13.3.5

Differentiating Services

13.4

Managing Service Quality

440 441

Recommendations for Improving Service Quality 443

13.4.1

Managing Customer Expectations

13.4.2

Incorporating Self-Service Technologies (SSTs) 446

13.5

Managing Product-Support Services

13.5.1

Identifying and Satisfying Customer Needs 447

13.5.2 Summary

Post-Sale Service Strategy

443

446

447

449

Applications

451

MARKETING LESSON

Shangri-La Bosphorus Hotel

MARKETING LESSON

Singapore Airlines

Developing Pricing Strategies and Programs 458

14.1

Understanding Pricing

460

14.1.1

Pricing in a Digital World

460

Giving It All Away

461

14.1.2

A Changing Pricing Environment

14.1.3

How Companies Price

461

462

14.1.4

Consumer Psychology and Pricing

14.2

Setting the Price

14.2.1

Step 1: Selecting the Pricing Objective

MARKETING INSIGHT

452

456

Chapter 14

MARKETING INSIGHT Chapter 13

433

13.3.3

400 401

12.6.6

Summary

13.3.1

MARKETING MEMO

399

When Less Is More

Product-Mix Pricing

Achieving Excellence in Services Marketing 433

MARKETING INSIGHT

394

12.6

13.3

463

466

Trading Up, Down, and Over

14.2.2

Step 2: Determining Demand

14.2.3

Step 3: Estimating Costs

466 467

469

472

Contents

xi

14.2.4

Step 4: Analyzing Competitors’ Costs, Prices, and Offers 475

15.3.3

Identifying Major Channel Alternatives

15.3.4

Evaluating the Major Alternatives

14.2.5

Step 5: Selecting a Pricing Method

15.4

Channel-Management Decisions

14.2.6

Step 6: Selecting the Final Price

15.4.1

Selecting Channel Members

15.4.2

Training and Motivating Channel Members 517

15.4.3

Evaluating Channel Members

15.4.4

Modifying Channel Design and Arrangements 520

15.4.5

Global Channel Considerations

15.5

Channel Integration and Systems

15.5.1

Vertical Marketing Systems

MARKETING INSIGHT

476

480

Stealth Price Increases

481

14.3

Adapting the Price

14.3.1

Geographical Pricing (Cash, Countertrade, Barter) 482

482

14.3.2

Price Discounts and Allowances

14.3.3

Promotional Pricing

14.3.4

Differentiated Pricing

14.4

Initiating and Responding to Price Changes 485

483

484 484

14.4.1

Initiating Price Cuts

14.4.2

Initiating Price Increases

14.4.3

Responding to Competitors’ Price Changes 487

Summary

485 486

489

Applications

492

MARKETING LESSON

Siam Park City

MARKETING LESSON

eBay

493

PART 6

Delivering Value

Chapter 15

Designing and Managing Marketing Channels and Value Networks 500 Marketing Channels and Value Networks 502

15.1

The Importance of Channels

15.1.2

Multichannel Marketing

15.1.3

Integrating Multichannel Marketing Systems 503

15.1.4

Value Networks

15.1.5

The Digital Channels Revolution

15.2

The Role of Marketing Channels

15.2.1

Channel Functions and Flows

15.2.2

Channel Levels

15.2.3

Service Sector Channels

15.3

Channel-Design Decisions

15.3.1

Analyzing Customer Needs and Wants

MARKETING INSIGHT 15.3.2

xii

504 505

523

Pure-Click Companies

15.6.2

Brick-and-Click Companies

15.7

M-Commerce Marketing Practices

15.7.1

Changes in Customer and Company Behavior 526

15.7.2

Marketing Practices

523

523 526 526

526

Lessons from South Korea’s MobileRetailers 527

15.8

Conflict, Cooperation, and Competition 528

15.8.1

Types of Conflict and Competition

15.8.2

Causes of Channel Conflict

528

15.8.3

Managing Channel Conflict

529

15.8.4

Dilution and Cannibalization

15.8.5

Legal and Ethical Issues in Channel Relations 530

528

529

532

Applications

536

MARKETING LESSON

7-Eleven

MARKETING LESSON

Taobao

537 541

505

505

Chapter 16

Managing Retailing, Wholesaling, and Logistics 544

16.1

Retailing

16.1.1

Types of Retailers

507 509 509 509

Understanding the Showrooming Phenomena 510

Establishing Objectives and Constraints

Contents

15.6.1

Summary

521

521

Horizontal Marketing Systems

502

503

521

E-Commerce Marketing Practices

500

15.1.1

520

15.6

497

517

517

15.5.2

MARKETING MEMO

513

515

511

MARKETING INSIGHT 16.1.2

546 546

Enhancing Online Shopping in Asia 548

The Modern Retail Marketing Environment 549

MARKETING INSIGHT 16.1.3

Franchise Fever in Asia

Marketing Decisions

MARKETING INSIGHT

550

553

MARKETING INSIGHT

The Growth of Shopper Marketing 554

MARKETING MEMO

Helping Stores to Sell

MARKETING INSIGHT

Feng Shui and Its Application to Retailing and Marketing in the Far East 561

16.2

Private Labels

16.2.1

Role of Private Labels

16.2.2

Private Label Success Factors

MARKETING INSIGHT

562 562

Wholesaling

16.3.1

Trends in Wholesaling

16.4

Market Logistics

16.4.1

Integrated Logistics Systems

16.4.2

Market-logistics Objectives

16.4.3

563

Manufacturer’s Response to the Private Label Threat 564

16.3

Summary

559

565

Select the Communications Channels

17.2.5

Establish the Total Marketing Communications Budget 594

17.3

Selecting the Marketing Communications Mix 596

MARKETING INSIGHT

566

Market-logistics Decisions

17.3.2

Factors in Setting the Marketing Communications Mix 600

17.3.3

Measuring Communication Results

17.4

Managing the Integrated Marketing Communications Process 602

17.4.1

Coordinating Media

17.4.2

Implementing IMC

Summary

MARKETING LESSON

Shanghai Tang

MARKETING LESSON

Amazon.com

577

PART 7

Communicating Value

580

Chapter 17

573

601

602 603

How Integrated Is Your IMC Program? 603

604

Applications

572

Marketing Communications and the Chinese Consumer 597

Characteristics of the Marketing Communications Mix 597

MARKETING MEMO

568

592

17.3.1

567

570

Applications

17.2.4

564 565

Collectivism, Consensus Appeals, and Credibility 592

607

MARKETING LESSON

Red Bull

MARKETING LESSON

Target

608 610

Chapter 18

Managing Mass Communications: Advertising, Sales Promotions, Events, and Public Relations 612

Designing and Managing Integrated Marketing Communications 580

18.1

Developing and Managing an Advertising Program 614

17.1

The Role of Marketing Communications 582

18.1.1

Setting the Advertising Objectives

17.1.1

The Changing Marketing Communications Environment 582

18.1.2

Deciding on the Advertising Budget

18.1.3

Developing the Advertising Campaign

17.1.2

Marketing Communications and Brand Equity 582

17.1.3

The Communications Process Models

17.2

Developing Effective Communications 587

17.2.1

Identify the Target Audience

17.2.2

Set the Communications Objectives

17.2.3

Design the Communications

MARKETING INSIGHT

585

587 588

Celebrity Endorsements as a Message Strategy 591

588

614 615 616

MARKETING INSIGHT

Safi Rania Gold

MARKETING INSIGHT

Advertising Guidelines for Modern Asia 619

MARKETING MEMO

Print Ad Evaluation Criteria

618

18.2

Choosing Media

18.2.1

Reach, Frequency, and Impact

18.2.2

Choosing among Major Media Types

18.2.3

Place Advertising Options

MARKETING INSIGHT

621

622 622 623

624

Playing Games with Brands

Contents

626

xiii

18.2.4

Evaluating Advertising Effectiveness

18.3

Sales Promotion

MARKETING INSIGHT

630

Alibaba’s Singles’ Day Phenomenon Sets Sights on Going Global 630

18.3.1

Concerns with Promotion

18.3.2

Major Decisions

18.4

Events and Experiences

MARKETING INSIGHT

631

632

Brands and Sport Sponsorship 637

Events Objectives

18.4.2

Major Sponsorship Decisions

639

Measuring High Performance Sponsorship Programs 641

Creating Experiences

18.5

Public Relations

18.5.1

Marketing Public Relations

18.5.2

Major Decisions in Marketing PR

642

642 644

649

MARKETING LESSON

Gillette (A)

650

MARKETING LESSON

Gillette (B)

654

Chapter 19

643

646

Applications

Managing Digital Communications: Online, Social Media, and Mobile 656

19.1

Online Marketing

19.1.1

Advantages and Disadvantages of Online Marketing Communications 658

MARKETING INSIGHT 19.1.2

658

Asia’s Technologically Savvy Shoppers 659

Online Marketing Communication Options 659

MARKETING MEMO

How to Maximize the Marketing Value of Emails 662

19.2

Social Media

19.2.1

Social Media Platforms

663 663

19.2.2

Using Social Media

19.3

Word of Mouth

19.3.1

Forms of Word of Mouth

19.3.2

Creating Word-of-Mouth Buzz

MARKETING MEMO 19.3.3

xiv

664

665 665 665

How To Start A Buzz Fire

667

Measuring the Effects of Word of Mouth 667

Contents

Tracking Online Buzz

668

19.4

Mobile Marketing

19.4.1

The Scope of Mobile Marketing

668

19.4.2

Developing Effective Mobile Marketing Programs 669

19.4.3

Mobile Marketing across Markets

668

669

671

Applications

672

MARKETING LESSON

Facebook

MARKETING LESSON

Unilever (Axe and Dove)

673 675

640

18.4.3

Summary

MARKETING INSIGHT

Summary

637

18.4.1

MARKETING MEMO

628

Chapter 20

Managing Personal Communications: Direct and Database Marketing and Personal Selling 678

20.1

Direct Marketing

20.1.1

The Benefits of Direct Marketing

20.1.2

Direct Mail

20.1.3

Catalog Marketing

20.1.4

Telemarketing

20.1.5

Public and Ethical Issues in Direct Marketing 683

20.2

Customer Databases and Database Marketing 684

20.2.1

Customer Databases

20.2.2

Data Warehouses and Data Mining

20.2.3

The Downside of Database Marketing

20.3

Designing the Sales Force

20.3.1

Sales Force Objectives and Strategy

20.3.2

Sales Force Structure

MARKETING INSIGHT

680 680

681 682

683

684 684 686

687 688

689

Major Account Management

20.3.3

Sales Force Size

20.3.4

Sales Force Compensation

690

20.4

Managing the Sales Force

20.4.1

Recruiting and Selecting Representatives 692

20.4.2

Training and Supervising Sales Representatives 692

20.4.3

Sales Rep Productivity

20.4.4

Motivating Sales Representatives

694

20.4.5

Evaluating Sales Representatives

695

20.5

Principles of Personal Selling

20.5.1

The Six Steps

20.5.2

Negotiation

20.5.3

Relationship Marketing

691 692

693

698 699 701

697

690

MARKETING INSIGHT Summary

Culture and Relationship Marketing 702

705

Applications

708

MARKETING LESSON

Progressive

MARKETING LESSON

Victoria’s Secret

709 711

PART 8

Creating Successful Long-Term Growth

Chapter 21

Introducing New Market Offerings

21.1

New-Product Options

21.1.1

Make or Buy

714 714

716

716

21.1.2

Types of New Products

21.2

Challenges in New-Product Development 717

21.2.1

The Innovation Imperative

MARKETING INSIGHT

716

717

Lessons from Google in Creating an Innovative Culture 718

21.5

Managing the Development Process: Concept to Strategy 731

21.5.1

Concept Development and Testing

21.5.2

Marketing Strategy Development

21.5.3

Business Analysis

21.6

Managing the Development Process: Development to Commercialization 736

21.6.1

Product Development

21.6.2

Market Testing

21.6.3

Commercialization

21.7

The Consumer-Adoption Process

21.7.1

Stages in the Adoption Process

21.7.2

Factors Influencing the Adoption Process 742

Summary

731 734

735

737

737 740 742

742

746

Applications

750

MARKETING LESSON

Apple

MARKETING LESSON

Tiger Balm

751 753

21.2.2

New-Product Success

719

Chapter 22

Tapping into Global Markets

758

21.2.3

New-Product Failure

720

21.2.4

Asian Perspective of New-Product Development 721

22.1

Competing on a Global Basis

760

22.2

Deciding Whether to Go Abroad

761

22.3

Deciding Which Markets to Enter

762

22.3.1

How Many Markets to Enter

22.3.2

Evaluating Potential Markets

22.3.3

Succeeding in Developing Markets

21.3

Organizational Arrangements

721

21.3.1

Budgeting for New-Product Development 722

21.3.2

Organizing New-Product Development 722

21.4

Managing the Development Process: Ideas 724

21.4.1

Generating Ideas

724

762 763 764

MARKETING INSIGHT

Heinz’s Four A’s for Emerging Market Expansion 767

MARKETING INSIGHT

How Chinese Brands can Gain Global Acceptance 770

MARKETING MEMO

Ten Ways to Great New-Product Ideas 725

MARKETING INSIGHT

New-Idea Generation in Japanese Companies 725

MARKETING INSIGHT

P&G’s New CONNECT + DEVELOP Approach to Innovation 726

MARKETING INSIGHT

MARKETING MEMO

Seven Ways to Draw New Ideas from Your Customers 727

MARKETING MEMO

How to Run a Successful Brainstorming Session 729

22.4

Deciding How to Enter the Market

22.4.1

Indirect and Direct Export

22.4.2

Licensing

22.4.3

Joint Ventures

771

771

772 773

Guanxi and Its Application to Marketing in Greater China 774

22.4.4

Direct Investment

22.5

Deciding on the Marketing Program

22.5.1

Global Similarities and Differences

22.5.2

Marketing Adaptation

MARKETING MEMO

775 776

777

778

The Ten Commandments Of Global Branding 779

Contents

xv

MARKETING INSIGHT

22.5.3

Global Product Strategies

22.5.4

Global Communication Strategies

22.5.5

Global Pricing Strategies

22.5.6

Global Distribution Strategies

22.6

Country-of-Origin Effects

22.6.1

Building Country Images

22.6.2

Consumer Perceptions of Country of Origin 790

Summary

780 783

785

23.3.3 787

789

792

Applications

795

MARKETING LESSON

L’Oréal

MARKETING LESSON

Volkswagen

796

23.1

Trends in Marketing Practices

Social Marketing

Marketing Implementation and Control 820

23.4.1

Marketing Implementation

23.4.2

Marketing Control

23.5

The Future of Marketing

23.2

Internal Marketing

23.2.1

Organizing the Marketing Department

805

MARKETING LESSON

Timberland

Appendix Appendix

A1

Endnotes

E1 G1

Tools for Marketing Control

Relations with Other Departments

23.2.3

Building a Creative Marketing Organization 810

Glossary

Socially Responsible Marketing

Name Index

MARKETING INSIGHT

The Marketing CEO

Corporate Social Responsibility

23.3.2

Socially Responsible Business Models

xvi

Contents

Image Credits

837 839

C1 I1

Company, Brand, and Organization Index

810

23.3.1

Major Marketing Weaknesses

Unilever Platinum Stores

Characteristics of Customer-Driven Company Departments 806

810

Subject Index

812 815

827

MARKETING LESSON

23.2.2

23.3

820

821

832

805

809

818

829

Applications 804

Making a Difference: Top 10 Tips for Cause Branding 817

23.4

Summary

Managing a Holistic Marketing Organization 802

816

23.3.4

MARKETING MEMO

798

Chapter 23

MARKETING MEMO

Cause-Related Marketing

MARKETING MEMO

789

Confucius and Marketing in East Asia 815

II3

I11

833

827

MARKETING MANAGEMENT AN ASIA PERSPECTIVE

Now into its seventh edition, this book continues to showcase the excellent content that Kotler has created with examples and case studies that are easily recognized. This enables students to relate to and grasp marketing concepts better. IN THIS EDITION, YOU WILL FIND THAT WE HAVE:

1 Global brand names to provide a balanced look at Marketing Management 2 An in-depth look at Asian concepts and practices such as Islamic marketing, guanxi, online marketing, etc. 3 An emphasis on 3 key marketing changes–Economic, Environmental, and Technological

Global brand names to provide a balanced look at Marketing eting Management Management (Seventh Edition)

10%

International companies in a non-Asian context • Apple • PepsiCo • Accenture • Ritz-Carlton

50%

xviii About This Book

International companies in an Asian context • Google • Kit Kat • Uber • Procter and Gamble

40%

Asian companies in an Asian context / non-Asian context • MCM • Tata • TaoBoa • Samsung

weights If we knew the hase decision. r choice. utes in their purc ict her compute ider several attrib we could more reliably pred capacity, Most buyers cons puter’s memory attributes, . To e to the com hes to the four percent to price the importanc 10 of and ent that Yishan attac ht, perc we weig n assigned 40 y-value model, ent to size and Suppose Yisha the expectanc bility, 20 perc tion leads to r, according to graphics capa This computa 30 percent to for each compute puter’s attributes. perceived value about each com fs find Yishan’s belie her hts by multiply her weig s: value perceived the following ) = 8.0 ) + 0.2(6) + 0.1(4 0.4(10) + 0.3(8 ) = 7.8 Computer A = ) + 0.2(8) + 0.1(3 = 0.4(8) + 0.3(9 B r pute Com 0) + 0.1(5) = 7.3 ) + 0.3(8) + 0.2(1 0.4(6 = C r ) = 4.7 Compute + 0.2(7) + 0.1(8 0.4(4) + 0.3(3) h Computer D = puter A, whic n will favor com predict that Yisha ulation would y-model form this, a .49 An expectanc value way. Knowing eived highest perc rences the same sions. The marketer (at 8.0) has the form their prefe deci r rs buye buye r ence t compute greater interest of things to influ Suppose mos do a number egies to stimulate ASIA’S TECHN ufacturer can following strat OLOGICALLY computer man could apply the SAVVY SHOPPERS for example, Asia’s digital of computer B, consumers are technology leapf consumers, partic in brand B: rogs. ularly those living itioning. consumers are platforms prima outside cities, acces Asian is called real repos ing. ique likely to make ition rily techn s digital through mobile search engines ological repos when looking Thailand, 85 perce computer—This phones, bypassing is called psych their first choic ing, for ique Redesign the sition prod nt techn of depo PCs. ucts instead of consumers not his e In Web site. devices for their d competitive checking a comp living in cities use t the brand—T strategy, calle ity than it online purchases. any’s Alter beliefs abou brands—This d has more qual They enjoy watch mobile to learn about Asian consumers t competitors’ products, espec competitor’s bran ing videos are generally not ially those invol platform. There Alter beliefs abou buyers mistakenly believe a using cosmetics. loyal to any partic ving cooking and fore, shopping when more e ular h sens s using attac social media suits make rs to Social media is Understanding 193 them well. to persuade buye also perceived how try has. Asian lly could consu as being more than official sites actua company to deve mers buy onlin The marketer trustworthy about product e led one lop two videos rtance weights— h the brand excels. quality, especially Hanting Hotel, in Indonesia to hair styling prod attention to Alter the impo in whic a Chinese mid-p promote its in China. draw buyers’ uct. One video the attributes rice hotel chain , similar to a TV membership cards showed a celeb e marketer could importance to , gave virtual commercial, rity endorsing through WeCh attributes—Th at, resulting in the product. The members and realiz speed. to neglected was adapted to ideal 500,000 new or processing other video Call attention what Indonesian ing 62,000 room rs to change their buye such as styling ade book shop utes, times Socia ings. persu pers attrib longe l media such wanted. Nearly try to r than a typical neglected as Facebook, six marketer could TV commercia he What a ls—T blogg sApp Insta idea l, , er the and Line allow gram, WeChat, r’s demonstrating video featured 50 retailers to conn Shift the buye how to use the utes. Asian consumers The longer video ect with consu hair styling prod or more attrib enjoy the intera received 40 perce mers. uct. levels for one ction with seller not buy simply shorter one with nt more viewe based on price s. They do rs than the the celebrity endo beliefs. or the cheapest considerations rsement. Asian consumers res to Islamic deal. Instead, such as enjoying ysia that adhe are also spoilt any the online shop and product choic e-commerce shop for choice in are free from ries brand in Mala and ping toilet s ng experience e dient are ping term leadi important. s of sites. It is a fragm ral ingre GOLD Amazon and eBay, Unlike the more Safi—Safi is the ented market. e from pure natu of its recent launches is the mad are there Besid matu in ’s Taobao (in China es re markets, wher online shopping Zalora and Lazad All its products Malays not only or alcohol. One ), Flipkart (in India e payment for is via credit cards a (in almost all s animal origin monly used by ), customer’s door and there is deliv South Qoo10 and Carou ingredients of of the ingredient l gold is com step, Asians, espe ery sell (in Singapore) east Asian countries), m, gold is one g ment. The meta areas, have no cially those living to the Kaidee and PanT skincare treat old Malay custo , Mudah (in Mala ty and ever-lastin credit cards. Such ipMarket (in Thail for beauty. In in rural is ment for beau ysia), consumers prefe delivery. They and), OLX (in Indon Thegioididong of the region, jewellery but also l Malayan treat also pick up their r cash-on(in Vietnam). Mark Islamicization esia), and k, a traditiona the into susu ates this for d pre-d purchased items such as post office et fragmentation used which Safi turne at places means that s and convenien this practice, m (forbidden). ept ever, hara conc How as . are paym lars ce youth stores and make ent there. ic scho GOLD skinc their modern Islam skin Sources: Florian introduce the to ntial y pote rtunit a prohibited by is Hoppe, Sebas this as an oppo belief that gold 2016; Cindy Chiu, tien Lamy, and Alessandro Canna comes in nano a positive. It took ed), and draws on Muslims’ rsi, Todd Guild, and 24-carat gold (allow Gordon Orr, “Five “Can Southeast Asia Live Up to producing technology, the which is halal Its E-Commerce Keys to Connecting layer of the skin, Potential?” Bain dient. Using nano with China’s Wired & Company, 16 into the second of wrinkles. ce trate treatment ingre Consu aran pene mers,” to appe March McKinsey Digita l enough reducing the l, August 2015. size that is smal te under the skin. firming skin and on three mean necessary for stay or accumula the s of communicatio more collagen uct worked to gold does not business—“tele n to build her nano size, the ined how the prod multimillion-d phon rsement. Because of its body. Safi expla ollar the halal endo the Internet, wher e, telegraph, and tell a wom rses out of the is on, and received fs; introducing gold, an”—would now cosmetics e the company Instead, it dispe GOLD by Safi announce Halal Certificati ds ’s of belie have offici towar ic e Body to al , ic Islam add site describes s special offer ent from Consumer attitud to Islamic beliefswher new and old prod Malaysian Islam s and promotion uct adheres to the endorsem its adherence e they can buy the new prod ; and getting onal Malayan optimized by Estée Lauder prod s, and helps customers locat ucts, D. By ensuring that recently used gold as a traditi e stores ucts. de towards GOL the reminder of y, and an endorsement from tionally but not Marketers must to enhance attitu which was tradi go where the custo treatment for beaut , Safi was able Customers defin rity. mers are, and the religious body e the rules of the religious autho increasingly that’ engagement, with the help s online. however, and of agents and insulate them intermediarie information they selves s if they so choose. They need, what offer willing to pay. define what ings they’re inter India’s largest ested in, and e-commerce just like Ama platform is Flipk what they’re zon as an onlin art. Starting off e bookstore, offers cash-on-d Flipkart beats elivery payment Amazon beca logistic service, options to custo use it whic mers and has set up its own e-commerce ecos h improves the unreliable delivery netw ystem in India 7 ork of the exist . ing

Asian concepts and practices

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MARKETING INSIGHT

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MARKETING INSIGHT

Con

FuCIus anD Two Confucian MarkeTIng values, li (礼) In easT asIa and ren (仁), have cornerstones of become the social structure Matsushita’s ideal in East Asia. translated as Li has been rites, s to society. Mats nt stores have ushita was also dai departme highest taxpayer provides the appro ceremonies, etiquette, and very often the in Japan. propriety. It segae, and Hyun to brace themselves for priate Shin beha otte, vior for every s—L Confucius also Confucianism also ations mall social situation. rtment store maintained that explains certain ile business oper Lotte’s online s. mob Korean depa grow and Asia. ce huma marketing based on the The Confucian loyalt n relations shou l marketpla their Internet an individual mora ld be y of friendship amon mix practices in on as the virtua strengthened ed services on businesses provi efforts for the good l sentiment of ren, leading g overseas Chine offline g online competiti s, offering customer-tailor des a channel to positive of others. These se nction with its more intensifyin label advan conju ium comp in tage based conc prem held anies p for local over foreig epts on the solidarity in regional mark ershi will be ction of n of the family. Confu created a culture ets. For example, otional events features a colle as well as a partn enter Asia, it ran relationships as when Kmart tried its own Hmall 61 cius viewed famil lly, massive prom into local retail a social system to y rtment Store has basis. Additiona ers which could of the community through the abilit of blood families. agement. . Hyundai Depa match its price y to accept even ent stock man rather than s department store lower margins at that they matc all for more effici The CJm s Japan ping’ the hed or ese, in particular, same time with CJ O Shop have been deep local retailers receiv bettered Kmart’s quality. 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ó Managing a holis

An emphasis on 3 key marketing changes–economic, environmental, and technological—helps students to understand • Marketing during economic downturns and recessions • The rise of sustainability and social responsibility • The increased development of computing power, the Internet, and mobile phones.

ChaPter 23

Economic, environmental and technological

23.3.2 Socially Responsible Bus

Companies that iness Models can likely to succeed.38 innovate new solutions and values Indeed, socially it is consisten responsible mark in a socially responsible way t with are eting also strike asia). Some Asian Confucian values (see Mark s a resonant chor the most eting Insight: companies even d in Asia as Confucius and go all out in their Marketing in corporate socia east l responsibility efforts: Tata—The Tata Group not only wants to make the communities” money but to it serves. Tata “improve the quali an honest com has a reputation ty of life pany for being an enlig exemplifies Tata’ . It has lost some deals beca htened employer of s culture. The use it would not and company is base Tata’s founder, pay bribes. Tata where it is the Steel biggest employer d in Jamshedpur, a town by grateful emp named after . Statues of Tata loyees) are testa chairmen (som ments to Tata social services e erected Stee of any Indian city. At an annual cost l’s providing the most compreh garbage remo val, hospital and of $30 million, ensive school subsidies it pays for wate Tata Steel laid r supplies, , and even rogu off 35,000 work e elephant hunt ers in 1999, salaries until the the company ers. When age of 60. With agreed to pay competitor Essa 45,000 employee the work r produces abou s, Tata wants to t half of Tata Stee Tata Steel remains overstaffed ers’ “privatize” its . l’s Rival outp ut with only 1,30 urban services chairman Rata 0 employees. to scale back n Tata notes, its capital outla “we are also problems.” Perh y. However, as proud that we’v aps being loved e never Tata takes social may be more responsibility seriou highly prized than had serious industrial Its social servic sly. being profitable.39 es programs includ paying for water supplies and subsid e Corporate phila hospital bills and izing nthropy as a whol school fees. corporate socia e is on the rise. l responsibility More firms are in the form marketing, and com ing to the belie of cash dona employee volun f that tions, in-kind teerism programs “smart thing to contributions, do.”40 is the not just cause the “right thing ” but also the

815

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Preface What’s New in the Seventh Edition

Welcome to the seventh edition of Marketing Management: An Asian Perspective. With the seventh edition, a great care was taken to truly reflect the modern realities of marketing in Asia brought on by technology and the increasing role of social responsibility; while in selected parts of Asia, culture and heritage nuances suggest adaptation of marketing practices. Throughout the text, three broad forces—growth and downturns, technology, and social responsibility—are identified as critical to the success of marketing programmes. These three topics are evident throughout the text. As has been the case for a number of editions now, the overriding goal of the revision for the seventh edition of Marketing Management: An Asian Perspective is to create as comprehensive, current, and engaging a marketing textbook as possible. Wherever appropriate, new materials have been added, old materials updated, and no longer relevant or necessary material removed. While marketing is changing in many significant ways, yet many core elements remain. We feel that a balanced approach of classic and contemporary approaches and perspectives is the way to go. Marketing Management: An Asian Perspective seventh edition allows instructors to build on what they have prepared for teaching previously while at the same time offering a text that is unsurpassed in breadth, depth, and relevance for students experiencing Marketing Management: An Asian Perspective for the first time. Many of the favourably received chapter features such as topical chapter opening vignettes, in-text boxes highlighting noteworthy companies or issues, and the Marketing Insight and Marketing Memo boxes that provide in-depth conceptual and practical commentary, have been retained. At the end of each chapter, the Summary page consolidates the students’ knowledge and serves as a speedy revision tool. The organizational structure of Marketing Management: An Asian Perspective has largely been preserved although several adjustments have been made to improve student understanding, as described below. Significant changes to the seventh edition include: •

Brand-new opening vignettes for over 80 per cent of the chapters set the stage for the chapter material to follow. By covering topical brands or companies, the vignettes are great classroom discussion starters.

•

Almost half of the in-text boxes are new. These boxes provide vivid illustrations of chapters using actual companies and situations. The boxes cover a variety of products, services, and markets. Marketing Insight boxes include contemporary issues such as “The Value of Whatsapp to Facebook.” They also delve into important marketing topics such as the use of technology in services marketing in “Tapping on Technology for Service Excellence: Henn-na Hotel” and developing effective brand names in “Driving Deeper Brand Connection in China.” Marketing Memo boxes offer practical advice and direction in dealing with various decisions at all the stages of the marketing management process. Topics covered include “Lessons from South Korea’s Mobile Retailers” and “Service Excellence: Five Pointers from SIA.”

•

Several of the in-text box materials are from Think Business, the knowledge portal of the National University of Singapore Business School, which carries a wide range of business articles and videos.

•

Each end-of-chapter section includes two expanded Marketing Lessons for case problem solving. Over 75 per cent of Marketing Lessons are new cases. The rest have been updated. These cases highlight challenges that companies face in Asia as well as innovative, insightful marketing accomplishments by leading organizations that businesses, including those in Asia, can learn from. Each case includes questions that promote classroom discussion and analysis. Almost all the cases are new. They include companies such as MCM, Yum, Uber, Unilever, 7-Eleven, Heinz, and Nintendo.

•

A brand new Chapter 19 on Managing Digital Communications: Online, Social Media, and Mobile gives the deserved attention to the impact of the digital revolution on marketing.

Preface

xxi

What Is Marketing Management All About?

Changes are observed in the marketing discipline like fundamental topics such as segmentation, targeting, and positioning as well as concepts such as brand equity, customer value analysis, database marketing, e-commerce, value networks, hybrid channels, supply chain management, and integrated marketing communications. Asian businesses must acknowledge and respond to the new elements in today’s marketplace. Firms now sell goods and services through a variety of direct and indirect channels. Mass advertising is not nearly as effective as it was, so marketers are exploring new forms of communication, such as experiential, entertainment, and viral marketing. Asian consumers are telling companies what types of product or services they want and when, where, and how they want to buy them. They are increasingly reporting to other consumers what they think of specific companies and products—using email, blogs, and other digital media to do so. Company messages are becoming a smaller fraction of the total “conversation” about products and services. In response, forward-thinking Asian companies are shifting gears from managing product portfolios to managing customer portfolios. They are compiling databases on individual customers to better understand them and to construct individualized offerings and messages. They are doing less product and service standardization and more niching and customization and are replacing monologues with customer dialogues. They are improving their methods of measuring customer profitability and customer lifetime value. They are measuring the return on their marketing investment and its impact on shareholder value. Ethical and social implications of their marketing decisions are also their area of concern. As companies change, so does their marketing organization. Marketing is no longer a company department charged with a limited number of tasks—it is a company-wide undertaking. It drives the company’s vision, mission, and strategic planning. Marketing includes decisions like who the company wants as its customers; which of their needs to satisfy; what products and services to offer; what prices to set; what communications to send and receive; what channels of distribution to use; and what partnerships to develop. Marketing succeeds only when all departments work together to achieve goals: when engineering designs the right products, finance furnishes the required funds, purchasing buys high-quality materials, production makes high-quality products on time, and accounting measures the profitability of different customers, products, and areas. To address all these different shifts, good marketers are practicing holistic marketing. Holistic marketing is the development, design, and implementation of marketing programs, processes, and activities that recognize the breadth and interdependencies of today’s marketing environment. Four key dimensions of holistic marketing are: 1. Internal marketing—ensuring everyone in the organization embraces appropriate marketing principles, especially senior management. 2. Integrated marketing—ensuring that multiple means of creating, delivering, and communicating value are employed and combined in the best way. 3. Relationship marketing—having rich, multifaceted relationships with customers, channel members, and other marketing partners. 4. Performance marketing—understanding returns to the business from marketing activities and programs, as well as addressing broader concerns and their legal, ethical, social, and environmental effects. These four dimensions are woven throughout the book and at times spelled out explicitly. The text specifically addresses the following tasks that constitute modern marketing management:

xxii

Preface

1.

Developing marketing strategies and plans

2.

Capturing marketing insights

3.

Connecting with customers

4.

Building strong brands

5.

Creating value

6.

Delivering value

7.

Communicating value

8.

Conducting marketing responsibly for long-term success

What Makes Marketing Management the Marketing Leader?

As marketing has maintained its respected position among students, educators, and businesspeople, Marketing Management: An Asian Perspective has kept up-to-date and remains contemporary. Students (and instructors) feel that the book is talking directly to them in terms of both content and delivery. Marketing Management: An Asian Perspective owes its marketplace success to its ability to maximize three dimensions that characterize the best marketing texts—depth, breadth, and relevance—as measured by the following criteria: •

Depth. Does the book have solid academic grounding? Does it contain important theoretical concepts, models, and frameworks? Does it provide conceptual guidance to solve practical problems?

•

Breadth. Does the book cover all the right topics? Does it provide the proper amount of emphasis on those topics?

•

Relevance. Does the book engage the reader? Is it interesting to read? Does it have lots of compelling examples?

This seventh edition builds on the fundamental strengths of past editions that collectively distinguish it from all other marketing management texts: •

Managerial Orientation. The book focuses on the major decisions that marketing managers and top management face in their efforts to harmonize the organization’s objectives, capabilities, and resources with marketplace needs and opportunities.

•

Analytical Approach. Marketing Management: An Asian Perspective presents conceptual tools and frameworks for analyzing recurring problems in marketing management. Cases and examples illustrate effective marketing principles, strategies, and practices.

•

Multidisciplinary Perspective. The book draws on the rich findings of various scientific disciplines—economics, behavioral science, management theory, and mathematics—for fundamental concepts and tools directly applicable to marketing challenges.

•

Universal Applications. The book applies strategic thinking to the complete spectrum of marketing: products, services, persons, places, information, ideas and causes; consumer and business markets; profit and nonprofit organizations; domestic and foreign companies; small and large firms; manufacturing and intermediary businesses; and low and hightech industries.

•

Asian Insights. This book provides insights with an Asian flavour, drawing from regional thinkers and business leaders (from Confucius and Sun Tzu to Jong-Yong Yun and Carlos Ghosn, among others), institutions (chaebol, keiretsu, and so on), Asian trends and events (China’s reliance on its domestic market, demographic changes, etc.), and practices that impact Asian marketing (guanxi, mianzi, feng shui, counterfeiting, etc.).

•

Comprehensive and Balanced Coverage. Marketing Management: An Asian Perspective covers all the topics an informed marketing manager needs to understand to execute strategic, tactical, and administrative marketing.

Preface

xxiii

The Teaching and Learning Package

Marketing Management: An Asian Perspective is an entire package of materials available to students and instructors. This edition includes a number of ancillaries designed to make the marketing management course an exciting, dynamic, interactive experience.

INSTRUCTOR’S MANUAL The Instructor’s Manual includes chapter/summary overviews, key teaching objectives, answers to end-of-chapter materials, exercises, projects, and detailed lecture outlines. Also included is the feature, “Professors on the Go!” which was created with the busy professor in mind. It brings key material upfront, where an instructor who is short on time can find key points and assignments that can be incorporated into the lecture, without having to page through all the material provided for each chapter.

TEST ITEM FILE The Test Item File contains more than 3,000 multiple-choice, true-false, short-answer, and essay questions, with page reference and difficulty level provided for each question. Please note that an entire section is dedicated to application questions. These real-life situations take students beyond basic chapter concepts and vocabulary and ask them to apply marketing skills. The Test Item File supports Association to Advance Collegiate Schools of Business (AACSB) International Accreditation. Each chapter of the Test Item File was prepared with the AACSB curricula standards in mind. Where appropriate, the answer line of each question* indicates a category within which the question falls. This AACSB reference helps instructors identify those test questions that support that organization’s learning goals. *Please note that not all the questions will offer an AACSB reference.

POWERPOINT SLIDES Teaching slides are available for easy customization and sharing.

xxiv

Preface

Acknowledgements

T

he seventh edition of Marketing Management: An Asian Perspective bears the imprint of many people. Our colleagues at the Kellogg Graduate School at Northwestern University, Dartmouth College, the National University of Singapore Business School, and the Singapore Management University continue to have an impact on our thinking. We also want to thank our respective academic leaders, Deans Dipak Jain at Kellogg, Paul Danos at Tuck, and Bernard Yeung at National University of Singapore Business School for their continuous support of our research and writing efforts. The talented staff at Pearson Education—particularly Steven Jackson and Ishita Sinha— deserve praise for their role in shaping this book. We thank Elison A.C. Lim and MingMin Yeh, Institute of Asian Consumer Insight, Nanyang Business School, for contributing the case “Food Scandals in Taiwan: The Case of Tin Hsin International Group”; Dae Ryun Chang, Yonsei School of Business, and Kevin Sproule, Singapore Management University, for contributing the case “Gold Misses”; Desai Narasimhalu and Sarita Mathur, Singapore Management University, for contributing the case “Tagit”; Philip Zerrillo, Havovi Joshi, and S. N. Venkat, Singapore Management University for contributing the cases “Tata Salt (A)” and “Tata Salt (B)”; Srinivas Reddy and Havovi Joshi, Singapore Management University for contributing the case “Shangri-La Bosphorus Hotel”; Philip C. Zerillo and Sarita Mathur, Singapore Management University, and Pannapachr Itthiopassagul, Thammasat University for contributing the cases “Siam Park City” and “Unilever”; Srinivas Reddy and Christopher Dula, Singapore Management University for contributing the case “Gillette (A)”; Srinivas Reddy, Christopher Dula, and Adina Wong for contributing the case “Gillette (B)”; Doreen Kum, National University of Singapore Business School while she was at Singapore Management University for contributing the case “Tiger Balm”; Steven Wyatt and Christopher Dula, Singapore Management University for contributing the case “Shanghai Tang”. Our overriding debt continues to be to our families, who provided the time, support, and inspiration to prepare this edition. We are grateful to the following individuals and companies for providing us permission to use some of the materials for this book: Banyan Tree Hotels and Resorts BMW of North America Center for Insurance Studies Clear Channel Singapore Eu Yan Sang International Ltd. Essilor Singapore Frito-Lay, Inc. Groupe Danone Haier America Haw Par Healthcare Limited Hotel Mume Hyundai Motor Company LG Electronics Chile Ltd Lion Corporation (S) Pte Ltd. Mindbody Inc. Mondo USA Inc. Sigg Switzerland AG NTUC Fairprice Cooperative Limited Nu Skin Innovation Center Singapore Cancer Society Smooth E Company Limited The Coca-Cola Company The Gatorade Company Tourism Bureau of Ministry of Transportation and Communications, R.O.C

Toyota Motor Sales, U.S.A Wipro Unza Singapore Pte Ltd Winter Wolves Games Philip Kotler Kevin Lane Keller Swee Hoon Ang Chin Tiong Tan Siew Meng Leong

xxvi Acknowledgements

PART 1

Understanding Marketing Management

1

C H A P T E R

U

Defining Marketing for the New Realities Formally or informally, people and organizations engage in a vast number of activities called marketing. In the face of digital revolution and other major changes in the business environment, good marketing is both increasingly vital and radically new.

nder the leadership of ex-P&G marketing executive Paul Polman and marketing whiz Keith Weed, Unilever is steering in an aggressive new direction. Its marketing model “Crafting Brands for Life” establishes social, economic, and product missions for each brand, including Dove, Ben & Jerry’s, Lifebuoy, and Knorr. Polman states, “I have a vision of all of our brands, including a force for good, with each having a billion fans or more to help drive change.” One part of the mission, for instance, is sustainability—specifically, to halve its ecological footprint while doubling revenues. To improve advertising and marketing communications, Unilever aims to strike a balance between “magic” and “logic,” doubling marketing training expenditures and

emphasizing ad research. To better understand the digital world, Weed took Unilever’s top marketing executives to Silicon Valley to visit Google and Facebook, and he took a similar group to visit Hollywood executives at Disney and Universal. Unilever has set its sights on developing and emerging (D&E) markets, hoping to grow by 15 percent to 20 percent annually in China and to draw 70 percent to 75 percent of its business from D&E markets by 2020. The company has adopted “reverse innovation” by applying branding and packaging innovations from developing markets to recession-hit developed markets. In Indonesia and the Philippines, it sells its detergents and shampoos in small satchets.1

In this chapter, we will address the following questions: 1. Why is marketing important? 2. What is the scope of marketing? 3. What are some fundamental marketing concepts? 4. How has marketing management changed? 5. What are the tasks necessary for successful marketing management?

G

ood marketing is no accident, but a result of careful planning and execution. Marketing practices are continually being refined and reformed in virtually all industries to increase the chances of success. But marketing excellence is rare and difficult to achieve. Marketing is both an “art” and a “science”—there is constant tension between the formulated side of marketing and the creative side. It is easier to learn the formulated side, which will occupy most of our attention in this book; but we will also describe how creativity and passion operate in many companies. This book will help to improve your understanding of marketing and your ability to make the right marketing decisions. In this chapter, we lay the foundation for our study by reviewing important marketing concepts, tools, frameworks, and issues.

1.1 The Importance of Marketing The first decade of the 21st century challenged firms to prosper financially and even survive in the face of an unforgiving economic environment. The second decade is also financially challenging. Marketing is playing a key role in addressing these challenges. Without demand for products and services, business functions such as finance, operations, and accounting will not exist. Thus, financial success often depends on marketing ability. Marketing’s broader importance extends to society as a whole. Marketing has helped introduce and win acceptance for new products that have eased or enriched people’s lives. It can inspire enhancements in existing products as marketers innovate to improve their position in the marketplace. Successful marketing builds demand for products and services, which, in turn, creates jobs. By contributing to the bottom line, successful marketing also allows firms to more fully engage in socially responsible activities.2

Part 1 ó Understanding Marketing Management

4

Making the right decisions is not always easy. Marketing managers must decide what features to design into a new product, what prices to offer customers, where to sell products, and how much to spend on advertising, sales, the Internet, or mobile marketing. They must make those decisions in an Internet-fueled environment where consumers, competition, technology, and economic forces change rapidly and the consequences of the marketer’s words and actions can quickly multiply.

1.2 The Scope of Marketing To prepare to become a marketer, you need to understand what marketing is, how it works, and what is marketed.

1.2.1 What Is Marketing? Marketing is about identifying and meeting human and social needs. One of the shortest definitions of marketing is “meeting needs profitably.” When eBay and Taobao recognized that people were unable to locate some of the items they desired most and created an online auction clearing-house, or when IKEA noticed that people wanted good furniture at a substantially lower price and created knock-down furniture, they demonstrated their marketing savvy and turned a private or social need into a profitable business opportunity. The American Marketing Association offers the following formal definition: Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.3 Coping with exchange processes calls for a considerable amount of work and skill.

Marketing management takes place when at least one party to a potential exchange thinks about the means of achieving desired responses from other parties. We see marketing management as the art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value.

There will always, one can assume, be need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself. Ideally, marketing should result in a customer who is ready to buy. All that should be needed then is to make the product or service available.4 When Apple designed its iPhone and when Toyota introduced its Lexus automobile, they were swamped with orders because they had designed the “right” product based on careful marketing homework.

Apple introduced its watch for a more complete ecosystem consisting of its iPod, iPhone, and iPad that its competitors find difficult to compete with.

1.2.2 What Is Marketed? Marketers are involved in marketing 10 types of entities: goods, services, events, experiences, people, places, properties, organizations, information, and ideas.

Goods

5

Physical goods constitute the bulk of most countries’ production and marketing efforts. Each year, companies worldwide market billions of fresh, canned, bagged, and frozen food products and millions of automobiles, refrigerators, television sets, machines, and various other mainstays of a modern and global economy.

Services As economies advance, a growing proportion of their activities is focused on the production of services. Developed economies usually have a 70–30 services-to-goods mix. Services include the work of airlines, hotels, automobile rental firms, hairstylists and beauticians, maintenance and repair people, as well as professionals working within or for companies, such as accountants, bankers, lawyers, engineers, doctors, software programmers, and management consultants. Many market offerings consist of a variable mix of goods and services. At a fast-food restaurant, for example, the customer consumes both a product and a service.

Maidreamin Café—Japan’s Maidreamin Café has become very popular, especially with those who seek companionship. The service attendants are young women who serve customers with deference. They can personalize pancakes for customers, for instance, drawing pictures of a cat, taking pictures with you, or even putting on a dance performance—all for a fee, of course. Warm and welcoming, they chat with guests and invite them into their dream-like world for a special dining experience.

ChaPter 1 ó Defining Marketing for the New realities

We can distinguish between a social and a managerial definition of marketing. A social definition shows the role marketing plays in society. A social definition that serves our purpose is: Marketing is a societal process by which individuals and groups obtain what they need and want through creating, offering, and freely exchanging products and services of value with others. Managers sometimes think of marketing as “the art of selling products,” but people are surprised when they hear that the most important part of marketing is not selling! Selling is only the tip of the marketing iceberg. Peter Drucker, a leading management theorist, puts it this way:

At Maidreamin Café, Japan, service comes with personalized decoration of pancakes for customers.

Maidreamin Café is a popular Japanese theme café that provides an opportunity for guests to relax and enjoy innocent fun.

Events Marketers promote time-based events, such as major trade shows, artistic performances, and company anniversaries. Global sporting events, such as the Olympics or World Cup, are promoted aggressively to both companies and fans.

Part 1 ó Understanding Marketing Management

6

Experiences

Singapore Night Safari, the world’s first wildlife night park, offers unique experiences—walking trails and tram rides for its visitors.

By orchestrating several services and goods, a firm can create, stage, and market experiences. Tokyo Disneyland and DisneySea represent experiential marketing: customers visit a fairy kingdom or a pirate ship. There is also a market for customized experiences, such as spending a week on eco-tourism in remote natural habitats in Asia, or learning about wildlife at the Singapore Night Safari.

People Celebrity marketing is a major business. Today, every major film star has an agent, a personal manager, and ties to a public relations agency. Artists, musicians, and even CEOs, physicians, high-profile lawyers and financiers, and other professionals are also getting help from celebrity marketers.5 Some people have done a masterful job of marketing themselves—think of Korean singing sensation Girls’ Generation, and film stars Jackie Chan and Zhang Ziyi.

Places Cities, states, regions, and whole nations compete actively to attract tourists, factories, company headquarters, and new residents.6 Place marketers include national tourism agencies, economic development specialists, real estate agents, commercial banks, local business associations, and advertising and public relations agencies. For example, Asian tourism promotion boards market their respective countries to woo regional and international visitors. Some campaign taglines used include: “Malaysia—Truly Asia,” “Amazing Thailand,” “Hong Kong: Live It. Love It!,” “Your Singapore,” Macau’s “A Heritage of Two Cultures,” and Taiwan’s “The Heart of Asia.”

Properties are intangible rights of ownership of either real property (real estate) or financial property (stocks and bonds). Properties are bought and sold, and this requires marketing. Real estate agents work for property owners or sellers, or buy residential or commercial real estate. Investment companies and banks are involved in marketing securities to both institutional and individual investors.

Organizations Organizations actively work to build a strong, favorable, and unique image in the minds of their target public. Companies spend money on corporate identity ads. This is certainly the case with Philips “Sense and Simplicity” campaign. Royal Philips—Philips researchers asked 1,650 consumers and 180 customers in dozens of in-depth and quantitative interviews and focus groups what was most important to them in using technology. Respondents from the United Kingdom, the United States, France, Germany, the Netherlands, Hong Kong, China, and Brazil agreed on one thing: they wanted the benefits of technology without the hassle. With its “Sense and Simplicity” advertising campaign and focus, Philips believes “our brand now reflects our belief that simplicity can be a goal of technology. It just makes sense.” The campaign consists of print, online, and television advertising directed by five experts from the worlds of health care, lifestyle, and technology whose role is to provide “additional outside perspectives on the journey to simplicity.”7

Information The production, packaging, and distribution of information are major industries.8 The former CEO of Siemens Medical Solutions, Tom McCausland, says, “[our product] is not necessarily an X-ray or an MRI, but information. Our business is really health-care information technology, and our end product is really an electronic patient record: information on lab tests, pathology, and drugs as well as voice dictation.”9

Ideas Every market offering includes a basic idea. Charles Revson of Revlon observed: “In the factory, we make cosmetics; in the store we sell hope.” Products and services are platforms for delivering some idea or benefit. Social marketers are busy promoting such ideas as “Say No to Drugs,”

ChaPter 1 ó Defining Marketing for the New realities

Properties

7

“Exercise Daily,” and “Eat Healthy Food.” In Asia, governments often engage in social marketing. In Thailand, there is a campaign against driving when sleepy. The Singapore government is noted for its social marketing, including encouraging graduate women to get married and have more children.

1.2.3 Who Markets? Marketers and Prospects A marketer is someone who seeks a response (attention, a purchase, a vote, a donation) from another party, called the prospect. If two parties are seeking to sell something to each other, we call them both marketers. Marketers are skilled at stimulating demand for a company’s products, but this is a limited view of the tasks they perform. Just as production and logistics professionals are responsible for supply management, marketers are responsible for demand management. Marketing managers seek to influence the level, timing, and composition of demand to meet the organization’s objectives.

1.

Negative demand—Consumers dislike the product and may even pay a price to avoid it.

2.

Non-existent demand—Consumers may be unaware or uninterested in the product.

3.

Latent demand—Consumers may share a strong need that cannot be satisfied by an existing product.

4.

Declining demand—Consumers begin to buy the product less frequently or not at all.

5.

Irregular demand—Consumer purchases vary on a seasonal, monthly, weekly, daily, or even hourly basis.

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6.

Full demand—Consumers are adequately buying all products put into the marketplace.

7.

Overfull demand—More consumers would like to buy the product than can be satisfied.

Part 1 ó Understanding Marketing Management

Eight demand states are possible:

8.

Unwholesome demand—Consumers may be attracted to products that have undesirable social consequences.

In each case, marketers must identify the underlying cause(s) of the demand state and then determine a plan of action to shift the demand to a more desired state.

Markets Traditionally, a “market” was a physical place where buyers and sellers gathered to buy and sell goods. Economists describe a market as a collection of buyers and sellers who transact over a particular product or product class (e.g., the housing market or grain market). Five basic markets and their connecting flows are shown in Figure 1.1. Manufacturers go to resource markets (raw material markets, labor markets, money markets), buy resources and turn them into goods and services, and then sell finished products to intermediaries, who sell them to consumers. Consumers sell their labor and receive money with which they pay for goods and services. The government collects tax revenues to buy goods from resource, manufacturer, and intermediary markets, and uses these goods and services to provide public services. Each nation’s economy and the global economy consist of complex interacting sets of markets linked through exchange processes. Marketers often use the term market to cover various groupings of customers. They view the sellers as constituting the industry and the buyers as constituting the market. They talk about need markets (the slimming-seeking market), product markets (the shoe market), demographic markets (the youth market), and geographic markets (the China market); or they extend the concept to cover other markets, such as voter markets, labor markets, and donor markets.

Resources

Resources Resource markets

Money

Services, money

Services, money Taxes

Government markets Taxes, goods

Consumer markets Services

Services, money

Taxes, goods Money

Money Goods and services

Intermediary markets

Goods and services

Figure 1.1 Structure of Flows in a Modern Exchange Economy

Figure 1.2 shows the relationship between the industry and the market. Sellers and buyers are connected by four flows. The sellers send goods and services and communications (ads, direct mail) to the market; in return they receive money and information (attitudes, sales data). The inner loop shows an exchange of money for goods and services; the outer loop shows an exchange of information. Communications Goods/services Market (a collection of buyers)

Industry (a collection of sellers) Money Information Figure 1.2 A Simple Marketing System

Key Customer Markets Consider the following key customer markets: consumer, business, global, and non-profit and governmental.

Consumer Markets Companies selling mass consumer goods and services, such as soft drinks, cosmetics, air travel, and athletic shoes and equipment, spend a great deal of time trying to establish a superior brand image. Much of a brand’s strength depends on developing a superior product and packaging, ensuring its availability, and backing it with engaging communications and reliable service.

Business Markets Companies selling business goods and services often face well-trained and well-informed professional buyers who are skilled in evaluating competitive offerings. Business buyers buy goods to make or resell a product to others at a profit. Business marketers must demonstrate how their products will help these buyers achieve higher revenue or lower costs. Advertising can play a role, but the sales force, the price, and the company’s reputation may play a greater one.

ChaPter 1 ó Defining Marketing for the New realities

Manufacturer markets

Taxes, goods

Money

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Global Markets Companies in the global marketplace must decide which countries to enter; how to enter each country (as an exporter, licensor, joint venture partner, contract manufacturer, or solo manufacturer); how to adapt their product and service features to each country; how to price their products in different countries; and how to design their communications for different cultures. These decisions must be made in the face of different requirements for buying, negotiating, owning, and disposing of property; different cultures, languages, and legal and political systems; and a currency that might fluctuate in value. International business expands as companies export, license, contract manufacture, and enter joint venture partnerships. Marketers have to be more aware of cultural and legislative differences and adapt their strategies accordingly.

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McDonald’s—With the U.S. dining landscape full of fast-food outlets, McDonald’s is looking to China for revenue and profits. In 2016, China is McDonald’s 3rd largest market behind the United States and Japan. China’s informal out-of-home eating industry is expanding and McDonald’s is pouncing on this opportunity with its plan to open another 1,300 outlets to add to the current 2,200 outlets. How will it achieve this? It is relying on a combination of the traditional and the new to capture a large slice of the market. It is seeking investment partners to help build its franchise business. It has a $2 million innovation center in Hong Kong dedicated to coming up with suitable products. Alongside the Big Mac and fries, Chinese diners can choose from green pea pies, rice burgers, and a mint-flavored soda called Blue Haven. Its Chicken McNuggets come with chili garlic sauce. It also offers a chicken-and-mushroom pie in the shape of a pinwheel because according to Chinese folklore, the pinwheel is supposed to bestow good luck. When the company opened its first drive-through outlet in Guangzhou, it realized that this concept was foreign to the Chinese. Customers would drive up, collect their food, and then park their automobiles before entering the restaurant to eat their meal. Yet, with the anticipated boom in the Chinese auto market, McDonald’s is opening more automobile-friendly outlets. It has an agreement with Sinopec, the state-owned oil company, to give it first refusal on locating its outlets at any of Sinopec’s 30,000 fuel stations across China.10

Non-profit and Governmental Markets Companies selling to non-profit organizations with limited purchasing power, such as churches, universities, charitable organizations, or government agencies, need to price carefully. Lower prices affect the features and the quality that the seller can build into the offering. Much government purchasing calls for bids, with the lowest bid being favored in the absence of extenuating factors.

Marketplaces, Marketspaces, and Metamarkets The marketplace is physical, as when you shop in a store; the marketspace is digital, as when you shop on the Internet.11 Mohan Sawhney proposed the concept of a metamarket to describe a cluster of complementary products and services that are closely related in the minds of consumers, but are spread across a diverse set of industries. The automobile metamarket consists of automobile manufacturers, new and used car dealers, financing companies, insurance companies, mechanics, spare parts dealers, service shops, auto magazines, classified auto ads in newspapers, and auto sites on the Internet. In purchasing a car, a buyer will get involved in many parts of this metamarket, and this has created an opportunity for metamediaries to assist buyers to move seamlessly through these groups, although they are disconnected in physical space. Metamediaries can also serve other metamarkets, such as the home ownership market, the parenting and baby care market, and the wedding market.12

1.3 Core Marketing Concepts To understand the marketing function, we need to understand the following core set of concepts.

1.3.1 Needs, Wants, and Demands Needs are the basic human requirements. People need food, air, water, clothing, and shelter to survive. People also have strong needs for recreation, education, and entertainment. These needs become wants when they are directed to specific objects that might satisfy the need. A Japanese

needs food but may want tempura, soba, and ocha. A Thai needs food but may want a coconut drink and rice with green curry, followed by glutinous rice with mango for dessert. Wants are shaped by one’s society. Demands are wants for specific products backed by an ability to pay. Many people want a Mercedes; only a few are willing and able to buy one. Companies must measure not only how many people want their product, but also how many would actually be willing and able to buy it.

These distinctions shed light on the frequent criticism that “marketers create needs” or “marketers get people to buy things they do not want.” Marketers do not create needs: needs pre-exist marketers. Marketers, along with other societal factors, influence wants. Marketers might promote the idea that a Mercedes would satisfy a person’s need for social status. They do not, however, create the need for social status. Some customers have needs of which they are not fully conscious, or that they cannot articulate: they might use words that require some interpretation. What does it mean when the customer asks for a “powerful” fan or a “peaceful” hotel? The marketer must probe further. We can distinguish among five types of needs: 1.

Stated needs (the customer wants an inexpensive car)

2.

Real needs (the customer wants a car whose operating cost, not its initial price, is low)

3.

Unstated needs (the customer expects good service from the dealer)

4.

Delight needs (the customer would like the dealer to include an onboard navigation system)

5.

Secret needs (the customer wants to be seen by friends as a savvy consumer)

1.3.2 Target Markets, Positioning, and Segmentation A marketer can rarely satisfy everyone in a market. Not everyone likes the same dim sum, hotel room, restaurant, automobile, college, or movie. Thus, marketers start by dividing the market into segments. They identify and profile distinct groups of buyers who might prefer or require varying product and services mixes by examining demographic, psychographic, and behavioral differences among buyers. The marketer then decides which segments present the greatest opportunity—which are its target markets. For each chosen target market, the firm develops a market offering. The offering is positioned in the minds of the target buyers as delivering some central benefit(s). For example, Volvo develops its cars for buyers to whom automobile safety is a major concern. Volvo, therefore, positions its car as the safest a customer can buy.

1.3.3 Offerings and Brands Companies address needs by putting forth a value proposition—a set of benefits they offer to customers to satisfy their needs. The intangible value proposition is made physical by an offering, which can be a combination of products, services, information, and experiences. A brand is an offering from a known source. A brand name such as McDonald’s carries many associations in the minds of people: hamburgers, fun, children, fast food, convenience, and golden arches. These associations make up the brand image. All companies strive to build brand strength—that is, a strong, favorable, and unique brand image.

Best Buy was considered too expensive by consumers in China, where local stores offer much cheaper products and have higher brand recognition.

ChaPter 1 ó Defining Marketing for the New realities

Best Buy—The world’s largest consumer electronics retailer, Best Buy, entered China in 2006 when it took control of Jiangsu Five Star Appliance Company, then China’s fourthlargest electronics retailer. However, in 2011, Best Buy closed all of its nine Best Buy branded stores in China to focus on expanding the more profitable domestic chain it had acquired. Why? While Chinese consumers appreciated Best Buy’s reliability and the quality of its goods, they found the prices too high. Further, it was challenging for Best Buy to gain brand recognition against Five Star, which has been around for a much longer time. Thus, even though there might have been a need for quality products, wants were low because of poor brand recognition, and demand suffered because of the inability and in some cases, unwillingness, to pay a high price.13

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1.3.4 Value and Satisfaction The offering will be successful if it delivers value and satisfaction to the target buyer. The buyer chooses between different offerings on the basis of which is perceived to deliver the most value. Value reflects the perceived tangible and intangible benefits and costs to customers. Value can be seen as primarily a combination of quality, service, and price (QSP), called the “customer value triad.” Value increases with quality and service, and decreases with price, although other factors can play an important role. Marketing can be seen as the identification, creation, communication, delivery, and monitoring of customer value. Satisfaction reflects a person’s comparative judgments resulting from a product’s perceived performance (or outcome) in relation to his or her expectations. If the performance falls short of expectations, the customer is dissatisfied and disappointed. If the performance matches the expectations, the customer is satisfied. If it exceeds them, the customer is highly satisfied or delighted.

1.3.5 Marketing Channels To reach a target market, the marketer uses three kinds of marketing channels. Communication channels deliver and receive messages from target buyers and include newspapers, magazines, radio, television, mail, telephone, billboards, posters, fliers, Twitter, and the Internet. Beyond these, communications are conveyed by facial expressions and clothing, the look of retail stores, and many other media. Marketers are increasingly adding dialogue channels (Facebook, Instagram, and email) to counterbalance the more typical monologue channels (such as ads). The marketer uses distribution channels to display, sell, or deliver the physical product(s) or service(s) to the buyer or user. They include distributors, wholesalers, retailers, and agents.

Part 1 ó Understanding Marketing Management

12 Coca-Cola capitalized on Japanese love for coffee by offering Georgia canned coffee through vending machines, a distribution strategy that is consistent with the Japanese lifestyle.

Coca-Cola—Coca-Cola in Japan popularized the idea of canning coffee and making it available through vending machines. While Americans can enjoy a hot cup of coffee in most places, Japanese traditionally drink ocha or green tea. However, Coca-Cola found that the Japanese enjoy coffee but just cannot get it readily. Hence, in a country where vending machines are a common form of retailing, Coca-Cola’s Georgia-brand canned coffee can be bought from many of the thousands of vending machines to suit Japanese lifestyle needs.

The marketer also uses service channels to carry out transactions with potential buyers. Service channels include warehouses, transportation companies, banks, and insurance companies that facilitate transactions. Marketers clearly face a design problem in choosing the best mix of communication, distribution, and service channels for their offerings.

1.3.6 Supply Chain The supply chain is a longer channel stretching from raw materials to components to final products that are carried to final buyers. The supply chain for women’s purses starts with hides, and moves through tanning operations, cutting operations, and manufacturing, with the marketing channels bringing the products to customers. The supply chain represents a value delivery system. Each company captures only a certain percentage of the total value generated by the supply chain. When a company acquires competitors or moves upstream or downstream, its aim is to capture a higher percentage of supply chain value.

1.3.7 Competition Competition includes all the actual and potential rival offerings and substitutes that a buyer might consider.

1.3.8 Marketing Environment Competition represents only one force in the environment in which the marketer operates. The marketing environment consists of the task environment and the broad environment. The task environment includes the immediate actors involved in producing, distributing, and promoting the offering. The main actors are the company, suppliers, distributors, dealers, and the target customers. Included in the supplier group are material suppliers and service suppliers, such as marketing research agencies, advertising agencies, banking and insurance companies, transportation companies, and telecommunications companies. Included with distributors and dealers are agents, brokers, manufacturer representatives, and others who facilitate finding and selling to customers. The broad environment consists of six components: demographic environment, economic environment, physical environment, technological environment, political-legal environment, and social-cultural environment. These environments contain forces that can have a major impact on the actors in the task environment. Market actors must pay close attention to the trends and developments in these environments and make timely adjustments to their marketing strategies.

1.4 The New Marketing Realities We can say with some confidence that “the marketplace is not what it used to be.” Marketers must attend and respond to a number of significant developments.

1.4.1 Major Societal Forces Today the marketplace is radically different as a result of major, sometimes interlinking societal forces that have created new behaviors, new opportunities, and new challenges: Network information—The digital revolution has created an Information Age that promises to lead to more accurate levels of production, more targeted communications, and more relevant pricing. Globalization—Technological advances in transportation, shipping, and communications have made it easier for companies to market in other countries and easier for consumers to buy products and services from marketers in other countries. International travel continues to grow as more people work and play in other countries. Deregulation—Many countries have deregulated industries to create greater competition and growth opportunities. Companies in the telecommunications, domestic air travel, and electrical utilities industries may face foreign competition and may enter other local markets. Privatization—Many countries, such as China, have converted state-owned enterprises to private ownership and management to increase their efficiency. Heightened competition—Brand manufacturers are facing intense competition from domestic and foreign brands, which is resulting in rising promotion costs and shrinking

Apple’s iPad changed the e-book reading landscape by affording readers an alternative to Amazon’s Kindle and Sony’s Reader.

ChaPter 1 ó Defining Marketing for the New realities

Apple—When Apple introduced the iPad, it took a huge bite off the sales of dedicated e-book readers such as Amazon’s Kindle and Sony’s Reader. Apple sold over 450,000 iPads in less than a week when it was first launched. When the iPad2 was launched in 2011, sales were estimated in the range of 400,000 to 600,000 units during the first three days on the market. A survey found that most of those who bought the iPad2 did not own the previous version. The introduction of the iPad thus posed a significant competition to the Kindle, forcing Amazon to improve on its tablet device. Amazon responded by introducing a more friendly version. Apple, in turn, introduced the iPad Mini.14

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profit margins. They are further buffeted by powerful retailers who command limited shelf space and are putting out their own store brands in competition with national brands. Many strong brands are extending into related product categories, creating megabrands with much presence and reputation. Industry convergence—Industry boundaries are blurring at an incredible rate as companies are recognizing that new opportunities lie at the intersection of two or more industries. The computing and consumer electronics industries are converging, for example, Apple and Samsung release a stream of devices from MP3 players to phones to notebooks and watches for a complete entertainment and functional integrated system. Retail transformation—Small retailers are succumbing to the growing power of giant retailers and “category killers.” Store-based retailers are facing growing competition from e-commerce on the Internet. In response, entrepreneurial retailers are building entertainment into stores with coffee bars, lectures, demonstrations, and performances. They are marketing an “experience” rather than a product assortment. Disintermediation—The amazing success of early online dot-coms such as Amazon, Taobao, E*Trade, and others who created disintermediation in the delivery of products and services struck terror in the hearts of many established manufacturers and retailers. In response to disintermediation, many traditional companies engaged in reintermediation and became “brick-and-click,” adding online services to their existing offerings. Many brick-and-click competitors became stronger contenders than the pureclick firms, since they had a larger pool of resources to work with and well-established brand names. Consumer buying power—Buyers today are only a click away from comparing competitor prices and product attributes on the Internet. They can even name the price they want to pay for a hotel room, airline ticket, or mortgage, and see if there are any willing suppliers. Further, buyers can join with others to aggregate their purchases to achieve deeper volume discounts—hence the popularity of coupon sites such as Groupon. Business buyers can run a reverse auction where sellers compete to capture the buyer’s business.

Part 1 ó Understanding Marketing Management

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Consumer information—Consumers can get a good breadth and depth of information on practically anything. They can access information online. Personal connections and user-generated content thrive on social media such as Facebook, Flickr (photos), Wikipedia (encyclopedia articles), and YouTube (videos).15 Social networking sites—such as TripAdvisor for ardent travelers—bring together consumers with a common interest. Consumer participation—Particularly through the Internet, consumers have found an amplified voice to influence peer and public opinion. In recognition, companies are inviting them to participate in designing and even marketing offerings to heighten their sense of connection and ownership. Coupon sites such as Groupon allow consumers to aggregate their purchases for deeper volume discounts, hence, increasing their buying power.

Consumer resistance—Many customers feel there are fewer real product differences. So they show less brand loyalty and become more price- and quality-sensitive in their search for value, and less tolerant about undesired marketing.

Marketers can involve consumers through crowdsourcing, which is the act of outsourcing ideas through an open call to a community. Consumers can give ideas on product improvement or vote on which product design they like best. Crowdder, a crowdsourcing site in the Philippines, is a Web-based consumer insight service that combines real-time insighting and social gaming into a single system. The portal allows a company to input questions, upload media, and select a preferred set of consumers classified by gender and location. Marketers therefore have access to consumers’ insights.

1.4.2 New Company Capabilities Societal forces have also combined to generate a new set of capabilities for today’s companies: 1.

1.4.3 Marketing in Practice Given the new marketing realities, organizations are challenging their marketers to find the best balance of old and new and to provide demonstrable evidence of success. Marketing Memo: Reinventing Marketing at Coca-Cola describes some of the many different ways that the organization has changed its marketing.

ChaPter 1 ó Defining Marketing for the New realities

Marketers can use the Internet as a powerful information and sales channel. The Internet augments marketers’ geographical reach to inform customers and promote their products worldwide. By establishing one or more Web sites, marketers can list their companies’ products and services, histories, business philosophies, job opportunities, and other information of interest to visitors. 2. Researchers can collect fuller and richer information about markets, customers, prospects, and competitors. They can also conduct fresh marketing research by using the Internet to arrange for focus groups, send out questionnaires, and gather primary data in several other ways. 3. Marketers can tap into social media to amplify their brand message. They can feed information and updates to consumers via blogs and other postings, support communities, and create their own stops on the Internet superhighway. Over a two-year period, Dell took in more than $2 million in U.S. revenue from coupons provided through Twitter and another $1 million from people who started at Twitter and bought a new computer on Dell’s Web site. The @DellOutlet Twitter account generated millions of followers. 4. Marketers can facilitate and speed external communication among customers. They can also create online and offline “buzz” through brand advocates and user communities. 5. Marketers can send ads, coupons, samples, and information to customers who have requested them or have given the company permission to send them. Micro-target marketing and two-way communication are easier thanks to the proliferation of special-interest magazines, TV channels, and Internet newsgroups. Extranets linking suppliers and distributors let firms send and receive information, place orders, and make payments more efficiently. A company can also interact with each customer individually to personalize messages, services, and the relationship. 6. Marketers can reach consumers on the move with mobile marketing. Using GPS technology, for instance, marketers can pinpoint consumers’ exact locations and send them messages at the mall with coupons and a relevant perk (buy this book today and get a free coffee at the bookstore’s coffee shop). Location-based advertising is attractive because it reaches consumers close to the point of sale. Firms can also advertise on video iPods and reach consumers on their mobile phones through mobile marketing.16 7. Companies can produce individually differentiated goods. Thanks to advances in factory customization, computers, the Internet, and database marketing software, customers can, for a price, buy M&M candies with their names on them. BMW’s technology allows buyers to design their own models from among 350 variations, with 500 options, 90 exterior colors, and 170 trims. The company claims that 80 percent of the cars bought by individuals in Europe and up to 30 percent bought in the United States are built to order. 8. Companies can improve purchasing, recruiting, training, and internal and external communications. Aerospace and defense contractor Boeing joins large, high-profile companies Walt Disney, General Motors, and McDonald’s in embracing corporate blogging to communicate with the public, customers, and employees. External blogs allow dialogues with a marketing vice president and a glimpse into the flight testing of new aircraft models; internal blogs allow conversations on hot topics and anonymous feedback.17 9. Companies can facilitate and speed up internal communication among their employees by using the Internet as a private intranet. Employees can query one another, seek advice, and download or upload needed information from and to the company’s main computer. 10. Companies can improve their cost efficiency by skillful use of the Internet. Corporate buyers can achieve substantial savings by using the Internet to compare sellers’ prices and purchase materials at auction, or by posting their own terms in reverse auctions. Companies can improve logistics and operations to reap substantial cost savings while improving accuracy and service quality.

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MARKETING MEMO

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ReInventIng MaRketIng at CoCa-Cola

Coca-Cola is fundamentally changing the way it does marketing, primarily by adding a strong digital component to its traditional marketing tools. The new model is based on moving consumers from impressions to expressions to conversations to transactions. Coca-Cola defines consumer expressions as any level of engagement with brand content: a comment, “like,” or share on Facebook; a tweet; or an uploaded photo or video. Coca-Cola strives to put strongly sharable pieces of communications online that will not only generate impressions but also lead to expressions from consumers who join or extend the communication storyline and ultimately buy the product. These communications focus on the core themes of “happiness” and “optimism” that define the brand’s positioning. One successful application is the video of the “Hug Me” vending machine in Singapore, which dispensed cans of Coke when people put their arms around it and hugged it. Within in a week, the video generated 112 million impressions. Coca-Cola actively experiments, allocating 70 percent of its budget to activities it knows will work, 20 percent to improving those activities, and 10 percent to experimentation. The company accepts that experiments can fail but believes in taking chances to learn and develop better solutions. Even in its traditional advertising and promotion, it looks for innovation. For instance, Coca-Cola places much importance on cultural leadership and causes that benefit others. The mission of its Arctic Home project is to protect the habitat of polar bears, which have starred in animated form in its holiday ads for years. Committing $3 million to the World Wildlife Fund, Coca-Cola drew attention to the project by turning its traditional red cans white.

Coca-Cola reinforces its message of happiness with special promotional “Hug Me” vending machines which dispense free products.

Sources: Joe Tripodi, “Coca-Cola Marketing Shifts from Impressions to Expressions,” Harvard Business Review, HBR Blog Network, 27 April 2011; Tim Nudd, “Coca-Cola Joins the Revolution in World Where the Mob Rules,” Adweek, 19 June 2012; Surajeet Das Gupta and Vivea Susan Pinto, “Q&A: Joseph Tripodi,” Business Standard, 3 November 2011; “Coca-Cola Sets Facebook Record,” www.warc.com, 6 September 2012.

Marketing Balance Companies must always move forward, innovating in products and services, staying in touch with customer needs, and seeking new advantages rather than relying on past strengths. India’s Hindustan Unilever asks all staff members—not just marketers—to obtain a “consumer license” to work on its brands, which requires spending 50 hours of face time with shoppers. One senior executive noted, “Our consumers are moving faster than marketers do, whether in terms of rural or urban changes or the way they consume media and entertainment.”18 Moving forward especially means incorporating Internet and digital efforts into marketing plans. Marketers must balance increased spending on search advertising, social media, e-mails, and text messages with appropriate spending on traditional marketing communications. But they must do so in tough economic times, when accountability has become a top priority and returns on investment are expected from every marketing activity. The ideal is retaining winning practices from the past while adding fresh approaches that reflect the new marketing realities.19

Marketing Accountability Marketers are increasingly asked to justify their investments in financial and profitability terms, as well as in terms of building the brand and growing the customer base. Organizations recognize that much of their market value comes from intangible assets, particularly brands, the customer base, employees, distributor and supplier relations, and intellectual capital. They are thus applying more metrics—brand equity, customer lifetime value, return on marketing investment (ROMI)—to understand and measure their marketing and business performance and a broader variety of financial measures to assess the direct and indirect value their marketing efforts create.

Marketing in the Organization

ChaPter 1 ó Defining Marketing for the New realities

As the late David Packard of Hewlett-Packard observed, “Marketing is far too important to leave to the marketing department.” Increasingly, marketing is not done only by the marketing department; every employee has an impact on the customer. Marketers now must properly manage all possible touch points: store layouts, package designs, product functions, employee training, and shipping and logistics. To create a strong marketing organization, marketers must think like executives in other departments, and executives in other departments must think more like marketers. Interdepartmental teamwork that includes marketers is needed to manage key processes such as production innovation, new-business development, customer acquisition and retention, and order fulfillment.

1.5 Company Orientation toward the Marketplace Given these new marketing realities, what philosophy should guide a company’s marketing efforts? Increasingly, marketers operate consistently with a holistic marketing concept. Let’s review the evolution of earlier marketing ideas.

1.5.1 The Production Concept The production concept is one of the oldest concepts in business. It holds that consumers will prefer products that are widely available and inexpensive. Managers of production-oriented businesses concentrate on achieving high production efficiency, low costs, and mass distribution. This orientation makes sense in developing countries such as China where the largest PC manufacturer, Lenovo, and domestic appliances giant, Haier, take advantage of the country’s huge inexpensive labor pool to dominate the market. It is also used when a company wants to expand the market.20

1.5.2 The Product Concept The product concept holds that consumers will favor those products that offer the most quality, performance, or innovative features. Managers in these organizations focus on making superior products and improving them over time. However, these managers are sometimes caught up in a love affair with their products. They might commit the “better mousetrap” fallacy, believing that a better mousetrap will lead people to beat a path to their door. A new or improved product will not necessarily be successful unless the product is priced, distributed, advertised, and sold properly.

1.5.3 The Selling Concept The selling concept holds that consumers and businesses, if left alone, will ordinarily not buy enough of the organization’s products. The organization must, therefore, undertake an aggressive selling and promotion effort. The selling concept is practiced most aggressively with unsought goods, goods that buyers normally do not think of buying, such as insurance, encyclopedias, and funeral plots. Most firms practice the selling concept when they have overcapacity. Marketing based on hard selling carries high risks. It assumes that customers who are coaxed into buying a product will like it; and that if they do not, they will not return it or badmouth it or complain to consumer organizations, or might even buy it again.

1.5.4 The Marketing Concept The marketing concept is a customer-centered, “sense-and-respond” philosophy. The job is not to find the right customers for your products, but the right products for your customers. The marketing concept holds that the key to achieving organizational goals consists of the company being more effective than competitors in creating, delivering, and communicating superior customer value to its chosen target markets. Theodore Levitt drew a perceptive contrast between the selling and marketing concepts: Selling focuses on the needs of the seller; marketing on the needs of the buyer. Selling is preoccupied with the seller’s need to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering, and finally consuming it.21

17 China’s abundant cheap labor has led some companies to engage in massive production to drive costs down.

1.5.5 The Holistic Marketing Concept Without question, the trends and forces defining the 21st century are leading business firms to a new set of beliefs and practices. Today’s best marketers recognize the need to have a more complete, cohesive approach that goes beyond traditional applications of the marketing concept. The holistic marketing concept is based on the development, design, and implementation of marketing programs, processes, and activities that recognize their breadth and interdependencies. Holistic marketing recognizes that “everything matters” with marketing and that a broad, integrated perspective is often necessary. Holistic marketing thus recognizes and reconciles the scope and complexities of marketing activities. Figure 1.3 provides a schematic overview of the four broad themes characterizing holistic marketing: relationship marketing, integrated marketing, internal marketing, and performance marketing. We will examine these major themes throughout the book.

Marketing department

Senior management

Other departments

Communications

Products & services

Channels

Integrated marketing

Internal marketing

Holistic marketing

Sales revenue

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Brand & customer equity

Performance marketing

Ethics Community Customers Environment Legal Figure 1.3 Holistic Marketing Dimensions

Relationship marketing

Partners Channel

Relationship Marketing Increasingly, a key goal of marketing is to develop deep, enduring relationships with people and organizations that could directly or indirectly affect the success of the firm’s marketing activities. Relationship marketing aims to build mutually satisfying long-term relationships with key constituents to earn and retain their business.22 Four key constituents of relationship marketing are customers, employees, marketing partners (channels, suppliers, distributors, dealers, and agencies), and members of the financial community (shareholders, investors, and analysts). Marketers must respect the need to create prosperity among all these constituents and develop policies and strategies to balance the returns to all key stakeholders. To develop strong relationships with these constituents requires an understanding of their capabilities and resources, as well as their needs, goals, and desires. The ultimate outcome of relationship marketing is a unique company asset called a marketing network. A marketing network consists of the company and its supporting stakeholders—customers, employees, suppliers, distributors, retailers, ad agencies, university scientists, and others—with whom it has built mutually profitable business relationships. The operating principle is simple: build an effective network of relationships with key stakeholders, and profits will follow.23 Relationships and networks take on added importance in Asian marketing. In East Asia, the cultivation of personal relationships and the use of guanxi (personal connections) in business are still evident. In countries like China, which have a long history of being exploited by other nations, personal relations are useful in developing trust among business partners. To conduct business successfully in Asia, hiring a consultant or an intermediary to foster guanxi may be

fruitful, and selecting a joint-venture partner who has valuable connections with the local government may also prove beneficial.

Because attracting a new customer may cost five times as much as retaining an existing one, relationship In East Asia, guanxi or the cultivation of personal relationships is an integral part marketing also emphasizes customer retention. Companies of doing business. build customer share by offering a larger variety of goods to existing customers, training employees in cross-selling and upselling. Marketing must skillfully conduct not only customer relationship management (CRM), but partner relationship management (PRM) as well. Companies are deepening their partnering arrangements with key suppliers and distributors, seeing them as partners in delivering value to final customers so everybody benefits. ExxonMobil, Shell, Caltex, and SPC—In Singapore, petrol companies are increasingly relying on their rewards programs to hold on to their customers. ExxonMobil has an upgraded Smiles reward program that gives a more favorable earn rate and a higher discount for petrol purchases. It also introduced a Gold Tier scheme which gives 30 percent bonus points to customers who spend at least S$250 a month. Shell’s Escape program changed its awards based on number of liters pumped instead of amount spent. With increasing petrol prices, the point issuance based on liters insulates customers against pump price changes. Caltex’s Thanks! Program rewards high-value customers with a Platinum Pack that includes fuel discount vouchers, free beverages, and bonus Thanks! Points. SPC’s program saves customers the trouble of keeping track of their points and deciding what to redeem them for. The company’s computer system stores the points earned in a given month and gives upfront discounts over and above other discounts the following month.

Integrated Marketing Integrated marketing occurs when the marketer devises marketing activities and assembles fully integrated marketing programs to create, communicate, and deliver value for consumers such that “the whole is greater than the sum of its parts.” Two key themes are that (1) many different marketing activities can create, communicate, and deliver value and (2) marketers should design and implement any one marketing activity with all other activities in mind. When a hospital buys an MRI from General Electric, for instance, it expects good installation, maintenance, and training services to go with the purchase. All company communications also must be integrated. Using an integrated communication strategy means choosing communication options that reinforce and complement each other. A marketer might selectively employ television, radio, and print advertising, public relations and events, and PR and Web site communications so each contributes on its own as well as improving the effectiveness of the others. Each must also deliver a consistent brand message at every contact. When BMW launched its modernized MINI Cooper, it employed an integrated marketing strategy in the United States that included a broad mix of media: billboards, posters, Internet, print, PR, product placement, and grassroots campaigns. Many were linked to a cleverly designed Web site with product and dealer information. The car was used as seats in a sports stadium and appeared in Playboy magazine as a centerfold. The imaginative integrated campaign built a six-month waiting list for the MINI Cooper.

ChaPter 1 ó Defining Marketing for the New realities

Companies are also shaping separate offers, services, and messages to individual customers, based on information about past transactions, demographics, psychographics, and media and distribution preferences. By focusing on their most profitable customers, products, and channels, these firms hope to achieve profitable growth, capturing a larger share of each customer’s expenditures by building high customer loyalty. They estimate individual customer lifetime value and design their market offerings and prices to make a profit over the customer’s lifetime.

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The company must also develop an integrated channel strategy. It should assess each channel option for its direct effect on product sales and brand equity, as well as its indirect effect through interactions with other channel options. Marketers must weigh the trade-off between having too many channels (leading to conflict among channel members and/or a lack of support) and too few (resulting in marketing opportunities being overlooked). Online marketing activities are increasingly prominent in building brands and sales.

Internal Marketing Internal marketing, an element of holistic marketing, is the task of hiring, training, and motivating able employees who want to serve customers well. Smart marketers recognize that marketing activities within the company can be as important as—if not even more so—than marketing activities directed outside the company. It makes no sense to promise excellent service before the company’s staff is ready to provide it. Marketing is no longer the responsibility of a single department—it is a company-wide undertaking that drives the company’s vision, mission, and strategic planning. It succeeds only when all departments work together to achieve customer goals (see table 1.1): when engineering Table 1.1 Assessing which Company Departments are Customer-Minded

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R&D They spend time meeting customers and listening to their problems. They welcome the involvement of marketing, manufacturing, and other departments to each new project. They benchmark competitors’ products and seek “best of class” solutions. They solicit customer reactions and suggestions as the project progresses. They continuously improve and refine the product on the basis of market feedback. Purchasing They proactively search for the best suppliers. They build long-term relationships with fewer but more reliable, high-quality suppliers. They do not compromise quality for price savings. Manufacturing They invite customers to visit and tour their plants. They visit customer plants. They willingly work overtime to meet promised delivery schedules. They continuously search for ways to produce goods faster and/or at lower cost. They continuously improve product quality, aiming for zero defects. They meet customer requirements for “customization” where possible. Marketing They study customer needs and wants in well-defined market segments. They allocate marketing effort in relation to the longrun profit potential of the targeted segments. They develop winning offers for each target segment. They measure company image and customer satisfaction on a continuous basis. They continually gather and evaluate ideas for new products, product improvements, and services. They urge all company departments and employees to be customer-centered.

Sales They have specialized knowledge of the customer’s industry. They strive to give the customer “the best solution.” They make only promises that they can keep. They feedback customers’ needs and ideas to those in charge of product development. They serve the same customers for a long period of time. Logistics They set a high standard for service delivery time and meet this standard consistently. They operate a knowledgeable and friendly customer service department that can answer questions, handle complaints, and resolve problems in a satisfactory and timely manner. Accounting They prepare periodic “profitability” reports by product, market segment, geographic areas (regions, sales territories), order sizes, channels, and individual customers. They prepare invoices tailored to customer needs and answer customer queries courteously and quickly. Finance They understand and support marketing expenditures (e.g., image advertising) that produce long-term customer preference and loyalty. They tailor the financial package to the customer’s financial requirements. They make quick decisions on customer creditworthiness. Public Relations They send out favorable news about the company and “damage control” unfavorable news. They act as an internal customer and public advocate for better company policies and practices.

Source: © Philip Kotler, Kotler on Marketing (New York: Free Press, 1999), pp. 21–22. Reprinted with permission of Free Press, a Division of Simon & Schuster Adult Publishing Group. Copyright © 1999 by Philip Kotler. All rights reserved.

designs the right products, finance furnishes the right amount of funding, purchasing buys the right materials, production makes the right product in the right time horizon, and accounting measures profitability in the right ways. Such interdepartmental harmony can only truly coalesce, however, when management clearly communicates a vision of how the company’s marketing orientation and philosophy serve customers. The following example highlights the coordination problem:

Internal marketing requires vertical alignment with senior management and horizontal alignment with other departments, so everyone understands, appreciates, and supports the marketing effort.

Performance Marketing Holistic marketing incorporates performance marketing, which requires understanding the returns to the business from marketing activities and programs, as well as addressing broader concerns and their legal, ethical, social, and environmental effects. Top management is going beyond sales revenue to examine the marketing scorecard and interpret what is happening to market share, customer loss rate, customer satisfaction, product quality, and other measures.

Financial Accountability Marketers are thus being increasingly asked to justify their investments to senior management in financial and profitability terms, as well as in terms of building the brand and growing the customer base.24 As a consequence, they are employing a broader variety of financial measures to assess the direct and indirect value their marketing efforts create. They are also recognizing that much of their firms’ market value comes from intangible assets, particularly their brands, customer base, employees, distributor and supplier relations, and intellectual capital.

Social Responsibility Marketing The effects of marketing clearly extend beyond the company and the customer to society as a whole. Marketers must carefully consider their role in broader terms, and the ethical, environmental, legal, and social context of their activities.25 Increasingly, consumers demand such behavior, as Starbucks Chairman Howard Schultz has observed: We see a fundamental change in the way consumers buy their products and services … Consumers now commonly engage in a cultural audit of providers. People want to know your value and ethics demonstrated by how you treat employees, the community in which you operate. The implication for marketers is to strike the balance between profitability and social consciousness and sensitivity…. It is not a program or a quarterly promotion, but rather a way of life. You have to integrate this level of social responsibility into your operation.26 This realization calls for a new term that enlarges the marketing concept. We propose calling it the “societal marketing concept.” The societal marketing concept holds that the organization’s task is to determine the needs, wants, and interests of target markets and to deliver the desired satisfactions more effectively and efficiently than competitors in a way that preserves or enhances the consumer’s and society’s long-term well-being. Sustainability has become a major corporate concern in the face of challenging environmental forces. Firms such as Panasonic are building factories that are environmentally friendly; McDonald’s strives for a “socially responsible supply system” encompassing everything from healthy fisheries to redesigned packaging.27 The societal marketing concept calls upon marketers to build social and ethical considerations into their marketing practices. They must balance and juggle the often conflicting

ChaPter 1 ó Defining Marketing for the New realities

The marketing vice president of a major Asian airline wants to increase the airline’s traffic share. His strategy is to build up customer satisfaction through providing better food, cleaner cabins, better-trained cabin crews, and lower fares; yet he has no authority in these matters. The catering department chooses food that keeps food costs down; the maintenance department uses cleaning services that keep cleaning costs down; the human resources department hires people without regard to whether they are naturally friendly; the finance department sets the fares. Because these departments generally take a cost or production point of view, the vice president of marketing is stymied in creating an integrated marketing mix.

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criteria of company profits, consumer want satisfaction, and public interest. table 1.2 displays some different types of corporate social initiatives, illustrated by McDonald’s.28 Companies see cause-related marketing as an opportunity to enhance their corporate reputation, raise brand awareness, increase customer loyalty, build sales, and increase press coverage. They believe that customers will increasingly look for signs of good corporate citizenship that go beyond supplying rational and emotional benefits. Bata Indonesia—Bata Indonesia is different from other shoe manufacturers. While some sports apparel manufacturers have been labeled negatively for exploiting cheap Asian sweatshop labor, Bata Indonesia’s factory compound looks better as a park than Jakarta’s few parks do. Wide, tree-lined avenues lead to clean, spacious work sheds. There is also a grassy pitch for soccer matches, and a clean, well-stocked medical clinic situated near the main gate. While stories of other factories that force and lock their workers out of the factory grounds during lunchtime are rampant, Bata Indonesia provides two canteens for its staff. This display of social welfare is the reason that it was chosen by Bienestar, a U.S.-based clothing manufacturer, to make its No Sweat sneakers. While a pair of Nike sneakers cost $2, No Sweat’s cost $4.50 a pair. The extra cost for workers’ benefits, ranging from free health care and a monthly rice allowance, to a pay package that is about 30 percent above the minimum wage in Indonesia, is detailed on every No Sweat shoe box.29

Table 1.2 Corporate Social Initiatives by McDonald’s in Asia Type

Description

Example

Corporate social marketing

Supporting behavior change

McDonald’s sponsorship of Clean Community Days in China through which it encourages participation in tree planting and recycling programs.

Cause marketing

Promoting social issues through efforts such as sponsorships, licensing agreements, and advertising

McDonald’s use of funds raised during World Children’s Day to sponsor dictionaries for needy children in China. In Japan, McDonald’s sponsors an annual All-Japan Rubber Baseball Tournament. Rubber baseball is an original Japanese product, created to provide a safe way for children to play baseball.

Cause-related marketing

Donating a percentage of revenues to a specific cause based on the revenue occurring during the announced period of support

During the relief efforts for the 2004 Asian tsunami, McDonald’s India saw employees donatsing a day’s pay, while McDonald’s Singapore committed a portion of sales from popular menu items, and employees from McDonald’s Hong Kong volunteered for UNICEF.

Corporate philanthropy

Making gifts of money, goods, or time to help non-profit organizations, groups, or individuals

McDonald’s Singapore donated part of the proceeds made on World Children’s Day to support children with HIV/AIDS.

Corporate community involvement

Providing in-kind or volunteer services in the community

In Mumbai, McDonald’s was involved in restoring a designated “heritage structure” in a historically and commercially important part of the city.

Socially responsible business practices

Adapting and conducting business practices that protect the environment and human and animal rights

McDonald’s Japan leads in energy efficiency programs. It has tracked its energy use for more than 10 years and has developed metrics to monitor carbon dioxide emissions.

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campaigns

Source: Adapted from Philip Kotler and Nancy Lee, Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause (Hoboken, NJ: Wiley, 2004). Copyright © 2005 by Philip Kotler and Nancy Lee. Used by permission of John Wiley & Sons, Inc; www.mcdonalds.com/corp/values.html.

1.6 Updating the Four P’s E. Jerome McCarthy classified these tools into four broad groups that he called the four P’s of marketing: product, price, place, and promotion.30 Collectively, these P’s are called the marketing mix. The marketing variables under each P are shown in Figure 1.4. A complementary view of the four P’s can be found in Marketing Insight: Understanding of the 4 a’s of Marketing.

MARKETING INSIGHT

UndeRStandIng the 4 a’S oF MaRketIng

Acceptability Is the extent to which a firm’s total product offering exceeds customer expectations. The authors assert that acceptability is the dominant component in the framework and that design, in turn, is at the root of acceptability. Functional aspects of design can be boosted by, for instance, enhancing the core benefit or increasing reliability of the product; psychological acceptability can be improved with changes to brand image, packing and design, and positioning. Affordability Is the extent to which customers in the target market are able and willing to pay the product’s price. It has two dimensions: economic (ability to pay) and psychological (willingness to pay). Acceptability combined with affordability determines the product’s value proposition. When a software company lowered the price of its software from $5,000 to $199 and started charging for customer support, sales demand increased enormously.

Accessibility The extent to which customers are able to readily acquire the product, has two dimensions: availability and convenience. Successful companies develop innovative ways to deliver both, as some online retailers do with excellent customer service and return policies and tracking of up-to-the-minute information about warehouse stock, brands, and styles. Awareness Is the extent to which customers are informed regarding the product’s characteristics, persuaded to try it, and reminded to repurchase. It has two dimensions: brand awareness and product knowledge. Sheth and Sisodia say that awareness is the ripest for improvement because most companies are either ineffectual or inefficient at developing it. For instance, properly done advertising can be incredibly powerful, but word-ofmouth marketing and co-marketing can more effectively reach potential customers. Sheth and Sisodia base the 4 A’s framework on the four distinctive roles a consumer plays in the marketplace—seeker, buyer, payer, and user. A fifth consumer role—evangelizer— captures the fact that consumers often recommend products to others and have become increasingly critical with the advent of the Internet and social media platforms. Note that we can easily relate the 4 A’s to the traditional 4 P’s. Marketers set the product (which mainly influences acceptability), the price (which mainly influences affordability), the place (which mainly influences accessibility), and promotion (which mainly influences awareness).

Sources: Jagdish N. Sheth and Rajendra Sisodia, The 4 A’s of Marketing: Creating Value for Customer, Company and Society (New York: Routledge, 2012); “New Rules: Jagdish Sheth Outlines 4 A’s of Marketing,” The Financial Express, 6 April 2004; “Industry Leaders Discuss Marketing for Not for Profit Organizations @ BIMTECH Marketing Summit,” www.mbauniverse.com, 1 May 2012.

Given the breadth, complexity, and richness of marketing, however—as exemplified by holistic marketing—clearly these four P’s are not the whole story. If we update them to reflect the holistic marketing concept, we arrive at a more representative set that encompasses modern marketing realities: people, processes, programs, and performance, as in Figure 1.5. People reflects internal marketing and that employees are critical to marketing success. Marketing will only be as good as the people inside the organization. It also reflects that marketers must view consumers as people to understand their lives more broadly, and not just as they shop for and consume products and services. Processes reflects the creativity, discipline, and structure brought to marketing management. Marketers must avoid ad hoc planning and decision making, and ensure that state-of-the-art marketing ideas and concepts play an appropriate role in all they do. Only by instituting the right set of processes to guide activities and programs can a firm engage in mutually beneficial long-term relationships. Another important set of processes guides the firm in imaginatively generating insights and breakthrough products, services, and marketing activities. Programs reflects the firm’s consumer-directed activities. It encompasses the old four P’s as well as a range of other marketing activities that might not fit as neatly into the old view of marketing. Regardless of whether they are online or offline, traditional or nontraditional, these activities must be integrated such that their whole is greater than the sum of their parts and they accomplish multiple objectives for the firm.

ChaPter 1 ó Defining Marketing for the New realities

According to Jagdish Sheth and Rajendra Sisodia, poor management as a consequence of not knowing what drives consumers is behind the majority of marketing failures. The authors make the case that consumer knowledge is a much more reliable route to success. Their customer-centric marketing management framework emphasizes what they believe are the most important consumer values and which they call the four A’s: acceptability, affordability, accessibility, and awareness.

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Marketing Mix

Product Product variety Quality Design Features Brand name Packaging Sizes Services Warranties Returns

Place Channels Coverage Assortments Locations Inventory Transport Price List price Discounts Allowances Payment period Credit terms

Promotion Sales promotion Advertising Sales force Public relations Direct marketing

Figure 1.4 The Four P Components of the Marketing Mix

We define performance as in holistic marketing, to capture the range of possible outcome measures that have financial and nonfinancial implications (profitability as well as brand and customer equity), and implications beyond the company itself (social responsibility, legal, ethical, and community related). Finally, these new four P’s apply to all disciplines within the company, and by thinking this way, managers grow closely aligned with the rest of the company.

1.7 Marketing Management Tasks

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These core concepts and others provide the input for a set of tasks that make up successful marketing management. We will use the following hypothetical situation to illustrate these tasks (Marketing Memo: Marketers’ Frequently asked Questions is a good checklist for the questions marketing managers ask).

Marketing Mix Four P's

Emperor, Inc. operates in several industries, including chemicals, cameras, and film. The company is organized into Strategic Business Units (SBUs). Corporate management is considering what to do with its Oriental camera division. At present, Oriental produces a range of 35 mm and digital cameras. The market for cameras is intensely competitive. Although Emperor has a sizable market share and is producing much revenue for the company, the 35 mm market itself is growing very slowly and its market share is slipping. In the fastergrowing digital camera segment, Emperor is facing strong competition and has been slow to gain sales. Emperor’s corporate management wants Oriental’s marketing group to produce a strong turnaround plan for the division. Marketing management has to Modern Marketing come up with a convincing marketing plan, sell corporate management on the plan, Management and then implement and control it. Four P's

Product

People

Place

Processes

Promotion

Programs

Price

Performance

Figure 1.5 The Evolution of Marketing Management

1.7.1 Developing Marketing Strategies and Plans The first task facing Oriental is to identify its potential long-run opportunities given its market experience and core competencies (see Chapter 2). Oriental can design its cameras with better features. It can also consider making a line of video cameras, or it can use its core competency in optics to design a line of binoculars and telescopes. Whichever direction it chooses, it must develop concrete marketing plans that specify the marketing strategy and tactics going forward.

MARKETING MEMO 1. 2. 3. 4.

6. 7. 8.

How can we spot and choose the right market segment(s)? How can we differentiate our offerings? How should we respond to customers who buy on price? How can we compete against lower-cost, lowerprice competitors? How far can we go in customizing our offering for each customer? How can we grow our business? How can we build stronger brands? How can we reduce the cost of customer acquisition?

9. How can we keep our customers loyal for longer? 10. How can we tell which customers are more important? 11. How can we measure the payback from advertising, sales promotion, and public relations? 12. How can we improve sales force productivity? 13. How can we establish multiple channels and yet manage channel conflict? 14. How can we get the other company departments to be more customer-oriented?

1.7.2 Capturing Marketing Insights and Performance Oriental needs a reliable marketing information system to closely monitor its marketing environment. Its microenvironment consists of all the players who affect the company’s ability to produce and sell cameras—suppliers, marketing intermediaries, customers, and competitors. Its macroenvironment consists of demographic, economic, physical, technological, political-legal, and social-cultural forces that affect sales and profits (see Chapter 3). Oriental also needs a dependable marketing research system. To transform marketing strategy into marketing programs, marketing managers must measure market potential, forecast demand, and make basic decisions on marketing expenditures, marketing activities, and marketing allocation.31 To make these allocations, marketing managers may use sales-response functions that show how sales and profits would be affected by the amount of money spent in each application (see Chapter 4).

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5.

MaRketeRS’ FReQUently aSked QUeStIonS

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1.7.3 Connecting with Customers Oriental must consider how to best create value for its chosen target markets and develop strong, profitable, long-term relationships with customers (see Chapter 5). To do so, Oriental needs to understand consumer markets (see Chapter 6). Who buys cameras, and why do they buy? What are they looking for in the way of features and prices? Where do they shop? Oriental also sells cameras to business markets, including large corporations, professional firms, retailers, and government agencies (see Chapter 7), where purchasing agents or buying committees make the decisions. Oriental needs to gain a full understanding of how organizational buyers buy. It needs a sales force that is well-trained in presenting product benefits. Oriental will not want to market to all possible customers. It must divide the market into major market segments, evaluate each segment, and target those market segments that the company can best serve (see Chapter 8).

1.7.4 Building Strong Brands Oriental must understand the strengths and weaknesses of the Emperor brand with customers (see Chapter 9). Is its 35 mm film heritage a detriment in the digital camera market? Suppose Oriental decides to focus on the consumer market and develop a positioning strategy (see Chapter 10). Should Oriental position its cameras as the “Mercedes” brand, offering superior cameras at a premium price with excellent service and strong advertising? Should it build a simple, low-priced camera aimed at more price-conscious consumers? Or something in between? Oriental must also pay close attention to competitors (see Chapter 11), anticipating its competitors’ moves and knowing how to react quickly and decisively. It may want to initiate some surprise moves, in which case it needs to anticipate how its competitors will respond.

1.7.5 Shaping the Market Offerings At the heart of the marketing program is the product—the firm’s tangible offering to the market, which includes the product quality, design, features, and packaging (see Chapter 12). To gain a competitive advantage, Oriental may provide various services, such as leasing, delivery, repair, and training (see Chapter 13). A critical marketing decision relates to pricing (see Chapter 14). Oriental must decide on wholesale and retail prices, discounts, allowances, and credit terms. Its price should be commensurate with the offer’s perceived value; otherwise, buyers will turn to competitors’ products.

1.7.6 Delivering Value Oriental must also determine how to properly deliver the value embodied by these products and services to the target market. Channel activities include the various activities the company undertakes to make the product accessible and available to target customers (see Chapter 15). Oriental must identify, recruit, and link various marketing facilitators to supply its products and services efficiently to the target market. It must understand the various types of retailers, wholesalers, and physical-distribution firms and how they make their decisions (see Chapter 16).

1.7.7 Communicating Value Oriental must also adequately communicate the value embodied by their products and services to the target market. It will need an integrated marketing communication program that maximizes the individual and collective contribution of all communication activities (see Chapter 17). Oriental needs to set up mass communication programs consisting of advertising, sales promotion, events, and public relations (see Chapter 18). It also needs to set up more personal communications in the form of direct and interactive marketing (see Chapter 19) and must also hire, train, and motivate salespeople (see Chapter 20).

1.7.8 Creating Successful Long-Term Growth Part 1 ó Understanding Marketing Management

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Based on its product positioning, Oriental must initiate new-product development, testing, and launching (see Chapter 21). The strategy also will have to take into account changing global opportunities and challenges (see Chapter 22). Finally, Oriental must build a marketing organization that is capable of implementing the marketing plan (see Chapter 23). Because of surprises and disappointments that can occur as marketing plans are implemented, Oriental will need feedback and control to understand the efficiency and effectiveness of its marketing activities and how it can improve them.32

Summary 1.1 THE IMPORTANCE OF MARKETING

1.2 THE SCOPE OF MARKETING

What is marketing? From a managerial point of view, marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy the individual and organizational goals. Marketing management is the art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value. What is marketed? Marketable products encompass the tangible (goods, people, places, properties, organizations) and the intangible (services, events, experiences, information, ideas). Who markets? A marketer is someone seeking a positive response from a target party, called the prospect. A marketer’s primary task is to influence the level, timing, and composition of demand in accordance with his or her company’s corporate goals.

1.3 CORE MARKETING CONCEPTS

What are needs, wants, and demands? Needs are what people require at a fundamental level to survive. Wants are specific objects that a person desires that can satisfy a particular need. Wants become demand for products when they are supported by an ability to pay for the goods. What is market segmentation? Marketers practice market segmentation to identify groups of buyers who would be more inclined to buy their product. This becomes the target market, and for each of the target markets, the firm develops an offering that is strategically positioned to espouse a unique benefit. What is a value proposition? It is the set of benefits in a product that marketers offer to customers to satisfy their needs. When is an offering successful? The offering is successful if it delivers value and satisfaction to the customer. Value reflects the perceived tangible and intangible benefits and costs to customers; while satisfaction reflects how one feels after comparing a product’s perceived performance (or outcome) in relation to his or her expectations. Resources

Resources Resource markets

Money

What is a market? A market is a physical or non-physical place where a collection of buyers and sellers interact to transact over a product (e.g., a Honda Civic) or a product class (car market). See Figure A Structure of Flows in a Modern Exchange Economy, for a summary of the typical interactions between the five basic markets in our economies.

Services, money Manufacturer markets

Taxes, goods

Money

Services, money Taxes

Government markets Taxes, goods

Services Services, money

Taxes, goods Money

Money Goods and services

Consumer markets

Intermediary markets

Goods and services

Figure A Structure of Flows in a Modern Exchange Economy

ChaPter 1 ó Defining Marketing for the New realities

Marketing creates, communicates, and delivers value to customers via products and services, simultaneously maintaining good working relationships with customers and colleagues alike. The aim of marketing is to know a customer’s needs comprehensively so that the product satisfies his or her demands completely.

What are the key customer markets? There are four different types of customer markets, namely the consumer, business, global, and non-profit and governmental markets.

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How do marketers reach out to their target markets? To reach a target market, marketers use three kinds of channels: 1. The communication channel to deliver messages to and receive messages from consumers 2. The distribution channel to display or deliver products to consumers 3. The service channel as a means to carry out transactions What kinds of environment does a marketer face? The marketing environment consists of the task environment (comprising the immediate participants in producing, distributing, and promoting) and the broad environment (comprising demographic, economic, physical, technological, political-legal, and social-cultural factors).

1.4 THE NEW MARKETING REALITIES

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What global forces affect marketing? Marketers have to adapt to major societal forces that govern behavior including societal forces such as network information, globalization, deregulation, privatization, heightened competition, industry convergence, retail transformation, disintermediation, consumer buying power, consumer information, consumer participation, and consumer resistance. What new capabilities do companies have? The Information Age provides both marketers and consumers with trawls of information and knowledge. It digitalizes transactions, vastly increasing the size of the marketplace to global levels, and increasing the ease of acquiring a particular product. There has been a substantial increase in consumers’ buying power, putting marketers under heightened competition. Companies recognize that to move ahead, they have to tap opportunities lying at the intersections of two industries, and utilize varying and unorthodox means to market their products. Marketers can tap into social media and mobile marketing to reach their target markets.

1.5 COMPANY ORIENTATION TOWARD THE MARKETPLACE

What are the different concepts guiding a company’s marketing efforts? Three earlier marketing concepts that are used less nowadays are the production, product and selling concepts. The fourth and most abundantly used concept today is the marketing concept, which is customer-centered rather than product-based. What is the Holistic Marketing Concept? The holistic marketing concept is based on the development, design, and implementation of marketing programs, processes, and activities that recognize their breadth and interdependencies. Holistic marketing recognizes that “everything matters” with marketing and that a broad, integrated perspective is often necessary. Four components of holistic marketing are relationship marketing, integrated marketing, internal marketing, and performance marketing. See Figure B Holistic Marketing Dimensions. Marketing department

Senior management

Other departments

Communications

Products & services

Channels

Integrated marketing

Internal marketing

Holistic marketing

Sales revenue Brand & customer equity

Relationship marketing

Performance marketing

Ethics Community Environment Legal

Customers

Partners Channel

Figure B Holistic Marketing Dimensions

What does relationship marketing hope to achieve? Relationship marketing aims to build mutually satisfying relationships with customers to retain a larger consumer base over the long run. This is especially crucial in Asia, where a strong marketing network is essential to the conduct of business.

What is the objective of integrated marketing? Integrated marketing aims to develop a suitable mix of products and services as a value offering to the customer.

What is performance marketing? Performance marketing concerns going beyond financial returns and consider legal, ethical, social, and environmental effects of marketing activities. Other than financial accountability, marketers also need to be socially responsible, Social responsibility marketing has become increasingly important, as more customers demand that nature and the environment are not harmed in the marketing process and that no negative externalities are created.

With holistic marketing, what are the revised four P’s? Reflective of the holistic marketing concept, modern marketing management suggests that people, processes, programs, and performance are important.

1.7 MARKETING MANAGEMENT TASKS

What are the responsibilities of a marketing manager? The responsibilities of a marketing manager are manifold. He or she has to develop marketing strategies, capture marketing demand, connect with customers, build up the brand name, shape the market offering, communicate and deliver value, and finally strive for long-term growth.

Applications Marketing Debate—Does Marketing Create or Satisfy Needs? Marketing has often been defined in terms of satisfying customers’ needs and wants. Critics, however, maintain that marketing does much more than that and creates needs and wants that did not exist before. According to these critics, marketers encourage consumers to spend more money than they should on goods and services they really do not need. Take a position: Marketing shapes consumer needs and wants versus Marketing merely reflects the needs and wants of consumers.

Marketing Discussion Consider the broad shifts in marketing. Do any themes emerge in them? Can you relate the shifts to major societal forces? Which force has contributed to which shift?

ChaPter 1 ó Defining Marketing for the New realities

What is internal marketing? Internal marketing affects all employees within an organization. Marketing is not done only by the marketing department; it needs to affect every aspect of the customer experience. To create a strong marketing organization, marketers must think like executives in other departments, and executives in other departments must think more like marketers; making sure that everyone is aligned to the marketing principles that the company embraces.

1.6 UPDATING THE FOUR P’s

What are the marketing-mix tools? The four marketing-mix tools, also called the four P’s of marketing are product, price, place, and promotion.

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Marketing Lesson MODERN CREATION MüNCHEN (MCM)

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Modern Creation München (MCM) is a privately held retail company that designs, manufactures and distributes a wide range of luxury goods and fashion accessories. Founded in 1976 by Michael Cromer, MCM was a German leather goods maker that offered a wide range of products from handbags and trunks to shoes and even tennis racket covers. The brand epitomized glamor in the 1980s, with its flashy logo imprinted on all its products, and advertising campaigns featuring the likes of former supermodel Cindy Crawford. In the 1990s, revenues increased fifteen-fold to about €5 billion with 250 stores worldwide. However, the company came to be plagued by an influx of counterfeits that diluted the brand’s appeal. Its founder also faced a tax evasion scandal. To stem MCM’s plunging brand value, the company undertook a restructuring in 1997, spinning off many of its stores and trademark rights, which eventually led to its sale in 1998 to a Swiss investment group. Among its licensees is a feisty Korean woman entrepreneur, Sung-Joo Kim. Despite the adverse conditions at MCM headquarters, the Sung Joo Group continued its growth and accounted for two-thirds of MCM’s total sales revenue worldwide in 2004. Kim, nicknamed “Genghis Kim” for her drive and ambition, is a woman with a fascinating personal narrative. Born into one of the richest families in South Korea, Kim was expected to marry a fellow chaebol man, not dabble in business. However, Kim had other ideas—she left to study overseas in her teens. MCM’s strategy was to emphasize the company’s German heritage and Italian craftsmanship while maximizing its popularity in Asia, especially Korea and China. Kim believed that the emerging consumers in Asia were young professionals. These consumers were well-traveled and technology-savvy. They were wellinformed about global trends and thus had higher expectations of their luxury purchases. To capture this group of consumers, MCM needed a more compelling point of difference. Thus, MCM sought to position itself as youthful luxury, feeding off the new generation’s different

perception of luxury. Drastic changes were made to every part of the MCM brand. First, MCM’s product designs were changed radically. The Sung Joo Group appointed Michael Michalsky, the then global concept director at Adidas, to be the concept director of a new and inventive design for MCM to appeal to the global market. Michalsky’s first collection, their “Lion” line-up, was bold, sporty, funky, and a novel take on MCM totally unlike the company’s original style. MCM also revitalized the “Cognac Visetos,” a signature line of MCM’s most iconic leather goods and luggage collections. To maintain their exclusivity, each of MCM’s products was tagged with a unique serial number inscribed on a golden brass plate. Beginning with Michalsky, MCM today, strives to be bolder with its design, incorporating vivid colors and eye-catching patterns through progressive styles in MCM products. Second, MCM expanded beyond the women’s market, moving into men’s products and travel goods. The entry into the men’s market was essential to MCM’s Chinese operations as the typical luxury shopper in China was predominantly male and over the age of 35. These men held senior positions in domestic companies or governmental agencies and were well-connected. Now, men could choose from an assortment of bags, backpacks, small leather goods, accessories, and shoes. Of course, women were not neglected. MCM offered a variety of handbags, backpacks, small leather goods, and accessories; travel goods included a wide range of luggage bags, backpacks, and small leather goods. MCM also offered a broad range of craft luxury leather goods, handbags, apparel, footwear, and accessories. Over the years, the men’s line-up has been expanded. Today, it consists of up to 40 percent of MCM’s offerings. The Sung Joo Group also enhanced its signature Visetos line by updating it with trendy colors and seasonal design motifs. As the company began opening stores in the United States and China, the New York and Shanghai Collections were also developed. MCM’s offerings were updated to reflect each season’s fashion trends with increasingly aggressive and bold designs. When entering the Chinese market, MCM worked with Craig Redman, an illustrator and graphic design artist, and applied his fun designs into its Shanghai Collection. These initiatives have seen MCM gain depth and breadth in product categories, target a wider spectrum of consumers including women and men, as well as the casual, travel, and office markets. Third, the Sung Joo Group focused on enhancing its product quality. The company used high-quality materials for its leather, buckles, and pendants and chose to forego Chinese factories despite their lower production costs. Instead, the company purchased factories from luxury brands PRADA and Gucci in Europe to ensure better production.

Woods and decorated with brass plates engraved with serial numbers for each MCM product to showcase MCM’s brand identity. The MCM retail store in the Lotte Department Store, the biggest department store in Korea, was moved to the luxury zone where brands such as Gucci and PRADA are located. The shift represented the tradeup of MCM’s positioning into the luxury group. It now competes with other globally well-known luxury brands. The Sung Joo Group defined the main target segment of MCM as “real women” of the 21st century—professional career women who achieved success economically but still seek value purchases. To that effect, it adopted a three-pronged approach in its marketing directions, which included maintaining focus on marketing through Kim, increasing collaborative marketing, and using MCM’s globalization as a marketing resource. Kim’s ambition, drive, and foresight enabled MCM to maintain and strengthen its position in the Korean luxury market. Her abilities, attitude, and strong repute went beyond Korea’s geographical borders. Kim was widely recognized as a strong leader; she was awarded the Pride of Korea Grand Prize in 2002 by the Korean Press Association and selected as one of the “New Century leaders” by CNN in 2003 as well as one of the “Top 50 Women to Watch” by The Wall Street Journal in 2004. In 2014, she received the “Global Leadership Award” from the International Federation of Business and Professional Women. Kim personifies what “real women” of the 21st century would aspire to be, thus making her the best marketing resource for MCM. She is the main model at all MCM’s promotional events. The company even operates a Web site exclusively for her. This personal site shapes and improves MCM’s brand image for globally successful women and acts as a platform for public relations. It also adds a personal touch to MCM’s marketing efforts. Collaboration and below-the-line marketing activities are aggressively executed. The Sung Joo Group hosted a variety of spectacular events, including a joint event for the fashion industry with 10 Corso Como, a renowned and trendy global company in Milan, Italy, during the Milano Collection. The activities also included the premiere for singer Beyoncé’s 2009 film, Obsessed, in New York City and sponsorship of Marc Valvo during New York Fashion Week. These collaborations created buzz, increased visibility, and reinforced MCM’s luxurious yet trendy brand image. The Sung Joo Group has also tried to create a strong and compelling brand story focused on MCM’s Germanoriented craftsmanship. It collaborated with Germanbased brands such as BMW and invited representatives from Germany’s public organizations and important German government representatives to grace Korea’s MCM events, ingeniously utilizing its country-of-origin effect to build the new global MCM.

ChaPter 1 ó Defining Marketing for the New realities

The Sung Joo Group also updated its pricing strategy for MCM. When it took over MCM, the brand was treated as a “masstige” brand in Korea—prestige for the masses, with affordable prices—unlike its overseas top-tier pricing. This misalignment in pricing meant that the Sung Joo Group had to gradually increase prices in Korea to match the luxury positioning it was going for. Ultimately, MCM had both affordable global product lines and higher-end lines. As MCM expanded overseas, different pricing strategies were applied to these markets compared with Korea, to avoid rapid changes back home. Ultimately, prices were increased both outside and inside Korea, though the rate of increase varied. The different pricing system was crucial to MCM’s positioning in the luxury market. The company needed to balance exclusivity, high-quality design, and craftsmanship while giving the impression of inclusiveness. In line with Kim’s focused strategy, all existing retail stores worldwide were shut down. New distribution and retail strategies were implemented. Based on the Boston Business Model, the Sung Joo Group redefined the global market with three regions: the image market for Europe and the United States, the star market for China, and the cash cow market for Korea. To reposition MCM in Europe, the image market, the Sung Joo Group reopened an MCM store in Berlin, Germany in July 2006, signaling the company’s commitment to its German heritage. In the United States, the Sung Joo Group proceeded slowly to cultivate a following via word-of-mouth communication. MCM premiered its collection at major department stores Bloomingdale’s and Intermix in 2007 before opening its first stand-alone boutique in New York’s Plaza Hotel in 2008. For its premier New York collection, it showcased designs by Joy Gryson, a former accessories design director at Marc Jacobs. Sales were still insignificant at about $5 million, compared with $16 million in 1993 during its heyday. Despite this, MCM gained visibility as numerous people, including Hollywood stars, began appearing in various television shows and fashion events with an MCM bag. The Sung Joo Group realized that the Chinese market would become the biggest luxury market worldwide. Thus, for this star market, the company opened its largest flagship store at Beondeugeori in Shanghai, in early 2010. It also opened a flagship store in Beijing and set up a corporate office in Hong Kong to support its China operations. For the Korean cash cow market, the Sung Joo Group shifted away from its old island- and boot-type outlets in department stores to luxury boutiques highlighting MCM’s change in positioning. In 2007, the flagship store MCM HAUS, was opened in Chungdamdong, the most famous street for fashion in Seoul. The store was located in a unique building tinted with contemporary art by Richard

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MCM’s annual sales reached $250 million in 2009 despite poor market conditions at the time. Sales reached $450 million in 2011 and $500 million in 2013, and they continue to grow. MCM’s strong sales performance can be largely attributed to the strong demand from Chinese customers. While tackling markets at different maturity levels within China, MCM was able to maintain a cohesive brand identity and offer merchandise to cater to the specific needs of each regional market. MCM has experienced much success with its rebranding exercise, but the brand has to continue changing to keep up with the increasingly sophisticated luxury goods marketplace. Many other luxury brands have also experienced noticeable performance and growth due to the increasing affluence of the population at large. They continue to position themselves as fashion leaders through innovation, collaboration, and some hybrid approaches with art and culture. It is imperative that MCM start focusing on sustaining its growth. However, MCM faces a few challenges. First, despite enjoying a stellar performance since 2005, it still lacks global awareness. MCM has only about 39 years of brand history. It lacks the rich heritage of the traditional European luxury brands, making its image as a luxury brand in the global market much weaker than its competitors’. Second, the endeavor to reposition MCM in the luxury market is still an ongoing process that requires time and intensive financial investment. MCM’s fantastic presence in Korea has funded its global expansion. Any slip-up may be detrimental to the company’s global expansion plans. However, in 2013, sales started slowing down in Korea as local demand became sluggish. MCM was pressured to withdraw or downsize from major Korean department store chains. But it quickly recovered from this minor setback and continued its expansion, opening stores in Malaysia and Singapore and even a flagship store in Seoul in Garousu-Gil in December 2013.

Korean consumers have played an increasingly important role in the global luxury market as they understand and have experience with various global luxury brands and markets. Further, they have a variety of channels to purchase luxury brands. Many global luxury brands are eyeing Korea as target markets or as test markets. This threatens MCM’s current market share, which in turn, threatens the company’s ability to fund further growth. Thus, MCM needs to develop an effective retention program to prevent its Korean consumers from switching to competitors. Finally, as a relatively new entrant in the luxury market, MCM needs to develop a global marketing strategy that not only meets the global luxury standard but also remains differentiated from other brands. Luxury brands are pursuing more innovation, sophistication, and personalization to appeal to emerging consumers, coined the “Twitter, Google, Instagram and Facebook (TGIF) generation” by Kim. Many of these luxury brands—MCM’s competitors— have sought to collaborate on art and culture in key countries, implementing a variety of strategies to strengthen their brand’s core values. They are also investing heavily in opening flagship stores, artisan workshops, and boutique stores to highlight the brand’s spirit and heritage. Such investments are especially challenging for MCM, which has limited resources. In spite of the challenges ahead, Kim has injected new capital into the business, trimmed its overstretched distribution network, and revamped the product lines, allowing MCM’s sales to grow. Today, MCM is present in over 35 countries and operating over 300 stores, with flagship boutiques in major cities such as Athens, Beijing, and Munich, generating over half a billion dollars in sales. The company launched its global ecommerce business in February 2015, setting the stage for its future growth.

Questions 1. What are MCM’s core brand values? 2. What are the pros, cons, and risks associated with MCM’s three-pronged approach to marketing? 3. Going into e-commerce was one of the actions that MCM has taken to stay relevant in today’s global luxury market. What other avenues can MCM go into to maintain sustainable growth and appeal to the emerging TGIF generation? Sources: www.sungjoogroup.com/en; www.kimsungjoo.com/en; www.mcmworldwide.com; Divia Harilela, “Sung-Joo Kim on Rebuilding MCM,” www .businessoffashion.com, 11 November 2014; Martin Soong, “It’s All About ‘TGIF’ for This Korean CEO,” www.cnbc.com, 4 June 2015; Valerie Smith, “Sung-Joo Kim: Changing the Face of Luxury,” www.credit-suisse.com, 12 March 2015; “Interview with Sung-Joo Kim, Chief Visionary Officer and Chairperson of Luxury Fashion Brand MCM Holdings AG & Sungjoo Group,” http://blog.globalinvesther.com, 7 February 2015; “Emerging Leaders,” http://thomaswhite.com/global-perspectives/sung-joo-kim, December 2012; Vinicy Chan, “Handbag Maker MCM Plans IPO as Sales Set to Triple,” http://bloomberg.com, 26 March 2014; Hannah Marriott, “The World in a Bag: The Rise of MCM,” The Guardian, 19 August 2014; Nurul Jannah Kamaruddin, “Sungjoo Group Plans to Open First Mode Creation Munich Boutique in M’sia,” Bernama Daily Malaysian News, 11 August 2013; “Trendy Travel Companion,” New Sunday Times, 27 July 2014; “2015-2019 Travel and Business Bags Market in Germany,” Technavio Insights, 2015, p. 77, p. 104; Paula Hancocks and Sung Kim, “Interview with South Korean Entrepreneur Sung-Joo Kim,” International Wire, 30 Dec 2011; Eun Jung Choi , “MCM of Sung Joo Group: An MCM Licensee Wrote a Creation Myth in the Luxury Industry,” Asian Case Research Journal, 2014, 18(2), pp. 277–316; Choi Kyong-ae, “MCM Suffers Major Setback,” Korea Times, 24 September 2013; Ramirez, Elva, “MCM’s Eastern Makeover; An Ambitious South Korean Businesswoman Attempts to Resurrect the Faded Luxury Brand,” www.onlinewsj.com, 13 March 2010; Nick Debnam and George Svinos, “Luxury Brands in China,” www.kpmg.com, 2007; Mary Jane Pittilla, “Ambitious MCM Takes the US Market by Storm,” www.moodiereport.com, 12 October 2007.

Marketing Lesson In 1998, two Stanford University PhD students, Larry Page and Sergey Brin, founded a search engine company and named it Google. The name plays on the number googol—1 followed by 100 zeroes—and refers to the massive quantity of data available online that the company helps users to find. Google’s corporate mission is “To organize the world’s information and make it universally accessible and useful.” From the beginning, Google has strived to be one of the “good guys” in the corporate world, supporting a touchy-feely work environment, strong ethics, and a famous founding credo: “Don’t be evil.” The company has become the market leader for search engines through its business focus and constant innovation. As Google grew into a primary destination for Web users searching for information online, it attracted a host of online advertisers. These advertisers drove Google’s revenue by buying “search ads”—little text-based boxes shown alongside search results that advertisers pay for only when users click on them. Google’s search ad program, called AdWords, sells space on its search pages to ads linked with specific keywords. Google auctions off the keyword ads, with prime keywords and page locations going to the highest bidder. Google also has a program called AdSense, which allows any Web site to display targeted Google ads related to the content of its site. Web site publishers earn money every time visitors click on these ads. In addition to offering prime online “real estate” for advertisers, Google adds value by providing tools to better target their ads and better understand the effectiveness of their marketing. Google Analytics, free to Google’s advertisers, provides a custom report, or dashboard, detailing how Internet users found the site, what ads they saw and/or clicked on, how they behaved while there, and how much traffic was generated. With its ability to deploy data that enable upto-the-minute improvements in a Web marketing program, Google supports a style of marketing in which the advertising resources and budget can be

ChaPter 1 ó Defining Marketing for the New realities

GOOGLE

constantly monitored and optimized. Google calls this approach “marketing asset management,” implying that advertising should be managed like assets in a portfolio depending on the market conditions. Rather than following a marketing plan developed months in advance, companies use the real-time data collected on their campaigns to optimize the campaign’s effectiveness and be more responsive to the market. Over the past years, Google has expanded far beyond its search capabilities with numerous other services, applications, and tools. It creates and distributes its products for free, which in turn provides new opportunities for the firm to sell additional targeted advertising space. Since 97 percent of Google’s revenues come from online advertising, new advertising space is critical to the company’s growth. Google’s wide range of products and services fall into five categories: desktop products, mobile products, Web products, hardware products, and other products. Desktop products include both stand-alone applications such as Google Earth (a virtual globe that uses satellite imagery and aerial photography), Google Chrome (a Web browser), and Google Video/YouTube, or desktop extensions such as Google Toolbar (a browser toolbar). Mobile products include all Google products available for mobile devices. Web products are broken down into the following subsets—advertising (e.g., AdWorks, DoubleClick, Click-to-Call), communications and publishing (e.g., Google Docs, Google Calendar, Google Gadgets, Wave), development (e.g., Android, Google Code), mapping (e.g., Google Sky, Google Maps), Search (Google Dictionary, Google Alerts, Google Scholar), and statistics (e.g., Google Trends, Google Analytics). Google’s stage of development starts within Google Labs, which lists new products available for testing. It next moves to beta status, where invited users test early prototypes. Once the product is fully tested and ready to be released to the general public, it moves into the gold stage as a core Google product. Google Voice, for example, is in the beta stage. It provides consumers with one Google phone number, which then connects to the user’s home, office, and mobile numbers. The user decides which phones ring, based on who calls. Due to Google Voice’s complexity and popularity, users can sign up only by invitation. Google has not spent a lot of money on traditional advertising. Efforts have been targeted at Microsoft consumers with appeals to use Google’s “cloud computing” applications instead of Microsoft Office or Windows. By “Going Google,” a user can access all of his or her documents and applications via a Web browser instead of owning the physical infrastructure

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and software. In addition, in 2009 Google launched its first-ever television commercial for Google Chrome, an alternative to Microsoft’s Internet Explorer Web browser. Google is also betting big in the mobile category. With its 2008 launch of Android, a mobile operating system, Google went head-to-head with Apple’s iPhone. Although many still prefer Apple’s platform, even critics have praised Android’s benefits. Most importantly, Android is free, open sourced, and backed by a multimillion-dollar investment. That means Google wants its partners to help build and design Android over the years. In addition, the iPhone is available only through AT&T in the U.S., while most of AT&T’s competitors support Android phones. If Google influences millions of new consumers to use smart phones, it could make billions in mobile advertising. One analyst stated that Google “is trying to get ahead of the curve with these initiatives so when [mobile advertising] becomes mainstream, Google will be one of the major players, and display is a key growth area for Google.” In 2010, Google launched Nexus, its own Android mobile phone. Google’s goal is to reach as many people as possible on the Web—whether by PC or by phone. The more users there are on the Web, the more advertising Google can sell. Google’s new products also accomplish this goal and make the Web a more personalized experience. One program allows users to mark their

current position on Google Maps, click the local tab, and receive information about local restaurants, bars, and entertainment venues. Google has enjoyed great success as a company and a brand since its launch. When it experienced an hour-long outage in 2009, worldwide Internet traffic decreased by 5 percent. However, it has had run-ins with the Chinese government. In 2010, it threatened to leave China because of censorship and intrusions from hackers. It then closed its Internet search service there and redirected users in China to its uncensored search engine in Hong Kong. This decision to route mainland Chinese users to Hong Kong was an attempt by Google to skirt censorship requirements without running afoul of Chinese laws. However, this angered Chinese officials. Globally, Google holds a more dominant lead than Yahoo! and Bing. It commands a market share of 81.4 percent in India, 92.8 percent in Germany, and 94 percent in Spain. Although its market share in the U.S. has fallen to 66.3 percent relative to Yahoo!’s 14.3 percent and Bing’s 10.9 percent, its market share overall is expected to grow on Android adoption. In 2015, Google was the second most powerful brand in the world after Apple with an estimated brand value of $120.3 billion. In 2014, Google’s revenues topped $66 billion.

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Questions 1. With a portfolio as diverse as Google’s, what are the company’s core brand values? 2. What’s next for Google? Is it doing the right thing taking on Microsoft with its cloud computing, Apple in the fight for smart phones, and the Chinese government on censorship search? Sources: www.google.com; “Google’s Android Mobile Platform Is Getting Huge,” Advertising Age, October 2009; Rita Chang, “Google Set for Richer Advertising on Smartphones,” Advertising Age, 5 October, 2009; “The Market Share of Google in Various Countries,” www.labnol.org, 7 June 2010; Jordan McCollum, “The Sky Is Falling! (And So Is Google’s Market Share),” www.marketpilgrim.com; Miguel Helft and David Barboza, “Google Shuts China Site in Dispute over Censorship,” www.nytimes.com, 22 March 2010; “2012 Financial Tables, “http://investor.google.com; “2012 BrandZ Top 100,” www .millwardbrown.com/BrandZ.

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C H A P T E R

Developing Marketing Strategies and Plans Developing the right marketing strategies over time requires a blend of discipline and flexibility. Firms must stick to a strategy but must also constantly improve it. In today’s fast-changing marketing world, identifying the best long-term strategies is crucial but challenging.

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as China International Travel Service (CITS) and China Travel Service (CTS), which offer similar packages at different price ranges, is a bold, strategic, and tactical marketing plan.

The establishment of Mercedes-Benz Travel allows Mercedes-Benz to add another dimension to its brand image—a diverse and passionate lifestyle. This also allows the company to prioritize the customer and serve them better, all the while enhancing its brand influence. Unlike local players that have shied away from this opportunity, Mercedes-Benz is one of the first non-tourism brands to use its brand value in a strategic manner in the profitable luxury tourism market in China. Entering a market dominated by state-owned companies such

The German automaker will develop its tours to include unique and unusual destinations, and also give a new twist for travelers visiting famous tourism sites. Looking to deliver the best or nothing, its package itineraries include theme-based trips with Europe as a primary destination, special trips only for women, summer camps, and education trips. It also includes special events—for instance, one could meet high-end fashion designer Karl Lagerfeld after enjoying a fashion show in Paris or end up having a chat with the curator of the Louvre while viewing Leonardo da Vinci’s famous portrait of Mona Lisa at the museum. Clients can also visit the automobile manufacturer’s headquarters in Germany and test-drive their latest models.1

n a bid to make its mark as the luxury car of choice in the Chinese market, Mercedes-Benz established the “Mercedes-Benz Travel” program in partnership with HH Travel, a high-end Chinese travel agency and a subsidiary of Ctrip International. The program focuses on outbound tourists, especially those traveling to Europe; this move made Mercedes-Benz the first automaker to offer travel solutions for a fast-growing luxury tourism sector in China.

In this chapter, we will address the following questions: 1. How does marketing affect customer value? 2. How is strategic planning carried out at different levels of the organization? 3. What does a marketing plan include?

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his chapter begins by examining some of the strategic marketing implications involved in creating customer value. It then provides several perspectives on planning and describes how to draw up a formal marketing plan.

2.1 Marketing and Customer Value The task of any business is to deliver customer value at a profit. A company can win only by finetuning the value delivery process and choosing, providing, and communicating superior value.

2.1.1 The Value Delivery Process The traditional view of marketing is that the firm makes something and then sells it. Companies that subscribe to this view have the best chance of succeeding in economies marked by shortage of goods, where customers are not fussy about quality, features, or style—for example, with basic staple goods in developing markets. The traditional view will not work, however, in economies where people face abundant choices. There, the “mass market” is actually splintering into numerous micromarkets, each with its own wants, perceptions, preferences, and buying criteria. The smart competitor must design and deliver offerings for well-defined target markets. This belief is at the core of the new view of business processes, which places marketing at the beginning of planning. Instead of emphasizing making and selling, these companies see themselves as part of a value delivery process.

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We can divide the value creation and delivery sequence into three phases. The first phase, choosing the value, represents the “homework” marketing staff must do before any product exists. The marketing staff must segment the market, select the appropriate market target, and develop the offering’s value positioning. The formula “segmentation, targeting, positioning (STP)” is the essence of strategic marketing. Once the business unit has chosen the value, the second phase is providing the value. Marketing must determine specific product features, prices, and distribution. The task in the third phase is communicating the value by utilizing the sales force, sales promotion, advertising, and other communication tools to announce and promote the product. Each of these value phases has cost implications. China Focus (Yiwu)—Although China has been experiencing three decades of growth, averaging 10 percent a year, many Chinese families still find branded Western toys out of their reach. Barbie dolls are perceived to be too expensive and trashy for Chinese girls. In comes Princess Secret by Chinese manufacturer China Focus (Yiwu). This doll is touted as the suitable playmate for Chinese girls as they are pretty, lower maintenance than Barbie, conservative, and speaks Chinese. Despite Princess Secret costing twice as much to manufacture as other local dolls, it is still cheaper than imports. Indeed, not only do Chinese parents see the value in Princess Secret, but non-Chinese too. In 2010, China Focus received the bulk of its $5 million revenue selling its Princess Secret and other dolls in the United States and Europe. Mattel, which opened its first Barbie-dedicated store in China closed after two years of poor sales.2

2.1.2 The Value Chain Michael Porter has proposed the value chain as a tool for identifying ways to create more customer value.3 According to this model, every firm is a synthesis of activities performed to design, produce, market, deliver, and support its product. The value chain identifies nine strategically relevant activities—five primary activities and four support activities—that create value and cost in a specific business. The primary activities cover the sequence of bringing materials into the business (inbound logistics), converting them into final products (operations), shipping out final products (outbound logistics), marketing them (marketing and sales), and servicing them (service). The support activities—procurement, technology development, human resource management, and firm infrastructure—are handled in certain specialized departments, as well as elsewhere. Several departments, for example, may do procurement and hiring. The firm’s infrastructure covers the costs of general management, planning, finance, accounting, and legal and government affairs.

The firm’s task is to examine its costs and performance in each value-creating activity and look for ways to improve it. The firm should estimate its competitors’ costs and performances as benchmarks against which to compare its own costs and performance. It should go further and study the “best of class” practices of the world’s best companies.4 For instance, to support its corporate goal to be more innovative, General Electric benchmarks against Procter & Gamble as well as develops its own best marketing practices.

The market sensing process—All the activities involved in gathering market intelligence, disseminating it within the organization, and acting on the information The new offering realization process—All the activities involved in researching, developing, and launching new high-quality offerings quickly and within budget The customer acquisition process—All the activities involved in defining target markets and prospecting for new customers The customer relationship management process—All the activities involved in building deeper understanding, relationships, and offerings to individual customers The fulfillment management process—All the activities involved in receiving and approving orders, shipping the goods on time, and collecting payment Strong companies develop superior capabilities in managing and linking their core business processes. They re-engineer the workflows and build cross-functional teams responsible for each process.6 Winning companies are those that excel at managing core business processes through cross-functional teams. To be successful, a firm also needs to look for competitive advantages beyond its own operations, into the value chains of suppliers, distributors, and customers. Many companies today have partnered with specific suppliers and distributors to create a superior value delivery network also called a supply chain.7 Companies also make strategic decisions in their acquisitions to create value for their customers (see Marketing Insight: The Value of WhatsApp to Facebook).

MARKETING INSIGHT

The VAlue oF WhATsApp To FAcebook

Facebook sent shockwaves through the tech industry in 2014 when it paid $19 billion to acquire WhatsApp, an instant messaging app. That is a staggering amount to pay for such a young company, which has revenue equal to only 10 percent of Facebook’s. This deal was leagues ahead of the $1 billion it paid for photo-based social networking app Instagram in 2012. Apps as a business commodity barely existed eight years ago; Whatsapp itself first appeared on the scene in 2009, and the app industry, in general, can be a capricious business—just ask the developer behind Flappy Bird. Let’s take a brief look at what makes the one-centimetersquare button on your mobile screen worth $19 billion. While this won’t be a fast money-spinner for Facebook, there are two key reasons that make the move worth the outlay. First, WhatsApp collects everyone’s contact information when they sign up and thus acquires knowledge of the user. Facebook doesn’t have this draw, as it only captures friends, often missing out on business associates and acquaintances. Several commentators have suggested that what Facebook has bought for its $19 billion are the phone numbers of its billion

users. This is valuable data and brings us to the second reason, platform building. WhatsApp is a relatively simple chat app with a few twists—group chat, for example—but it has a vast and growing user base, reportedly growing at a million new users a day. Facebook sees potential for a lot more in the way of ecommerce, with WhatsApp opening the way to the development of a multifunction platform selling services, much like other chatbased apps such as Japan’s Line, China’s Tencent, and Skype, bought by Microsoft in 2011 for an at-the-time astonishing $8.5 billion. We’ve seen mega-acquisitions succeed and fail over the years—look at NewsCorp’s experience with MySpace. So how will this play out? Free chat The key questions revolve around whether Facebook will convert WhatsApp successfully without alienating its core user base. App users tend to be fickle friends, and there are plenty of other free chat apps available for those who are looking.

ChaPter 2 ó Developing Marketing Strategies and Plans

The firm’s success depends not only on how well each department performs its work, but also on how well the various departmental activities are coordinated to conduct core business processes.5 These processes include:

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In addition, among the 20 well-known chat apps, WhatsApp is the only one to impose a $1 yearly subscription fee. All the others are free and have made that aspect the core of their business model. So has Facebook shown itself to be good at integration and innovation? Has it acquired the most complementary companies? Can it reinvent its own ecosystem to retain the activities and young users? These are just some of the questions that should give investors pause for thought.

One thing is certain: with plenty of free chat programs available, charging even $1 will not succeed in generating the estimated $1 billion, which is the supposed basis for this acquisition. However, Facebook and its hoodie-wearing CEO have shown themselves to be smart buyers who are in it for the long-term. Taking over Whatsapp not only brings it into Facebook’s grasp, but it also means taking out a massive potential competitor, like Google, and preventing them from getting their hands on it. There is a deeper strategy at play here.

Source: Adapted from Keith Carter, “What’s Behind the WhatsApp Deal?” Think Business, 21 February 2014. Partially reproduced with permission from Think Business, NUS Business School, National University of Singapore (http://thinkbusiness.nus.edu). Copyright NUS Business School.

2.1.3 Core Competencies Companies outsource less-critical resources if they can obtain better quality or lower cost. The key is to own and nurture the resources and competencies that make up the essence of the business—its core competency. A core competency has three characteristics: (1) it is a source of competitive advantage in that it makes a significant contribution to perceived customer benefits; (2) it has applications in a wide variety of markets; and (3) it is difficult for competitors to imitate.8

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Competitive advantage also accrues to companies that possess distinctive capabilities. Whereas core competencies tend to refer to areas of special technical and production expertise, distinctive capabilities tend to describe excellence in broader business processes. George Day sees market-driven organizations as excelling in three distinctive capabilities: market sensing, customer linking, and channel bonding.9 In terms of market sensing, he believes that tremendous opportunities and threats often begin as “weak signals” from the “periphery” of a business.10 He offers a systematic process for developing peripheral vision, and practical tools and strategies for building “vigilant organizations” attuned to changes in the environment, by asking questions related to learning from the past, evaluating the present, and envisioning the future. Businesses may need to realign themselves to maximize core competencies. Realignment has three steps: (1) (re)defining the business concept (the “big idea”); (2) (re)shaping the business scope (the lines of business); and (3) (re)positioning the company’s brand identity (how customers should see the company). Panasonic—As Panasonic approaches its 100th anniversary in 2018, it faces unprecedented difficulties, notably a massive loss of roughly $19 billion over 2011 and 2012. For years, its “Ideas for Life” positioning had fueled innovation, generating successful products like its rugged Toughbook notebook computers. Its television sets and other home electronics ran into trouble, however, when the economy stalled just as consumers began to treat flat-screen LCD televisions as a commodity. Further, a strong yen and high manufacturing costs in Japan made it difficult for Panasonic to compete on price. AntiJapanese sentiment from a territorial dispute proved a stumbling block in China. Finally, the acquisition of Sanyo in 2009, designed to help the company sell more green-energy products, was a disappointment. A major restructuring by new president Kazuhiro Tsuga in fall 2012 scaled back manufacturing in Japan, abandoned the mobile phone market overseas, and cut back investment in solar panels and rechargeable batteries. Tsuga emphasized that Panasonic will streamline business units and emphasize profit, not just revenue growth. McKinsey & Company found that many successful Asian companies adopt at least one of three strategies to harness their core competence:11 1.

Expand quickly to capture global market opportunities—Being the best company in a domestic market no longer guarantees survival since global players have the ability to attack incumbents in their home markets and erode their profits. Half of the top 10 value creators, on average, earned more than half of their revenues outside their home markets, often by leveraging Asia’s low-cost labor or mastering its complicated and inefficient supply

chains. For example, Hong Kong-based Johnson Electric, manufacturer of micro motors, derives much of its revenue from Europe, Japan, and the United States. It benefited from the relatively low cost of skilled labor to capture global market share. 2.

Become asset-light by using intangibles—Physical assets are becoming less relevant in the global battle for supremacy. The more profitable Asian companies focus on intangibles such as fostering human capital, exploiting network effects, and creating synergies based on reputation. For example, Hong Kong’s Li & Fung, which manages supply chains for international companies, does not own any production facilities. Instead, it specializes in offering its customers a one-stop service ranging from the development of products through sourcing raw materials and managing production to consolidation of shipping.

McKinsey & Company found that many Asian companies, such as Taiwan Semiconductor Manufacturing are successful, by becoming singularly focused in a particular area. In TSMC’s case, it becomes an expert in the semiconductor foundry business.

2.1.4 The Central Role of Strategic Planning These companies focus on the customer and are organized to respond effectively to changing customer needs. They have well-staffed marketing departments, and their other departments also accept the concept that the customer is king. They also have a strong market leadership (see Marketing Memo: What Does It Take to be a successful cMo?) To ensure that they select and execute the right activities, marketers must give priority to strategic planning in three key areas:

MARKETING MEMO

WhAT Does IT TAke To be A successFul cMo?

The challenge chief marketing officers (CMOs) face is that success factors are many and varied. CMOs must have strong quantitative and qualitative skills; they must have an independent, entrepreneurial attitude but work closely with other departments; and they must capture the “voice” of consumers yet have a keen bottom-line understanding of how marketing creates value. Two-thirds of top CMOs think returnon-marketing-investment (ROMI) will be the primary measure of their effectiveness in 2015. One survey asking 200 senior-level marketing executives which innate and learned qualities were most important yielded these answers: Innate Qualities Risk take Willingness to make decisions Problem-solving ability

Learned Qualities Global experience Multichannel expertise

Change agent

Cross-industry experience Digital focus

Results-oriented

Operational knowledge

Marketing experts George Day and Robert Malcolm believe three driving forces will change the role of the CMO in the coming years: (1) predictable marketplace trends, (2) the changing role of the C-suite, and (3) uncertainty about the economy and organizational design. They identify five priorities for any successful CMO: 1. 2. 3. 4. 5.

Act as the visionary for the future of the company. Build adaptive marketing capabilities. Win the war for marketing talent. Tighten the alignment with sales. Accept accountability for returns on marketing spending.

Perhaps the most important role for any CMO is to infuse a customer perspective in business decisions affecting any customer touchpoint (where a customer directly or indirectly interacts with the company). Increasingly, these customer insights must have a global focus. As one top executive search firm leader said, “Tomorrow’s CMO will have to have global and international experience. You can do it without living abroad . . . but you have to get exposure to those markets. It opens your eyes to new ways of doing business, increases cultural sensitivity, and increases flexibility.”

Sources: Jennifer Rooney, “CMO Tenure Hits 43-Month Mark,” Forbes, 14 June 2012; Steven Cook, “It’s Time to Raise the CMO Bar,” www.cmo.com, 24 January 2012; “From Stretched to Strengthened: Insights from the Global Chief Marketing Officer Study,” IBM CMO C-Suite Studies, October 2011; Natalie Zmuda, “Global Experience Rises as Prerequisite to Getting Ahead,” Advertising Age, 10 June, 2012; George S. Day and Robert Malcolm, “The CMO and the Future of Marketing,” Marketing Management, Spring 2012, pp. 34–43; Marc De Swann Arons and Frank Van Den Driest, The Global Brand CEO: Building the Ultimate Marketing Machine (New York: Airstream, 2011); Marylee Sachs, The Changing MO of the CMO: How the Convergence of Brand and Reputation Is Affecting Marketers (Surrey, England: Gower, 2011); Marylee Sachs, What the New Breed of CMOs Know That You Don’t (Surrey, England: Gower, 2013).

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3.

Become atomizers—These companies receive more than 80 percent of their revenues from a single main industry sector. Unlike the typical Asian conglomerate, these focused companies have resisted the temptation of empire-building. For example, Taiwan Semiconductor Manufacturing Company is a specialized circuit foundry. Its founder, Morris Chang, has enshrined in its corporate charter a single-minded preoccupation with the semiconductor foundry business, thus preventing the company from attempting to move into the production of its own branded products and from competing against its customers.

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(1) managing a company’s businesses as an investment portfolio; (2) assessing each business’s strength by considering the market’s growth rate and the company’s position and fit in that market; and (3) establishing a strategy. For each business, the company must develop a game plan for achieving its long-run objectives. The marketing plan is the central instrument for directing and coordinating the marketing effort. The marketing plan operates at two levels: strategic and tactical. The strategic marketing plan lays out the target markets and the value proposition that will be offered, based on an analysis of the best market opportunities. The tactical marketing plan specifies the marketing tactics, including product features, promotion, merchandising, pricing, sales channels, and service. Today, teams develop the marketing plan with inputs and sign-offs from every important function. These plans are then implemented at the appropriate levels of the organization. Results are monitored, and necessary corrective action taken. The complete planning, implementation, and control cycle is shown in Figure 2.1. We next consider planning at each of these four levels of the organization. Planning

Implementing

Controlling

Corporate planning

Organizing

Measuring results

Division planning

Implementing Diagnosing results

Business planning

Product planning

Taking corrective action

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2.2 Corporate and Division Strategic Planning

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Figure 2.1 The Strategic Planning, Implementation, and Control Processes

All corporate headquarters undertake four planning activities: (1) defining the corporate mission; (2) establishing strategic business units (SBUs); (3) assigning resources to each SBU; and (4) assessing growth opportunities.

2.2.1 Defining the Corporate Mission

Amazon’s mission is to be the world’s largest online store.

An organization exists to accomplish something: to make cars, lend money, provide lodging, and so on. Its specific mission or purpose is usually clear when the business starts. Over time the mission may change to take advantage of new opportunities or respond to new market conditions. Amazon.com changed its mission from being the world’s largest online bookstore to aspiring to become the world’s largest online store. eBay changed its mission from running online auctions for collectors to running online auctions covering all kinds of goods. To define its mission, a company should address Peter Drucker’s classic questions:12 What is our business? Who is the customer? What is of value to the customer? What will our business be? What should our business be? These simple-sounding questions are among the most difficult a company will ever have to answer. Successful companies continuously raise these questions and answer them thoughtfully and thoroughly.13 Organizations develop mission statements to share with managers, employees, and (in many cases) customers. A clear, thoughtful mission statement provides employees with a shared sense of purpose, direction, and opportunity. Mission statements are at their best when they reflect a vision, an almost “impossible dream” that provides a direction for the company for the next 10 to 20 years. Sony’s former president, Akio Morita, wanted everyone to have access to “personal portable sound,” so his company created the Walkman and portable CD player.

Good mission statements have five major characteristics: They focus on a limited number of goals—The statement, “We want to produce the highestquality products, offer the most service, achieve the widest distribution, and sell at the lowest prices” claims too much.

2.

They stress the company’s major policies and values—They narrow the range of individual discretion so that employees act consistently on important issues.

3.

They define the major competitive spheres within which the company will operate — Table 2.1 summarizes some key competitive dimensions for mission statements.

4.

They take a long-term view—Management should change the mission only when it ceases to be relevant.

5.

They are as short, memorable, and meaningful as possible—Three- to four-word corporate mantras like “Better global society” for Samsung may be useful.

Table 2.1 Defining Competitive Territory and Boundaries in Mission Statements Industry. Some companies operate in only one industry; some only in a set of related industries; some only in industrial goods, consumer goods, or services; and some in any industry. Caterpillar focuses on the industrial market; John Deere operates in the industrial and consumer markets. Products and applications. Firms define the range of products and applications they will supply. St. Jude Medical is “dedicated to developing medical technology and services that put more control in the hands of physicians, and that advance the practice of medicine and contribute to successful outcomes for every patient.” Competence. The firm identifies the range of technological and other core competencies it will master and leverage. Japan’s NEC has built its core competencies in computing, communications, and components to support production of laptop computers, television receivers, and handheld telephones. Market segment. The type of market or customers a company will serve is the market segment. Aston Martin makes only high-performance sports cars. Gerber serves primarily the baby market. Vertical. The vertical sphere is the number of channel levels, from raw material to final product and distribution, in which a company will participate. At one extreme are companies with a large vertical scope. American Apparel dyes, designs, sews, markets, and distributes its line of clothing apparel out of a single building in downtown Los Angeles. At the other extreme are “hollow corporations,” which outsource the production of nearly all goods and services to suppliers. Metro International prints 34 free local newspaper editions in 16 countries. It employs few reporters and owns no printing presses; instead it purchases its articles from other news sources and outsources all its printing and much of its distribution to third parties. Geographical. The range of regions, countries, or country groups in which a company will operate defines its geographical sphere. Some companies operate in a specific city or state. Others are multinationals like Toyota and Royal Dutch/Shell, which each operate in more than 100 countries.

Sony’s founding president, Akio Morita, had an “impossible dream” for Sony—to make accessible for everyone a “personal portable sound.” This mission saw the innovative Walkman that heralded the way for iPod and other MP3 players.

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1.

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Compare the rather vague missions statements on the left with Google’s mission statement and philosophy below:14 To build total brand value by innovating to deliver customer value and customer leadership faster, better, and more completely than our competition.

Google Mission To organize the world’s information and make it universally accessible and useful. Google Philosophy

We build brands and make the world a little happier by bringing our best to you.

Never settle for the best. 1. Focus on the user and all else will follow. 2. It’s best to do one thing really, really well. 3. Fast is better than slow. 4. Democracy on the Web works. 5. You don’t need to be at your desk to need an answer. 6. You can make money without doing evil. 7. There is always more information out there. 8. The need for information crosses all borders. 9. You can be serious without a suit. 10. Great just isn’t good enough.

2.2.2 Establishing Strategic Business Units (SBUs)

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Companies often define their businesses in terms of products: They are in the “auto business” or the “clothing business.” But Theodore Levitt argues that market definitions of a business are superior to product definitions.15 A business must be viewed as a customer-satisfying process, not a goods-producing process. Products are transient; basic needs and customer groups endure forever. Transportation is a need: the bicycle, the automobile, the railroad, the airline, and the truck are products that meet that need. Levitt encouraged companies to redefine their businesses in terms of needs, not products. IBM redefined itself from a hardware and software manufacturer to a “builder of networks.” Table 2.2 gives several examples of companies with a product and a market definition of their business. It highlights the difference between a target market definition and a strategic market definition. Table 2.2 Product-Oriented versus Market-Oriented Definitions of a Business Company

Product Definition

Market Definition

Canon

We make copying equipment.

We help improve office productivity.

Petronas

We sell gasoline.

We supply energy.

Sony Pictures

We make movies.

We market entertainment.

Apple iPad

We sell tablets.

We offer information convenience.

Mitsubishi

We make air-conditioners.

We provide climate control in the home.

A target market definition tends to focus on selling a product or service. Pepsi could define its target market as everyone who drinks a cola beverage and competitors would therefore be other cola companies. A strategic market definition could be everyone who might drink something to quench his or her thirst. Suddenly, Pepsi’s competition would then include non-cola soft drinks, bottled water, fruit juices, tea, and coffee. To better compete, Pepsi might decide to sell additional beverages whose growth rate appears to be promising. A business can be defined in terms of three dimensions: customer groups, customer needs, and technology.16 Consider a small company that defines its business as designing incandescent

lighting systems for television studios. Its customer group is television studios; the customer need is lighting; and the technology is incandescent lighting. The company might want to expand. It could make lighting for other customer groups, such as homes, factories, and offices; or it could supply other services needed by television studios, such as heating, ventilation, or airconditioning. It could design other lighting technologies for television studios, such as infrared or ultraviolet lighting.

1.

It is a single business or collection of related businesses that can be planned separately from the rest of the company.

2.

It has its own set of competitors.

3.

It has a manager who is responsible for strategic planning and profit performance, and who controls most of the factors affecting profit.

The purpose of identifying the company’s strategic business units is to develop separate strategies and assign appropriate funding. Senior management knows that its portfolio of businesses usually includes a number of “yesterday’s has-beens” as well as “tomorrow’s breadwinners.”17 Liz Claiborne has put more emphasis on some of its younger businesses such as Juicy Couture, Mexx, and Kate Spade while selling businesses such as Ellen Tracy that do not have the same buzz.

ChaPter 2 ó Developing Marketing Strategies and Plans

Large companies normally manage quite different businesses, each requiring its own strategy. General Electric classified its businesses into strategic business units (sbus). An SBU has three characteristics:

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The Kate Spade brand allows Liz Claiborne to attract a more youthful customer.

2.2.3 Assigning Resources to Each SBU Once it has defined SBUs, management must decide how to allocate corporate resources to each. Several portfolio-planning models provide an analytical means for making investment decisions. The GE/McKinsey Matrix classifies each SBU according to the extent of its competitive advantage and the attractiveness of its industry. Management would want to grow, “harvest” or draw cash from, or hold on to the business. Another model, from Boston Consulting Group, called the BCG’s Growth-Share Matrix, uses relative market share and annual rate of market growth as criteria to make investment decisions. Portfolio-planning models like these have fallen out of favor as oversimplified and subjective. More recent methods that firms use to make internal investment decisions are based on shareholder value analysis, and whether the market value of a company is greater with an

SBU or without it (whether it is sold or spun off ). These value calculations assess the potential of a business based on potential growth opportunities from global expansion, repositioning or retargeting, and strategic outsourcing.

2.2.4 Assessing Growth Opportunities Assessing growth opportunities involves planning new businesses, downsizing, or terminating older businesses. The company’s plans for existing businesses allow it to project total sales and profits. If there is a gap between future desired sales and projected sales, corporate management will have to develop or acquire new businesses to fill it. Figure 2.2 illustrates this strategic-planning gap for a major manufacturer of blank compact discs called Musicale (name disguised). The lowest curve projects the expected sales over the next five years from the current business portfolio. The highest curve describes desired sales over the same period. Evidently, the company wants to grow much faster than its current businesses will permit. How can it fill the strategic-planning gap? Desired sales Sales ($ millions)

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Strategic-Planning Gap

Integrative growth Intensive growth

Current portfolio

0

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ion growth

Diversificat

1

2 3 Time (years)

4

5

Figure 2.2 The Strategic-Planning Gap

The first option is to identify opportunities to achieve further growth within current businesses (intensive opportunities). The second is to identify opportunities to build or acquire businesses that are related to current businesses (integrative opportunities). The third is to identify opportunities to add attractive businesses that are unrelated to current businesses (diversification opportunities).

Intensive Growth Corporate management’s first course of action should be a review of opportunities for improving existing businesses. Igor Ansoff proposed a useful framework for detecting new intensive growth opportunities called a “product-market expansion grid.”18 The company first considers whether it could gain more market share with its current products in their current markets (market-penetration strategy). Next it considers whether it can find or develop new markets for its current products (market-development strategy). Then it considers whether it can develop new products of potential interest to its current markets (product-development strategy). Later it will also review opportunities to develop new products for new markets (diversification strategy). How might Musicale use these major intensive growth strategies to increase its sales? Musicale could try to encourage its current customers to buy more. This could work if its customers could be shown the benefits of using more compact discs for recording music or for data storage. Musicale could try to attract its competitors’ customers. This could work if Musicale noticed major weaknesses in its competitors’ products or marketing programs. Finally, Musicale could try to convince non-users of compact discs to start using them. This could work if there are still enough people who are not able to or do not know how to burn a compact disc. How can Musicale use a market-development strategy? First, it might try to identify potential user groups in the current sales areas. If Musicale has been selling compact discs only to consumer markets, it might go after office and factory markets. Second, Musicale might seek additional

ChaPter 2 ó Developing Marketing Strategies and Plans

Starbucks—Starbucks is a company that has achieved growth in many different ways. Howard Schultz recognized an unfilled niche for cafés serving gourmet coffee directly to customers. This became Starbucks’ market-penetration strategy, and helped the company attain a loyal customer base in Seattle. The market-development strategy marked the next phase in Starbucks’ growth: it applied the same successful formula that had worked wonders in Seattle, first to other cities in the Pacific Northwest, then throughout North America, and finally, worldwide. In its alliance with Tata in India, Starbucks developed an India-only espresso roast that is every bit as good as the espresso it serves all over the world. Once the company established itself as a presence in thousands of cities internationally, Starbucks sought to increase the number of purchases by existing customers with a product-development strategy that led to new in-store merchandise, including compilation CDs. Starbucks pursued diversification into grocery store aisles with Frappuccino® bottled drinks, Starbucks brand ice cream, and the purchase of tea retailer Tazo® Tea. Starbucks introduced instant coffee VIA in its stores. The encouraging sales gave Starbucks an easier time convincing the trade to carry the brand. Starbucks is drafting off its stores into ubiquitous channels of distribution and then integrating that into the same capability and discipline that it had with the social and digital media. Starbucks has also ventured into the beer business. To target at the health-conscious market, Starbucks offer Refreshers beverages made with real fruit juice and fruit pieces.19

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Starbucks adopt a variety of growth strategies. Besides entering new markets, Starbucks expands by offering a wider portfolio of products which includes venturing into the beer and fruit juice markets. It has also expanded into the roaster business.

distribution channels in its present locations. If it has been selling its discs only through stereo equipment dealers, it might add mass-merchandising channels. Third, the company might consider selling in new locations in its home country or abroad. If Musicale is sold only in Asia, it could consider entering the U.S. market. Management should also consider new-product possibilities. Musicale could develop new features, such as additional data storage capabilities or greater durability. It could offer the CD at two or more quality levels, or it could research an alternative technology such as flash drives. These intensive growth strategies offer several ways to grow. Still, that growth may not be enough. In that case, management must also look for integrative growth opportunities.

Integrative Growth A business can increase sales and profits through backward, forward, or horizontal integration within its industry. An example of horizontal integration is the purchase of Volvo from Ford by Geely, China’s largest private-run automobile maker. This acquisition will allow Geely to boost its technology and move into Western markets where its brand recognition has been low.20 In another

example, in anticipation of the opening of its Shanghai Disneyland Park, Disney opened a school in Shanghai, offering English-language courses that seek to make learning fun for 2- to 12-yearolds. Children interact with Disney characters and stories via huge video monitors, and they are taught in small classes by native English speakers supported by bilingual Chinese assistants. Disney is using language learning to attract young children and their families to nurture a future consumer base for its theme park and products.21 How might Musicale achieve integrative growth? The company might acquire one or more of its suppliers (such as plastic material producers) to gain more control or generate more profit (backward integration). It might acquire some wholesalers or retailers, especially if they are highly profitable (forward integration). Finally, Musicale might acquire one or more competitors (horizontal integration). However, these new sources may still not deliver the desired sales volume. In that case, the company must consider diversification.

Diversification Growth Diversification growth makes sense when good opportunities can be found outside the present businesses. A good opportunity is one in which the industry is highly attractive and the company has the right mix of business strengths to be successful. For example, from its origins as an animated film producer, Walt Disney Company has moved into licensing characters for merchandised goods; has entered the broadcast industry with its own Disney Channel as well as ABC and ESPN acquisitions, as well as the movie industry with the acquisition of Lucasfilm and Marvel Entertainment; operates a cruise line; and has developed theme parks and vacation and resort properties.

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Several types of diversification are possible for Musicale. First, the company could seek new products that have technological or marketing synergies with existing product lines, even though the new products themselves may appeal to a different group of customers (concentric strategy). It might start a laser disc manufacturing operation because it knows how to manufacture compact discs. Second, the company might search for new products that could appeal to current customers even though the new products are technologically unrelated to its current product line (horizontal strategy). Musicale might produce compact disc cases, even though producing them requires a different manufacturing process. Finally, the company might seek new businesses that have no relationship to its current technology, products, or markets (conglomerate strategy). Musicale might want to consider such new businesses as making application software or personal organizers.

Downsizing and Divesting Older Businesses Companies must not only develop new businesses, they must also carefully prune, harvest, or divest tired old businesses to release needed resources and reduce costs. Weak businesses require a disproportionate amount of managerial attention. Managers should focus on growth opportunities, not fritter away energy and resources trying to salvage hemorrhaging businesses.

2.2.5 Organization and Organizational Culture Strategic planning is done within the context of the organization. A company’s organization consists of its structures, policies, and corporate culture, all of which can become dysfunctional in a rapidly changing business environment. Whereas structures and policies can be changed (with difficulty), the company’s culture is very hard to change. Yet changing a corporate culture is often the key to successfully implementing a new strategy. What is corporate culture? Some define it as “the shared experiences, stories, beliefs, and norms that characterize an organization.” Walk into any company and the first thing that strikes you is the corporate culture—the way people are dressed, how they talk to one another, and the way they greet customers. At Google, almost everyone eats in the office café for lunch, sitting at whatever table has an opening and enjoying conversations with fellow employees from different teams. Everyone is comfortable in sharing ideas and opinions. Google’s culture to foster innovation rests on the belief that each employee is an equally important part of its success. Hence, no one hesitates to pose questions directly to its founders, Larry Page or Sergey Brin, in its weekly meetings or spike a volleyball across the net at a corporate officer. Sometimes corporate culture develops organically and is transmitted directly from the CEO’s personality and habits to the company employees. Such is the case with Microsoft, which began as an entrepreneurial upstart. Even as it grew to a $85.3-billion company in 2016, Microsoft did not lose the hard-driving culture established by founder Bill Gates. In fact, most feel that Microsoft’s

ultra-competitive culture is the biggest key to its success and to its much-criticized dominance in the computing industry.22

Corporate culture may also be transformed when stateowned enterprises are privatized as is occurring in many parts of Asia. Some private-sector Asian businesses have also undergone remarkable changes in corporate culture in response to the changing marketing environment, as illustrated by Samsung Electronics.23

Overseas Chinese companies are constantly collecting “soft” data to make fast decisions based on experience. They do not share information readily. This may change as state-owned enterprises become privatized and as more Asian managers are Western-trained.

Samsung Electronics—When Jong Yong Yun was appointed CEO of Samsung Electronics, earnings had weakened due to a long decline in memory chip prices, Samsung’s main source of profit. Yun reinvented Samsung through a four-step process which he calls “the cycle of change.” First, “chaos making” involved shaking up the old structure. Yun slashed debt by selling $1.9 billion in assets and exiting 16 marginal businesses like dishwashers, pagers, and juice mixers. Defying such Korean business traditions as lifetime employment and seniority as the means to advance, he cut a third of the payroll and replaced about half of the senior managers. Second, Yun shook the complacency out of his managers who emphasized market share over profits, using the slogan: “First survival, then growth.” Third, Yun instilled new values. He appointed three foreigners to Samsung’s corporate board to tap their expertise and signal acceptance of international financial practices and standards. Yun also hired over 50 young Koreans with American MBAs in marketing and assigned them to every division as catalysts for making the company more attuned to global customers. He meets regularly with them and other high-flyers to obtain feedback and to encourage them. Yun also abolished Samsung’s top-down power hierarchy. He does not read lengthy reports nor preside over long formal meetings. Instead, Yun spends half his time visiting plants, sales offices, and retailers. He has a PC hotline where employees can send him complaints and suggestions directly. Yun insists on nearly paperless offices. Samsung has outsourced its secretarial work and mailroom. Fourth, Yun restored order by implementing a quick, simple, and autonomous managerial approach. He handed 17 global product managers total responsibility for the entire value chain, from R&D and production to distribution and sales. Inventories have thus been reduced by 75 percent, saving Samsung billions. Innovative offerings were also launched in high-growth businesses such as mobile phones and laptops. Yun encouraged interdivisional cooperation by mixing wireless, semiconductor, and computer expertise to actualize Samsung’s digital-convergence strategy. Samsung has since built strong global market positions in memory chips, thin-film displays, and wireless communications.

Samsung changed its corporate culture to one that encourages more communication and cooperation across hierarchy and divisions; and gives product managers more autonomy.

ChaPter 2 ó Developing Marketing Strategies and Plans

Corporate culture varies markedly among Asian companies. Overseas Chinese businesses are characterized by fast, autocratic, experience-based, and action-oriented decision making. These businesses seem to invest and risk their capital without much analysis. In reality, the overseas Chinese collect and analyze data tirelessly to make rapid decisions. Many leverage their core competencies in hoarding information and erecting barriers to outsiders’ acquisition of such information. However, their corporate culture may change as a new generation of Western-trained managers assumes leadership of their parents’ businesses.

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What organizational factors drive high-performing Asian businesses? Rohit Deshpandé and John Farley profiled high-performing firms in six Asian countries. Their sample included 500 of the largest firms (including state-owned businesses) in major Asian industrial cities selected from stock market and local business directory listings.24 The results showed that the four organizational factors which affected business performance in Western industrialized nations— market orientation, innovativeness, corporate culture, and organizational climate—were also operative in diverse Asian settings. The most successful Asian companies also looked very similar regardless of their country’s political and economic systems. However, they found that there was no homogeneous Asian model of business performance. Instead, there were many country-specific findings. Chinese and Indian companies seem to be positioned especially well to be globally competitive as they tended to have more entrepreneurial cultures. This indicates that the next set of global challengers will come from China and India. In contrast, Japanese firms have non-entrepreneurial cultures, reflecting the value placed on consensus in Japanese society. This may hinder their cultivation of growth markets in future, both at home and abroad. Thailand’s firms similarly demonstrate an above-average consensual corporate culture, stemming from the country’s strong Buddhist tradition. India and Vietnam appear to be grappling in different ways with the legacy of central economic planning, with India’s private sector showing signs of entrepreneurialism, while Vietnamese firms are more bureaucratic. Perhaps given its unique history of melding Asian and European cultures, Hong Kong was the only country where firms did not demonstrate a single clear profile of corporate culture.

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50 Asian companies display a myriad of corporate cultures. While Chinese companies are more entrepreneurial, Japanese companies are less so, placing more emphasis on consensual decision making.Korean companies are making an impact with Samsung and LG, and several Korean skincare brands such as Etude House and Innisfree, helped in large part with a tide of popularity called K-Wave.

Although Deshpandé and Farley uncovered much variation among firms in the six Asian countries, its major thesis should be of universal interest to marketing managers: competitive and entrepreneurial firms perform better, and more consensual and bureaucratic firms perform worse than their national peers. Similarly, more market-oriented firms which place customer interest first, and innovative businesses which help create new customers, perform better regardless of where they are based. Despite a fast-changing and increasingly globalized world, these features remain constant.

2.2.6 Marketing Innovation Innovation in marketing is critical. Imaginative ideas on strategy exist in many places within a company.25 Senior management should identify and encourage fresh ideas from three groups that tend to be underrepresented in strategy making: employees with youthful perspectives; employees who are far removed from company headquarters; and employees who are new to the industry. Each group is capable of challenging company orthodoxy and stimulating new ideas. British-based Reckitt Benckiser has been an innovator in the staid household cleaning products industry by generating 40 percent of sales from products under three years old. Its multinational staff is encouraged to dig deep into consumer habits and is well rewarded for excellent performance. Marketing Insight: creating Innovative Marketing describes how some leading companies approach innovation. Firms develop strategy by identifying and selecting among different views of the future. The Royal Dutch/Shell Group pioneered scenario analysis. A scenario analysis consists of developing

MARKETING INSIGHT

creATIng InnoVATIVe MArkeTIng it’s decision upon decision, action upon action, day upon day, month upon month. . . . It’s cumulative momentum and no one decision defines a great company.” Collins cites Walt Disney in theme parks and Wal-Mart in retailing as examples of companies that were successful because they executed a big idea brilliantly over a long period of time. To find breakthrough ideas, some companies immerse a range of employees in solving marketing problems. Samsung’s Value Innovation Program (VIP) isolates product development teams of engineers, designers, and planners with a timetable and end date in the company’s center just south of Seoul, Korea, while 50 specialists help guide their activities. To help make tough trade-offs, team members draw “value curves” that rank attributes, such as a product’s sound or picture quality, on a scale from 1 to 5. To develop a new car, BMW mobilizes specialists in engineering, design, production, marketing, purchasing, and finance at its Research and Innovation Center or Project House. Companies like Facebook and Google kickstart the creative problem-solving process by using the phrase, “How might we?” Tim Brown, CEO of IDEO, says that his company asks “how might we” with each design challenge. “The ‘How’ part assumes there are solutions out there—it provides creative confidence,” Brown said. “The ‘Might’ part says we can put ideas out there that might work or might not—either way, it’s OK. And the ‘We’ part says we’re going to do it together and build on each other’s ideas.”

Source: Steve Hamm, “Innovation: The View from the Top,” BusinessWeek, 3 April 2006, pp. 52–53; Jena McGregor, “The World’s Most Innovative Companies,” BusinessWeek, 24 April, 2006, pp. 63–74; Rich Karlgard, “Digital Rules,” Forbes, 13 March 2006, p. 31; Jennifer Rooney and Jim Collins, “Being Great Is Not Just a Matter of Big Ideas,” Point, June 2006, p. 20; Moon Ihlwan, “Camp Samsung,” BusinessWeek, 3 July 2006, pp. 46–47; Mohanbir Sawhney, Robert C. Wolcott, and Inigo Arroniz, “The 12 Different Ways for Companies to Innovate,” MIT Sloan Management Review, Spring 2006, pp. 75–85; Victoria Barret, “Why Salesforce.com Ranks #1 on Forbes Most Innovative List,” Forbes, September 2012; Warren Berger, “The Secret Phrase Top Innovators Use,” HBR Blog Network, 17 September 2012.

plausible representations of a firm’s possible future that make different assumptions about forces driving the market and include different uncertainties. Managers think through each scenario with the question: “What will we do if it happens?” They adopt one scenario as the most probable and watch for signposts that might confirm or disconfirm that scenario.26 Movie Industry—Netflix and the Internet started a decline in DVD sales that began in 2007 and has not stopped. The emergence of Redbox kiosks renting movies for $1 a day added yet another threat to the movie business and DVD sales. Film studios clearly need to prepare for the day when films are primarily sold not through physical distribution but through satellite and cable companies’ video- on-demand services. Although studios make 70 percent on a typical $4.99 cable viewing versus 30 percent on the sale of a DVD, sales of DVDs still generate 70 percent of a film’s profits. To increase electronic distribution without destroying their DVD business, studios are experimenting with new approaches. Some, such as Warner Bros., are releasing a DVD at the same time as online and cable versions of a movie. Disney cross-promotes its parent-friendly films at its theme parks, on its TV channels, and in its stores. Warner has entered the video game business (such as with Batman: Arkham Asylum) in hopes of generating additional revenue on its intellectual property. Warner Interactive typically spends $30 million to $40 million to make its games and generated close to $1 billion in sales in 2011. Film studios are considering all possible scenarios as they rethink their business model in a world where the DVD is no longer king.

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When IBM surveyed top CEOs and government leaders about their priorities, business-model innovation and coming up with unique ways of doing things scored high. IBM’s own drive for business-model innovation led to much collaboration, both within IBM and externally with companies, governments, and educational institutions. Then-CEO Samuel Palmisano noted how the breakthrough Cell processor, based on the company’s Power architecture, would not have happened without collaboration with Sony and Nintendo as well as competitors Toshiba and Microsoft. Procter & Gamble (P&G) has made it a goal for 50 percent of new products to come from outside its labs—from inventors, scientists, and suppliers whose new-product ideas can be developed in-house. Mark Benioff, CEO and co-founder of Salesforce.com, believes the key to innovation is the ability to adapt. While the company spent years relying on disruptive ideas to come from within, it acquired two firms for $1 billion because it “couldn’t afford to wait” and has purchased 24 firms in total. As Benioff notes, “Innovation is a continuum. You have to think about how the world is evolving and transforming. Are you part of the continuum?” Business guru Jim Collins’s research emphasizes the importance of systematic, broad-based innovation: “Always looking for the one big breakthrough, the one big idea, is contrary to what we found: To build a truly great company,

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Film studios are finding new ways to expand their movie franchises, as with Warner Bros. and Batman.

2.3 Business Unit Strategic Planning The business unit strategic-planning process consists of the steps shown in Figure 2.3. We examine each step in the sections that follow. External environment (opportunity & threat analysis) Business mission

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SWOT analysis

Goal formulation

Strategy formulation

Program formulation

Internal environment (strengths/ weaknesses analysis)

Implementation

Feedback and control

Figure 2.3 The Business Unit Strategic-Planning Process

2.3.1 The Business Mission Each business unit needs to define its specific mission within the broader company mission. Thus, a television studio-lighting-equipment company might define its mission as, “To target major television studios and become their vendor of choice for lighting technologies that represent the most advanced and reliable studio lighting arrangements.” Notice that this mission does not attempt to win business from smaller television studios, by being lowest in price, or by venturing into non-lighting products.

2.3.2 SWOT Analysis The overall evaluation of a company’s strengths, weaknesses, opportunities, and threats is called SWOT analysis. It involves monitoring the external and internal marketing environment.

External Environment (Opportunity and Threat) Analysis A business unit has to monitor key macroenvironment forces (demographic-economic, natural, technological, political-legal, and social-cultural) and significant microenvironment actors (customers, competitors, suppliers, distributors, and dealers) that affect its ability to earn profits. The business unit should set up a marketing intelligence system to track trends and important developments and any related opportunities and threats.

Opportunities can take many forms, and marketers have to be good at spotting them. Consider the following: A company may benefit from converging industry trends and introduce hybrid products or services that are new to the market. Major mobile phone manufacturers have released phones with multimedia capabilities and apps. A company may make a buying process more convenient or efficient. Consumers can now use the Internet to search for the lowest price for several products with a few clicks. In India, banks are expanding to the rural population by employing roving tellers. These roving tellers use a laptop, a wireless modem, and a fingerprint scanner to open accounts, take deposits, and process money transfers for farmers and migrant workers in small towns; thus, making the buying process more convenient and accessible. A company can meet the need for more information and advice. Zuji.com facilitates finding travel information by providing several flight and hotel alternatives. A company can customize a product or service that was formerly offered only in a standard form. Timberland and high-end Salvatore Ferragamo offer customized shoes with varied combinations of colors for individual buyers. A company can introduce a new capability. Apple’s iPad allowed consumers to access emails, play games, and watch movies on a convenient-to-carry touch pad. A company may be able to deliver a product or a service faster. Taiwanese contract manufacturers excel in the speedy design, manufacture, and delivery of a variety of computer-related products and components. A company may be able to offer a product at a much lower price. Pharmaceutical firms like Ranbaxy sell generic versions of brand-name drugs. To evaluate opportunities, companies can use Market opportunity Analysis (MoA) to determine the attractiveness and probability of success: 1.

Can the benefits involved in the opportunity be articulated convincingly to a defined target market(s)?

2.

Can the target market(s) be located and reached with cost-effective media and trade channels?

3.

Does the company possess or have access to the critical capabilities and resources needed to deliver customer benefits?

4.

Can the company deliver the benefits better than any actual or potential competitors?

5.

Will the financial rate of return meet or exceed the company’s required threshold for investment?

In the opportunity matrix in Figure 2.4(a), the best marketing opportunities facing the TV-lighting-equipment company are listed in the upper-left cell (# 1). The opportunities in the  lower-right cell (# 4) are too minor to consider. The opportunities in the upper-right cell (# 2) and lower-left cell (# 3) should be monitored for any improvement in attractiveness and success probability.

In a bid to reach 50 percent of the rural households without bank accounts, Indian banks have roving tellers who take fingerprints of firsttime customers in villages. This makes the banking process more accessible.

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Good marketing is the art of finding, developing, and profiting from opportunities.27 A marketing opportunity is an area of buyer need and interest in which there is a high probability that a company can profitably satisfy that need. There are three main sources of market opportunities.28 The first is to supply something that is in short supply. This requires little marketing talent, as the need is fairly obvious. The second is to supply an existing product or service in a new or superior way. There are several ways to uncover possible product or service improvements: by asking consumers for their suggestions (problem detection method); by asking consumers to imagine an ideal version of the product or service (ideal method); and by asking consumers to chart their steps in acquiring, using, and disposing of a product (consumption chain method). The third source often leads to a totally new product or service.

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(a) Opportunity Matrix

Attractiveness

Success Probability High

Low

High

1

2

Low

3

4

1. Company develops more powerful lighting system 2. Company develops device to measure energy efficiency of any lighting system 3. Company develops device to measure illumination level 4. Company develops software program to teach lighting fundamentals to TV studio personnel (b) Threat Matrix

Probability of Occurrence

Seriousness

High

Low

High

1

2

Low

3

4

1. Competitor develops superior lighting system 2. Major prolonged economic depression 3. Higher costs 4. Legislation to reduce number of TV studio licenses

Figure 2.4 Opportunity and Threat Matrices

An environmental threat is a challenge posed by an unfavorable trend or development that would lead, in the absence of defensive marketing action, to lower sales or profit. Threats should be classified according to seriousness and probability of occurrence. Figure 2.4(b) illustrates the threat matrix facing the TV-lighting-equipment company. The threats in the upper-left cell are major, because they can seriously hurt the company and they have a high probability of occurrence. To deal with them, the company needs contingency plans that spell out changes it can make before or during the threat. The threats in the lower-right cell are very minor and can be ignored. The threats in the upper-right and lower-left cells need to be monitored carefully in the event that they grow more serious.

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Internal Environment (Strengths and Weaknesses) Analysis It is one thing to find attractive opportunities and another to be able to take advantage of them. Each business needs to evaluate its internal strengths and weaknesses. It can do so by using a form like the one shown in Marketing Memo: checklist for performing strengths/Weaknesses Analysis.

checklIsT For perForMIng sTrengThs/WeAknesses AnAlysIs

MARKETING MEMO

Performance Major Strength Marketing 1. Company reputation 2. Market share 3. Customer satisfaction 4. Customer retention 5. Product quality

Minor Strength

Minor Major Neutral Weakness Weakness

Importance Hi

Med

Low

6. 7. 8. 9. 10. 11. 12.

Service quality Pricing effectiveness Distribution effectiveness Promotion effectiveness Sales force effectiveness Innovation effectiveness Geographical coverage

Manufacturing 16. Facilities 17. Economies of scale 18. Capacity 19. Able, dedicated workforce 20. Ability to produce on time 21. Technical manufacturing skill Organization 22. Visionary, capable leadership 23. Dedicated employees 24. Entrepreneurial orientation 25. Flexible or responsive

Clearly, the business does not have to correct all its weaknesses, nor should it gloat about all its strengths. The big question is whether the business should limit itself to those opportunities where it possesses the required strengths or whether it should consider opportunities that mean it might have to acquire or develop certain strengths.

2.3.3 Goal Formulation Once the company has performed a SWOT analysis, it can proceed to goal formulation—the development of specific goals for the planning period. Goals are objectives that are specific with respect to magnitude and time. Most business units pursue a mix of objectives including profitability, sales growth, market share improvement, risk containment, innovation, and reputation. The business unit sets these objectives and then manages by objectives (MBO). For an MBO system to work, the unit’s objectives must meet four criteria: 1.

They must be arranged hierarchically, from the most to the least important. For example, the business unit’s key objective for the period may be to increase the rate of return on investment. Managers can increase profit level by increasing revenue and reducing expenses. Revenue can be increased by increasing market share and prices.

2.

objectives should be stated quantitatively whenever possible. The objective “increase the return on investment (ROI)” is better stated as the goal “increase ROI to 15 percent within two years.”

3.

goals should be realistic. They should arise from an analysis of the business unit’s opportunities and strengths, not from wishful thinking.

4.

objectives must be consistent. It is not possible to maximize sales and profits simultaneously.

Other important trade-offs include short-term profit versus long-term growth, deep penetration of existing markets versus developing new markets, profit goals versus non-profit goals, and high growth versus low risk. Each choice in this set of trade-offs calls for a different marketing strategy.

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Finance 13. Cost or availability of capital 14. Cash flow 15. Financial stability

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2.3.4 Strategic Formulation Goals indicate what a business unit wants to achieve; strategy is a game plan for getting there. Every business must design a strategy for achieving its goals, consisting of a marketing strategy, and a compatible technology strategy and sourcing strategy.

Porter’s Generic Strategies Michael Porter proposed three generic strategies that provide a good starting point for strategic thinking: overall cost leadership, differentiation, and focus.29 1.

Overall cost leadership—The business achieves the lowest production and distribution costs so that it can price lower than its competitors and win a large market share. Firms pursuing this strategy must be good at engineering, purchasing, manufacturing, and physical distribution. They need less skill in marketing. The problem with this strategy is that other firms will usually compete with still lower costs and hurt the firm that rested its whole future on cost.

2.

Differentiation—The business concentrates on achieving superior performance in an important customer benefit area valued by a large part of the market. The firm cultivates those strengths that will contribute to the intended differentiation. Thus, the firm seeking quality leadership, for example, must make products with the best components, put them together expertly, inspect them carefully, and effectively communicate their quality.

3.

Focus—The business focuses on one or more narrow market segments. The firm gets to know these segments intimately and pursues either cost leadership or differentiation within the target segment.

According to Porter, firms pursuing the same strategy directed to the same target market constitute a strategic group. The firm that carries out that strategy best will make the most profits. Firms that do not pursue a clear strategy and try to be good on all strategic dimensions do the worst.

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Porter drew a distinction between operational effectiveness and strategy.30 Competitors can quickly copy the operationally effective company using benchmarking and other tools, thus diminishing the advantage of operational effectiveness. Porter defines strategy as “the creation of a unique and valuable position involving a different set of activities.” A company can claim that it has a strategy when it “performs different activities from rivals or performs similar activities in different ways.”

Strategic Alliances Even giant companies—P&G, Google, Samsung—often cannot achieve leadership either nationally or globally, without forming alliances with domestic or multinational companies that complement or leverage their capabilities and resources. Just doing business in another country may require the firm to license its product, form a joint venture with a local firm, or buy from local suppliers to meet “domestic content” requirements. As a result, many firms are rapidly developing global strategic networks, and victory is going to those who build the better global network. Star Alliance, for example, brings together 27 airlines including Lufthansa, United Airlines, Air Canada, ANA, Austrian Airlines, Air China, Singapore Airlines, SAS, Thai Airways, Air New Zealand, Asiana Airlines, and Spanair into a huge global partnership that allows travelers in 193 countries to make nearly seamless connections to hundreds of destinations. Many strategic alliances take the form of marketing alliances. These fall into four major categories. 1.

Product or service alliances—One company licenses another to produce its product, or two companies jointly market their complementary products or a new product. For instance, Starbucks partnered with the Tata Group to enter India. The group has helped Starbucks find suitable locations, develop a suitable store design, and get the menu right with the inclusion of tandoori paneer rolls and cardamom-flavored croissants. The Tata group also owns around 19 coffee estates and has its own roasting facilities that help address Starbucks’ needs.

2.

Promotional alliances—One company agrees to carry a promotion for another company’s product or service. In India, Pepsi built strategic alliances with adidas and Microsoft to tap Indian cricket fans during the World Cup. adidas retails its Men-in-Blue cricket accessories, Microsoft features Pepsi in its XBox 360 games, while Yahoo! maintains its www.bluebillion.co.in Web site.

3.

Logistics alliances—One company offers logistical services for another company’s product. For example, Hong Kong’s Li & Fung manages Avon’s supply chain.

4.

Pricing collaborations—One or more companies join in a special pricing collaboration. Hotel and rental car companies often offer mutual price discounts.

Companies need to give creative thought to finding partners that might complement their strengths and offset their weaknesses. Well-managed alliances allow companies to obtain a greater sales impact at less cost. In contrast, poorly managed alliances often end in failure. To keep their strategic alliances thriving, corporations have begun to develop organizational structures to support them and have come to view the ability to form and manage partnerships as core skills (called partner relationship Management, prM).31

2.3.5 Program Formulation and Implementation Even a great marketing strategy can be sabotaged by poor implementation. If the unit has decided to attain technological leadership, it must plan programs to strengthen its R&D department, gather technological intelligence, develop leading-edge products, train the technical sales force, and develop ads to communicate its technological leadership. Once the marketing programs are formulated, the marketing people must estimate their costs. Questions arise: Is participating in a particular trade show worth it? Will a specific sales contest pay for itself? Will hiring another salesperson contribute to the bottom line? Activitybased cost (ABC) accounting should be applied to each marketing program to determine whether it is likely to produce sufficient results to justify the cost.32 Today’s businesses recognize that unless they nurture other stakeholders––customers, employees, suppliers, distributors—the business may never earn sufficient profits for the stockholders. A company can aim to deliver satisfaction levels above the minimum for different stakeholders. For example, it might aim to delight its customers, perform well for its employees, and deliver a threshold level of satisfaction to its suppliers. In setting these levels, a company must be careful not to violate the various stakeholder groups’ sense of fairness about the relative treatment they are receiving.33 A dynamic relationship connects the stakeholder groups. A smart company creates a high level of employee satisfaction, which leads to higher effort, which leads to higher-quality products and services, which creates higher customer satisfaction, which leads to more repeat business, which leads to higher growth and profits, which leads to high stockholder satisfaction, which leads to more investment, and so on. This is the virtuous circle that spells profits and growth. According to McKinsey & Company, strategy is only one of seven elements in successful business practice.34 The first three elements—strategy, structure, and systems—are considered the “hardware” of success. The next four—style, skills, staff, and shared values —are the “software.”

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Companies make strategic alliances to help them tap on opportunities. In India, the opportunity to reach to the large cricket fans during the World Cup saw Pepsi entering into a promotional alliance with adidas and Microsoft.

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The first “soft” element, style, means that company employees share a common way of thinking and behaving. Giordano’s employees smile at the customer, and Lenovo employees are professional in their customer dealings. The second, skills, means that the employees have the skills needed to carry out the company’s strategy. The third, staffing, means that the company has hired able people, trained them well, and assigned them to the right jobs. The fourth, shared values, means that the employees share the same guiding values. When these elements are present, companies are usually more successful at strategy implementation.35

2.3.6 Feedback and Control As it implements its strategy, the firm needs to track the results and monitor new developments especially as the marketplace changes. Haier is a good example.

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Haier stands by its quality products. It was prepared to destroy its products if they do not meet quality standards as they come off the production line. Today, Haier is the second largest refrigerator manufacturer in the world.

Haier—Founded in 1984 from its predecessor, Qingdao Refrigerator, Haier first marketed refrigerators from a German company called Liberherr. It made the headlines when its inferior-quality products were smashed just before they went off the production line—an inauspicious beginning for a company whose vision is “Committing Yourself to the Motherland by Pursuing Excellence.” Yet, over the next 16 years, Haier’s sales rose by 11,600 times while its product offering grew from a single refrigerator model to nearly 70 products in almost 11,000 designs. Haier is now China’s leading maker of washing machines and ranks second in refrigerator sales worldwide. Its products are sold in over 160 countries and over 38,000 outlets. However, after largely having the Chinese market to itself for a decade, Haier now faces competition from domestic upstarts and such foreign entrants as Samsung, Siemens, and Electrolux. Haier has responded by partnering with Sanyo and Taiwan’s Sampo in production and distribution alliances. It also makes digital TVs with LG Electronics. Finally, it is diversifying its business in areas such as finance, computers, and mobile phones.36

A company’s strategic fit with the environment will inevitably erode because the market environment changes faster than the company’s 7 S elements identified by McKinsey & Company. Thus, a company might remain efficient while it loses effectiveness. Peter Drucker pointed out that it is more important to “do the right thing” (effectiveness) than “to do things right” (efficiency). The most successful companies excel at both. Once an organization fails to respond to a changed environment, it becomes increasingly hard to recapture its lost position. Organizations are set up as efficient machines, and it is difficult to change one part without adjusting everything else. Yet organizations can be changed through strong leadership, preferably in advance of a crisis. The key to organizational health is the willingness to examine the changing environment and to adopt new goals and behaviors.

2.4 Product Planning: The Nature and Contents of a Marketing Plan Working within the plans set by the levels above them, product managers come up with a marketing plan for individual products, lines, brands, channels, or customer groups. Each product level (product line, brand) must develop a marketing plan for achieving its goals. A marketing plan is a written document that summarizes what the marketer has learned about the marketplace and indicates how the firm plans to reach its marketing objectives.37 It contains tactical guidelines for the marketing programs and financial allocations over the planning period.38 A marketing plan is one of the most important outputs of the marketing process. It provides direction and focus for a brand, product, or company. Non-profit organizations use marketing plans to guide their fund-raising and outreach efforts, and government agencies use them to build public awareness of nutrition and to stimulate tourism.

Marketing plans are becoming more customer- and competitor-oriented, and better reasoned and more realistic than in the past. The plans draw more inputs from all the functions and are team-developed. Marketing executives increasingly see themselves as professional managers first, and specialists second. Planning is becoming a continuous process to respond to rapidly changing market conditions.

MARKETING MEMO

MArkeTIng plAn crITerIA

Here are some questions to ask when evaluating a marketing plan. 1. Is the plan simple? Is it easy to understand and act on? Does it communicate its content easily and practically? 2. Is the plan specific? Are its objectives concrete and measurable? Does it include specific actions and activities, each with specific dates of completion, specific persons responsible, and specific budgets?

3. Is the plan realistic? Are the sales goals, expense budgets, and milestone dates realistic? Has a frank and honest self-critique been conducted to raise possible concerns and objections? 4. Is the plan complete? Does it include all the necessary elements?

Source: Tim Berry and Doug Wilson, On Target: The Book on Marketing Plans, (Eugene, OR: Palo Alto Software., 2000).

To guide implementation effectively, every part of the plan must be described in considerable detail. Sometimes a company will post its marketing plan on an Internet Web site so everyone can consult specific sections and collaborate on changes. A marketing plan usually contains the following sections: Executive summary and table of contents—The marketing plan should open with a brief summary of the main goals and recommendations. Situation analysis—This section presents relevant background data on sales, costs, the market, competitors, and the various forces in the macroenvironment. How is the market defined, how big is it, and how fast is it growing? What are the relevant trends and critical issues? All this information is used to carry out on a SWOT (strengths, weaknesses, opportunities, and threats) analysis. Marketing strategy—Here the product manager defines the mission, and marketing and financial objectives. The manager also defines those groups and needs which the market offerings are intended to satisfy as well as its competitive positioning. All this is done with inputs from other organizational areas, such as purchasing, manufacturing, sales, finance, and human resources. Financial projections—Financial projections include a sales forecast, an expense forecast, and a break-even analysis. On the revenue side, the projections show the forecasted sales volume by month and product category. On the expense side, the projections show the expected costs of marketing, broken down into finer categories. The break-even analysis shows how many units must be sold monthly to offset the monthly fixed costs and average per-unit variable costs. A more complex method of estimating profit is risk analysis. Here we obtain three estimates (optimistic, pessimistic, and most likely) for each uncertain variable affecting profitability, under an assumed marketing environment and marketing strategy for the planning period. The computer simulates possible outcomes and computes a distribution showing the range of possible rates of returns and their probabilities.39 Implementation controls—The last section of the marketing plan outlines the controls for monitoring and adjusting the implementation of the plan. Typically, it spells out the goals and budget for each month or quarter, so management can review each period’s results and take corrective action as needed. Some organizations include contingency plans.

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Most marketing plans cover one year, though they may vary from under five to over 50 pages. The most frequently cited shortcomings of current marketing plans, according to marketing executives, are lack of realism, insufficient competitive analysis, and a short-run focus (see Marketing Memo: Marketing plan criteria for some guideline questions to ask in developing marketing plans).

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2.4.1 The Role of Research To develop innovative products, successful strategies, and action programs, marketers need up-to-date information about the environment, the competition, and the selected market segments. Often, analysis of internal data is the starting point for assessing the current marketing situation, supplemented by marketing intelligence and research investigating the overall market, the competition, key issues, threats, and opportunities. As the plan is put into effect, marketers use research to measure progress toward objectives and identify areas for improvement. Finally, marketing research helps marketers learn more about their customers’ requirements, expectations, perceptions, satisfaction, and loyalty. Thus, the marketing plan should outline what marketing research will be conducted and when, as well as how the findings will be applied.

2.4.2 The Role of Relationships Although the marketing plan shows how the company will establish and maintain profitable customer relationships, it also affects both internal and external relationships. First, it influences how marketing personnel work with each other and with other departments to deliver value and satisfy customers. Second, it affects how the company works with suppliers, distributors, and partners to achieve the plan’s objectives. Third, it influences the company’s dealings with other stakeholders, including government regulators, the media, and the community at large. Marketers must consider all these relationships when developing a marketing plan.

2.4.3 From Marketing Plan to Marketing Action Most companies create yearly marketing plans. Marketers start planning well in advance of the implementation date to allow time for marketing research, analysis, management review, and coordination between departments. As each action program begins, they monitor ongoing results, investigate any deviation from plans, and take corrective steps as needed. Some prepare contingency plans. Marketers must be ready to update and adapt marketing plans at any time.

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The marketing plan should define how progress toward objectives will be measured. Managers typically use budgets, schedules, and marketing metrics for monitoring and evaluating results. Budgets compare planned expenditures with actual expenditures for a given period; schedules show when tasks were supposed to be completed and when they actually were; and marketing metrics track actual outcomes of marketing programs to see whether the company is moving forward its objectives.

Summary 2.1 MARKETING AND CUSTOMER VALUE

What is the value chain? The value chain is a means to identify ways to create more customer value by examining the costs and benefits of each activity that the firm undergoes. What are core competencies and how does a company use them to their advantage? Core competencies are areas of a firm where it enjoys a comparative advantage in or where the firm benefits from superior production and technical expertise, and that are difficult for competitors to imitate. Distinctive capabilities refer to business processes on a larger scale, comprising market sensing, customer linking, and channel bonding. Strong companies develop superior capabilities in managing core business processes such as newproduct introduction, inventory management, and customer acquisition and retention. Managing these core processes effectively means firms must be vigilant. To harness their core competencies, firms are encouraged to do at least one of the following three strategies: 1. Expand quickly to benefit from untapped markets worldwide. 2. Specialize in a specific industry or product. 3. Become asset-light by outsourcing production and storage activities. How do companies formulate a marketing plan? A marketing plan comprises two levels: the strategic plan (identifying target markets, and developing the value offering), and the tactical plan (providing

2.2 CORPORATE AND DIVISION STRATEGIC PLANNING

Market-oriented strategic planning is the managerial process of developing and maintaining a viable fit between the firm’s objectives, skills, and resources, and its changing market opportunities. The aim of strategic planning is to shape the company’s businesses and products so that they yield target profits and growth. There are four levels on which firms plan on: corporate, division, business, and product levels. What is the corporate planning process? The corporate strategy establishes the framework within which the divisions and business units prepare their strategic plans. The corporate planning level involves four steps: 1. Defining a corporate mission. 2. Establishing strategic business units (SBUs) to address a single business opportunity or a collection of businesses. 3. Allocating resources to each SBU. 4. Assessing growth opportunities by expanding existing businesses via intensive or integrative growth; engaging in diversification growth into new businesses to enter an untapped market; and downsizing older businesses. A successful corporate culture involves all members in a firm having a positive attitude towards work, staying flexible in the light of adversity, and doing away with a top-down approach of management. Corporate cultures may change after mergers and acquisitions to ensure survival upon changes in the market climate, or a change in the top level of management.

2.3 BUSINESS UNIT STRATEGIC PLANNING

The business unit strategic planning process involves the following steps as outlined in Figure A The Business Unit Strategic Planning Process.

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What is the value delivery process? In modern economies, the value delivery process integrates marketing into all aspects of value creation and delivery. This process begins before the product is created and continues well after it becomes available. It involves choosing (or identifying), providing (or delivering), and communicating superior value.

more specifics on product features, pricing and promotions, merchandizing, and service channels).

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2. The SWOT analysis picks out internal (strengths and weaknesses of the company) and external (opportunities and threats) factors that would help or harm the success of the business. See Figure B Opportunity and Threat Matrices.

How does the business unit level organization undertake their planning? Business unit planning typically takes place in the following six steps: 1. A business mission is formulated to guide the business in its marketing strategy and target market. External environment (opportunity & threat analysis) Business mission

Goal formulation

SWOT analysis

Strategy formulation

Program formulation

Internal environment (strengths/ weaknesses analysis)

Implementation

Feedback and control

Figure A The Business Unit Strategic Planning Process

(a) Opportunity Matrix

High

Low

High

1

2

Low

3

4

1. Company develops more powerful lighting system 2. Company develops device to measure energy efficiency of any lighting system 3. Company develops device to measure illumination level 4. Company develops software program to teach lighting fundamentals to TV studio personnel (b) Threat Matrix

Probability of Occurrence High Seriousness

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Attractiveness

Success Probability

Low

High

1

2

Low

3

4

1. Competitor develops superior lighting system 2. Major prolonged economic depression 3. Higher costs 4. Legislation to reduce number of TV studio licenses

Figure B Opportunity and Threat Matrices

3. Goal formulation should be realistic and consistent, balancing contradictive objectives like sales and profits. 4. Strategic formulation develops a route to achieve the firm’s goals. There are three generic strategies that Michael Porter suggests: lowest costs, highest quality, and a narrow target segment. 5. Program formulation and implementation aims to strengthen a firm’s comparative advantage; keep costs as low as possible while maximizing

benefits (e.g., profits/revenue/long-term potential growth); and nurture the relationships with customers and stakeholders. 6. The last step is feedback and control, where firms monitor the market climate for the viability of its products and the emergence of competitors.

2.4 PRODUCT PLANNING: THE NATURE AND CONTENTS OF A MARKETING PLAN

Each product level within a business unit must develop a marketing plan for achieving its goals. A marketing plan is a written document that summarizes what the marketer has garnered from his or her research on the market environment and the method adopted to achieve his or her objectives. The marketing plan consists of five sections: 1. Executive summary and a table of contents. 2. Situational analysis where background data is presented. 3. Marketing strategy where the mission, direction of approach, and target market are identified. 4. Financial projections which include a sales forecast, expense forecast, and break-even analysis. 5. Implementation controls which outline the controls for monitoring and adjusting the implementation of the plan.

Applications Marketing Debate—What Good Is a Mission Statement?

Take a position: Mission statements are critical to a successful marketing organization versus Mission statements rarely provide useful marketing value.

Marketing Discussion Consider Porter’s value chain and the holistic marketing orientation model. What implications do they have for marketing planning? How would you structure a marketing plan to incorporate some of their concepts?

ChaPter 2 ó Developing Marketing Strategies and Plans

Mission statements are often the product of much deliberation and discussion. At the same time, some critics claim that mission statements sometimes lack “teeth” and specificity, or do not vary much from firm to firm and make the same empty promises.

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Marketing Lesson TWG TEA

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TWG Tea from the Wellness Group is the name in the tea business. Started in 2007 by Hong Kong-born Indian, Manoj Murjani, and Frenchman, Taha Bouqdib, this Singapore-based company is the titan of luxe in the teadrinking industry. In a beverage industry that has seen more people drinking gourmet coffee, thanks to Starbucks and other coffee chains, TWG Tea wants to be revolutionary. It boasts the finest and largest collection of tea from every producing country in the world. It all started when Murjani was strolling in Paris and was attracted by the display at a teahouse that Bouqdib was the charge de mission. The two men hit off immediately as they shared their passion for tea. By then, Murjani was already living in Singapore. Bouqdib, of Moroccan descent, and his American wife, visited Singapore and liked it. Thus, TWG Tea was born on Murjani’s expertise in business and branding, and Bouqdib’s knowledge of tea. Why Singapore? The city is close to the five tea-growing capitals of Asia—China, India, Sri Lanka, Taiwan, and Japan. This ensures that the tea leaves can be quickly delivered for freshness. Moreover, the fact that Singapore does not produce tea means that these countries cannot impose an export duty on their leaves. What strategy does Murjani and Bouqdib have for TWG Tea? They aim to make tea an affordable indulgence. Just like spending a large sum on a bespoke or limited edition bag at Louis Vuitton, TWG Tea wants consumers to likewise, be willing to pay a relatively higher sum for gourmet tea. It offers gourmet blends of loose tea leaves that costs from $4.50 to $4,500 for 50 grams. Its tea bags are easily three times the price of Twinings or Lipton. Just like haute couture fashion designers, Murjani and Bouqdib choose their tea leaves very carefully, and spend lots of time creating various blends. TWG Tea buys its teas from 36 countries, including places like Zimbabwe, Mozambique, and Myanmar. They cultivate good relations with their suppliers. Bouqdib has worked in the tea business since he was 23 and has fostered strong relationships with tea gardens and estates worldwide. As an example, the Da Hong Bao leaves from the Wuyi

mountains in China’s Fujian province are highly coveted by tea aficionados and are generally reserved for the government. However, with its good relations, TWG Tea has some quantities of it. Thus, it is not surprising that even some Chinese tea connoisseurs come to Singapore to buy the Da Hong Bao from TWG Tea. The founders travel regularly to sample hundreds of teas at the source. They choose the best and bring them back and build blends from them. In blending, Murjani and Bouqdib live in a world of their own. They create more than two dozens of flavors each year. They see tea like fashion, introducing every season with a collection. Accompanying these exotic blends are equally intriguing names like Silver Moon, Magic Flute, Weekend in Moscow, and Singapore Breakfast Tea. The latter is served on all Singapore Airlines first and business-class flights. The idea behind these different blends and interesting names is to create a voyage-like experience when customers walk into its boutique. TWG Tea wants its customers to feel that they are traveling to a different place with their palate and that the tea will evoke memories of these different flavors. Today, TWG Tea carries more than 1,000 single estate fine harvests and exclusive tea blends, including the first flush of Darjeeling from the best garden in India. Says a Euromonitor International researcher, “TWG Tea is well positioned to take advantage of the positive health associations of fruit and herbal teas.” Indeed, sales of tea is on the rise. In the United States alone, total sales of tea was almost $7 billion in 2007, four times from 1990. Sales of specialty tea, which TWG Tea is in, was $1.1 billion in the United States that year. By 2009, 1.8 million tons of tea are consumed as hot beverages. This is expected to increase. In its full year of operation, TWG Tea sold 650 tons of tea, bringing in sales of $30 million. It became profitable in 2009. Besides the Singapore Airlines’ coup, TWG Tea is carried by the upscale Dean & Deluca food chain in the United States and Harrods in London. In Singapore, its tea salons in business area Raffles Place and high-end shopping malls, Ion and Marina Bay Sands, are elegantly decorated, offering an intimate and relaxing atmosphere. Set amidst designer shops such as Harry Winston, Louis Vuitton, Cartier, and Giorgio Armani, the TWG Tea salon in Ion has been described as a bejeweled showcase of tea and culinary treats. There is a Tea Book that explains the intricacies of each tea. Besides tea, food and wine are also served. TWG Tea ensures that tea is woven into different aspects of the meal in creative and subtle ways. There’s sautéed veal served with asparagus and apples drizzled with a rich sauce infused with Pink Garden Tea. Its Roast Apricot Cod dish has potato puree sprinkled with Matcha Tea and a Apricot Tea-infused sauce. It even has tea-infused vinaigrette for the salads and tea-infused chocolates.

34 countries. TWG Tea sees its wholesale revenue expanding and the direction for growth. Besides SIA, TWG Tea also supplies to various hotels, including all the 5-star hotels under the Starwood chain. TWG Tea is looking for expansion. In 2011, lifestyle group, OSIM International, better known for its massage chairs, acquired 35 percent of TWG Tea. The partnership is to expand to the Asian markets of China, Hong Kong, Taiwan, and South Korea where OSIM knows well. LVMH is also said to be interested in having an equity stake in TWG Tea.

Questions 1. Evaluate TWG Tea’s strategy to be a fashion designer tea brand. 2. Do you think the concept of experience can be extended to tea beyond consumption at tea salons? 3. What expansion plans do you think TWG Tea should engage in? What factors might limit its expansion? Sources: Jessica Tan, “TWG’s Ritzy Tea,” www.forbes.com, 14 December 2009; “Tea for Two and Me and You,” The Straits Times, 20 October 2009; Grace Millimaci, “Tea Salon is a Sensory Invitation,” www.au.news.yahoo.com, 14 September 2011; “Ron Sim’s Tea Break,” The Business Times, 18 April 2011; “Interview with Taha Bouqdib,” CNBC Managing Asia, 25 February 2012; www.twgtea.com.

ChaPter 2 ó Developing Marketing Strategies and Plans

Other than food, the salons also sell accessories for the perfect tea experience. There are teapots insulated with 18-carat gold, tea cups made to ensure that the tongue can savor the rich blends without bitterness, tea-infused candles. As one observer puts it, “At TWG Tea, you’re not just buying tea. You’re buying into the experience of the brand that promotes the lifestyle that is evocative of luxury.” Retail sales make up 66 percent of revenue in 2011. It has 17 salons and boutiques in Japan, Hong Kong, United States and United Kingdom; and is sold in

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Marketing Lesson YUM! BRANDS

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Based in Louisville, Kentucky, Yum! Brands is a global company that develops, operates, franchises, and licenses a system of both traditional and non-traditional quick service restaurants that prepare, package, and sell a menu of food items. It began in 1997 as Tricon Global Restaurants, an independent company that was spun out of PepsiCo’s former fast food division, which owned and franchised the KFC, Pizza Hut, and Taco Bell brands worldwide. In 2002, Tricon changed the company’s name to Yum! Brands. Yum’s traditional restaurants feature dine-in, takeout, and in some instances, drive-through or delivery services. Its non-traditional restaurants, which are typically licensed outlets, include express outlets and kiosks operating in locations such as malls, airports, gasoline service stations, and colleges. To date, it has over 41,000 restaurants in some 125 countries and territories with 537,000 employees, of which 87 percent are part-timers. In 2014, with recorded revenues of over $13 billion, Yum! Brands was ranked number 228 on the Fortune 500 list, named among the 100 Best Corporate Citizens by Corporate Responsibility Magazine, and selected as one of the Aon Hewitt Top Companies for Leaders in North America. Yum! Brands is a leader in international retail development. In 2014, it opened an average of over five new restaurants per day outside the United States, with more than 15,000 restaurants in emerging markets—nearly twice as many as close competitors such as McDonald’s. As Yum China, it is the leading retail developer in China, with over 6,800 restaurants in over 1,000 cities. Yum China, which includes all KFC and Pizza Hut operations in the country, has been at the center of Yum’s business operation, with a consuming class that is projected to double from 300 million to over 600 million people by 2020. Based in Shanghai, most Yum China outlets are company-owned KFCs and Pizza Huts. The company also owns non-controlling interests in Chinese entities that operate like franchisees and a meat-processing entity that supplies lamb to Little Sheep, a Chinese hot-pot chain acquired by Yum China in 2011.

KFC was the first quick-service restaurant chain to enter China in 1987. Today, it is the number one foreign brand in China with over 4,800 restaurants in over 1,000 cities. It operates throughout the day with breakfast, delivery, and 24-hour operations, and with its offering of such food items as fried shrimp, egg tarts, and other local fare, it is considered one of the few companies that best understand Chinese consumers. KFC China has faced several challenges in the past—an outbreak of severe acute respiratory syndrome in 2003, the avian flu scare in 2004, and in 2005, when KFC had to remove several products from its menu because some of its chicken seasoning contained Sudan I, a dye associated with increased cancer risk. Despite these setbacks, KFC saw Yum China earning a dominating 39 percent market share in China’s fast-food market. However, KFC’s reputation took a beating when one of its chicken suppliers, the Su Hai Group, was accused by the Chinese media on November 23, 2012, of feeding toxic chemicals to chickens to accelerate their growth cycle from 100 days to a mere 45. This, as it turned out, was not true. KFC China responded on the same day, denying the allegations and stating that the 45-day cycle was the industry standard. At the same time, KFC China highlighted the fact that Su Hai Group supplied less than 1 percent of its chicken supply. But the damage had been done. Everything boils down to the Chinese perception of local and imported breeds of chicken and the values associated with them. Local breeds, known as yellow chickens due to the color of their feathers, are mostly pasture-raised and considered to be naturally bred. Imported breeds have white feathers and are called white chickens. They are generally bred and raised in an environment designed to prompt the development of body weight. As a result, the Chinese are inclined to associate white chicken with chemical injections, poor nutritional value, cheap meat, and inferior taste, despite the fact that the 45-day growth cycle is the industry standard in most developed markets. It was of paramount importance to Yum China that Chinese consumers did not lose faith in KFC, as more than half of Yum China’s business comes from the brand. However, the scandal continued to take a toll. Chatter about “KFC’s 45-day chicken” was picked up in online forums. Three leading Internet sites surveyed user opinions on the safety of KFC’s food. Results indicated that most consumers would not buy food from KFC China in the future. The situation worsened when it was found that KFC China’s top two Chinese suppliers, Dachan and Shengnong, farmed their chicken with growth cycles of 42 and 45 days respectively. KFC China was faced with the possibility of having to change its sourcing approach. But there is an inherent

a marketing campaign to assure customers of the safety of its food. However, Yum China’s troubles were far from over. It ran into a “hot pot” problem in July 2013, when Little Sheep, its popular Mongolian hot pot chain, suffered the brunt of negative publicity concerning quality issues at other competitive hot pot chains. Customers had complained of restaurants recycling unconsumed soup stock from previous diners and serving fake lamb meat. After inspecting meat samples, Shanghai public health investigators found that chicken, duck, and even rat and fox meat were being regularly labeled as lamb in major suppliers’ freezers, and few packages showed expiration dates. As the category leader, Little Sheep’s sales were significantly impacted even though it had no quality issue. In the summer of 2014, Yum China’s same-store sales were down 14 percent as customers continued to avoid Yum China chains following revelations that one of its suppliers was using contaminated and expired meat. Yum China immediately cut ties with the supplier. This generated extensive news coverage in China that shook consumer confidence, negatively affected brand usage, and disparaged the hard work of Yum China in shoring up its reputation and businesses in the aftermath of earlier scandals. Amidst the gloom, there was a light at the end of the tunnel. Many of Yum China’s KFC outlets were open 24 hours during the football World Cup season in 2014, offering World Cup–themed burgers and deals. This helped Yum China recover. Same-store sales in China rose 15 percent in the second quarter of 2014, higher than the 9 percent increase in the previous quarter. The recovery was also partly due to the makeover of at least 130 of its KFC restaurants. Yum China transformed its KFCs into cafe-styled restaurants, featuring artsy posters, rows of green plants, free Wi-Fi, soft lighting, and wooden furniture. KFC China’s renewed menu and marketing campaign also boosted Yum China’s recovery efforts. The other Yum restaurant chain—Pizza Hut—was not as severely impacted by the scandals as KFC. With 1,300 restaurants in 350 cities, Pizza Hut is the number one Western casual dining chain in China. It offers an extensive menu across many categories and five-star service at a three-star price. This translates to value for its customers and an exclusive dining experience that only Pizza Hut can provide. Pizza Hut Home Service is available in 250 restaurants in 35 cities and is the only “All Meal” replacement delivery brand in China. Some 40 percent of its menu consists of Chinese food. Going forward, Yum China faces several challenges. Pizza Hut restaurants are seen as old and out-of-style. In China, a Taiwanese fried chicken chain called Dicos, which is among the country’s top three largest fast-food operators, is starting to pose a real threat.

ChaPter 2 ó Developing Marketing Strategies and Plans

problem, for producers of yellow chickens are at a disadvantage compared with white chickens. The yellow chicken has a higher feed-to-meat conversion rate (3.5:1, compared with white chickens’ 2:1), a longer growth cycle (100 versus 45 days) and sell at a higher wholesale price (RMB 28 per chicken versus RMB 20). So if KFC China were to source yellow chickens to cater to local taste and meet customers’ high expectations for food safety, its gross margins would decline sharply from 65 to 57 percent. Although China is a country where food safety practices and standards are infamous, these incidents plagued KFC China as it had established itself as a “luxury” fastfood chain among Chinese consumers. Because of its nutritious and safe image that occupied the premium market segment with a pleasant dine-in atmosphere, locals were happy to pay premium prices as long as KFC China matched their expectations of nutrition and safety. Yum China’s image in China dipped further when the Shanghai Food and Drug Administration (SFDA) revealed on December 20, 2012, that 8 out of 19 batches of chicken samples that Yum China sent to the labs for testing in 2010 and 2011 had higher than acceptable levels of antibiotics. This high-profile official probe into KFC’s chicken suppliers was covered by China’s state-run media, China Central Television, a powerful Beijing-controlled national broadcaster. The intense media attention given to the probe and the resultant bad publicity led to Yum China losing 6 percent of its sales. In response to the probe, Yum China issued an official apology. In China, foreign companies such as KFC are viewed as benchmarks of safety and success. Thus, customers have higher expectations and feel more acutely disappointed when these companies fail to live up to expectations. In January 2013, the SFDA concluded its investigation and released its recommendations to Yum China. The recommendation was for Yum China to strengthen its poultry supply chain practices which included refining its voluntary self-testing procedures, improving its reporting and communications, and enhancing its supplier management. In addition to the chicken scandal, a harsher winter in many regions in China hurt KFC as more customers chose to dine at home. When they ordered online, it was largely price-driven, making KFC a less desirable option. The combined trends of a negative consumer sentiment and slower opening of new stores led to slower growth for Yum China. To bring people back to KFC, Yum China increased its direct communication with customers using social media and other marketing activities. Just when its efforts were seemingly paying off, another outbreak of avian flu ruined Yum China’s earlier efforts to recover. In May 2013, sales fell by 25 percent. KFC China had to launch

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However, Yum China has built a solid platform, with its category-leading brands being driven by an experienced local management team, a highly educated workforce, a huge unmatched real estate and development team, a country-wide distribution system, best-in-class operations, and a dedication to innovation and product quality. Thus, in spite of the challenges it faces, Yum China believes that its category-leading brands, combined with a rapidly expanding consuming class, have much room to grow. The food scandals and its effects on KFC China’s sales highlight the importance of reassuring customers about food safety, especially in China, a country that has experienced much disappointment in this area. It also underscores the difficulty of ensuring quality and safety along the supply chain in China. Foreign restaurant companies are experiencing increased scrutiny from Chinese consumers. With KFC China suffering so many bouts of food safety-related scandals, it is imperative that the company re-establishes consumer trust and has an effective system in place to

ensure food safety. This is especially important to Yum! Brands as it is more invested in China than other companies are. Yum! Brands has claimed that it aims to build its restaurant brands into global, iconic brands that people believe in. To do so, KFC, Pizza Hut, and Taco Bell must be seen to be more relevant, engaging, connected, and caring. Yum! Brands will emphasize sharper brand positioning and insight-driven marketing programs by concentrating on more product customization, more transparency, leading innovation, and more engagement through social and digital media. In October 2015, Yum! Brands announced that it was spinning off its troubled China operations into a separate company. The average sales of its KFC store in China was $1.2 million in 2015, down from $1.7 million in 2012 when the food safety scandals started to surface. While Pizza Hut still remained as the market leader for pizzas in China, KFC has been unseated by Chick-fil-A, an American fast-food restaurant.

Questions

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1. Conduct a SWOT Analysis on Yum! Brands, particularly its operations in China. 2. In view of the Chinese consumers’ heavy emphasis on health and food safety, what marketing strategies can Yum China adopt? 3. Evaluate KFC China’s strategy to position the restaurant as a luxury food brand. Did that cause KFC to be more susceptible to scandals and less able to recover? Sources: “Yum Cuts Ties with China Meat Plant after Scandal,” www.cnbc.com, 23 July 2014; Yue Wang, “Yum Brands Warns of Weak China Recovery,” Forbes, 12 September 2014; Patti Waldmeir, “China Food Scandal Hits Yum Brand Sales,” Financial Times, www.ft.com, 8 October 2014; Maria Armental, “Yum Brands Results Weighed Down by China,” Wall Street Journal, 21 April 2015; Rene Pastor, “Yum Brands Said Sales in No. 1 Market China on the Mend After Food Scares,” South China Morning Post, www.scmp.com, 22 April 2015; “Yum Brands’ Chicken in China Contained Excessive Chemical Levels, Report Says,” www.bizjournals.com, 25 January 2013; Carina Perkins, “Yum! Moves to Deflect Chicken Antibiotic Scandal,” www.globalmeatnews.com, 10 January 2013; Tom Huddleston Jr., “Chinese Meat Scandal Hurts Sales at Fast-Food Giant Yum Brands,” Fortune, 7 October 2014; “Yum to Push Marketing Strategy at KFC in China,” www.chinaeconomicreview.com, 5 December 2013; Charles Riley, “Another Food Scandal? KFC Just Cannot Win,” http://money.cnn.com, 31 July 2014; Laurie Burkitt, “Yum Brands Apologizes Amid Chicken Probe,” Wall Street Journal, 10 January 2013; “Yum Brands’ Results Show Recovery on Mainland China,” South China Morning Post, 5 February 2014; Lily Kuo, “How Free KFC Wifi and the World Cup Helped Yum Brands Recover in China,” http://qz.com, 17 July 2014; Sapna Maheshwari and Kevin Tang, “Yum Brands Suffers From Chinese Hot Pot Scandal after Poultry Problems Subside, ” www.buzzfeed.com, July 2013; Laurie Burkitt and Julie Jargon, “China Woes Put Dent in Yum Brand,” Wall Street Journal, 8 January 2013; Adam Jourdan and Lisa Baertlein, “Yum, McDonald’s Apologize as New China Food Scandal Hits,” www.reuters.com, 21 July 2014; “Yum Brands to Spin Off Troubled China Operations,” The Business Times, 22 October 2015, p. 24.

Sample Marketing Plan: Pegasus Sports International

2.1 Market Summary

1.0 Executive Summary

The aftermarket skate accessory market has been largely ignored. Although there are several major manufacturers of the skates themselves, the accessory market has not been addressed. This provides Pegasus with an extraordinary opportunity for market growth. Skating is a booming sport. Currently, most of the skating is recreational. There are, however, a growing number of skating competitions, including team-oriented competitions such as skate hockey as well as individual competitions such as speed skate racing. Pegasus will work to grow these markets and develop the skate transportation market, a more utilitarian use of skating. Pegasus has outlined a go-to-market marketing program that combines highly relevant products and services with an evolving direct-to-consumer distribution strategy to tap into customer passions and loyalty.

Target Markets Recreational Fitness Speed Hockey Extreme

2.1.1 Market Demographics The profile for the typical Pegasus customer consists of the following geographic, demographic, and behavior factors:

Geographics Pegasus has no set geographic target area. By leveraging the  expansive reach of the Internet and multiple delivery services, Pegasus can serve both domestic and international customers. The total targeted population is 31 million users.

Demographics There is an almost equal ratio between male and female users.

2.0 Situation Analysis Pegasus is entering its first year of operation. Its products have been well received, and marketing will be key to the development of brand and product awareness as well as the growth of the customer base. Pegasus International offers several different aftermarket skating accessories, serving the growing inline skating industry.

Ages 13–46, with 48 percent clustering around ages 23–34. The recreational users tend to cover the widest age range, including young users through active adults. The fitness users tend to be ages 20–40. The speed users tend to be in their late 20s and early 30s. The hockey players are generally in their teens through their early 20s. The extreme segment is of similar age to the hockey players.

Table 2.3 Target Market Forecast Target Market Forecast

Potential Customers

Growth

2016

2017

2018

2019

2020

CAGR*

Recreational

10%

19,142,500

21,056,750

23,162,425

25,478,668

28,026,535

10.00%

Fitness

15%

6,820,000

7,843,000

9,019,450

10,372,368

11,928,223

15.00%

Speed

10%

387,500

426,250

468,875

515,763

567,339

10.00%

Hockey

6%

2,480,800

2,628,800

2,768,528

2,953,720

3,130,943

6.00%

Extreme

4%

2,170,000

2,256,800

2,347,072

2,440,955

2,538,593

4.00%

10.48%

31,000,000

34,211,600

37,784,350

41,761,474

46,191,633

10.48%

Total *Compound Annual Growth Rate

ChaPter 2 ó Developing Marketing Strategies and Plans

Pegasus Sports International is a start-up aftermarket inline skating accessory manufacturer. Inline skates have four or five wheels arranged in a single line and are often called Rollerblades by the general public after one of the early pioneers in the category. In addition to the aftermarket products, Pegasus is developing SkateTours, a service that takes clients out, in conjunction with a local skate shop, and provides them with an afternoon of skating using inline skates and some of Pegasus’s other accessories such as SkateSails.

Pegasus possesses good information about the market and knows a great deal about the common attributes of the most prized customer. This information will be leveraged to better understand who is served, what their specific needs are, and how Pegasus can better communicate with them.

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Of the users who are over 20, 65 percent have an undergraduate degree or substantial undergraduate coursework. The adult users have a median personal income of $47,000.

throughout the world, although sales have slowed down in some markets. The growth statistics for 2016 were estimated to be about 31 million units. More and more people are discovering—and in many cases rediscovering—the health benefits and fun of skating.

Behavior Factors Users enjoy fitness activities not as a means for a healthy life but as intrinsically enjoyable activities in themselves. Users spend money on gear, typically sports equipment. Users have active lifestyles that include some sort of recreation at least two to three times a week.

2.2 SWOT Analysis The following SWOT analysis captures the key strengths and weaknesses within the company and describes the opportunities and threats facing Pegasus.

2.2.1 Strengths 2.1.2 Market Needs

In-depth industry experience and insight

Pegasus is providing the skating community with a wide range of accessories for all variations of skating. The company seeks  to  fulfill the following benefits that are important to its customers:

Creative yet practical product designers

Quality craftsmanship. The customers work hard for their money and do not enjoy spending it on disposable products that work for only a year or two. Well-thought-out designs. The skating market has not been addressed by well-thought-out products that serve skaters’ needs. Pegasus’s industry experience and personal dedication to the sport will provide it with the needed information to produce insightfully designed products.

The use of a highly efficient, flexible business model utilizing direct customer sales and distribution

2.2.2 Weaknesses The reliance on outside capital necessary to grow the business A lack of retailers who can work face to face with the customer to generate brand and product awareness The difficulty of developing brand awareness as a start-up company

Customer service. Exemplary service is required to build a sustainable business that has a loyal customer base.

2.2.3 Opportunities

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Participation within a growing industry

2.1.3 Market Trends

Decreased product costs through economies of scale

Pegasus will distinguish itself by marketing products not previously available to skaters. The emphasis in the past has been to sell skates and very few replacement parts. The number of skaters is not restricted to any one single country, continent, or age group, so there is a world market. Pegasus has products for virtually every group of skaters.

The ability to leverage other industry participants’ marketing efforts to help grow the general market

The fastest-growing segment of this sport is the fitness skater (Table 2.3). Therefore, the marketing is being directed toward this group. BladeBoots will enable users to enter establishments without having to remove their skates. BladeBoots will be aimed at the recreational skater, the largest segment. SkateAids, on the other hand, are great for everyone. The sport of skating will also grow through SkateSailing. This sport is primarily for the medium-to-advanced skater, and its growth potential is tremendous. The sails that Pegasus has manufactured have been sold in Europe, following a pattern similar to windsurfing. Another trend is group skating. More and more groups are getting together on skating excursions in cities all over the world. For example, Tokyo has night group skating that attracts hundreds of people. The market trends are showing continued growth in all directions of skating.

2.1.4 Market Growth With the price of skates going down due to competition by so many skate companies, the market has had steady growth

2.2.4 Threats Future/potential competition from an already-established market participant A continued slump in the economy that could have a negative effect on people’s spending of discretionary income on fitness/recreational products The release of a study that calls into question the safety of skating or the inability to prevent major skating-induced traumas

2.3 Competition Pegasus Sports International is forming its own market. Although there are a few companies that do make sails and foils that a few skaters are using, Pegasus is the only brand that is truly designed for and by skaters. The few competitors’ sails on the market are not designed for skating but for windsurfing or for skateboards. In the case of foils, storage and carrying are not practical. There are different indirect competitors who are manufacturers of the actual skates. After many years in the market, these companies have yet to become direct competitors by manufacturing accessories for the skates that they make.

2.4 Product Offering Pegasus Sports International now offers several products: The first product that has been developed is BladeBoots, a cover for the wheels and frame of inline skates, which allows skaters to enter places that normally would not allow them in with skates on. BladeBoots come with a small pouch and belt that converts to a well-designed skate carrier.

The third product, SkateAid, will be in production by the end of the year. Other ideas for products are under development but will not be disclosed until Pegasus can protect them through pending patent applications.

Maintain positive, strong growth each quarter (notwithstanding seasonal sales patterns). Achieve a steady increase in market penetration. Decrease customer acquisition costs by 1.5 percent per quarter.

3.3 Financial Objectives Increase the profit margin by 1 percent per quarter through efficiency and economy-of-scale gains. Maintain a significant research and development budget (as  a  percentage relative to sales) to spur future product developments. Achieve a double- to triple-digit growth rate for the first three years.

2.5 Keys to Success The keys to success are designing and producing products that meet market demand. In addition, Pegasus must ensure total customer satisfaction. If these keys to success are achieved, it will become a profitable, sustainable company.

2.6 Critical Issues As a start-up business, Pegasus is still in the early stages. The critical issues are for Pegasus to: Establish itself as the premier skating accessory company. Pursue controlled growth that dictates that payroll expenses will never exceed the revenue base. This will help protect against recessions. Constantly monitor customer satisfaction, ensuring that the growth strategy will never compromise service and satisfaction levels.

3.0 Marketing Strategy The key to the marketing strategy is focusing on the speed, health and fitness, and recreational skaters. Pegasus can cover about 80 percent of the skating market because it produces products geared toward each segment. Pegasus is able to address all of the different segments within the market because, although each segment is distinct in terms of its users and equipment, its products are useful to all of the different segments.

3.1 Mission Pegasus Sports International’s mission is to provide the customer with the finest skating accessories available. “We exist to attract and maintain customers. With a strict adherence to this maxim, success will be ensured. Our services and products will exceed the expectations of the customers.”

3.4 Target Markets With a projected world skating market of 31 million that is steadily growing (statistics released by the Sporting Goods Manufacturers Association), the niche has been created. Pegasus’s aim is to expand this market by promoting SkateSailing. The breakdown of participation in skating is as follows: 1+ percent speed (growing), 8 percent hockey (declining), 7 percent extreme/aggressive (declining), 22 percent fitness (nearly 7 million—the fastest growing), and 61 percent recreational (first-timers). Pegasus’s products are targeting the fitness and recreational groups because they are the fastest growing. These groups are gearing themselves toward health and fitness, and combined they can easily grow to 85 percent (or 26 million) of the market in the next five years.

3.5 Positioning Pegasus will position itself as the premier aftermarket skating accessory company. This positioning will be achieved by leveraging Pegasus’s competitive edge: industry experience and passion. Pegasus is a skating company formed by skaters for skaters. Its management is able to use its vast experience and personal passion for the sport to develop innovative, useful accessories for a broad range of skaters.

4.0 Marketing Tactics The single objective of the marketing program is to position Pegasus as the premier skating accessory manufacturer, serving the domestic market as well as the international market. The marketing program will seek to first create customer awareness concerning the offered products and services and then develop the customer base. Specifically, Pegasus’s marketing program is composed of the following approaches to product, pricing, distribution, and communications.

ChaPter 2 ó Developing Marketing Strategies and Plans

The second product is SkateSails. These sails are specifically designed for use while skating. Feedback that Pegasus has received from skaters indicates skatesailing could become a very popular sport. Trademarking this product is currently in progress.

3.2 Marketing Objectives

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4.1 Product Several of Pegasus’s currently developed products have patents pending, and local market research indicates that there is great demand for these products. Pegasus will achieve fast, significant market penetration through a solid business model, longrange planning, and a strong management team that is able to execute this exciting opportunity. The three principals on the management team have more than 30 years of combined personal and industry experience. This extensive experience provides Pegasus with the empirical information as well as the passion to provide the skating market with much-needed aftermarket products.

4.2 Pricing This will be based on a per-product retail price. Because of the advantages of selling directly, higher margins can be achieved with premium pricing that will still appeal to customer segments.

4.3 Distribution Pegasus will sell its products initially through its Web site. In addition to allowing for higher margins, this direct-to-theconsumer approach will allow Pegasus to maintain a close relationship with customers, which is essential for producing products that have a true market demand. By the end of the year, Pegasus also will have developed relationships with different skate shops and will begin to sell some of its products through retailers.

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all of its products not only with its principals, who are accomplished skaters, but also with the many other dedicated and “newbie” users located in Tokyo. The extensive product testing by a wide variety of users provided Pegasus with valuable product feedback and has led to several design improvements.

5.0 Financials This section will offer the financial overview of Pegasus related to marketing activities. Pegasus will address break-even analysis, sales forecasts, and expense forecast and indicate how these activities link to the marketing strategy.

5.1 Break-Even Analysis The break-even analysis (Table 2.4) indicates that $7,760 will be required in monthly sales revenue to reach the break-even point.

Table 2.4 Break-Even Analysis Monthly Units Break-Even

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Monthly Sales Break-Even

$ 7,760

Assumptions: Average Per-Unit Revenue

$125.62

Average Per-Unit Variable Cost

$ 22.61

Estimated Monthly Fixed Cost

$ 6,363

Part 1 ó Understanding Marketing Management

4.4 Communications The message that Pegasus will seek to communicate is that it offers the best-designed, most useful skating accessories. This message will be communicated through a variety of methods. The first will be the Pegasus Web site, which will provide a rich source of product information and offer consumers the opportunity to purchase. A lot of time and money will be invested in the site to provide the customer with the perception of total professionalism and utility for Pegasus’s products and services. The second marketing method will be advertisements placed in numerous industry magazines. The skating industry is supported by several different glossy magazines designed to promote the industry as a whole. In addition, a number of smaller periodicals serve the smaller market segments within the skating industry. The last method of communication is the use of printed sales literature. The two previously mentioned marketing methods will create demand for the sales literature, which will be sent out to customers. The cost of the sales literature will be fairly minimal because it will use the alreadycompiled information from the Web site.

5.2 Sales Forecast Pegasus feels that the sales forecast figures are conservative. It will steadily increase sales as the advertising budget allows. Although the target market forecast (Table 2.3) listed all of the potential customers divided into separate groups, the sales forecast (Table 2.5) groups customers into two categories: recreational and competitive. Reducing the number of categories allows the reader to quickly discern information, making the chart more functional.

Table 2.5 Monthly Sales Forecast Sales Recreational Competitive Total Sales Direct Cost of Sales

4.5 Marketing Research Pegasus is blessed with the good fortune of being located in an Asian city where skating is popular: Tokyo, Japan. It will be able to leverage this opportune location by working with many of the different skaters who live in the area. Pegasus was able to test

2016 2017 2018 $455,740 $598,877 $687,765 $ 72,918

$ 95,820 $110,042

$528,658 $694,697 $797,807 2016

2017

2018

Recreational

$ 82,033 $107,798 $123,798

Competitive

$ 13,125

Subtotal Cost of Sales

$ 95,158 $125,046 $143,606

$ 17,248 $ 19,808

Table 2.6 Milestones Plan Milestones

Start Date

End Date

Budget

1/1/16

2/1/16

1/1/16

3/15/16

$20,400

Advertising campaign #1

1/1/16

6/30/16

Advertising campaign #2

3/1/16

Development of the retail channel

1/1/16

Totals

$0

Department

Helen

Marketing

outside firm

Marketing

$3,500

Helen

Marketing

12/30/16

$4,550

Helen

Marketing

11/30/16

$0

Helen

Marketing

$28,450

5.3 Expense Forecast

6.2 Marketing Organization

The expense forecast will be used as a tool to keep the department on target and provide indicators when corrections/ modifications are needed for the proper implementation of the marketing plan.

Helen Li will be responsible for the marketing activities.

6.3 Contingency Planning Difficulties and Risks Problems generating visibility, a function of being an Internet-based start-up organization

6.0 Controls The purpose of Pegasus’s marketing plan is to serve as a guide for the organization. The following areas will be monitored to gauge performance:

An entry into the market by an already-established market competitor

Worst-Case Risks

Revenue: monthly and annual

Determining that the business cannot support itself on an ongoing basis

Expenses: monthly and annual Customer satisfaction

Having to liquidate equipment or intellectual capital to cover liabilities

New-product development

6.1 Implementation The milestones identify the key marketing programs (Table 2.6). It is important to accomplish each one on time and on budget (Table 2.7). Table 2.7 Marketing Expense Budget 2016 $25,000

2017 $8,000

2018 $10,000

Advertisements

$8,050

$15,000

$20,000

Printed Material

$1,725

$2,000

$3,000

$34,775

$25,000

$33,000

6.58%

3.60%

4.14%

Web Site

Total Sales and Marketing Expenses Percent of Sales Contribution Margin Contribution Margin/Sales

$398,725 $544,652 $621,202 75.42%

78.40%

77.86%

Source: Adapted from a sample plan provided by and copyrighted by Palo Alto Software, Inc. Find more complete sample marketing plans at www.mplans.com. Reprinted by permission of Palo Alto Software.

ChaPter 2 ó Developing Marketing Strategies and Plans

Marketing plan completion Web site completion

Manager

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PART 2 Capturing Marketing Insights

3

C H A P T E R

Gathering Information and Forecasting Demand Making marketing decisions in a fast-changing world is both an art and a science. Holistic marketers recognize that the marketing environment is constantly presenting newer opportunities and threats, and they understand the importance of continuously monitoring, forecasting, and adapting to that environment.

C

hina’s fast-changing retail landscape has created havoc among many foreign and local grocers. Chinese shoppers are rapidly changing what they look for when grocery shopping. This has kept foreign supermarkets on their toes. Wal-Mart is revamping its store format and has introduced a new online shopping app to stem declining sales. It has also been hit by food safety scandals in China. Despite an ambitious program for building lifestyle malls, the UK-based chain Tesco failed in its gamble to have these malls anchored by its stores. Part of the reason for the lack of growth is competition from online grocers. Online grocery sales have exploded

in China. Sales of fresh foods, traditionally the preserve of brick-and-mortar stores, are growing faster online than other grocery items. Unlike the older folks, who find shopping a source of entertainment, the younger generation of Chinese, who grew up with computers, prefer to entertain themselves by traveling rather than shopping in physical stores. Wal-Mart intends to expand both online and offline to help customers shop as conveniently as possible. Others such as JD.com, a Chinese e-commerce company, has a deal to distribute fresh, chilled, and frozen products through convenience stores that either hold them for customer collection or deliver to their homes.1

In this chapter, we will address the following questions: 1. What are the components of a modern marketing information system? 2. What are useful internal records? 3. What is involved in a marketing intelligence system? 4. What are the key methods for tracking and identifying opportunities in the macroenvironment? 5. What are some important macroenvironment developments?

I

n this chapter, we consider how firms can develop processes to track trends. We also identify a number of important macroenvironment trends. Chapter 4 reviews how marketers can conduct more customized research that addresses specific marketing problems or issues.

3.1 Components of a Modern Marketing Information System The major responsibility for identifying significant marketplace changes falls to the company’s marketers. Marketers have two advantages for the task: disciplined methods for collecting information; and time spent interacting with customers, and observing competitors and other outside groups. Some firms have marketing information systems that provide rich detail about buyer wants, preferences, and behavior. DuPont—DuPont commissioned marketing studies to uncover personal pillow behavior for its Dacron Polyester unit, which supplies filling to pillow makers and sells its own Comforel brand. One challenge is that people do not give up their old pillows: 37 percent of one sample described their relationship with their pillow as being like that of “an old married couple,” and an additional 13 percent said their pillow was like a “childhood friend.” Respondents fell into distinct groups in terms of pillow behavior: stackers (23 percent), plumpers (20 percent), rollers or folders (16 percent), cuddlers (16 percent), and smashers, who pound their pillows into a more comfy shape (10 percent). Women were more likely to plump, men to fold. The prevalence of stackers led the company to sell more pillows packaged as pairs, as well as to market different levels of softness or firmness.2

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Every firm must organize and distribute a continuous flow of information to its marketing managers. A marketing information system (MIS) consists of people, equipment, and procedures to gather, sort, analyze, evaluate, and distribute needed, timely, and accurate information to marketing decision makers. A marketing information system is developed from internal company records, marketing intelligence activities, and marketing research. The first two topics are discussed here; the latter topic is reviewed in the next chapter. The company’s MIS should be a cross between what the managers think they need and what they really need, and what is economically feasible. An internal MIS committee can interview a cross-section of marketing managers to discover their information needs. Table 3.1 displays some useful questions. Table 3.1 Information Needs Probes What decisions do you regularly make? What information do you need to make these decisions? What information do you regularly get? What special studies do you periodically request? What information would you want that you are not getting now? What information would you want daily? Weekly? Monthly? Yearly? What magazines and trade reports would you like to see on a regular basis? What topics would you like to be kept informed of? What data analysis programs would you want? What are the four most helpful improvements that could be made in the present marketing information system?

3.2 Internal Records and Marketing Intelligence To spot important opportunities and potential problems, marketing managers rely on internal reports on orders, sales, prices, costs, inventory levels, receivables, and payables.

The heart of the internal records system is the order-to-payment cycle. Sales representatives, dealers, and customers send orders to the firm. The sales department prepares invoices and transmits copies to various departments. Shipped items are accompanied by shipping and billing documents that go to various departments. Because customers favor firms that can promise timely delivery, companies need to perform these steps quickly and accurately.

3.2.2 Sales Information Systems Marketing managers need timely and accurate reports on current sales. Consider Panasonic:

Panasonic—Panasonic makes digital cameras, plasma televisions, and other consumer electronics. After missing revenue goals, the company decided to adopt a vendor-managed inventory solution. Inventory distribution then came in line with consumption, and the availability of products to customers jumped from 70 percent to 95 percent. The average weeks that product supply sat in Panasonic’s channels went from 25 weeks to just 5 weeks within a year, and unit sales of the targeted plasma television rose from 20,000 to approximately 100,000. Best Buy, the initial U.S. retailer covered by the vendormanaged inventory model, has since elevated Panasonic from a Tier 3 to a Tier 1 “Go-To” brand for plasma televisions.3

Companies that make good use of “cookies” are smart users of targeted marketing. Many consumers are happy to cooperate. Not only do they not delete cookies, but they also expect customized marketing appeals and deals once they accept them. Companies must carefully interpret the sales data so as not to get the wrong signals. Michael Dell gave this illustration: “If you have three yellow Mustangs sitting on a dealer’s lot and a customer wants a red one, the salesman may be really good at figuring out how to sell the yellow Mustang. So the yellow Mustang gets sold, and a signal gets sent back to the factory that, hey, people want yellow Mustangs.”

3.2.3 Databases, Data Warehousing, and Data Mining The explosion of data brought about by the maturation of the Internet and mobile technology gives companies unprecedented opportunities to engage their customers. It also threatens to overwhelm decision makers. Marketing Insight: Making Big Data Work for You describes how companies use such data to their advantage.

ChaPter 3 ó Gathering Information and Forecasting Demand

3.2.1 The Order-to-Payment Cycle

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MARKETING INSIGHT

MAKING BIG DATA WORK FOR YOU

The age of big data allows companies to collect unprecedented amounts of information on everything from production activity through the supply chain, to customer interactions, and even clicks on a Web site. It can be a gold mine. But you need to know how to use it, says Keith Carter, Senior Visiting Fellow at National University of Singapore Business School.

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Delivering Results According to IBM, we generate around 2.5 billion gigabytes of data every day. That's lot of hard drives. But the value of big data doesn’t lie in its big-ness. Indeed, size is in many ways the problem with it; there’s simply so much data that many companies don’t know how to handle or manage it to extract useful information. Carter says that big data means nothing unless it is answering a strategic business question and putting the user in the right position to take action. In his words, it’s about acquiring “actionable intelligence.” “Actionable intelligence is about having the right ecosystem in place to answer strategic business questions with facts and then deliver results,” he says. In his book on the subject, Actionable Intelligence: A Guide to Delivering Business Results with Big Data—Fast! Carter shows how several multinational corporations have used the strategy to deliver a broad range of business benefits. Starbucks, for example, can use its customer loyalty card to track user transactions and actually track the user if they opt into that data-sharing feature. Why not take it further, Carter asks, and collect data on how long the customer stays in the store and what they do while they are there? A Strategic Question Carter has seen the “action” part of actionable intelligence first-hand, when he was an executive at Estée Lauder. After the

devastating earthquake and tsunami hit Japan in 2011, the key strategic question for the company was, how many of its products would be impacted by disruptions at Japanese suppliers? It took less than a day for his team to find the answer: more than 10,000 products would have a problem. That was the equivalent of half a billion dollars’ worth of business at risk. With that information in hand, they were able to focus on the suppliers that needed help the most. For actionable intelligence to be effective, Carter says, it’s important that the company culture is fact-based and willing to share information. Shared Facts “It’s about having a belief from the top that if I make a decision, I should make it with shared facts. It’s no longer as much by gut.” Carter also says it’s not just the big guys that benefit from big data; startups and SMEs can take advantage too. “When we come to making fact-based decisions, the small startup has more on the line because when they make a mistake it could kill their company. So with the data that’s available, now a small company has access to millions of pieces of information that they used to have to pay for,” he says. “Small business owners know more now than ever before.” The biggest mistake Carter sees companies making with big data is simply collecting it and putting it in a big warehouse. “All they’ve done is copy the data from one place. They still haven’t validated it,” he says. The right move is to formulate the strategic question, then acquire the data from inside and outside the company that answers that question. “Be ready to do it rapidly and iteratively, because as soon as you provide the first answer then the person who’s asking the question will realize there’s a deeper question—and then you’ll go and get more and as a result make an even better decision.”

Source: Adapted from Katie Sargent, “Making Big Data Work for You” Think Business, 4 March 2015. Partially reproduced with permission from Think Business, NUS Business School, National University of Singapore (http://thinkbusiness.nus.edu). Copyright NUS Business School.

3.2.4 The Marketing Intelligence System A marketing intelligence system is a set of procedures and sources managers use to obtain everyday information about developments in the marketing environment. The internal records system supplies results data, but the marketing intelligence system supplies happenings data. Marketing managers collect marketing intelligence by reading books, newspapers, and trade publications; talking to customers, suppliers, and distributors; monitoring social media on the Internet via online discussion groups, emailing lists and blogs; and meeting other company managers. A company can take several steps to improve the quality of its marketing intelligence: Train and motivate the sales force to spot and report new developments. The company must “sell” its sales force on their importance as intelligence gatherers. Reliance on the sales force for information is particularly important in rural marketing. Hindustan Unilever faces a situation where India’s rural population is split among 560,000 villages. Only 45 percent of rural Indians can be reached by motor-able roads. The company uses its salespeople to visit these villages regularly and find out what products these villagers want.

Motivate distributors, retailers, and other intermediaries to pass along important intelligence. Marketing intermediaries are often closer to the customer and competition, and can offer helpful insights. Hire external experts to collect intelligence. Many companies hire specialists to gather marketing intelligence. Service providers often send mystery shoppers to their stores to assess how employees treat customers. Mystery shoppers for McDonald’s discovered that only 46 percent of its U.S. restaurants met internal speed-of-service standards, forcing the company to rethink processes and training.4 Retailers also use mystery shoppers. They find that stores that consistently score high on service have the best sales. Typical questions their mystery shoppers report on are (1) How long before a sales associate greeted you? (2) Did the sales associate act as if he or she wanted your business? and (3) Was the sales associate knowledgeable about products in stock?5 Network internally and externally. It can purchase competitors’ products; attend open houses and trade shows; read competitors’ published reports; attend stockholders’ meetings; talk to employees, dealers, distributors, suppliers, and freight agents; collect competitors’ ads; and look up news stories about competitors. Companies can still gain useful information in the field. On a fact-finding trip to Asia for a U.S. textile company, Fuld & Co., a Cambridge consulting firm that specializes in competitive intelligence, snapped a photo of a goat munching grass on a field. This was not just any goat, but proof that the rival company’s much-heralded new Indonesian plant wasn’t where it was rumored to be. Armed with that information, the textile company was able to change its defensive strategy.6 Set up a customer advisory panel. Members might include representative customers or the company’s largest customers or its most outspoken or sophisticated customers. Many business schools have advisory panels made up of alumni and recruiters who provide valuable feedback on the curriculum. Take advantage of government data resources. Population census and trade data are valuable sources for a first cut about the market. Purchase information from outside suppliers. Well-known data suppliers include Nielsen and Taylor Nelson Sofrés. These research firms gather consumer-panel data at a much lower cost than the company can on its own.

3.2.5 Collecting Marketing Intelligence on the Internet The explosion of outlets available on the Internet, online review boards, discussion forums, chat rooms, and blogs can distribute one customer’s experiences or evaluation to other potential

ChaPter 3 ó Gathering Information and Forecasting Demand

Hindustan Unilever trains its sales force to reach out to India’s rural villagers. Its sales force collects information on village size, composition, electrical capacity, and use of hygiene products to help the company develop more effective marketing programs for this customer group.

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buyers, marketers seeking information about the consumers, and the competition. There are five ways marketers can research competitors’ product strengths and weaknesses online.7

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1.

Independent customer goods and service review forums. In the United States, these forums include Web sites such as Epinions, RateItAll, ConsumerREVIEW.com, and BizRate. Consumer feedback can come from members who provide ratings and feedback to assist other shoppers, and survey results on service quality collected from customers. These sites have the advantage of being independent from the goods and service providers, which may reduce bias.

2.

Distributor or sales agent feedback sites. These sites offer both positive and negative product or service reviews, but the stores or distributors have built the sites themselves. Amazon.com, for instance, offers an interactive feedback opportunity through which buyers, readers, editors, and others may review all products listed in the site, especially books.

3.

Combo-Site offering customer reviews and expert opinions. This type of site is concentrated in financial services and high-tech products that require professional knowledge. ZDNet, an online advisor on technology products, offers customer comments and evaluations based on ease of use, features and stability, along with expert reviews. ZDNet summarizes the number of positive and negative evaluations and total download numbers within a certain period (typically a week or a month) for each software program. The advantage of this type of review site is that a product supplier can compare opinions from the experts with those from consumers.

4.

Customer complaint sites. These forums are designed mainly for dissatisfied customers. Reviewers at most opinion sites tend to offer positive comments due to financial incentives and potential lawsuits for slanderous or libelous negative comments. In contrast, some Web sites offer a complaining forum with a moderator. For instance, PlanetFeedback and Complaints.com allow customers to voice unfavorable experiences with specific companies.

5.

Public blogs. Tens of millions of blogs exist online and their numbers continue to grow. Consultancy firms analyze blogs and social networks for insights into consumer sentiment and threats to the brand that may emerge online.

3.2.6 Communicating and Acting on Marketing Intelligence The competitive intelligence function works best when it is closely coordinated with the decisionmaking process.8 Given the speed of the Internet, it is important to act quickly on information gleaned online. Coca-Cola—When Coke’s monitoring software spotted a Twitter post that went to 10,000 followers from an upset consumer who could not redeem a prize from a MyCoke rewards program, Coke quickly posted an apology on his Twitter profile and offered to help resolve the situation. After the consumer got the prize, he changed his Twitter avatar to a photo of himself holding a Coke bottle.

3.3 Analyzing the Macroenvironment Successful companies recognize and respond profitably to unmet needs and trends.

3.3.1 Needs and Trends Enterprising individuals and companies manage to create new solutions to unmet needs. Dockers was created to meet the needs of baby-boomers who were unable to wear jeans, but wanted a physically and psychologically comfortable pair of pants at that point of time. Let’s distinguish among fads, trends, and megatrends.

A trend is a direction or sequence of events that has some momentum and durability. Trends are more Is Asians’ craze for all things Korean a fad, a trend, or a megatrend? Fads are shortpredictable and durable than fads. A trend reveals the lived while trends have momentum and are long lasting. shape of the future and provides many opportunities. For example, the percentage of Asian women wanting fairer skin has risen steadily over the years. Marketers of cosmetics cater to this trend with appropriate products and communications. A megatrend is a “large social, economic, political, and technological changes [that] are slow to form, and once in place, they influence us for some time—between 7 and 10 years, or longer.”10 Marketing Insight: Ten Forces Forging China's Future lists the forces in play. A new market opportunity does not guarantee success, even if the product is technically feasible. Market research is necessary to determine an opportunity’s profit potential.

MARKETING INSIGHT

TEN FORCES FORGING CHINA'S FUTURE

1. The great rebalancing—How can China increase consumption while reducing reliance on exports and investment? China’s household consumption as a share of GDP is much lower than that of the United States, which means that there is room for growth. 2. Infrastructure advances—China has huge infrastructural projects such as building airports, new expressways, and port facilities. With more roads being built, there is also more demand for cars. 3. The green challenge— China has severe air pollution issues. Environmental challenges create demand for green products, though these are not necessarily profitable. Manufacturers who become more efficient can help reduce emissions. 4. Manufacturing’s takeover—Chinese companies have to go beyond being “faster and cheaper” and instead adapt to growing consumer sophistication with more complex value chains and build logistics hubs nearer to China’s interior cities. 5. Rise of the upper middle class—By 2022, McKinsey research predicts that more than 75 percent of China’s urban consumers will earn $9,000 to $34,000 a year. A mere 4 percent of urban Chinese households were in this range in 2000. Today, Chinese consumers are more confident and independent. 6. E-tailing extraordinaire—China has a huge e-tail market: it is estimated that a dollar of online consumption in China Source: “Ten Forces Forging China’s Future,” McKinsey Quarterly, no. 3 (2013).

replaces 60 cents of sales in offline stores and generates about 40 cents of incremental consumption. E-tailing’s impact is more pronounced in small- and mid-size Chinese cities. Several megasites such as Taobao, Tmall, and Paipai— owned by Alibaba—are flourishing. 7. Innovation’s new spark—Long viewed as an imitator and follower of other countries’ innovations, Chinese companies are beginning to be more innovative. Tencent’s social network group is hiring students directly from college for ideas before they are exposed to less innovative Chinese company cultures. 8. Financier to the world?—As the world’s largest saver, China plays a key role in shifting the global financial landscape. Reforms need to take place to ensure that the currency— renminbi—becomes a major international one. 9. Investor confidence—Chinese entrepreneurs need outside capital to finance their growth and expansion. They will need to demonstrate governance and better transparency to gain trust from investors. 10. Cultivating human capital—China will have to develop its human infrastructure through better teamwork, communications, and presentation skills. Western managers need to understand China’s hidden rules and local sensitivities, such as the importance of “face.”

ChaPter 3 ó Gathering Information and Forecasting Demand

A fad is “unpredictable, short-lived, and without social, economic, and political significance.”9 A company can cash in on a fad such as Croc sandals, but this is more a matter of luck and good timing than anything else. At one time in Asia, Japanese film stars and J-pop music were the rage. Now, Asians are embracing all things Korean. Consumers are crazy over Korean drama series such as Winter Sonata, and Boys Over Flowers, Korean cosmetics brands such as Skin Food and The Face Shop, and Korean film stars such as Bae Yong Joon and Lee Min Ho.

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3.3.2 Identifying the Major Forces The beginning of the second decade of the 21st century brought a series of new challenges: the falling oil price; the rout in the China stock market, which affected savings, investment, and retirement funds; corporate scandals; and the rise of terrorism. These dramatic events were accompanied by the continuation of many existing trends that have already profoundly influenced the global landscape. Firms must monitor six major forces: demographic, economic, social-cultural, natural, technological, and political-legal. We will describe these forces separately, but marketers must pay attention to their interactions, because these will lead to new opportunities and threats. For example, explosive population growth (demographic) leads to more resource depletion and pollution (natural), which leads consumers to call for more laws (political-legal), which stimulate new technological solutions and products (technological), which, if they are affordable (economic), may actually change attitudes and behavior (social-cultural).

3.3.3 The Demographic Environment The main demographic force that marketers monitor is population, including the size and growth rate of populations in cities, regions, and nations; age distribution and ethnic mix; educational levels; and household patterns.

Worldwide Population Growth The world population is showing explosive growth: it totaled over 7.4 billion in 2015 and will exceed 9 billion by the year 2045.11 Table 3.2 offers an interesting perspective.12 Table 3.2 The World as a Village If the world were a village of 100 people:

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61 villagers would be Asian (of that, 20 would be Chinese and 17 would be Indian), 14 would be African, 11 would be European, 8 would be Latin or South American, 5 would be North American, and only one of the villagers would be from Australia, Oceania, or Antarctica. At least 18 villagers would be unable to read or write but 33 would have cellular phones and 16 would be online on the Internet. 18 villagers would be under 10 years of age and 11 would be over 60 years old. There would be an equal number of males and females. There would be 18 cars in the village. 63 villagers would have inadequate sanitation. 32 villagers would be Christians, 20 would be Muslims, 14 would be Hindus, 6 would be Buddhists, 16 would be non-religious, and the remaining 12 would be members of other religions. 30 villagers would be unemployed or underemployed, while of those 70 who would work, 28 would work in agriculture (primary sector), 14 would work in industry (secondary sector), and the remaining 28 would work in the service sector (tertiary sector). 53 villagers would live on less than two U.S. dollars a day. One villager would have AIDS, 26 villagers would smoke, and 14 villagers would be obese. By the end of a year, one villager would die and two new villagers would be born so the population would climb to 101. Source: David J. Smith and Shelagh Armstrong, If the World Were a Village: A Book About the World’s People, 2nd ed. (Tonawanda, NY: Kids Can Press, 2002).

Moreover, population growth is highest in countries and communities that can least afford it. The less developed regions of the world currently account for 84 percent of the world’s population and are growing at 1 percent per year, whereas the population in the more developed countries is

growing at only 0.3 percent per year. In developing countries, the death rate has been falling as a result of modern medicine, but the birth rate has remained fairly stable.

Table 3.3 Asian Population Statistics Population (Million)

Population Growth (Percent)

China

1,367

0.5

India

1,252

1.2

Indonesia

256

0.9

Japan

127

–0.2

The Philippines

101

1.6

Vietnam

94

1.0

Thailand

68

0.3

South Korea

49

0.1

Malaysia

31

1.4

Taiwan

23

0.2

Hong Kong

7

0.4

Singapore

6

1.9

Country

Total Asia – 12

3,381

The U.S.

321

0.8

European Union

514

0.3

7,256

1.1

World

Source: CIA World Factbook 2015, various country statistics.

A growing population does not mean growing markets unless these markets have sufficient purchasing power. Nonetheless, companies that carefully analyze their markets can find major opportunities. China’s “Little Emperors” are showered with everything from candy to computers as a result of the “six pocket syndrome.” As many as six adults—parents, grandparents, greatgrandparents, and aunts and uncles—may be indulging the whims of each child. Local marketers like BabyCare have exploited this opportunity. BabyCare—This Beijing child-care facility is aimed at helping infants develop their spatial perception and motor skills through play. There are also homework assignments in which mothers are to practice what they have learned with their kids. Consistent with the Chinese proverb that says the first three years are critical to a child’s future, BabyCare was formed to exploit China’s large market potential for nutritional supplements for expectant mothers and infants. Its facilities educate women on pregnancy and child-rearing, and sell them supplements at the same time. The bulk of its profits come not from classes, but from sales of vitamins, baby formula, and educational toys. However, the centers, which offer everything from classes on Lamaze birthing techniques and breast-feeding to how to be a good grandparent, are key to attracting new customers. BabyCare employs 4,500 sales representatives, most of whom are ex-customers.13

ChaPter 3 ó Gathering Information and Forecasting Demand

Table 3.3 contains the population data of the 12 Asian countries of principal interest in this book, given their greater market potential in the region. Overall, these 12 countries account for over three billion consumers, or nearly half the world’s population. Three of these countries have population growth rates far above the world’s average: India, the Philippines, and Malaysia. This, coupled with the large population bases in such nations as India, Indonesia, and China, appears to offer attractive potential for marketers.

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More importantly, the first batch of Little Emperors has become young adults now and are starting their own families. They never had to worry about money nor did they ever have to share. They grew up on a diet of foreign brands and Western notions of consumption. Additionally, with few local brands to rival Western companies, these young consumers are likely to favor non-Chinese brands.14 Sometimes the lessons from developing markets are helping businesses in developed markets. See Marketing Insight: Finding Gold at the Bottom of the Pyramid. Child-care facilities such as BabyCare are riding on Chinese parents’ indulgence on their “Little Emperors.” Besides conducting classes to develop young children’s spatial perception and motor skills, BabyCare also generates revenue from sales of supplements and educational toys.

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FINDING GOlD AT THE BOTTOM OF THE PYRAMID

Business writer C.K. Prahalad believes much innovation can come from developments in emerging markets such as China and India. He estimates there are 5 billion unserved and underserved people at the so-called “bottom of the pyramid.” One study showed that 4 billion people live on $2 or less a day. Firms operating in those markets have had to learn how to do more with less. In Bangalore, India, Narayana Hrudayalaya Hospital charges a flat fee of $1,500 for heart bypass surgery that costs 50 times as much in the United States. The hospital has low labor and operating expenses and an assembly-line view of care that has specialists focus on their own area. The approach works — the hospital’s mortality rates are half those of U.S. hospitals. Narayana also operates on hundreds of infants for free and profitably insures 2.5 million poor Indians against serious illness for 11 cents a month. Overseas firms are also finding creative solutions in developing countries. In Brazil, India, Eastern Europe, and other markets, Microsoft launched its pay-as-you-go FlexGo program, which allows users to prepay to use a fully loaded PC only for as long as wanted or needed without having to pay the full price the PC would normally command. When the payment runs out, the PC stops operating and the user prepays again to restart it.

Other firms find “reverse innovation” advantages by developing products in countries like China and India and then distributing them globally. After GE successfully introduced a $1,000 handheld electrocardiogram device for rural India and a portable, PC-based ultrasound machine for rural China, it began to sell them in the United States. Nestlé repositioned its low-fat Maggi brand dried noodles—a popular, low-priced meal for rural Pakistan and India—as a budget-friendly health food in Australia and New Zealand.

Sources: C. K. Prahalad, The Fortune at the Bottom of the Pyramid (Upper Saddle River, NJ: Wharton School Publishing, 2010); Bill Breen, “C. K. Prahalad: Pyramid Schemer,” Fast Company, March 2007, p. 79; Reena Jane, “Inspiration from Emerging Economies,” BusinessWeek, 23 March 2009, pp. 38–41; Vijay Govindarajan and Chris Trimble, Reverse Innovation: Create Far from Home, Win Everywhere (Boston, MA: Harvard Business School Publishing, 2012); Jeffrey R. Immelt, Vijay Govindarajan, and Chris Trimble, “How GE Is Disrupting Itself,” Harvard Business Review, October 2009, pp. 56–65; Vijay Govindrajan, “A Reverse-Innovation Playbook,” Harvard Business Review, April 2012, pp.120–23; Felicity Carus, “Reverse Innovation Brings Social Solutions to Developed Countries,” The Guardian, 29 August 2012; Constantinos C. Markides, “How Disruptive Will Innovations from Emerging Markets Be?” MIT Sloan Management Review, 54 (Fall 2012), pp. 23–25.

Population Age Mix National populations vary in their age mix. At one extreme is Indonesia, a country with a young population and rapid population growth. At the other extreme is Japan, a country with one of the

world’s oldest populations. Milk, diapers, school supplies, and toys would be important products in Indonesia while Japan’s population would consume more adult products.

A population can be subdivided into six age groups: preschool, school-age children, teens, young adults aged 25–40, middle-aged adults aged 40–65, and older adults aged 65 and above. Some marketers like to focus on cohorts. Cohorts are groups of individuals who are born during the same time period and travel through life together. The “defining moments” they experience as they become adults can stay with them for a lifetime and influence their values, preferences, and buying behaviors. For marketers, the most populous age groups shape the marketing environment. For example, in Japan, the proportion of over-65-year-olds is already 20 percent. By 2020, it will approach 30 percent. This provides a significant business opportunity for elderly facilities, particularly given Japan’s becoming less family-oriented.

Ethnic and Other Markets Countries also vary in ethnic and racial make-up. At one extreme is Japan, where almost everyone is Japanese; at the other is the United States, where people come from virtually all nations. Ethnic groups have certain specific wants and buying habits. They prefer certain types of food and clothing. They speak different dialects and languages, which may necessitate the employment of salespeople and telemarketers of different ethnicities and linguistic skills, and the use of suitably translated marketing communications materials and appropriate media vehicles. Marketers also need to be careful that they do not engage in marketing tactics that may offend certain ethnicities or religions.

McDonald’s—To celebrate the Lunar New Year, McDonald’s introduced 12 Doraemon lucky charms in the form of the Chinese zodiac animals in several Asian countries. Customers could buy the charm toy at $1.60. That year, the Lunar New Year coincided with Valentine’s Day. Among the 12 charms was a Cupid Doraemon holding a heart replacing the pig figurine, because McDonald’s wanted to be sensitive to its Muslim customers. Thus, the cupid design was included to commemorate Valentine’s Day. However, this move offended the Chinese community as the collection was incomplete without the pig. Online forum discussions had Chinese customers suggesting that customers should have a choice whether they wanted the pig toy or Cupid. The irony was that the Muslim community would not have been offended if the pig charm had been included. In fact, they felt that out of consideration for the Chinese customers, a complete set of the zodiac animals should have been offered. Further, they felt that it was only a toy, and pointed out that even Winnie the Pooh toys sometimes come with Piglet in a set. McDonald’s responded with an apology and, to make things right, brought out the Doraemon pig lucky charm to complete the collection.15

Yet, marketers must be careful not to overgeneralize about ethnic groups. Within each ethnic group are consumers who are quite different from each other. Asia’s ethnic diversity, reflected in Tables 3.4 and 3.5, shows that the 12 Asian countries have more than 20 major languages and 12 major religions. Just as significant is the number of major languages and religions in some of the countries, which suggests substantial diversity within their national borders.

ChaPter 3 ó Gathering Information and Forecasting Demand

There is a global trend toward an aging population. It is the start of what the Japanese are calling the Silver Century. The graying of the population is affected by another trend, the widespread fall in fertility rates. In most countries, women are not having enough babies to replace the people who die. While there are currently about 11 working people for every retiree in Asia today, it is estimated that by 2050, the number of workers will fall to four per retiree. There will be a huge problem of having to support a vastly larger population of elderly people. However, future Asian retirees are envisaged to be more affluent, active, cosmopolitan, and youthful than their parents. This implies good prospects for marketers of travel, entertainment, health care, wealth management, and beauty care offerings.

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Table 3.4 Major Asian Languages Country China Hong Kong India Indonesia Japan Malaysia The Philippines Singapore South Korea Taiwan Thailand Vietnam

Languages Mandarin, Chinese dialects Chinese dialect (Cantonese), English Hindi, Bengali, English Bahasa Indonesia, English, Dutch, local dialects (Javanese) Japanese Bahasa Melayu, English, Chinese dialects, Tamil Tagalog, English English, Mandarin, Chinese dialects, Bahasa Melayu, Tamil Korean, English Mandarin, Taiwanese dialect Thai Vietnamese, English, French, Chinese

Source: The CIA Factbook 2015, various country statistics.

Table 3.5 Major Asian Religions

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Country

Major Religions

China

Buddhist 18.2%, Christian 5.1%, Muslim 1.8%

Hong Kong

Eclectic mixture of local religions 90%, Christian 10%

India

Hindu 79.8%, Muslim 14.2%, Christian 2.3%

Indonesia

Muslim 87.2%, Christian 7.0%, Catholic 2.9%, Hindu 1.7%

Japan

Shintoist 79.2%, Buddhist 66.8%

Malaysia

Muslim 61.3%, Buddhist 19.8%, Christian 9.1%, Hindu 6.3%

The Philippines

Catholic 82.9%, Muslim 5%, Christian 4.5%

Singapore

Buddhist 33.9%, Muslim 14.3%, Christian 11%, Taoist 11.3%, Hindu 5.2%

South Korea

Christian 31.6%, Buddhist 24.2%

Taiwan

Buddhist and Taoist 93%

Thailand

Buddhist 93.6%, Muslim 4.9%

Vietnam

Buddhist 9.3%, Catholic 6.7%

Source: The CIA Factbook 2015, various country statistics.

Educational Groups

Asians are motivated to upgrade their knowledge and skills. This has translated into a high demand for tertiary education and quality books.

The population in any society falls into five educational groups: illiterates, high school dropouts, high school degree holders, college degree holders, and professional degree holders. In Japan, 99 percent of the population is literate, whereas the rate is much lower in less developed countries and rural communities. In India, for example, 61 percent of those aged 15 and above can read or write, with males higher than females at 73.4 percent vis-a-vis 47.8 percent. The desire for Asians to upgrade their knowledge and skills spell a high demand for quality books, magazines, and educational programs in the region. Many universities have established offshore campuses in various Asian countries or have partnered local schools to introduce joint degree and executive programs.

Household Patterns

Married couple households have slipped among the more developed Asian economies. Asians are delaying marriage longer than ever, cohabitating in greater numbers, forming more same-sex partnerships, living far longer, and remarrying less after splitting up. But singles can also have significant buying power and spend more on themselves than those who live in larger households.

Geographical Shifts in Population This is a period of great migratory movements between and within countries. For example, the establishment of Special Economic Zones along coastal China led to many inlanders moving to such cities as Shenzhen. Meanwhile, neighboring Hong Kongers have also flocked to the city for its better job prospects and lower cost of living. This has led to a narrowing of property prices between the two cities, and the launch of more housing projects in Shenzhen. With economic development, China saw a substantial increase in its “floating” population—people living away from their hometowns for at least six months. Slightly more than half of its 1.37 billion population live in urban areas.16 Marketers are eyeing the rural markets in China and India.

Rural Marketing in India—Over the years, the economic growth in rural India has outpaced growth in urban areas by almost 40 percent. Rural India accounts for twothirds of overall GDP and 60 percent of national demand. Indian companies are targeting at the rise of the low-end Indian consumer. They know that they cannot build a brand presence in India without a strategy for reaching the villages. Engaging the village-level consumers means that Indian companies have to tailor-make innovative products and pricing strategies for the rising masses of the rural segment. Bharti offers the world’s lowest calling rates; Reliance sells the world’s cheapest handsets; and Tata the world’s cheapest car.17

3.3.4 Economic Environment Purchasing power depends on current income, prices, savings, debt, and credit availability. Marketers must pay careful attention to trends affecting purchasing power, because they can have a strong impact on business, especially for companies whose products are geared to high-income and price-sensitive consumers. Consulting company McKinsey, predicts that more than 20 of the world’s top 50 cities ranked by GDP will be located in Asia by 2025. Shanghai and Beijing will outrank Los Angeles and London, while Mumbai and Doha will surpass Munich and Denver.18

Income Distribution There are four types of industrial structures: subsistence economies like Laos (few opportunities for marketers); raw-material-exporting economies like Brunei (oil), with good markets for equipment, tools, supplies, and luxury goods for the rich; industrializing economies like China and India, where a new upper class and a growing middle class demand new types of goods; and industrial economies like Japan which are rich markets for all sorts of goods. In a global economy, marketers need to pay attention to the shifting income distribution in countries, particularly countries where affluence levels are rising.

ChaPter 3 ó Gathering Information and Forecasting Demand

The “traditional household” consists of a husband, wife, and children (and sometimes grandparents). In Asia, extended families are common. In the Indian subcontinent, for example, the household may also include dependent brothers and sisters. In some countries, there may be “non-traditional” households which include single live-alones, adult live-togethers of one or both sexes, single-parent families, childless married couples, and empty-nesters. More people are divorcing or separating, choosing not to marry, marrying later, or marrying without the intention to have children. Each group has a distinctive set of needs and buying habits. The single, separated, widowed, and divorced need smaller apartments; inexpensive and smaller appliances, furniture, and furnishings; and smaller-size food packages. Marketers must increasingly consider the special needs of non-traditional households, because they are growing rapidly.

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India and the Philippines—With its surfeit of low-cost, high-IQ, English-speaking employees, India is snapping up programming and call-center jobs once held by Americans, in a wave of outsourcing that shows no signs of stopping. While India’s ascendance inevitably means lost jobs and anguish for American white-collar workers, it also means a larger market for American and Western goods—and anguish for traditional Indian families. Along with training in American accents and geography, India’s legions of call-center employees are absorbing new ideas about family, material possessions, and romance. “I call these kids ‘liberalization children’,” says Rama Bijapurkar, a Mumbaibased marketing consultant. “This generation has a hunger in the belly for achievement.” Liberalization children are questioning conservative traditions such as arranged marriages and no public kissing. They want to watch Hollywood movies, listen to Western music, chat on mobile phones, buy on credit—rather than saving—and eat out in restaurants or cafés. And they are being targeted relentlessly by companies that have waited to see India develop a Western-style consumer class. Of late, the Philippines has overtaken India as the call center of choice. American customers find it difficult to understand Indian agents who speak British-style English. Filipinos, in contrast, learn American English in the first grade and follow American basketball. They also have an Eastern, attentive hospitality and attitude of care. It also has better utility infrastructure than India. While Filipino call-center agents generally earn more than their Indian counterparts, MNCs feel they are worth the extra cost because of their Americanized culture.19

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India took off as an offshore call center for several MNCs. This has changed its income distribution. Along with higher income, these call-center employees, trained to speak in American accent, have also embraced new ideas about family, material possessions, and romance. The Philippines is now the new call center hub despite the higher costs because American customers find them easier to understand than they do Indian agents.

Marketers often distinguish countries with five different income-distribution patterns: (1) very low incomes, (2) mostly low incomes, (3) very low, very high incomes, (4) low, medium, high incomes, and (5) mostly medium incomes. Theme Parks in Asia—The middle-class segment in Asia has boosted the coffers of theme parks. When Universal Studios in Singapore opened, it proved critics wrong by drawing in more than 1 million visitors after six months. Tokyo Disneyland and DisneySea, Universal Studios in Osaka, and South Korea’s Everland were ranked among the world’s top 10 theme parks in terms of visitors. Asia’s growing middle income group, predicted

Aside from cross-national income differences, companies must also consider intra-country variations in income. Procter & Gamble has won over consumers in China’s hinterlands with a budget detergent called Tide Clean White, while holding onto city consumers with the more expensive Tide Triple Action. General Motors targets the wealthiest Chinese with the Cadillac, middle management with the Buick Excelle, office Everland, a world-class theme park, is a popular place for friends, couples and workers with the Chevrolet Spark, and rural consumers with families in South Korea. the Wuling minivan. Similarly, Lenovo not only manufactures PCs costing $2,000 or more that double as home entertainment centers, but also simple machines costing a few hundred dollars for poorer families who want their children to be computer literate. Geely makes the $17,000 Mybo as a family sedan for city drivers, while the $3,700 Haoqing is aimed at recent college graduates buying their first car.21

ChaPter 3 ó Gathering Information and Forecasting Demand

by the Asian Development Bank to grow exponentially to become the world’s single biggest group of consumers, is believed to be responsible for the theme park boom. Encouraged by this, Universal Studios is building its largest theme park in South Korea, Disneyland is building a park in Shanghai, and Legoland sets up its first Asian park in Johor, Malaysia.20

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Chevy Spark, a subcompact hatchback, is a popular choice among young car-buyers in Asia for its bright colors, affordable price, fuel efficiency and safety.

Cadillac, a luxury sedan, is a favorite choice for wealthy Chinese.

Income, Savings, Debt, and Credit Consumer expenditures are affected by income levels, savings, debt, and credit availability. The Japanese have a high savings rate, about 13 percent of their income, or nearly three times more than U.S. consumers. Despite such a high savings rate, the recession that began in the 1990s ate into Japanese pockets and marketers responded accordingly. Minicars such as the Suzuki Wagon R and utility wagons—which are safe and energy efficient—boomed. Muji, which sells a range of well-made but generic clothing, furniture, and household goods, did well too. The recession also led to an increased preference for eating in. 7-Eleven Japan increased its share of the processed food market as well as branched out into offering such services as easing bill payments, dispensing cash, and parcel delivery.22 Many retailers established 100-yen (85-cent) stores, including am/pm Japan, Three F, Lawson 100, as well as 24-hour chains like Shop 99 and Hyper Convenience USMart.23

Bargain-hunting Japanese—The shrinking Japanese income has turned many Japanese into bargain hunters. Department stores have to offer cheaper merchandise in a bid to compete with lower-price merchants. The Mitsukoshi department store in Ginza has to compete with casual wear stores H&M and UNIQLO. Department stores are also facing stiff competition from operators of outlet malls, sprawling complexes located away from built-up areas. Such competition has seen department stores adapting their strategies. A Daimaru outlet now features a UNIQLO store; a Matsuzakaya’s store now has one floor occupied by Muji, whose minimalist earth-colored products are well received by young Japanese; and Takashimaya has brought in popular handicrafts chain Yuzawaya into its shopping center. For luxury brand Louis Vuitton, Japan has been its most profitable market. However, with the weak economy, Louis Vuitton adapted. The days of relying on a logo and charging a high price are almost gone. Instead, Japanese are looking for craftsmanship and value for money. To promote sales, Louis Vuitton launched less expensive collections made with cheaper materials. The brand also opened in smaller cities where the lure of the logo still works.24

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Recession in Japan has seen changes in lifestyle. Companies such as generic brand store Muji flourished as did 100-yen stores. Japanese also prefer to eat in than dine out.

3.3.5 Social-Cultural Environment Society shapes the beliefs, values, and norms that largely define these tastes and preferences. People absorb, almost unconsciously, a worldview that defines their relationships to themselves, to others, to organizations, to society, to nature, and to the universe. Views of themselves—People vary in the relative emphasis they place on self-gratification. Marketers must recognize that there are many different groups with different views of themselves. Grey Global’s survey of young Indians and Chinese found they were overwhelmingly positive about the future, believed success was in their hands, and viewed products as status symbols. Over 60 percent viewed themselves as individualists.25 Views of others—People are concerned about the homeless, crime and victims, and other social problems. They would like to live in a more humane society. At the same time, people are seeking out their “own kind.” They hunger for serious and long-lasting relationships with a few others. These trends portend a growing market for social-support

products and services that promote direct relations between human beings, such as health clubs, cruises, and religious activities. They also suggest a growing market for “social surrogates,” things that allow people who are alone to feel that they are not, such as television, home video games, and social networking sites. Views of organizations—People vary in their attitudes toward corporations, government agencies, trade unions, and other organizations. During the tainted milk scandal in China in which melamine was found in milk powder and children died, dairy companies such as Mengniu, Yili, and Sanlu were resented by consumers. Even candy brand White Rabbit was recalled and avoided for fear of contamination. Such companies need to find new ways to win back consumer and employee confidence. They need to make sure that they are good corporate citizens and that their consumer messages are honest. Views of society—Some people defend it (preservers), some run it (makers), some take what they can from it (takers), some want to change it (changers), some are looking for something deeper (seekers), and some want to leave it (escapers).27 Consumption patterns often reflect social attitude. Makers tend to be high achievers who eat, dress, and live well. Changers usually live more frugally, drive smaller cars, and wear simpler clothes. Escapers and seekers are a major market for movies, music, surfing, and camping. Views of nature—Business has responded to increased awareness of nature’s fragility and finiteness by producing wider varieties of camping, hiking, boating, and fishing gear such as boots, tents, backpacks, and accessories. Views of the universe—People vary in their beliefs about the origin of the universe and their place in it. Asia is multi-religious. There are Buddhists, Christians, Hindus, Muslims, and Taoists. However, the extent of religious conviction and practice varies. Those who are not strong in their religious orientation seek self-fulfillment and immediate gratification. At the same time, every trend seems to breed a countertrend, as indicated by a worldwide rise in religious fundamentalism. Other cultural characteristics of interest to marketers are the persistence of core cultural values and the existence of subcultures.

Core Cultural Values The people living in a particular society hold many core beliefs and values that tend to persist. Most Asians still believe in hard work, filial piety, marriage, and education. Core beliefs and values are passed on from parents to children and are reinforced by major social institutions—schools, religious organizations, businesses, and governments. Secondary beliefs and values are more open to change. Believing in the institution of marriage is a core belief; believing that people should wed early is a secondary belief. Marketers have more chance of changing secondary values than core values. Thus, family-planning marketers could make some headway arguing that people should get married later, rather than that they should not get married at all.

ChaPter 3 ó Gathering Information and Forecasting Demand

Chinese Gen Y—While Chinese Gen Ys seem modern, playing the same online games as their Western counterparts, their values remain deeply Chinese. Gen Y Chinese have high expectations for their careers and expect to work diligently to achieve them. Family ranked most important (45 percent), followed by friends (17 percent) and career (12 percent). They see themselves as seeking balance. When put in a new environment, they emphasize the development of new friendships, while their Western counterparts focus almost entirely on the novel environment. When asked what would make their life happier, 82 percent of Chinese Gen Ys chose to do something for their parents.26

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Subcultures Each society contains subcultures, groups with shared values emerging from their special life experiences or circumstances. Japan’s Harajuku Kids represents subcultures who share common beliefs, preferences, and behaviors.

Cosplay—Cosplay is the Japanese term for “costume play.” Popular among Japanese, this trend is becoming popular in Singapore. People dress in costumes and accessories to represent an iconic character or idea, such as Lolita or decora (short for “decoration look”). The Lolita trend inspired clothing labels to sell doll-like clothes for adults. Teenagers in Tokyo’s Harajuku district popularized the look. The decora look is about celebrating one’s childlike state and never growing up. It is popular among accessory-crazed Harajuku youths who dress up in clothes and accessories emblazoned with cartoon characters like Hone Sempai’s Usamomo or Hello Kitty.

Marketers have always loved teenagers because they are society’s trendsetters in fashion, music, entertainment, ideas, and attitudes. Marketers also know that if they attract someone as a teen, there is a good chance they will keep the person as a customer later in life. Another rising submarket is the metrosexuals.

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Metrosexuals in India—Personal care companies are targeting Indian men as rising incomes allow them to buy more deodorants and shaving gels. Metrosexuals—urban, heterosexual men who pay close attention to grooming and fashion — were popularized in India by Bollywood actors such as Shah Rukh Khan. The growing attention to male grooming in India mirrors a trend in North America and Europe. While there is still a social stigma against male grooming products, there is a growing trend. A Gillette survey found that urban Indian men spend 20 minutes in front of the mirror each morning compared to women’s 18. The fastest growing segment of the male personal care market is toiletries— grooming products other than shaving gels. Products such as Brylcreem Talc and Helen Curtis India’s Park Avenue International Soap are garnering sales. Emami, which makes beauty and health-care products, developed its whitening cream for men because surveys showed they were consuming 30 percent of the women’s version.28

3.3.6 Natural Environment The deterioration of the natural environment is a major global concern. In many world cities, air and water pollution have reached dangerous levels. There is great concern about “greenhouse gases” in the atmosphere due to the burning of fossil fuels, about the depletion of the ozone layer due to certain chemicals, and about growing shortages of water. However, in many less developed Asian countries, such environmental concern is lacking. Air, water, and noise pollution are common. Imposing new regulations may hit certain industries very hard. Steel companies and public utilities in some countries like the United States have had to invest heavily in pollutioncontrol equipment and more environmentally friendly fuels, making hybrid cars, low-flow toilets and showers, organic foods, and green office buildings. Opportunities await companies and marketers who can create new solutions that promise to reconcile prosperity with environmental protection.29

Singapore-based Banyan Tree Resorts continues its pursuit of sustainability with initiatives targeting conservation of resources and climate change awareness, without compromising on its revenue and profits.

Corporate environmentalism recognizes the need to integrate environmental issues into the firm’s strategic plans. Trends in the natural environment for marketers to be aware of include the shortage of raw materials, especially water; increased pollution levels; and the changing role of governments. (See also Marketing Insight: The Green Marketing Revolution.)31

MARKETING INSIGHT

THE GREEN MARKETING REvOlUTION

Consumers’ environmental concerns are real. Converting this concern into concerted consumer action on the environment, however, will be a long-term process. Consumers are generally more concerned with environmental issues that are closer to home, such as water pollution in rivers and lakes, than broader issues such as global warming. As is often the case, behavioral change follows attitudinal change for consumers. Research by GfK Roper Consulting shows consumer expectations of corporate behavior with the environment have changed. Some of these expectations are higher than the demands they place on themselves. Consumers vary in their environmental sensitivity and can be categorized into five groups based on their degree of commitment. 1. Genuine Greens (15 percent)—This segment is the most likely to think and act green. Some may be true environmental activists, but most probably fall more under the category of strong advocates. This group sees few barriers to behaving green and may be open to partnering with marketers on environmental initiatives. 2. Not Me Greens (18 percent)—This segment expresses very pro-green attitudes but its behaviors are only moderate, perhaps because these people perceive lots of barriers to living green. There may be a sense among this group that the issue is too big for them to handle, and they may need encouragement to take action. 3. Go-with-the-Flow Greens (17 percent)—This segment engages in some green behaviors—mostly the “easy” ones such as recycling. But being green is not a priority for them and they seem to take the path of least resistance. This group may only take action when it is convenient for them.

4. Dream Greens (13 percent)—This segment cares a great deal about the environment but does not seem to have the knowledge or resources to take action. This group may offer the greatest opportunity to act green if given the chance. 5. Business First Greens (23 percent)—This segment’s perspective is that the environment is not a huge concern and that business and industry is doing its part to help. This may explain why they do not feel the need to take action themselves—even as they cite lots of barriers to doing so. 6. Mean Greens (13 percent)—This segment claims to be knowledgeable about environmental issues, but does not express pro-green attitudes or behaviors. It is hostile towards pro-environmental ideas. This group has chosen to reject prevailing notions about environmental protection and may even be viewed as a potential threat to green initiatives. Interestingly, although some marketers assume that younger people are more concerned about the environment than older consumers, some research suggests that older consumers actually take their eco-responsibilities more seriously. In the past, “green marketing” programs launched by companies around specific products were not always entirely successful for several reasons. Consumers might have thought that the product was inferior because it was green, or that it was not even really green to begin with. Those green products that were successful, however, persuaded consumers that they were acting in their own and society’s long-run interest at the same time. Some examples were organic foods that were seen as healthier, tastier, and safer, and energy-efficient appliances that were seen as costing less to run.

ChaPter 3 ó Gathering Information and Forecasting Demand

Banyan Tree Resorts—This Singapore-based hotel and resorts chain incorporates sustainability benchmarking and educating local communities about marine life in its resorts. Its Ungasan resort in Indonesia joined a group of Indonesian companies to focus on marine fisheries and sourcing from sustainable fisheries and seafood suppliers. Its Mayakoba resort has a Fauna Management Program which tracks and records all animal sightings within or nearby the resort grounds. It is also active in sea turtle protection efforts. The overall monitoring effort has recorded a 500 percent increase in species sighting recording from the first recording before development of the Mayakoba complex. Banyan Tree is able to accomplish these environmentally friendly initiatives without compromising its revenue and profits.30

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To avoid “green marketing myopia,” marketers should focus on consumer value positioning, calibrating consumer knowledge, and credibility of product claims. One challenge is the difficulty consumers have in understanding the environmental benefits of products, leading to many accusations of “greenwashing” where products are not nearly as green and environmentally beneficial as their marketing might suggest. Products offering environmental benefits are becoming more mainstream. Environmental concerns are affecting how virtually every major company does their business. Walt Disney Corp has pledged to reduce its solid waste. Singapore’s City Square Mall is an eco-friendly shopping mall that features waterless urinals in restrooms, sensors for rain for landscape irrigation and hybrid parking, and an ecoroof that harnesses solar power and rainwater. It also has a 49,000 sq ft park that is designed for learning about the ecology and eco-friendly methods. Toyota, Panasonic, IKEA, Procter & Gamble, and Wal-Mart are linked to high-profile environmental and sustainability programs.

Asian cities are gradually embracing the green movement by providing recycling bins for specific wastes.

The rules of the game in green marketing are changing rapidly as both consumers and companies respond to problems and proposed solutions to the significant environmental problems that exist.

Sources: Jerry Adler, “Going Green,” Newsweek, 17 July 2006, pp. 43–52; Jacquelyn A. Ottman, Edwin R. Stafford, and Cathy L. Hartman, “Avoiding Green Marketing Myopia,” Environment (June 2006): 22–36; Jill Meredith Ginsberg and Paul N. Bloom, “Choosing the Right Green Marketing Strategy,” MIT Sloan Management Review (Fall 2004): 79–84; Jacquelyn Ottman, Green Marketing: Opportunity for Innovation, 2nd ed. (New York: BookSurge Publishing, 2004); Mark Dolliver, “Deflating a Myth,” BrandWeek, 12 May 2008, pp. 30–31; “Winner: Corporate Sustainability, Walt Disney Worldwide,” Travel and Leisure, November 2009, p. 106; “The Greenest Big Companies in America”, Newsweek, 28 September 2009, pp. 34–53; Sarah Mahoney, “Best Buy Connects Green with Thrift,” Media Post News: Marketing Daily, January 28 2009; Reena Jana, “Nike Quietly Goes Green,” BusinessWeek, 11 June 2009.

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3.3.7 Technological Environment The essence of market capitalism is a dynamism that tolerates the creative destructiveness of technology as the price of progress. Televisions hurt newspapers; the Internet hurt both of them. When old industries fight or ignore new technologies, they decline. Tower Records and Borders had ample warning they would be hurt by Internet downloads; their failure to respond led to their liquidation. In some cases, innovation’s long-run consequences are not fully foreseeable. Mobile phones, video games, and the Internet allow people to stay in touch with each other and plugged in with current events, but they also reduce attention to traditional media as well as face-to-face social interaction, as people instead listen to music or watch a movie on their mobile phones. The marketer should monitor the following trends in technology: the pace of change, the opportunities for innovation, varying R&D budgets, and increased regulation.

Accelerating Pace of Change More ideas than ever are in the works, and the time between the appearance of new ideas and their successful implementation is all but disappearing. So is the time between introduction and peak production.

Competition has accelerated the pace of change. Shenzhen Great Loong Brother Industrial cloned the iPad even before it was announced.

Apple—Six months before Apple launched its iPad, a similar-looking device was on sale in China. Shenzhen Great Loong Brother Industrial cloned the iPad even before it had been announced. Its P88 was launched in August 2009 and was on show at a consumer electronics fair in Berlin. Similarly, Japanese electronic group Fujitsu claimed it had been selling “iPad” multimedia mobile devices years ago. These illustrate the accelerating pace in which competitors can copy a new product, motivating faster innovation.32

Unlimited Opportunities for Innovation Some of the most exciting work is being done in biotechnology, computers, microelectronics, telecommunications, robotics, and designer materials. Researchers are working on AIDS cures, happiness pills, painkillers, totally safe contraceptives, and non-fattening foods. They are designing robots for firefighting, underwater exploration, and home nursing.

Although the United States leads the world in annual R&D expenditures, Japan is fast increasing its R&D expenditures, mostly on non-defense-related research in physics, biophysics, and computer science. Many companies are content to put their money into copying competitors’ products and making minor feature and style improvements. Research directed toward major breakthroughs is being conducted by consortiums of companies rather than by single companies.

Increased Regulation of Technological Change Governments have expanded their agencies’ powers to investigate and ban potentially unsafe products. Safety and health regulations have also increased in the areas of food, automobiles, clothing, electrical appliances, and construction. China has an “indigenous innovation” regulation in which the government favors technology developed in China when buying computers and other goods. Multinationals whose products conform with Chinese laws and regulations and technology policy are considered “indigenous innovation” and can bid for government contracts.33

3.3.8 Political-Legal Environment The political and legal environment consists of laws, government agencies, and pressure groups that influence and limit various organizations and individuals. Sometimes, these laws also create new opportunities for business. For example, a recycling law would give the recycling industry a major boost and spur the creation of new companies making new products from recycled materials. Four major trends deal with the increase in business legislation, the growth of specialinterest groups, market reform, and corruption.

Increase in Business Legislation Business legislation is intended to (1) protect companies from unfair competition, (2) protect consumers from unfair business practices, (3) protect the interests of society from unbridled business behavior, and (4) charge businesses with the social costs created by their products or production processes. For example, in Taiwan, junk food ads are banned on children’s TV programs to curb obesity. In China, outdoor advertising that promotes high-end lifestyles is banned. Words such as “royal,” “luxury,” or “high class” are banned. This legislation came about because of concerns over the widening wealth gap.34 Legislation affecting businesses has increased steadily over the years. Governments worldwide have been examining and enacting laws covering competitive behavior, product standards, product liability, and commercial transactions. Others have passed strong consumer protection legislation: Thailand requires food processors selling national brands to market lower price brands as well, so that low-income consumers can find economy brands. In India, food companies need special approval to launch brands that duplicate what already exists on the market such as another cola drink or brand of rice. However, marketers can sometimes get around regulations as the following example illustrates: Dahongying—Tobacco advertising is banned in China. Yet Dahongying, which sells cigarettes, has its name regularly seen on TV, billboards, and in-store displays. This is because Dahongying trumpets the company’s other similarly named businesses in trading and education. It has even built libraries named Dahongying in China’s rural schools.35 Regulations on counterfeiting are also increasing. Asian exporters are expected to face tougher European Union customs controls. Popular counterfeited brands include Chanel, Christian Dior, Louis Vuitton, Timberland, and Rolex. Beijing’s Silk Market, Bangkok’s Silom

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Street market, and Shenzhen’s shopping malls are abundant with counterfeit products, although Shanghai’s Xiangyang Market has been disbanded. Even clones of fast-food restaurants exist. Although the production and sale of counterfeits is illegal, the rules against purchasing them are vague. While it is technically illegal to buy counterfeits, it is not a crime if a buyer is not aware or claims not to know the items are fake, or is not buying them for trade or business. Sometimes, legislation is passed to protect home industries. In Asia, such practices are more prevalent where local businesses may be less competitive than multinationals. Cisco—While Cisco continues its commitment to China, it is concerned over the Chinese government’s provision of loans and other support to favored domestic rivals such as Huawei Technologies and Harbor Networks. Further, China’s less-than-rigorous intellectual property protection, which puts Cisco’s patented products in jeopardy, is another sore point, although Cisco has successfully sued Huawei for intellectual property theft. Instead, Cisco has expanded its operations in India. It believes that the deregulation of India’s telecom industry will generate huge demand for broadband networks. Also, unlike China, there appears to be no homegrown rival to Cisco in India.36 To counter these protectionistic policies, some foreign companies introduce new local brands. Asia Pacific Breweries has a “made-in-Thailand” Heineken beer as well as a “made-inCambodia” Tiger beer.

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The number and power of special-interest groups have increased over time. One important force affecting business is the consumerist movement—an organized movement of citizens and government to strengthen the rights and powers of buyers in relation to sellers. Consumerists have advocated and, in some countries, won the right to know the true interest cost of a loan, the true cost per standard unit of competing brands (unit pricing), the basic ingredients in a product, the nutritional quality of food, the freshness of products, and the true benefits of a product. Privacy issues and identity theft will remain public policy hot buttons as long as consumers are willing to swap personal information for customized products from marketers they trust.37 Consumer concerns are that they will be robbed or cheated; that private information will be used against them; that someone will steal their identity; that they will be bombarded with solicitations; and that children will be targeted.38 Several companies have established consumer affairs departments to help formulate policies and respond to consumer complaints. Companies are careful to answer their emails and to resolve and learn from any customer complaints. Clearly, new laws and growing numbers of pressure groups have put more restraints on marketers. Marketers have to clear their plans with the company’s legal, public relations, public affairs, and consumer affairs departments. For instance, Japan’s product liability law empowers consumers to sue ad agencies for creating ads that mislead or project wrong images.

Market Reform Governments may also introduce market reforms to be consistent with their nation-building agenda. These reforms take time to bear fruit and businesses need to be patient, particularly in less developed Asian countries. Vietnam’s economic reform program, doi moi, has been criticized for being too slow with too much bureaucracy, overregulation, and inefficiency. Further, joint ventures fail because many foreign businesses feel that their Vietnamese counterparts do not understand practical business processes. In China, the corporatization of state-owned enterprises has led to burgeoning non-state enterprises (qiye jituan) that do not promise lifetime employment and income benefits. As government subsidies are withdrawn and benefits such as free housing removed, the reform has seen the property market booming as urban workers begin to buy private residential property.

Corruption Observations have been made that corruption among Asian political officials and businesspeople is rife. Such corruption may hinder economic development as bribes have to be paid to get

3.4 Forecasting and Demand Measurement Understanding the marketing environment and conducting marketing research (described in Chapter 4) can help to identify marketing opportunities. The company must then measure and forecast the size, growth, and profit potential of each new opportunity. Sales forecasts prepared by marketing are used by finance to raise cash for investment and operations; by manufacturing to establish capacity and output; by purchasing to acquire the right amount of supplies; and by human resources to hire the needed workers. If the forecast is off the mark, the company will face excess or inadequate inventory.

3.4.1 The Measures of Market Demand Companies can prepare as many as 90 different types of demand estimates for six different product levels, five space levels, and three time periods (see Figure 3.1). Each demand measure serves a specific purpose. A company might forecast short-run demand to order raw materials, plan production, and borrow cash. It might forecast regional demand to decide whether to set up regional distribution. There are many productive ways to break down the market: The potential market is the set of consumers with a sufficient level of interest in a market offer. However, their interest is not enough to define a market unless they also have sufficient income and access to the product. The available market is the set of consumers who have interest, income, and access to a particular offer. The company or government may restrict sales to certain groups; a particular state might ban motorcycle sales to anyone under 21 years of age. Eligible adults constitute the qualified available market—the set of consumers who have interest, income, access, and qualifications for the market offer.

Space Level

World Asia Region Territory Customer

All sales Industry sales Product Level

Company sales Product line sales Product form sales Product item sales Short run

Medium run

Long run

Time Level Figure 3.1 Ninety Types of Demend Measurement

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the smallest of clearances. In one Indonesian incident, there were 96 different levies imposed, accounting for 30 percent of the cost of doing business. From another point of view, it may be worthwhile for foreign businesses to consider greasing the machinery as part of conducting businesses in Asia in return for faster processing of business documents and procedures. In a survey called the Bribe Payers Index, Chinese businesspeople were the most willing to pay bribes, followed by Indonesia and India. Asian governments have made efforts to clean up such behavior for long-term economic dividends.

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The target market is the part of the qualified available market the company decides to pursue. The company might concentrate its marketing and distribution effort on the northern provinces. The penetrated market is the set of consumers who are buying the company’s product. These definitions are a useful tool for market planning. If the company isn’t satisfied with its current sales, it can try to attract a larger percentage of buyers from its target market. It can lower the qualifications for potential buyers. It can expand its available market by opening distribution elsewhere or lowering its price, or it can reposition itself in the minds of its customers.

3.4.2 A Vocabulary for Demand Measurement The major concepts in demand measurement are market demand and company demand.Within each, we distinguish among a demand function, a sales forecast, and a potential.

Market Demand The marketer’s first step in evaluating marketing opportunities is to estimate total market demand. Market demand for a product is the total volume that would be bought by a defined customer group in a defined geographical area in a defined time period in a defined marketing environment under a defined marketing program. Market demand is not a fixed number, but rather a function of the stated conditions. For this reason, we call it the market demand function. Its dependence on underlying conditions is illustrated in Figure 3.2(a). The horizontal axis shows different possible levels of industry marketing expenditure in a given time period. The vertical axis shows the resulting demand level. The curve represents the estimated market demand associated with varying levels of marketing expenditure. Some base sales—called the market minimum and labeled Q1 in the figure—would take place without any demand-stimulating expenditures.Higher marketing expenditures would yield higher levels of demand, first at an increasing rate, then at a decreasing rate. Take fruit juices. Given the indirect competition they face from other types of beverages, we would expect increased marketing expenditures to help fruit juice products stand out and increase demand and sales. Marketing expenditures beyond a certain level would not stimulate much further demand, suggesting an upper limit called the market potential and labeled Q2 in the figure.

(a) Marketing Demand as a Function of Industry Marketing Expenditure (assumes a particular marketing environment) Market potential, Q2 Market forecast, QF

Market minimum, Q1

Planned expenditure Industry Marketing Expenditure

Market Demand in the Specific Period

The distance between the market minimum and the market potential shows the overall marketing sensitivity of demand.We can think of two extreme types of markets, the expansible and the nonexpansible. An expansible market, such as the market for racquetball playing, is very much affected in size by the level of industry marketing expenditures. In terms of Figure 3.2(a), the distance between Q1 and Q2 is relatively large. A nonexpansible market — for example, the market for weekly trash or garbage removal—is not much affected by the level of marketing expenditures;

Market Demand in the Specific Period

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(b) Marketing Demand as a Function of Industry Marketing Expenditure (two different environments assumed) Market potential (prosperity)

Prosperity

Market potential (recession)

Recession

Figure 3.2 Market Demand Functions

Industry Marketing Expenditure

the distance between Q1 and Q2 is relatively small. Organizations selling in a nonexpansible market must accept the market’s size—the level of primary demand for the product class—and direct their efforts toward winning a larger market share for their product, that is, a higher level of selective demand for their product.

Comparing current and potential market shares yields a firm’s share-penetration index. If this index is low, the company can greatly expand its share. Holding it back could be low brand awareness, low availability, benefit deficiencies, or high price. A firm should calculate the share-penetration increases from removing each factor, to see which investments produce the greatest improvement.39 Remember the market demand function is not a picture of market demand over time. Rather, it shows alternative current forecasts of market demand associated with possible levels of industry marketing effort.

Market Forecast Only one level of industry marketing expenditure will actually occur.The market demand corresponding to this level is called the market forecast.

Market Potential The market forecast shows expected market demand, not maximum market demand. For the latter, we need to visualize the level of market demand resulting from a very high level of industry marketing expenditure, where further increases in marketing effort would have little effect. Market potential is the limit approached by market demand as industry marketing expenditures approach infinity for a given marketing environment. The phrase “for a given market environment” is crucial. Consider the market potential for automobiles. It’s higher during prosperity than during a recession. The dependence of market potential on the environment is illustrated in Figure 3.2(b). Market analysts distinguish between the position of the market demand function and movement along it. Companies cannot do anything about the position of the market demand function, which is determined by the marketing environment. However, they influence their particular location on the function when they decide how much to spend on marketing. Companies interested in market potential have a special interest in the product-penetration percentage, the percentage of ownership or use of a product or service in a population. Companies assume that the lower the product-penetration percentage, the higher the market potential, although this also assumes everyone will eventually be in the market for every product.

Company Demand Company demand is the company’s estimated share of market demand at alternative levels of company marketing effort in a given time period. It depends on how the company’s products, services, prices, and communications are perceived relative to the competitors’. Other things equal, the company’s market share depends on the relative scale and effectiveness of its market expenditures. Marketing model builders have developed sales response functions to measure how a company’s sales are affected by its marketing expenditure level, marketing mix, and marketing effectiveness.40

Company Sales Forecast Once marketers have estimated company demand, their next task is to choose a level of marketing effort. The company sales forecast is the expected level of company sales based on a chosen marketing plan and an assumed marketing environment. We represent the company sales forecast graphically with sales on the vertical axis and marketing effort on the horizontal axis, as in Figure 3.2. We often hear that the company should

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It pays to compare the current and potential levels of market demand. The result is the market penetration index. A low index indicates substantial growth potential for all the firms. A high index suggests it will be expensive to attract the few remaining prospects. Generally, price competition increases and margins fall when the market-penetration index is already high.

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develop its marketing plan on the basis of its sales forecast. This forecast-to-plan sequence is valid if forecast means an estimate of national economic activity, or if company demand is nonexpansible. The sequence is not valid, however, where market demand is expansible or where forecast means an estimate of company sales. The company sales forecast does not establish a basis for deciding what to spend on marketing. On the contrary, the sales forecast is the result of an assumed marketing expenditure plan. Two other concepts are important here. A sales quota is the sales goal set for a product line, company division, or sales representative. It is primarily a managerial device for defining and stimulating sales effort, often set slightly higher than estimated sales to stretch the sales force’s effort. A sales budget is a conservative estimate of the expected volume of sales, primarily for making current purchasing, production, and cash flow decisions. It’s based on the need to avoid excessive risk and is generally set slightly lower than the sales forecast.

Company Sales Potential Company sales potential is the sales limit approached by company demand as company marketing effort increases relative to that of competitors. The absolute limit of company demand is, of course, the market potential. The two would be equal if the company got 100 percent of the market. In most cases, company sales potential is less than the market potential, even when company marketing expenditures increase considerably. Each competitor has a hard core of loyal buyers unresponsive to other companies’ efforts to woo them.

3.4.3 Estimating Current Demand We are now ready to examine practical methods for estimating current market demand.Marketing executives want to estimate total market potential, area market potential, and total industry sales and market shares.

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Total Market Potential

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Total market potential is the maximum sales available to all firms in an industry during a given period, under a given level of industry marketing effort and environmental conditions. A common way to estimate total market potential is to multiply the potential number of buyers by the average quantity each purchases, times the price. If 100 million people buy books each year, and the average book buyer buys three books a year at an average price of $20 each, then the total market potential for books is $6 billion change to: (100 million × 3 × $20). The most difficult component to estimate is the number of buyers.We can always start with the total population in the nation, say, 261 million people. Next we eliminate groups that obviously would not buy the product. Assume illiterate people and children under 12 don’t buy books and constitute 20 percent of the population. This means 80 percent of the population, or 209 million people, are in the potentials pool. Further research might tell us that people of low income and low education don’t buy books, and they constitute over 30 percent of the potentials pool. Eliminating them,we arrive at a prospect pool of approximately 146.3 million book buyers.We use this number to calculate total market potential. A variation on this method is the chain-ratio method, which multiplies a base number by several adjusting percentages. Suppose a brewery is interested in estimating the market potential for a new light beer especially designed to accompany food. It can make an estimate with the following calculation:

Demand for the new light × beer

Population

×

Average percentage of personal discretionary income per capita spent on food

Expected Average Average Average percentage percentage of percentage of percentage of amount amount spent amount spent of amount × × on beverages × on alcoholic × spent on beer spent on food that will be beverages that is spent that is spent spent on light that is spent on alcoholic on beverages beer on beer beverages

Area Market Potential Because companies must allocate their marketing budget optimally among their best territories, they need to estimate the market potential of different cities, states, and nations. Two major methods are the market-buildup method, used primarily by business marketers, and the multiplefactor index method, used primarily by consumer marketers.

The market-buildup method calls for identifying all the potential buyers in each market and estimating their potential purchases. It produces accurate results if we have a list of all potential buyers and a good estimate of what each will buy. Unfortunately, this information is not always easy to gather. Consider a machine-tool company that wants to estimate the area market potential for its wood lathe in the Suzhou area. Its first step is to identify all potential buyers of wood lathes in the area, primarily manufacturing establishments that shape or ream wood as part of their operations. The company could compile a list from a directory of all manufacturing establishments in the area. Then it could estimate the number of lathes each industry might purchase, based on the number of lathes per thousand employees or per $1 million of sales in that industry.

Multiple-Factor Index Method Like business marketers, consumer companies also need to estimate area market potentials, but since their customers are too numerous to list they commonly use a straightforward index. A drug manufacturer might assume the market potential for drugs is directly related to population size. If the state of Sabah has 2.55 percent of the Malaysia population, Sabah might be a market for 2.55 percent of total drugs sold. A single factor is rarely a complete indicator of sales opportunity. Regional drug sales are also influenced by per capita income and the number of physicians per 10,000 people. Thus, it makes sense to develop a multiple-factor index and, assign each factor a specific weight. Suppose Sabah has 2.00 percent of Malaysians’ disposable personal income, 1.96 percent of Malaysia retail sales, and 2.28 percent of Malaysia population, and the respective weights are 0.5, 0.3, and 0.2. The buying-power index for Sabah is then 2.04 [0.5(2.00) + 0.3(1.96) + 0.2(2.28)]. Thus, 2.04 percent of the nation’s drug sales (not 2.28 percent) might be expected to take place in Sabah. The weights in the buying-power index are somewhat arbitrary, and companies can assign others if appropriate. A manufacturer might adjust the market potential for additional factors, such as competitors’ presence, local promotional costs, seasonal factors, and market idiosyncrasies. Many companies compute area indexes to allocate marketing resources. Suppose the drug company is reviewing the six cities listed in Table 3.6. The first two columns show its percentage of U.S. brand and category sales in these six cities. Column 3 shows the Brand Development Index (BDI), the index of brand sales to category sales. Shanghai has a BDI of 114 because the brand is relatively more developed than the category in Shanghai. Chengdu’s BDI is 65, which means the brand is relatively underdeveloped there. Table 3.6 Calculating the Brand Development Index (BDI) (a) Percent

(b) Percent of

of China Brand

China Category

BDI

Territory

Sales

Sales

(a ÷ b) × 100

Shanghai

3.09

2.71

114

Chengdu

6.74

10.41

65

Tianjin

3.49

3.85

91

Beijing

.97

.81

120

Shenzhen

1.13

.81

140

Suzhou

3.12

3.00

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After the company decides on the city-by-city allocation of its budget, it can refine each city allocation down to census tracts. Census tracts are small, locally defined statistical areas in metropolitan areas and some other counties. Data on population size, median family income, and other characteristics are available for these geographical units.

Industry Sales and Market Shares Besides estimating total potential and area potential, a company needs to know the actual industry sales taking place in its market. This means identifying competitors and estimating their sales. The industry trade association will often collect and publish total industry sales, although it usually does not list individual company sales separately. With this information, however, each company can evaluate its own performance against the industry’s. If a company’s sales are increasing by 5 percent a year and industry sales are increasing by 10 percent, the company is losing its relative standing in the industry. Another way to estimate sales is to buy reports from a marketing research firm that audits total sales and brand sales. Nielsen Media Research audits retail sales in various supermarket and drugstore product categories. A company can purchase this information and compare its performance to the total industry or any competitor to see whether it is gaining or losing share, overall or brand by brand. Because distributors typically will not supply information about how much of competitors’ products they are selling, business-to-business marketers operate with less knowledge of their market share results.

3.4.4 Estimating Future Demand The few products or services that lend themselves to easy forecasting generally enjoy an absolute level or a fairly constant trend, and competition that is either nonexistent (public utilities) or stable (pure oligopolies). In most markets, in contrast, good forecasting is a key factor in success.

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Companies commonly prepare a macroeconomic forecast first, followed by an industry forecast, followed by a company sales forecast. The macroeconomic forecast projects inflation, unemployment, interest rates, consumer spending, business investment, government expenditures, net exports, and other variables. The end result is a forecast of gross domestic product (GDP), which the firm uses, along with other environmental indicators, to forecast industry sales. The company derives its sales forecast by assuming it will win a certain market share. How do firms develop their forecasts? They may create their own or buy forecasts from outside sources such as marketing research firms, which interview customers, distributors, and other knowledgeable parties. Specialized forecasting firms produce long-range forecasts of particular macroenvironmental components, such as population, natural resources, and technology. Futurist research firms produce speculative scenarios. All forecasts are built on one of three information bases: what people say, what people do, or what people have done. Using what people say requires surveying buyers’ intentions, composites of sales force opinions, and expert opinion. Building a forecast on what people do means putting the product into a test market to measure buyer response. To use the final basis—what people have done—firms analyze records of past buying behavior or use time-series analysis or statistical demand analysis.

Survey of Buyers’ Intentions Forecasting is the art of anticipating what buyers are likely to do under a given set of conditions. For major consumer durables such as appliances, research organizations conduct periodic surveys of consumer buying intentions, ask questions like Do you intend to buy an automobile within the next six months? and put the answers on a purchase probability scale: 0.00

0.20

0.40

0.60

0.80

1.00

No

Slight

Fair

Good

High

Certain

chance

possibility

possibility

possibility

possibility

Surveys also inquire into consumers’ present and future personal finances and expectations about the economy. They combine bits of information into a consumer confidence measure (Conference Board) or a consumer sentiment measure (Survey Research Center of the University of Michigan).

Composite of Sales Force Opinions When buyer interviewing is impractical, the company may ask its sales representatives to estimate their future sales. Few companies use these estimates without making some adjustments, however. Sales representatives might be pessimistic or optimistic, they might not know how their company’s marketing plans will influence future sales in their territory, and they might deliberately underestimate demand so the company will set a low sales quota. To encourage better estimating, the company could offer incentives or assistance, such as information about marketing plans or past forecasts compared to actual sales. Sales force forecasts yield a number of benefits. Sales reps might have better insight into developing trends than any other group, and forecasting might give them greater confidence in their sales quotas and more incentive to achieve them. A “grassroots” forecasting procedure provides detailed estimates broken down by product, territory, customer, and sales rep.

Expert Opinion Companies can also obtain forecasts from experts, including dealers, distributors, suppliers, marketing consultants, and trade associations. Dealer estimates are subject to the same strengths and weaknesses as sales force estimates.Many companies buy economic and industry forecasts from well-known economic-forecasting firms that have more data available and more forecasting expertise. Occasionally, companies will invite a group of experts to prepare a forecast. The experts exchange views and produce an estimate as a group (group-discussion method) or individually, in which case another analyst might combine them into a single estimate (pooling of individual estimates). Further rounds of estimating and refining follow (the Delphi method).41

Past-Sales Analysis Firms can develop sales forecasts on the basis of past sales. Timeseries analysis breaks past time series into four components (trend, cycle, seasonal, and erratic) and projects them into the future. Exponential smoothing projects the next period’s sales by combining aaverage of past sales and the most recent sales, giving more weight to the latter. Statistical demand analysis measures the impact of a set of causal factors (such as income, marketing expenditures, and price) on the sales level. Finally, econometric analysis builds sets of equations that describe a system and statistically derives the different parameters that make up the equations statistically.

Market-Test Method When buyers don’t plan their purchases carefully, or experts are unavailable or unreliable, a direct-market test can help forecast new-product sales or established product sales in a new distribution channel or territory. (We discuss market testing in detail in Chapter 20.)

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For business buying, research firms can carry out buyer-intention surveys for plant, equipment, and materials, usually falling within a 10 percent margin of error. These surveys are useful in estimating demand for industrial products, consumer durables, product purchases where advanced planning is required, and new products. Their value increases to the extent that buyers are few, the cost of reaching them is low, and they have clear intentions they willingly disclose and implement.

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Summary 3.1 COMPONENTS OF A MODERN MARKETING INFORMATION SYSTEM

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Sources of information include: Customers—They provide feedback on products. Employees and partners—They pass on relevant customer information back to the company. Third parties—These include well-known data suppliers, government released data, and competitors’ reports and datasheets. ¢

¢

What is a marketing information system (MIS)? It consists of people, information, and systems to gather, analyze, and distribute information in a timely manner so that marketing managers can carry out their analysis, planning, implementation, and control responsibilities. It is a balance between information that is necessary for the marketer and economically realistic for the company to obtain.

What other sources of intelligence are there? The Internet, online review boards, discussion forums, chat rooms, and blogs are rich sources of intelligence.

3.2 INTERNAL RECORDS AND MARKETING INTELLIGENCE

3.3 ANALYZING THE MACROENVIRONMENT

What is an order-to-payment cycle? Orders are placed ➞ Invoices are prepared and distributed ➞ Out-of-stock items are ordered from suppliers ➞ Shipping and billing information are prepared and distributed to the customers and stored in the company’s databases What is a sales information system? It conveys real-time information on sales directly from sales outlets. It provides a breakdown of product sales, revenue, and new products to consider. What are databases, data warehousing and data mining? A database is a consolidated collection of customer information, buying preferences, and psychographics (interests, activities, and opinions). Companies use the database to rank customers according to their RFM (purchase recency, frequency, and monetary value). Data warehousing is the storage of this data for decision making. Data mining is the ‘mining’ of the data by statistical analysts to identify trends and target markets. What is a marketing intelligence system? It is a set of procedures to gather information about what is happening in the market.

¢

What are fads, trends, and megatrends? Many opportunities are found by identifying fads, trends, and megatrends. A fad is unpredictable and short-lived without longterm significance. A trend is a sequence of events with momentum and durability. A megatrend entails a large social, economic, political, or technological change that is slow to form but with huge lasting impact spanning a number of years. What are the major forces influencing the market? Markets respond to major forces that influence the market, namely demographic, economic, sociocultural, environmental, technological, and politicallegal (each elaborated in the following sections). What are the demographic factors that influence the market? Population growth is one of the main concerns of any market, but it does not mean a growing market unless it is in tandem with an increase in buying power. There is a growing population in developed countries of older and more affluent populations, hence affecting the population age mix. Thus, products should be dedicated towards meeting an aging population’s needs.

What are the economic factors that influence the market? The level of income disparity in a country across locations and social stratum affects the type of product offered in different regions. The type of industrial structure the country operates under (e.g., subsistence, raw-material exporting, industrializing and industrial economies) is an indicator of the propensity of the population to spend. A population’s propensity to save (e.g., Western versus Asian economies) must also be considered. The level of debt and credit availability in a country is a reflection of the health of the economy. A country with more liquid finances implies greater spending, which marketers can tap on to develop more sophisticated products. What are the socio-cultural factors that influence the market? A market is determined by customers’ views of themselves, society, and nature, as well as their cultural values. What are the factors in the natural environment that influence the market? There is increasing concern for the state of the environment due to greater awareness of environmental issues. Companies have responded by focusing on the development of greener products and eco-friendly practices. What are the technological factors that influence the market? Technology shrinks some markets and paves the way for others to emerge. The rapid pace of development creates continuously shifting and overlapping target markets.

Long-term externalities may be unforeseeable. Thus, there is an arising need for increased regulation of technological change. What are the political-legal factors that influence the market? Governments impose regulations to protect the goals and needs of the country. Governments charge companies with the perceived social costs their products or practices have on the market. Companies practicing unfair methods of competition are also clamped down on to protect the interests of fellow companies. Some regulations also protect local companies that do not have the ability to compete with the economies of scale and marketability that multinational companies enjoy. Regulations on counterfeiting are also increasing. The rise of Special Interest Groups to support consumerism imposes more responsibility on companies in terms of their product pricing, advertisements, and quality. The level of corruption in a country’s political and economic backbone influences the development of a country. ¢

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3.4 FORECASTING AND DEMAND MEASUREMENT

What does it mean by “market”? Potential market is the set of consumers with a sufficient level of interest in the product. Available market is the set of consumers who have an interest, income, and access to buy the product. Target market is that part of the available market that the company wants to pursue. Penetrated market is the set of consumers who buy the product. What is market demand and market penetration index? Market demand for a product is the total volume that would be bought by a defined customer group in a defined geographical area in a defined time period in a defined marketing environment under a defined marketing program. Market penetration index is a comparison of the current and potential levels of market demand.

ChaPter 3 ó Gathering Information and Forecasting Demand

The marketer has to cater to the linguistic, racial, and religious needs and wants of a market. The education level, schooling requirements, and presence of tuition markets in a country will have to be considered before a marketer enters into the educational market. The composition of a family unit affects their spending habits. The level of geographical shift in populations between less wealthy and affluent countries affects the type of product a company can offer.

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What methods are there to estimate current demand? The market-buildup method requires identifying all the potential buyers in each market and estimating their potential purchases. The multiple-factor index method involves giving weights to different factors that may contribute to sales opportunities. These factors include income and level of competition.

What methods are there to estimate future demand? Future demand can be estimated by surveying buyers’ intentions, using a composite of sales force opinions, using expert opinions, analyzing past sales, or conducting direct-market tests.

Applications Marketing Debate—Is Consumer Behavior More a Function of a Person’s Age or Generation? One of the widely debated issues in developing marketing programs that target certain age groups is how much consumers change over time. Some marketers maintain that age differences are critical and that the needs and wants of a 25-year-old in 2013 are not that different from those of a 25-year-old in 1983. Others dispute that contention and argue that cohort and generation effects are critical, and that marketing programs must therefore suit the times. Take a position: Age differences are fundamentally more important than cohort effects versus Cohort effects can dominate age differences.

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Marketing Discussion What brands and products do you feel successfully “speak to you” and effectively target your age group? Why? Which ones do not? What could they do better?

MICROSOFT Microsoft is the world’s most successful software company. The company was founded by Bill Gates and Paul Allen in 1975 with the original mission of having “a computer on every desk and in every home, running Microsoft software.” Since then, Microsoft has grown to become the third most valuable brand in the world through strategic marketing and aggressive growth tactics. Microsoft’s first significant success occurred in the early 1980s with the creation of the DOS operating system for IBM computers. The company used this initial success with IBM to sell software to other manufacturers, quickly making Microsoft a major player in the industry. Initial advertising efforts focused on communicating the company’s range of products from DOS to the launch of Excel and Windows—all under a unified “Microsoft” look. Microsoft went public in 1986 and grew tremendously over the next decade as the Windows operating system and Microsoft Office took off. In 1990, Microsoft launched a completely revamped version of its operating system and named it Windows 3.0. Windows 3.0 offered an improved set of Windows icons and applications like File Manager and Program Manager that are still used today. It was an instant success; Microsoft sold more than 10 million copies of the software within two years—a phenomenon in those days. In addition, Windows 3.0 became the first operating system to be preinstalled on certain PCs, marking a major milestone in the industry and for Microsoft. Throughout the 1990s, Microsoft’s communication efforts convinced businesses that its software was not only the best choice for business, but also that it needed to be upgraded frequently. Microsoft spent millions of dollars in magazine advertising and received endorsements from the top computer magazines in the industry, making Microsoft Windows and Office the must-have software of its time. Microsoft successfully launched Windows 95 in 1995 and Windows 98 in 1998, using the slogan, “Where Do You Want to Go Today?” The slogan did not push individual products but rather the company itself, which could help empower companies and consumers alike.

ChaPter 3 ó Gathering Information and Forecasting Demand

Marketing Lesson

During the late 1990s, Microsoft entered the notorious “browser wars” as companies struggled to find their place during the Internet boom. In 1995, Netscape launched its Navigator browser over the Internet. Realizing what a good product Netscape had, Microsoft launched the first version of its own browser, Internet Explorer, later that same year. By 1997, Netscape held a 72 percent share and Explorer an 18 percent share. Five years later, however, Netscape’s share had fallen to 4 percent. During those five years, Microsoft took three major steps to overtake the competition. First, it bundled Internet Explorer with its Office product, which included Excel, Word, and PowerPoint. Automatically, consumers who wanted MS Office became Explorer users as well. Second, Microsoft partnered with AOL, which opened the doors to 5 million new consumers almost overnight. And, finally, Microsoft used its deep pockets to ensure that Internet Explorer was available free, essentially “cutting off Netscape’s air supply.” These efforts, however, were not without controversy. Microsoft faced antitrust charges in 1998 and numerous lawsuits based on its marketing tactics, and some perceived that it was monopolizing the industry. Charges aside, the company’s stock took off, peaking in 1999 at $60 per share. Microsoft released Windows 2000 in 2000 and Windows XP in 2001. It also launched Xbox in 2001, marking the company’s entrance into the multibillion-dollar gaming industry. Over the next several years, Microsoft’s stock price dipped by over $40 a share as consumers waited for the next operating system and Apple made a significant comeback with several new Mac computers, the iPod, the iPhone, and iTunes. Microsoft launched the Vista operating system in 2007 to great expectations; however, it was plagued with bugs and problems. As the recession worsened in 2008, the company found itself in a bind. Its brand image was tarnished from years of Apple’s successful “Get a Mac” campaign, a series of commercials that featured a smart, creative, easygoing Mac character alongside a geeky, virus-prone, uptight PC character. In addition, consumers and analysts continued to slam Vista for its poor performance. In response, Microsoft created a campaign entitled “Windows. Life Without Walls” to help turn its image around. The company focused on how cost effective computers with its software were, a message that resonated well in the recession. It launched a series of commercials boasting “I’m a PC” that began with a Microsoft employee (looking very similar to the PC character from the Apple ads) stating, “Hello, I’m a PC and I’ve been made into a stereotype.” The commercials, which highlighted a wide variety of individuals who prided themselves on being PC owners, helped improve employee morale and customer loyalty.

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Microsoft opened a handful of retail stores—similar to Apple stores—in 2009. “The purpose of opening these stores is to create deeper engagement with consumers and continue to learn firsthand about what they want and how they buy,” Microsoft said in a statement. In Asia, to help ramp up the enhanced connectivity of Office, Microsoft has established remote data centers in Singapore and Hong Kong. Its bread-and-butter applications are now free online. In direct competition with Google, Microsoft’s Word, Excel, and PowerPoint have been pushed into the realm of cloud computing and can be used in Web browsers without users needing to install new software. Microsoft is also targeting social networking. Its new Office package has built into its Outlook email many of the features seen in sites such as Facebook. Microsoft is also focusing its marketing process on innovation in Asia, China in particular. It is increasing its R&D workforce in China by 10 percent. This translates

to an extra 300 to 400 people joining its existing 3,000 staff. Another 600 staff will join the company in countries such as Hong Kong and South Korea. While Microsoft currently spends $9 billion on innovation globally, it plans to invest $500 million in Asia in 2011 to develop Windows, cloud computing, advertising, and search. Today, the company offers a wide range of software and home entertainment products. In the ongoing browser wars, Internet Explorer holds a 66 percent market share compared to Firefox’s 22 percent and Safari’s 8 percent. In 2009, Microsoft launched a new search engine called Bing, which challenges Google’s dominant position in the marketplace and claims to give better search results. By May 2012, Bing’s market share was estimated to be 30 percent. Microsoft’s most profitable products continue to be Microsoft Windows and Microsoft Office, contributing the most to the company’s $73.7 billion revenue in 2012.

Questions 1. Evaluate Microsoft’s strategy in good and poor economic times. 2. Discuss the pros and cons of Microsoft’s “I’m a PC” campaign. Is Microsoft doing a good thing by acknowledging Apple’s campaign in its own marketing message? Why or why not?

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Sources: Burt Helm, “Best Global Brands,” BusinessWeek, 18 September 2008; Stuart Elliott, “Microsoft Takes a User-Friendly Approach to Selling Its Image in a New Global Campaign,” New York Times, 11 November 1994; Todd Bishop, “The Rest of the Motto,” Seattle Post Intelligencer, 23 September 2004; Devin Leonard, “Hey PC, Who Taught You to Fight Back?” New York Times, 30 August 2009; Suzanne Vranica and Robert A. Guth, “Microsoft Enlists Jerry Seinfeld in Its Ad Battle Against Apple,” Wall Street Journal, 21 August 2008, p. A1; Stuart Elliott, “Echoing the Campaign of a Rival, Microsoft Aims to Redefine ‘I’m a PC,’” New York Times, 18 September 2008, p. C4; John Furguson, “From Cola Wars to Computer Wars—Microsoft Misses Again,” BN Branding, 4 April 2009; Robin Wauters, “Compete Says Bing’s Combined U.S. Market Share Rose to 29% Last November,” www.techcrunch.com, 3 January 2011; Sam Holmes, “Tackling Microsoft’s Asia Challenge,” Wall Street Journal, 14 June 2010; “Microsoft to embark on major Asia-Pacific innovation push,” www .blog.freedmaninternational.com/microsoft-to-embark-on-major-asia-pacific-innovation-push/6866/, accessed on 27 April 2011; ”Watch Out, Google: Bing Nabs 30% of Search Market, “www.mashable.com, 11 May 2012; “Microsoft Reports Record Fourth-Quarter and Full-Year Revenue,” www.microsoft. com, 19 July 2012.

UBER Before 2009, hailing a cab simply meant flagging one down on the street. However, with the introduction of Uber that year, the meaning of “hailing a cab” changed completely. Travis Kalanick and Garrett Camp founded Uber in 2009. The Android, iOS, and Windows versions of the phone app have rapidly expanded to 57 countries since then, gaining much popularity. Kalanick believes that there is always a solution to every problem if you are creative enough. This “edge” of creativity is seen in Uber, a platform that essentially connects riders with drivers using their phone’s GPS. Uber prides itself in being a “platform” with a smooth interface that lets one know the rider and driver’s location in real-time. Report errors are rare. Unlike traditional taxi booking services, the mobile application gives a real-time update of when the car is reaching the pick-up point and also shows the movement of the Uber car towards you via GPS. With Uber, you do not have to call anyone for confirmation of your driver. Being a platform, Uber has also gone beyond just providing a ride for customers; it has shown the potential to be a groundbreaking delivery service, including making quick deliveries from the nearest pharmacy or your favorite ice cream stand miles away. The app operates whenever there is demand—if there is always someone looking for a ride and drivers to provide one, Uber is alive. This process is made easier by the fact that the entire transaction is completely cashless, as payment is done between Uber and riders via their credit cards, following which, Uber pays out to the driver while taking a small cut for itself. As an extension of the demand and supply model, Uber utilizes a dynamic pricing model that fluctuates in accordance with the changes in demand and supply. As Uber prides itself in being a platform connecting the rider and the driver, this also means that Uber does not control the number of the drivers on the road—this is totally dependent on the individual driver’s availability and preference. Its dynamic pricing model originated in early

ChaPter 3 ó Gathering Information and Forecasting Demand

Marketing Lesson

2012, when the Uber Boston Team noticed that there was a spike in the number of “unfulfilled” requests during peak hours on Friday and Saturday nights. There were not enough drivers on the road for weekend partygoers to catch a ride home with. By increasing the rates, Uber was able to motivate more drivers to be on the road to match the increased demand from riders. Its dynamic pricing model fluctuates according to changes in waiting times calculated by an algorithm in the backend. However, this dynamic model turns into a bane for customers if left unregulated during times of natural emergencies. For instance, during the recent breakdown of public transport services in Singapore in July 2015, Uber charges went up to five times its normal fare, with reports of a commuter having paid S$124 for a ride. Karun Arya, Uber Communications Lead for South Asia and India, commented, “As soon as we found out the extent of the disruption and the number of people who were stranded, we did turn off our dynamic pricing mechanism.” This highlights a possible lapse in its dynamic pricing model that has to be closely regulated by its operations in times of natural emergencies. Uber’s services have branched out into various specialties, depending on the type of car and the number of passengers riding. UberX, known as the low-cost Uber, provides everyday cars such as the Toyota Prius and Honda Civic that seat four passengers. UberBlack, the original service, provides a luxury black sedan that is pricier, while UberSUV and UberXL provide SUVs and minivans, respectively, that can seat up to six passengers. There is also UberTaxi, where local taxi drivers use their vehicles for the app’s service. However, the range of services for every country or city varies according to local regulations and the individual city’s base of operations. Some countries such as Thailand have gone as far as to provide UberCopter, a premium service where one can hire a helicopter for a ride. Uber constantly addresses the issue of safety in the service that its platform provides. Safety refers not just to that of the riders but also of the drivers. Unlike conventional taxi drivers, Uber drivers are able to view all the particulars about their rider within the app—such access has never been available for any driver before. They thus know beforehand whom they are ferrying. One of Uber’s female drivers from India, Maya, states “that she is not afraid of driving at night.” Drivers are even able to give feedback on their riders on the app via the simple press of a button. Riders too are guaranteed their safety. Uber requires every driver to have a license and pass a background check. They must also own the car, and it must be insured. However, the process of being an Uber driver is much more convenient and hassle-free than that of a regular taxi driver.

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However, not all is smooth sailing. The rapid expansion of Uber has come at the cost of conventional taxi operators. As such, many taxi companies have protested vehemently against the app, calling on local authorities to take it down or subject it to strict local regulations. This has resulted in some countries and cities implementing a blanket ban on the app or putting up measures to minimize conflicts between taxi operators and the app. Uber’s cost break down, which consists of a base fare and then a per-minute and per-mile charge, has been viewed to be generally lower than that of regular taxis. UberX, the low-cost option, claims to be 26 percent cheaper than the pricing of a regular cab. Uber’s expansion into one of the world’s largest markets, India, has been laden with obstacles. As in many other countries, Uber faced much protest from the local taxi operators when it started out. Mumbai’s auto union leader Shashank Rao highlighted Uber as one of their competitors, eating into their revenues and remarked that the government should take action against the newcomer as they were not subject to the same regulations as regular taxi operators. Meanwhile, the cab service has also expanded further into the east by setting up shop in China. The service began to reap the benefits of tapping into the potential of a 1.4 billion-sized population in China. By June 2015, the app was reported to have been logging an astonishing 1 million rides per day. What makes this even more surprising is that Uber has only operated in 11 Chinese cities so far. Uber aims to expand to over 50 cities in China, and given its current unprecedented growth rate, this means that Uber will join the list of foreign companies that have been essential in spurring growth in the less developed areas. However, Uber’s venture into China is not unchallenged; it faces stiff competition from another local taxi booking app, Didi Kuaidi. Didi Dache and Kuaidi Dache were market leaders, with up to 90 percent of the market share, when they merged in February 2015. Didi Kuaidi has since been valued at $8.75 billion. Uber positions itself as a “vibrant,” “fun” and “boyish” brand. Such a position differentiates it as a unique brand that customers can have a connection with, especially given that most companies in the transportation sector rarely place much emphasis on branding themselves. Most taxi operators and Uber’s competitors, such as Didi Kuaidi in China and GrabTaxi in Southeast Asia, rely heavily on the economic viability and rationality of their service for their business, and they hence appear to believe that there will always be a demand for their services as long as they provide it.

Along with its branding, Uber aggressively markets its app, encouraging customers to download it by providing free credits or discounts for their first ride with the app. However looking forward, Uber does face some serious challenges. As an app or platform that serves as the marketplace linking rider and driver, its business model or service is easily replicable and not difficult to imitate. This is evident in the rise of similar car-hailing or taxi-booking apps such as GrabTaxi, Hailo, Ola, and Didi Kuaidi in various Asian markets. Regardless of the differences in their interfaces, these applications essentially operate as a marketplace bringing drivers and riders together, similar to the service that Uber provides in the eyes of the customer. An example of the Uber service being replicated in local markets can be seen in Jakarta. Go-Jek, a motorbikehailing app in Jakarta, was launched in 2011 before Uber entered the city. The exponential growth of the app stems from the fact that motorbikes are a popular means of transport within the jam-packed Indonesian capital. In 2015, the app was given a revamped mobile app interface, resulting in 400,000 downloads and an increase in its drivers from 1,000 to 10,000 as of June 2015. It is a common sight to see motorists in prominent green jackets and helmets providing an alternative and efficient means of transportation to local commuters. Uber Indonesia faces the threat of such local competitive services being introduced even before it enters a city. It started its Jakarta operations only in June 2014, as a later entrant. In Singapore, other than registered taxi companies, Uber’s nearest competitor is the car-hire app GrabTaxi, which runs GrabCar. In July 2015, GrabCar upped the ante by launching an incentive program. It promised drivers $1,130 a week on top of their fare earnings if they picked up 100 different passengers in a week and made 60 trips during peak hours. According to its head, Kell Jay Lim, this plan has helped GrabCar build its network of drivers. This compares to Uber’s guaranteed earnings scheme, where if an Uber driver makes less than the guaranteed amount in fares during peak hours, the company tops up the difference. However, it is doubtful that the generous compensation packages offered by Uber and GrabCar will be permanent. In 2017, the Singapore govenrment allowed GrabCar, Uber, as well as other taxi operators to engage in dynamic or surge pricing where metered fares need not be used. Instead, drivers can offer a fare to match demand and supply. Users can decide whether to use the metered or offered price.

Questions

Sources: Bill Gurley, “Deeper Look at Uber’s Dynamic Pricing Model,” www.abovethecrowd.com, 11 March 2014; Jacob Davidson, “Uber Has Pretty Much Destroyed Regular Taxis in San Francisco,” www.time.com, 18 September 2014; John Patrick Pullen, “Everything You Need to Know about Uber,” www.time.com, 4 November 2014; Adrian Lim, “GrabTaxi Opens R&D Centre to Develop New Products, Improve App,” The Straits Times, 9 April 2015; Teo Cheng Wee, “Cab Shortage Drives China’s Car-Hire Boom,” The Straits Times, 25 April 2015; Christopher Tan, “Uber Sets Up Car Rental Firm in S’pore to Recruit Drivers,” The Straits Times, 29 May 2015; Wahyudi Soeriaatmadja, “Uber Taxi Takes Off in Jakarta,” The Straits Times, 8 June 2015; Adrian Lim, “Are Ride-Matching Apps an Uber Problem?,” The Straits Times, 14 June 2015; Zubaidah Nazeer, “Motorcycle Taxi Apps Zoom Ahead in Jakarta,” The Straits Times, 15 June 2015; Faizan Haidar, “Number of Women Drivers Increase in Uber, Ola Ranks,” Hindustan Times, 22 June 2015; “Motorbike-Hailing App Revs Up in Traffic-Choked Jakarta,” Manila Bulletin, 22 June 2015; Iran Siddique, “Sometimes, Strikes Are the Only Option: Shashank Rao, Auto Union Leader,” Free Press Journal, 22 June 2015; “Taxi Sector’s Shake-Up Could Benefit Everyone,” Global Times, 23 June 2015; “Beating Bangkok Traffic,” Bangkok Post, 23 June 2015; Mike Bastin, “Uber Breathes Fresh Air into Branding,” China Daily–Hong Kong Edition, 23 June 2015; Ryan Petersen, “Why Your Next Package Will Be Delivered by an Uber,” www.techcrunch.com, 29 June 2015; Faris Mokhtar & Diane Leow, “Uber to Look into Reports of ‘Surge’ Pricing Following MRT Disruptions,” ChannelNewsAsia, www.channelnewsasia.com, 8 July 2015; Adrian Lim, “GrabCar Ups Ante in Tussle with Rival Uber for Drivers,” The Straits Times, 18 July 2015, p. B4; Adrian Lim, “Over 10,600 Cabs to Offer Dynamic Pricing from Next Week,” The Straits Times, 22 March 2017, p. A4. www.uber.com.

ChaPter 3 ó Gathering Information and Forecasting Demand

1. What is Uber’s appeal? Identify what needs it fulfills. 2. Identify Uber’s direct and indirect competitors. Do a Michael Porters’ five forces assessment of the industry Uber is in. Is it profitable in the short and long run? 3. How should Uber position itself to sustain its current growth rate, in light of the competition it faces?

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C H A P T E R

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Conducting Marketing Research To make the best possible tactical decisions in the short run and strategic decisions in the long run, marketers need timely, accurate, and actionable information on consumers, competition, and their brands. Discovering consumer insights and understanding the marketing implications can often lead to a successful product launch or spur the growth of a brand.

n 2012, when launching its new Galaxy S III smartphone, Samsung faced a formidable opponent in Apple. To gain the upper hand, Samsung sifted through hundreds of thousands of tweets and online conversations to uncover recurring negative comments about the iPhone. One ad in Samsung’s campaign mocked Apple fanatics eagerly waiting in line for the latest iPhone model. With the tagline “The next big thing is already here,” Samsung’s ad showcased features such as screen size and NFC file-swapping technology, where

it had an advantage. The ad ended with a clever twist, showing the Samsung phone user—whose phone had all the features the Apple users were hoping for—waiting in line and saying he was just saving a spot for his parents. A huge hit online, the ad attracted millions of YouTube views. The TV ad was a follow-up to an earlier print ad contrasting a long list of Galaxy S III features with a much smaller list for the iPhone. Samsung also took a dig at Apple and its Genius retail employees by adding the tagline “It doesn’t take a genius.”1

In this chapter, we will address the following questions: 1. What constitutes good marketing research? 2. What are good metrics for measuring marketing productivity? 3. How can marketers assess their return on investment of marketing expenditures? 4. How can companies more accurately measure and forecast demand?

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n this chapter, we review the steps involved in the marketing research process. We also consider how marketers can develop effective metrics for measuring marketing productivity.

4.1 The Marketing Research System Marketing managers often commission formal marketing studies of specific problems and opportunities. They may request a market survey, a product-preference test, a sales forecast by region, or an advertising evaluation. It is the job of the marketing researcher to produce insight into the customer’s attitudes and buying behavior. Marketing insights provide diagnostic information about how and why we observe certain effects in the marketplace, and what that means to marketers.2 We define marketing research as the systematic design, collection, analysis, and reporting of data and findings relevant to a specific marketing situation facing the company. A company can obtain marketing research in a number of ways. Most large companies have their own marketing research departments, which often play crucial roles within the organization. Small companies can hire the services of a marketing research firm or conduct research in creative and affordable ways, such as: Engaging students or professors to design and carry out projects—The Business School at the National University of Singapore has several projects with companies where students engage in case analyses and consultancy. Some of the companies that the business school has worked with include Samsung and Kimberly-Clark. Using the Internet—A company can collect considerable information at very little cost by examining competitors’ Web sites, monitoring chat rooms, and accessing published data. Checking out rivals—Many small companies routinely visit their competitors. Tapping into marketing partner expertise—Marketing research firms, ad agencies, distributors, and other marketing partners may be able to share relevant market knowledge they have accumulated. Those partners targeting small- or medium-sized businesses may be especially helpful. For example, to promote more shipping to China, UPS conducted several in-depth surveys of the Chinese market to portray its complexities, but also its opportunities for even small- and medium-sized businesses.3

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Most companies use a combination of marketing research resources to study their industries, competitors, customers, and channel strategies. Companies normally budget marketing research at 1–2 percent of company sales. A large percentage of that is spent on the services of outside firms. Marketing research firms fall into three categories:

Market research can be engaged from syndicated research firms such as Nielsen Company. Nielsen conducts omnibus studies as well as customized ones for clients.

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Syndicated-service research firms—These firms gather consumer and trade information, which they sell for a fee. Example: Nielsen Company, Millward Brown, and TNS Global.

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Custom marketing research firms—These firms are hired to carry out specific projects. They design the study and report the findings.

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Specialty-line marketing research firms—These firms provide specialized research services. The best example is the field-service firm, which sells field-interviewing services to other firms. Marketing research can be carried out by everyone in the company—and by customers, too. Hindustan Unilever—This company has added a new concept to its consumer research in India—consumer windows. Besides its traditional market research, it has also established direct customer contact where its managers can log in to a Web site and request for an interface with any type of consumer across India. The request is then processed by the research agency which will organize meetings between the managers

and the consumers. Hindustan Unilever claims that after this window was set up, about nine managers will contact consumers in some 20 locations across five consumer groups every day. This tool has helped it find solutions to specific problems. When the sales of one of its top brands Lifebuoy tapered off, the consumer window sessions helped the company realize that consumers preferred a non-carbolic product, and thus repositioned the soap as a family product.4

Effective marketing research involves the six steps shown in Figure 4.1. We will illustrate these steps with the following hypothetical situation:

Managers at Hindustan Unilever have direct contact with consumers to find out their perceptions of their products.

Japan Airlines (JAL) is looking for new ways to serve its passengers. It is reviewing many new ideas, especially to cater to its first-class passengers on very long flights, many of whom are businesspeople whose high-priced tickets pay for most of the freight. Among these ideas are (1) ultra high-speed Wi-Fi service; (2) 124 channels of satellite cable TV; and (3) a 250-CD audio system that lets each passenger create a customized playlist of music and movies to enjoy during the flight. The marketing research manager was assigned to investigate how first-class passengers would rate these services, specifically ultra-high-speed Wi-Fi, and how much extra they would be willing to pay. One source estimates revenues of $70 million from Wi-Fi access over 10 years if enough first-class passengers paid $25. Thus, JAL would recover its costs in a reasonable time-period, given that providing the connection would cost $90,000 per plane.5

4.2.1 Step 1: Define the Problem, the Decision Alternatives, and the Research Objectives Marketing managers must be careful not to define the problem too broadly or too narrowly for the marketing researcher. A marketing manager who instructs the marketing researcher to “Find out everything you can about first-class air travelers’ needs,” will collect a lot of unnecessary information. One who says, “Find out if enough passengers on board a B747 flying direct between Tokyo and Los Angeles would be willing to pay $25 for ultra high-speed Wi-Fi service so that JAL would break even in one year on the cost of offering this service,” is taking too narrow a view of the problem. The marketing researcher might even raise this question: “Why does the Internet connection have to be priced at $25 as opposed to $10, $50, or some other price? Why does JAL have to break even on the cost of the service, especially if it attracts new users?” In discussing the problem, JAL’s managers discover another issue. If the new service was successful, how fast could other airlines copy it? Airline marketing research is replete with examples of new services that have been so quickly copied by competitors that no airline has gained a sustainable competitive advantage. How important is it to be first, and how long could the lead be sustained? The marketing manager and marketing researcher agreed to define the problem as follows: “Will offering ultra high-speed Wi-Fi service create enough incremental preference and profit for JAL to justify its cost against other possible investments JAL might make?” To help in designing the research, management should first spell out the decisions it might face and then work backward. Suppose management spells out these decisions: (1) Should JAL offer ultra high-speed Wi-Fi service? (2) If so, should the service be offered to first class only, or include business class, and possibly economy class? (3) What price(s) should be charged? (4) On what types of planes and lengths of trips should it be offered? Now management and marketing researchers are ready to set specific research objectives: (1) What types of first-class passengers would respond most to ultra high-speed Wi-Fi service? (2) How many first-class passengers are likely to use the Internet service at different price levels? (3) How many extra first-class passengers might choose JAL because of this new service? (4) How much long-term goodwill will this service add to JAL’s image? (5) How important is ultra high-speed

Define the problem and research objectives

Develop the research plan

Collect the information

Analyze the information

Present the findings

Make the decision

Figure 4.1 The Marketing Research Process

ChaPter 4 ó Conducting Marketing research

4.2 The Marketing Research Process

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Wi-Fi service to first-class passengers relative to providing other services such as a power plug or enhanced entertainment? Not all research projects can be this specific. Some research is exploratory—its goal is to shed light on the real nature of the problem and to suggest possible solutions or new ideas. Some research is descriptive—it seeks to ascertain certain magnitudes, such as how many first-class passengers would purchase ultra high-speed Wi-Fi service at $25. Some research is causal — its purpose is to test a cause-and-effect relationship.

4.2.2 Step 2: Develop the Research Plan The second stage of marketing research calls for developing the most efficient plan for gathering the needed information. The marketing manager needs to know the cost of the research plan before approving it. Suppose the company made a prior estimate that launching the ultra highspeed Wi-Fi service would yield a long-term profit of $50,000. The manager believes that doing the research would lead to an improved pricing and promotional plan and a long-term profit of $90,000. In this case, the manager should be willing to spend up to $40,000 on this research. If the research would cost more than $40,000, it is not worth doing.6 Designing a research plan calls for decisions on the data sources, research approaches, research instruments, sampling plan, and contact methods.

Data Sources The researcher can gather secondary data, primary data, or both. Secondary data are data that were collected for another purpose and already exist somewhere. Primary data are data freshly gathered for a specific purpose or for a specific research project.

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Researchers usually start their investigation by examining some of the rich variety of secondary data to see whether the problem can be partly or wholly solved without collecting costly primary data. Secondary data provide a starting point and offer the advantages of low cost and ready availability. When the needed data do not exist or are dated, inaccurate, incomplete, or unreliable, the researcher will have to collect primary data. Most marketing research projects involve some primary-data collection. The normal procedure is to interview some people individually or in groups, to get a sense of how people feel about the topic in question, and then develop a formal research instrument, debug it, and carry it into the field.

Research Approaches Primary data can be collected in five main ways: through observation, focus groups, surveys, behavioral data, and experiments.

Observational Research Fresh data can be gathered by observing the relevant actors and settings.7 Consumers can be unobtrusively observed as they shop or as they consume products. Researchers can equip consumers with pagers and instruct them to write down what they are doing whenever prompted, or hold more informal interview sessions at a café or bar.

Ethnographic Research

Observational research suggests unobtrusive observation of customers in places such as their natural shopping environment.

This is a particular observational research approach that uses concepts and tools from anthropology and other social science disciplines to provide deep understanding of how people live and work.8 The goal is to immerse the researcher into consumers’ lives to uncover unarticulated desires that might not surface in any other form of research.9 Firms such as Fujitsu, IBM, and Intel have embraced ethnographic research to design breakthrough products.

Ethnographic research is not limited just to consumer companies in developed markets. GE’s ethnographic research into the plastic-fiber industry showed the firm that it was not in a commodity business driven by price as much as it was in an artisanal industry with customers who

wanted collaborations at the earliest stages of development. GE completely reoriented the way it interacted with the companies in the plastic-fiber industry as a result. Ethnographic research can be especially useful in developing markets, especially farflung rural areas, where companies do not know consumers as well.10 The JAL researchers might meander around first-class lounges to hear how travelers talk about the different carriers and their features. They can fly on competitors’ planes to observe in-flight service.

Focus Group Research

Moderators attempt to track down potentially useful insights as they try to discern the real motivations of consumers and why they are saying and doing certain things. The sessions are typically recorded in some fashion, and marketing managers often remain behind two-way mirrors in the next room. In Asia, some cultural sensitivities may require that focus group sessions be segregated between male and female participants, or even by age. Older participants may find it offensive to be in the same group as younger participants, while younger participants may defer in their opinions to those of the older participants.

Unlike paper-and-pencil surveys, focus-group interviews allow participants to discuss freely their thoughts and feelings. In Asia, researchers need to be mindful of cultural nuances such as deference to seniority. In more conservative Asian countries, men and women attend separate focus groups.

In the JAL research, the moderator might start with a broad question, such as “How do you feel about first-class air travel?” Questions then move to how people view the different airlines, different existing services, different proposed services, and specifically, Internet service. Although focus group research has been shown to be a useful exploratory step, researchers must avoid generalizing the reported feelings of the focus group participants to the whole market, because the sample size is too small and the sample is not drawn randomly. Marketing Memo: Conducting Informative Focus Groups has some practical tips to improve the quality of focus groups.

MARKETING MEMO

CONDUCTING INFORMATIVE FOCUS GROUPS

Focus groups allow marketers to observe how and why consumers accept or reject concepts, ideas, or any specific notion. The key to using focus groups successfully is to listen. It is critical to eliminate biases as much as possible. Although many useful insights can emerge from thoughtfully run focus groups, there can be questions as to their validity, especially in today’s marketing environment. Some researchers believe that consumers have been so bombarded with ads, they unconsciously (or perhaps cynically) regurgitate what they have already heard as compared to what they think. There is also a concern that participants are just trying to maintain their self-image and public persona or have a need to identify with the other members of the group. Participants may not be willing to admit in public—or may not even recognize— their behavior patterns and motivations. There is also always the

“loudmouth” problem—when one highly opinionated person drowns out the rest of the group. It may be expensive to recruit qualified subjects, but getting the right participants is crucial. Even when multiple groups are involved, it may be difficult to generalize the results to a broader population. Focus group findings often vary from region to region. Some consumers tend to be highly critical and generally do not report that they like much. Too often, managers become comfortable with a particular focus group format and apply it generally and automatically to every circumstance. Asians typically need more time than American marketers typically are willing to give—a focus group in Asia rarely takes less than two hours and often more than four. Participants must feel as relaxed as possible and feel a strong obligation to “speak the truth.” Physical surroundings can be

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A focus group is a gathering of 6 to 10 people who are carefully selected based on certain demographic, psychographic or other considerations, and brought together to discuss various topics of interest at length. Participants are normally paid a small sum for attending. A professional research moderator provides questions and probes based on a discussion guide or agenda prepared by the marketing managers responsible to ensure that the right material gets covered.

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crucial. Researchers at one agency knew they had a problem when a fight broke out between participants at one of their sessions. As one executive noted, “we wondered why people always seemed grumpy and negative—people were resistant to any idea we showed them.” The problem was the room itself: cramped, stifling, forbidding: “It was a cross between a hospital room and a police interrogation room.” To fix the problem, the agency gave the room a makeover. Other firms are adapting the look of the room to fit the theme of the topic—like designing the room to look like a playroom when speaking to children.

Although many firms are substituting observational research for focus groups, ethnographic research can be expensive and tricky: researchers must be highly skilled, participants have to be on the level, and mounds of data have to be analyzed. The beauty of focus groups, as one marketing executive noted, is that, “it’s still the most cost-effective, quickest, dirtiest way to get information in rapid time on an idea.” In analyzing the pros and cons, Americus Reed might have said it best: “A focus group is like a chain saw. If you know what you’re doing, it’s very useful and effective. If you don’t, you could lose a limb.”

Sources: Sarah Jeffrey Kasner, “Fistfights and Feng Shui,” Boston Globe, 21 July 2001; Linda Tischler, “Every Move You Make,” Fast Company, April 2004, pp. 73–75; Dennis Rook, “Out-of-Focus Groups,” Marketing Research, Summer 2003, 15 (2), p. 11; Piet Levy, “In with the Old, In Spite of the New,” Marketing News, 30 May 2009, p. 19; Piet Levy, “10 Minutes with . . . Robert J. Morais,” Marketing News, 30 May 2011; William Boateng, “Evaluating the Efficacy of Focus Group Discussion (FGD) in Qualitative Social Research,” International Journal of Business and Social Science 3, April 2012, pp. 54–57; Demetrius Madrigal and Bryan McClain, “Do’s and Don’ts for Focus Groups,” www.uxmatters.com, 4 July 2011.

Survey Research Companies undertake surveys to learn about people’s knowledge, beliefs, preferences, and satisfaction, and to measure these magnitudes in the general population. JAL might prepare its own survey instrument to gather the information it needs, or it might add questions to an omnibus survey that carries the questions of several companies at a much lower cost. It can also put the questions to an ongoing consumer panel run by itself or another company, or it might do a mall intercept study by having researchers approach people in a shopping mall and ask them questions.

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Behavioral Data Research

Store-scanner data can provide rich information about brand preferences, competitive promotional effects, and customer profile. Importantly, they reveal behavioral rather than attitudinal responses.

Customers leave traces of their purchasing behavior in store-scanning data, catalog purchases, and customer databases. Much can be learned by analyzing these data. Customers’ actual purchases reflect preferences and often are more reliable than statements they offer to market researchers. People may report preferences for popular brands, and yet the data show them actually buying other brands. For example, grocery-shopping data show that high-income people do not necessarily buy the more expensive brands, contrary to what they might state in interviews; and many low-income people buy some expensive brands. Clearly, JAL can learn many useful things about its passengers by analyzing ticket purchase records.

Experimental Research The most scientifically valid research is experimental research, designed to capture cause-andeffect relationships by eliminating competing explanations of the observed findings. Experiments call for selecting matched groups of subjects, subjecting them to different treatments, controlling extraneous variables, and checking whether observed response differences are statistically significant. To the extent that extraneous factors are eliminated or controlled, the observed effects can be related to the variations in the treatments. JAL might introduce in-flight Internet service on one of its regular flights from Los Angeles to Tokyo. It might charge $25 one week and charge only $15 the next week. If the plane carried approximately the same number of first-class passengers each week and the particular weeks made no difference, any significant difference in the number of passengers using this service could be related to the different prices charged. The experimental design could be elaborated by trying other prices and including other air routes.

Research Instruments Marketing researchers have a choice of three main research instruments in collecting primary data: questionnaires, qualitative measures, and technological devices.

Questionnaires

Table 4.1 Types of Questions Name

Description

Example

A. Closed-end Questions Dichotomous

A question with two possible answers.

In arranging this trip, did you personally phone JAL?

Multiple choice

A question with three or more answers.

With whom are you traveling on this flight?

Yes

No

❑ No one

❑ Children only

❑ Spouse

❑ Business associates/friends/relatives

❑ Spouse and children ❑ An organized tour group Likert scale

Semantic differential

Importance scale

Rating scale

Intention-to-buy scale

A statement with which the respondent shows the amount of agreement/disagreement. A scale connecting two bipolar words. The respondent selects the point that represents his or her opinion. A scale that rates the importance of some attribute.

Small airlines generally give better service than large ones. Strongly disagree

Disagree

Neither agree nor disagree

Agree

Strongly agree

1__

2__

3__

4__

5__

JAL Large .......................................................................Small Experienced ................................................. Inexperienced Modern ....................................................... Old-fashioned Airline food service to me is Extremely

Very

Somewhat

Not very

Not at all

important

important

important

important

important

1__

2__

3__

4__

5__

A scale that rates some attribute from “poor” to “excellent.”

JAL food service is

A scale that describes the respondent’s intention to buy.

If an in-flight telephone were available on a long flight, I would

Excellent

Very Good

Good

Fair

Poor

1__

2__

3__

4__

5__

Definitely

Probably

buy

buy

1__

2__

Not sure

Probably

Definitely

not buy

not buy

3__

4__

5__

B. Open-end Questions Completely unstructured

A question that respondents can answer in an almost unlimited number of ways.

What is your opinion of JAL?

Word association

Words are presented, one at a time, and respondents mention the first word that comes to mind.

What is the first word that comes to your mind when you hear the following? Airline JAL Travel

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A questionnaire consists of a set of questions presented to respondents. Because of its flexibility, the questionnaire is by far the most common instrument used to collect primary data. Questionnaires need to be carefully developed, tested, and debugged before they are administered on a large scale. In preparing a questionnaire, the researcher carefully chooses the questions and their form, wording, and sequence. The form of the question can influence the response. Marketing researchers distinguish between closed-end and open-end questions. Closed-end questions specify all the possible answers and provide answers that are easier to interpret and tabulate. Open-end questions allow respondents to answer in their own words and often reveal more about how people think. They are especially useful in exploratory research, where the researcher is looking for insight into how people think rather than measuring how many people think a certain way. Table 4.1 provides examples of both types of questions; also see Marketing Memo: Questionnaire Do’s and Don’ts.

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Sentence

An incomplete sentence is presented and respondents complete the sentence.

When I choose an airline, the most important consideration in my decision is

Story completion

An incomplete story is presented, and respondents are asked to complete it.

“I flew JAL a few days ago. I noticed that the exterior and interior of the plane had very bright colors. This aroused in me the following thoughts and feelings. . . .” Now complete the story.

Picture

A picture of two characters is presented, with one making a statement. Respondents are asked to identify with the other and fill in the empty balloon.

Thematic Apperception Test (TAT)

A picture is presented and respondents are asked to make up a story about what they think is happening or may happen in the picture.

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QUESTIONNAIRE DO’S AND DON’TS

1. Ensure that questions are without bias. Do not lead the respondent into an answer. 2. Make the questions as simple as possible. Questions that include multiple ideas or two questions in one will confuse respondents. 3. Make the questions specific. Sometimes it is advisable to add memory cues. For example, it is good practice to be specific with time periods. 4. Avoid jargon or shorthand. Avoid trade jargon, acronyms, and initials not in everyday use. 5. Steer clear of sophisticated or uncommon words. Only use words in common speech. 6. Avoid ambiguous words. Words such as “usually” or “frequently” have no specific meaning. 7. Avoid questions with a negative in them. It is better to say “Do you ever . . . ?” than “Do you never . . . ?”

8. Avoid hypothetical questions. It is difficult to answer questions about imaginary situations. The answers cannot necessarily be trusted. 9. Do not use words that could be misheard. This is especially important when the interview is administered over the telephone. “What is your opinion of sects?” could yield interesting, but not necessarily relevant answers. 10. Desensitize questions by using response bands. For questions that ask people their age or companies their employee turnover, it is best to offer a range of response bands. 11. AEnsure that fixed responses do not overlap. Categories used in fixed response questions should be sequential and not overlap. 12. Allow for “other” in fixed response questions. Pre-coded answers should always allow for a response other than those listed.

Source: Adapted from Paul Hague and Peter Jackson, Market Research: A Guide to Planning, Methodology, and Evaluation (London: Kogan Page, 1999). See also Hans Baumgartner and Jan-Benedict E. M. Steenkamp, “Response Styles in Marketing Research: A Cross-National Investigation,” Journal of Marketing Research, (May 2001), pp. 143–56; Bert Weijters and Hans Baumgartner, “Misreponse to Reverse and Negated Items in Surveys: A Review,” Journal of Marketing Research, October 2012, 49, pp. 737–47.

Qualitative Measures Some marketers prefer more qualitative methods for gauging consumer opinion because consumer actions do not always match their answers to survey questions. Qualitative research techniques are relatively unstructured measurement approaches that permit a range of possible responses. Qualitative research techniques are a creative means of ascertaining consumer perceptions that may otherwise be difficult to uncover. The range of possible qualitative research techniques is limited only by the creativity of the marketing researcher.

There are also drawbacks to qualitative research. The in-depth insights that emerge have to be tempered by the fact that the samples involved are often very small and may not necessarily generalize to broader populations. Moreover, given the qualitative nature of the data, there may also be questions of interpretation. Different researchers examining the same results from a qualitative research study may draw very different conclusions. Marketing Insight: Getting into Consumer Heads with Qualitative Research describes some popular approaches.

gettIng Into ConsuMers’ heads wIth qualItatIve researCh

Here are some commonly used qualitative research approaches to get inside consumers’ minds and find out what they are thinking or feeling about brands and products: Word associations—People can be asked what words come to mind when they hear the brand’s name. “What does the Casio name mean to you? Tell me what comes to mind when you think of Casio watches.” The primary purpose of free association tasks is to identify the range of possible brand associations in consumers’ minds. But they may also provide some rough indication of the relative strength, favorability, and uniqueness of brand associations. Projective techniques—People are presented an incomplete stimulus and asked to complete it, or given an ambiguous stimulus that may not make sense in and of itself and are asked to make sense of it. The argument is that people will thus reveal their true beliefs and feelings. One such approach is “bubble exercises” based on cartoons or photos. Different people are depicted buying or using certain products or services. Empty bubbles, like those found in cartoons, are placed in the scenes to represent the thoughts, words, or actions of one or more of the people. Participants are then asked to “fill in the bubble” by indicating what they believed was happening or being said. Another technique is comparison tasks. People are asked to convey their impressions by comparing brands to people, countries, animals, activities, fabrics, occupations, cars, magazines, vegetables, nationalities, or even other brands. Visualization—People can be asked to create a collage from magazine photos or drawings to depict their perceptions. ZMET is a research technique that starts with a group of participants, who are asked in advance to select a minimum of 12 images from their own sources (e.g., magazines, catalogs, and family photo albums) that represent their thoughts and feelings about the research topic. The participants bring these images to a personal one-on-one interview with a study administrator, who uses advanced interview techniques to explore the images with the participants and reveal hidden meanings. Finally, the

participants use a computer program to create a collage with these images that communicates their subconscious thoughts and feelings about the topic. One ZMET study probed what women thought of panty hose. Twenty hosewearing women were asked to collect pictures that captured their feelings about wearing panty hose. Some of the pictures showed fence posts encased in plastic wrap or steel bands strangling trees, suggesting that panty hose are tight and inconvenient. Another picture showed tall flowers in a vase, suggesting that the product made a woman feel thin, tall, and sexy. Brand personification—People can be asked to describe what kind of person they think of when the brand is mentioned: “If the brand were to come alive as a person, what would it be like, what would it do, where would it live, what would it wear, who would it talk to if it went to a party (and what would it talk about)?” Thailand’s Boon Rawd Brewery conducted a brand personification study and found that Leo, a local beer, was perceived to have a mature personality that values Thai heritage. Singha, another local beer, was perceived as having an international Thai personality— someone who is modern and proud to be a Thai, and yet a citizen of the world with international ambitions. Heineken was viewed as the Master European Brewer, while Chang, a low-cost beer targeted at the rural market, had no clear brand personality. Laddering—A series of increasingly more specific “why” questions can be used to gain insight into consumer motivation and consumers’ deeper, more abstract goals. Ask why someone wants to buy a Samsung mobile phone. “They look well-built” (attribute). “Why is it important that the phone be well-built?”“It suggests that the Nokia phone is reliable” (a functional benefit). “Why is reliability important?” “Because my colleagues or family can be sure to reach me” (an emotional benefit). “Why must you be available to them at all times?” “I can help them if they are in trouble” (brand essence). The brand makes this person feel like a Good Samaritan, ready to help others.

Sources: Allen Adamson, “Why Traditional Brand Positioning Can’t Last,” BrandWeek, 17 November 2003, pp. 38–40; Todd Wasserman, “Sharpening the Focus,” BrandWeek, 3 November 2003, pp. 28–32; Linda Tischler, “Every Move You Make,” Fast Company, April 2004, pp. 73–75; Gerald Zaltman, How Customers Think: Essential Insights Into the Mind of the Market, (Boston: Harvard Business School Press, 2003).

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Technological Devices Galvanometers can measure the interest or emotions aroused by exposure to a specific ad or picture. The tachistoscope flashes an ad to a subject with an exposure interval that may range from less than one hundredth of a second to several seconds. After each exposure, the respondent describes everything he recalls. Eye cameras study respondents’ eye movements to see where their eyes land first, how long they linger on a given item, and so on. Technology has now advanced to such a degree that marketers can use devices such as skin sensors, brain wave scanners, and full body scanners to get consumer responses.11 Some advertising technology companies study the eye movements and brain activity of Web surfers to see which ads grab their attention.12 Marketing Insight: Understanding Brain Science provides a glimpse into some new marketing research frontiers studying the brain. Technology has replaced the diaries that participants in media surveys used to keep. Audiometers attached to television sets in participating homes now record when the set is on and to which channel it is tuned. Electronic devices can record the number of radio programs a person is exposed to during the day, or, using Global Positioning System (GPS) technology, how many billboards a person may walk by or drive by during a day. Technology is also used to capture consumer reactions to programming content.

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understandIng braIn sCIenCe

As an alternative to traditional consumer research and to better gauge consumer responses to marketing, some researchers have begun to develop sophisticated techniques from neuroscience that monitor brain activity. The term neuromarketing describes research on the effect of marketing stimuli on the brain. Firms are using EEG (electroencephalograph) technology to correlate brand activity with physiological cues, such as skin temperature and eye movement, and thus gauge how people react to ads. Researchers studying the brain have gotten different results from conventional research methods. One group of researchers at the UCLA used functional magnetic resonance imaging (fMRI) to find that the Super Bowl ads for which subjects displayed the highest brain activity were different from the ads with the highest stated preferences. Other research found little effect from product placement unless the products in question played an integral role in the storyline. Several studies have found higher correlations with brain wave research and behavior than with surveys. One study found that brain waves better predicted music purchases than stated music preferences. One major finding from neurological consumer research is that many purchase decisions appear to be characterized “as a largely unconscious habitual process, as distinct from the rational, conscious, information-processing model of economists and traditional marketing textbooks.” Even basic decisions, such as the purchase of gasoline, seem to be influenced by brain activity at the subrational level. A group of researchers in England used EEG technology to monitor cognitive functions related to memory recall and attentiveness in 12 different regions of the brain while subjects

were exposed to advertising. Brain wave activity in different regions indicated different emotional responses. For example, heightened activity in the left prefrontal cortex is characteristic of an “approach” response to an ad and indicates an attraction to the stimulus. In contrast, a spike in brain activity in the right prefrontal cortex is indicative of a strong revulsion to the stimulus. In yet another part of the brain, the degree of memory formation activity correlates with purchase intent. Other research has shown that people activate different regions of the brain in assessing the personality traits of other people than they do when assessing brands. Although it may offer different insights from conventional techniques, neurological research can be fairly expensive and has not been universally accepted. Given the complexity of the human brain, many researchers caution that it should not form the sole basis for marketing decisions. The measurement devices to capture brain activity, using skull caps studded with electrodes or creating artificial exposure conditions, can also be highly obtrusive. Others question whether neurological research really offers unambiguous implications for marketing strategy. Brian Knutson, a professor of neuroscience and psychology at Stanford University, compares the use of EEG to “standing outside a baseball stadium and listening to the crowd to figure out what happened.” Other critics worry that if the methods do become successful, they will only lead to more marketing manipulation by companies. Despite controversy, marketers’ endless pursuit of deeper insights about consumers’ response to marketing virtually guarantees continued interest in neuromarketing.

Sources: Carolyn Yoon, Angela H. Gutchess, Fred Feinberg, and Thad A. Polk, “A Functional Magnetic Resonance Imaging Study of Neural Dissociations between Brand and Person Judgments,” Journal of Consumer Research, June 2006, 33, pp. 31–40; Martin Lindstrom, Buyology: Truth and Lies about Why We Buy (New York: Doubleday, 2008); Brian Sternberg, “How Couch Potatoes Watch TV Could Hold Clues for Advertisers,” Boston Globe, 6 September 2009, pp. G1, G3; Kevin Randall, “Neuromarketing Hope and Hype: 5 Brands Conducting Brain Research,” Fast Company, 15 September 2009; Todd Essig, “The Future of Focus Groups: My Brain Knows What You Like,” Forbes, 28 April 2012; Carmen Nobel, “Neuromarketing: Tapping into the ‘Pleasure Center’ of Consumers,” Forbes, 1 February 2013.

Sampling Plan After deciding on the research approach and instruments, the marketing researcher must design a sampling plan. This calls for three decisions: Sampling unit—Who is to be surveyed? The marketing researcher must define the target population that will be sampled. In the JAL survey, should the sampling unit be only first-class business travelers, first-class vacation travelers, or both? Should travelers under age 18 be interviewed? Should both husbands and wives be interviewed? Once the sampling unit is determined, a sampling frame must be developed so that everyone in the target population has an equal or known chance of being sampled.

2.

Sample size—How many people should be surveyed? Large samples give more reliable results than small samples. However, it is not necessary to sample the entire target population or even a substantial portion to achieve reliable results. Samples of less than 1 percent of a population can often provide good reliability, with a credible sampling procedure.

3.

restrooms. It installed touch screens at its restrooms for feedback. Sampling procedure—How should the respondents be chosen? Probability sampling allows the calculation of confidence limits for sampling error. Thus, one could conclude after the sample is taken that “the interval five to seven trips per year has 95 chances in 100 of containing the true number of trips taken annually by first-class passengers flying between Tokyo and Los Angeles.”

Changi Airport Singapore targets airline passengers to rate its public

However, probability sampling is difficult to achieve in some countries like China. This follows from China’s large size and the time, cost, and difficulty of accessing respondents in all parts of the country due to lack of communication, transportation, and other infrastructural set-ups. Regional variations in cultural traditions and the economic situation present additional problems, particularly as economic development has been accompanied by increasing diversity across the country. The frequent need to obtain authorization from the relevant authorities when undertaking surveys may also result in gaining cooperation from a research unit affiliated with a particular ministry, but difficulty in sampling potential respondents affiliated with other ministerial systems.13

Contact Methods Once the sampling plan has been determined, the marketing researcher must decide how the subject should be contacted: mail, telephone, personal, or online interview.

Mail Contacts The mail questionnaire is the best way to reach people who would not give personal interviews or whose responses might be biased or distorted by the interviewers. Mail questionnaires require simple and clearly worded questions. Unfortunately, the response rate is usually low or slow.

Telephone Contacts Telephone interviewing is the best method for gathering information quickly; the interviewer is also able to clarify questions if respondents do not understand them. The response rate is typically higher than in the case of mailed questionnaires. The main drawback is that the interviews have to be short and not too personal. Telephone interviewing is getting more difficult because of consumers’ growing antipathy toward telemarketers calling them in their homes and interrupting their lives.

Personal Contacts Personal interviewing is the most versatile method. The interviewer can ask more questions and record additional observations about the respondent, such as dress and body language. At the same time, personal interviewing is the most expensive method and requires more administrative planning and supervision than the other three. It is also subject to interviewer bias or distortion. Personal interviewing takes two forms. In arranged interviews, respondents are contacted for

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1.

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an appointment, and often a small payment or incentive is offered. Intercept interviews involve stopping people at a shopping mall or busy street corner and requesting an interview. Intercept interviews can have the drawback of being non-probability samples, and the interviews must not require too much time.

Online Contacts The Internet offers many ways to do research. A company can embed a questionnaire on its Web site and offer an incentive to answer it, or it can place a banner on a frequently visited site inviting people to answer some questions and possibly win a prize. Online product testing, in which companies float trial balloons for new products, is also growing and providing information much faster than traditional new-product marketing research techniques. Marketers can also host a real-time consumer panel or virtual focus group or sponsor a chat room, bulletin board, or blog and introduce questions from time to time. They can ask customers to brainstorm or have followers of the company on Twitter rate an idea. Online communities and networks of customers serve as a resource for a wide variety of companies. As popular as online research methods are, smart companies are choosing to use them to augment rather than replace more traditional methods. There are a number of pros and cons to online research.14 Here are some advantages:

Firms like SurveyMonkey make it easy to conduct online consumer surveys.

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Online research is inexpensive—A typical email survey costs about 20 percent to 50 percent less than conventional survey, and return rates can be as high as 50 percent.

Online research is fast—Online surveys are fast because the survey can automatically direct respondents to applicable questions and transmit results immediately. People tend to be honest and thoughtful online—People may be more open about their opinions when they can respond privately and not to another person whom they feel might be judging them, especially on sensitive topics. Because they choose when and where they take the survey and how much time to devote to each question, they may be more relaxed and candid. Online research is versatile—Increased broadband penetration offers online research even more flexibility and capabilities. For instance, virtual reality software lets visitors inspect 3-D models of products such as cameras, cars, and medical equipment; and manipulate product characteristics. Even at the basic tactile level, online surveys can make answering a questionnaire easier and more fun than paper-and-pencil versions. Online community blogs allow customer participants to interact with each other. Some disadvantages include the following: Samples can be small and skewed—In rural parts of Asia, broadband Internet access may not be available. In Malaysia, power surges caused by monsoons can fry computer motherboards. In China, the government may not feel comfortable with market researchers gathering information from its citizens via the Internet. Although it is certain that more people will go online, online market researchers must find creative ways to reach population segments on the other side of the “digital divide.” One option is to combine offline sources with online findings. Providing temporary Internet access at locations such as malls and recreation centers is another strategy. Some research firms use statistical models to fill in the gaps in market research left by offline consumer segments. Online panels and communities can suffer from excessive turnover—Members may become bored with the company’s efforts and leave, or worse, stay put with half-hearted participation. Panel and community organizers are taking steps to address the quality of panel and the data they provide by raising recruitment standards, downplaying incentives,

and carefully monitoring participation and engagement levels. New features, events, and other activities must be constantly added to keep members interested and engaged.15 Online market research can suffer from technological problems and inconsistencies— Problems can arise with online surveys because browser software varies. The Web designer’s final product may look very different on the research subject’s screen. Online researchers have also begun to use text messaging in various ways—to conduct a chat with a respondent, to probe more deeply with a member of an online focus group, or to direct respondents to a Web site.16 Text messaging is also a useful way to get teenagers to open up on topics.

The data collection phase of marketing research is generally the most expensive and the most prone to error. In the case of surveys, four major problems arise. Some respondents will not be at home and must be contacted again or replaced. Other respondents will refuse to cooperate. Still others will give biased or dishonest answers. Finally, some interviewers will be biased or dishonest. When collecting information, it is also important to protect the personal information of the respondents. However, the level of privacy protection in Asia lags behind Western industrialized countries. Japan has instituted a law to protect personal information after several leaks of customer data occurred. When Japanese businesses and organizations seek personal information, they are required to explain the purposes for which the data will be used. When they provide personal data to a third party, they must obtain the consent of the individuals involved. They must also disclose the personal data they have on file to the individuals upon request. Several issues give rise to such leaks. One is the level of access employees have to personal data. Many companies fail to sufficiently restrict staff access to ensure protection. The growing trend towards outsourcing and flexible staffing based on the use of temporary workers also poses a data management problem. Further, Japan’s traditional corporate culture of keiretsu means that customer information is shared widely among different departments and affiliated companies.17

4.2.4 Step 4: Analyze the Information The next-to-last step in the process is to extract findings from the collected data. The researcher tabulates the data and develops frequency distributions. Averages and measures of dispersion are computed for the major variables. The researcher will also apply some advanced statistical techniques and decision models in the hope of discovering additional findings.

4.2.5 Step 5: Present the Findings As the last step, the researcher presents the findings. The researcher should present findings that are relevant to the major marketing decisions facing management. The main survey findings for the JAL case show that: 1.

Passengers would use ultra-high-speed Wi-Fi service primarily to stay connected and receive and send documents and emails. Some would also surf the Web to download videos and songs. They would charge the cost back to their employers.

2.

At $25, about 5 of 10 first-class passengers would use Wi-Fi service during a flight; at $15, about 6 would. Thus, a charge of $15 would produce less revenue (6 × $15 = $90) than $25 (5 × $25 = $125). By charging $25, JAL would collect $125 per flight. Assuming that the same flight takes place 365 days a year, JAL would annually collect $45,625 (365 × $125). Since the investment is $90,000, it will take approximately two years before JAL breaks even.

3.

Offering ultra high-speed Wi-Fi service would strengthen the public’s image of JAL as an innovative and progressive airline. JAL would gain some new passengers and customer goodwill.

4.2.6 Step 6: Make the Decision The managers who commissioned the research need to weigh the evidence. If their confidence in the findings is low, they may decide against introducing the in-flight Internet service. If they are predisposed to launching the service, the findings support their inclination. They may even decide to study the issues further and do more research. The decision is theirs, but hopefully the research provided them with insight into the problem (see Table 4.2).18

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4.2.3 Step 3: Collect the Information

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Table 4.2 The Seven Characteristics of Good Marketing Research

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1. Scientific method

Effective marketing research uses the principles of the scientific method: careful observation, formulation of hypotheses, prediction, and testing.

2. Research creativity

At its best, marketing research develops innovative ways to solve a problem: a clothing company catering to teenagers gave several young men video cameras, then used the videos for focus groups held in restaurants and other places teens frequent.

3. Multiple methods

Marketing researchers shy away from overreliance on any one method. They also recognize the value of using two or three methods to increase confidence in the results.

4. Interdependence of the type of information sought

Marketing researchers recognize that data are interpreted from underlying models that guide the type of information sought.

5. Value and cost of information

Marketing researchers show concern for estimating the value of information against its cost. Costs are typically easy to determine, but the value of research is harder to quantify. It depends on the reliability and validity of the findings and management’s willingness to accept and act on those findings.

6. Healthy skepticism

Marketing researchers show a healthy skepticism toward glib assumptions made by managers about how a market works. They are alert to the problems caused by “marketing myths.”

7. Ethical marketing

Marketing research benefits both the sponsoring company and its customers. The misuse of marketing research can harm or annoy consumers, increasing resentment at what consumers regard as an invasion of their privacy or a disguised sales pitch.

Some organizations are using marketing decision support systems to help their marketing managers make better decisions. A marketing decision support system (MDSS) is a coordinated collection of data, systems, tools, and techniques with supporting software and hardware by which an organization gathers and interprets relevant information from business and environment, and turns it into a basis for marketing action.19

4.3 Marketing Research in Asia The conduct of marketing research in Asia presents its own unique set of challenges.20 Indeed, much data on Asian markets—particularly less economically developed countries—is nonexistent, unreliable, or very costly to collect. Consider the problems with secondary data in the region. Many countries estimate their population by asking local authorities to estimate local population; they will get pure guesses or just extrapolations of past numbers. China relies on birth registration records for population size. However, in rural areas, many families have more than one child and do not register their younger children with the population census. The national income estimate may be based on tax returns, but no allowance is made for widespread unreported or under-reported income. There are also few comparable databases available. For instance, in counting the number of travelers leaving their countries, Taiwan, South Korea, Japan, Hong Kong, and the Philippines have varying approaches. In Taiwan, an exit visa with trip destination and duration information is required for each departure. In contrast, only the departure flight number is recorded for each traveler leaving Hong Kong. The collection of primary data is also saddled with problems. Survey research suffers from a lack of sampling lists, few or unqualified interviewers, poor language translation of questions, respondent refusals to be interviewed, metric equivalence, or less than truthful responses. For example, the Japanese desire not to contradict makes for more “yea-saying” and upward social

Additionally, researchers should bear in mind the connotations Asians associate with certain product features. For example, when asking Asians for their reactions toward price, remember that Asians tend to equate high price with high quality. A warranty on a durable product may be viewed as a signal of quality by an American consumer, but might be viewed as an extrinsic cue of little value to the Chinese consumer. In countries where imports are restricted or highly taxed, like South Korea and the Philippines, “imported” and especially “made in U.S.A.” are strong product claims, and thus associated with quality. Further, words such as “high quality,” “colorful,” and “expensive” have varying meanings from country to country. Researchers must also be aware of the cultural variations in Asian countries. For example, it may be decided that the wife be interviewed. However, in some Muslim countries, men have several wives. Who is to be interviewed?

Asians are more prone to yea-saying. Hence, having an odd-numbered scale may lead to more mid-point responses when customers do not want to give an unfavorable response. Companies may consider using evennumbered scale in their Asian questionnaire.

In many countries, the researcher cannot send a mailed questionnaire because of low population literacy or poor postal service; and telephone interviews are not feasible where telephone ownership or service is poor. This means that researchers must rely primarily on personal interviewing, focus group interviewing, and observational research to arrive at a fair picture of the marketplace. However, over-explanation of the research topic may occur, resulting in inadvertently leading questions. While a lot of insight into the market can be gained from these methods, they cannot be sure of how representative the findings are. Asian countries also vary in their research capabilities. Hong Kong, Japan, the Philippines, and Singapore have fairly advanced research industries; while those in China and Indonesia are more limited, although improving. Thus, companies going abroad face a problem: they need reliable data because they know little about other countries’ cultures, distribution, and economics; yet the data often are poor for making key decisions. Researchers should also be attuned to the high rate of change in the Asian region. Information may thus be outdated very quickly. Marketing research is most useful insofar as it can forecast patterns of behavior. Where rates of change are rapid, the future is more difficult to predict. Several solutions have been suggested to overcome some of these problems. First, it may be unwise to develop one marketing research study for all of Asia. Rather, a sequence of piloting, adaptation, and rollout may be preferable. External validation among data sources is also advised. For example, Japan’s travel departure statistics are known to be accurate and can be used to check the incoming travel figures that South Korea keeps for Japanese visitors. Standardized question structure, back-translation, and logic checks of questions may also be useful research strategies. It has also been recommended that samples be based on future demographic profiles to account for Asia’s high rate of change. Finally, as more companies enter Asia, the marketing research capabilities and infrastructure in the region will improve.

ChaPter 4 ó Conducting Marketing research

bias than in a Western culture. Chinese have been observed to use their group as a reference for expressed opinions rather than speaking their own mind. Does using a 5- or 7-point scale lead to more responses in the mid-point of the scale in China than in the United States? Japanese managers have been found to not adequately understand the scale anchors “agree/disagree” that are commonly used in Likert-type scales. Further, semantic differential scales are difficult to construct in the Chinese language as the language does not readily provide good antonyms. Chinese have a problem answering hypothetical questions as well. Quality control also varies. While the standard of market research in Japan matches the best standards worldwide, this may not be true for all of Asia, especially those countries where market research has developed in the recent past. In a research commissioned by the Hong Kong Tourism Board, several interviewers were charged with fraud after they were found fabricating the data.

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Because of Asia’s varied languages, some questionnaires come in multiple languages to minimize misunderstanding of what was surveyed.

4.4 Measuring Marketing Productivity Marketing research must assess the efficiency and effectiveness of marketing activities. Two complementary approaches to measure marketing productivity are: (1) marketing metrics to assess marketing effects, and (2) marketing mix modeling to estimate causal relationships and how marketing activity affects outcomes. Marketing dashboards are a structured way to disseminate the insights gleaned from these two approaches within the organization.

4.4.1 Marketing Metrics Marketers employ a wide variety of measures to assess marketing effects. Marketing metrics is the set of measures that help firms to quantify, compare, and interpret their marketing performance.

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Tim Ambler believes firms must give priority to measuring and reporting marketing performance through marketing metrics. He believes evaluation can be split into two parts: (1) short-term results, and (2) changes in brand equity. Short-term results often reflect profit-andloss concerns as shown by sales turnover, shareholder value, or some combination of the two. Brand-equity measures include awareness, market share, relative price, number of complaints, distribution and availability, total number of customers, perceived quality, and loyalty/retention. Ambler also recommends developing employee measures and metrics, arguing that “end users are the ultimate customers, but your own staff are your first; you need to measure the health of the internal market.” Table 4.3 summarizes a list of popular internal and external metrics from Ambler’s survey. Table 4.3 Sample Marketing Metrics I. External

II. Internal

Awareness

Awareness of goals

Market share (volume or value)

Commitment to goals

Relative price (market share value/volume)

Active innovation support

Number of complaints (level of dissatisfaction)

Resource adequacy

Consumer satisfaction

Staffing/skill levels

Distribution/availability

Desire to learn

Total number of customers

Willingness to change

Perceived quality/esteem

Freedom to fail

Loyalty/retention

Autonomy

Relative perceived quality

Relative employee satisfaction

Sources: Tim Ambler, “What Does Marketing Success Look Like?” Marketing Management, Spring 2001, pp. 13–18

4.4.2 Marketing-Mix Modeling Marketing accountability also means that marketers can more precisely estimate the effects of different marketing investments. Marketing-mix models analyze data from a variety of sources, such as retailer scanner data, company shipment data, pricing, media and promotion spending data, to understand more precisely the effects of specific marketing activities. To deepen understanding, multivariate analyses are conducted to sort through how each marketing element influences marketing outcomes of interest such as brand sales or market share.21

1.

Marketing-mix modeling focuses on incremental growth instead of baseline sales or longterm effects.

2.

Despite their importance, the integration of metrics such as customer satisfaction, awareness, and brand equity into marketing-mix modeling is limited.

3.

Marketing-mix modeling generally fails to incorporate metrics related to competitors, the trade, or the sales force (the average business spends far more on the sales force and trade promotion than on advertising or consumer promotion).

4.4.3 Marketing Dashboards Firms are also employing organizational processes and systems to make sure they maximize the value of all these different metrics. Management can assemble a summary set of relevant internal and external measures in a marketing dashboard for synthesis and interpretation. Marketing dashboards are like the instrument panel in a car or plane, visually displaying real-time indicators to ensure proper functioning. They are only as good as the information on which they are based, but sophisticated visualization tools are helping bring data alive to improve understanding and analysis.24 Some companies are also appointing marketing controllers to review budget items and expenses. Increasingly, these controllers are using business intelligence software to create digital versions of marketing dashboards that aggregate data from disparate internal and external sources. As input to the marketing dashboard, companies should include two key market-based scorecards that reflect performance and provide possible early warning signals: A customer-performance scorecard records how well the company is doing year after year on such customer-based measures as those shown in Table 4.4. Management should set norms for each measure and take action when results get out of bounds. A stakeholder-performance scorecard tracks the satisfaction of various constituencies who have a critical interest in and impact on the company’s performance: employees, suppliers, banks, distributors, retailers, and stockholders. Again, management should take action when one or more groups register increased or above-norm levels of dissatisfaction.25 Table 4.4 Sample Customer-Performance Scorecard Measures Percentage of new customers to average number of customers. Percentage of lost customers to average number of customers. Percentage of win-back customers to average number of customers. Percentage of customers falling into very dissatisfied, dissatisfied, neutral, satisfied, and very satisfied categories. Percentage of customers who say they would repurchase the product. Percentage of customers who say they would recommend the product to others.

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Especially popular with packaged goods marketers such as Procter & Gamble, Clorox, and Colgate, the findings from marketing-mix modeling are used to allocate or re-allocate expenditures. Analyses explore which part of ad budgets is wasted, what optimal spending levels are, and what minimum investment levels should be.22 Although marketing-mix modeling helps to isolate effects, it is less effective at assessing how different marketing elements work in combination. David Reibstein notes three other shortcomings:23

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Percentage of target market customers who have brand awareness or recall. Percentage of customers who say that the company’s product is the most preferred in its category. Percentage of customers who correctly identify the brand’s intended positioning and differentiation. Average perception of company’s product quality relative to chief competitor. Average perception of company’s service quality relative to chief competitor. Some executives worry that they will miss the big picture if they focus too much on a set of numbers on a dashboard. Some critics are concerned about privacy and the pressure the technique places on employees. But most experts feel the rewards offset the risks.26 Marketing Insight: Marketing Dashboards to Improve Effectiveness and Efficiency provides practical advice about the development of these marketing tools.

MARkETING DASHBOARDS TO IMPROVE EFFECTIVENESS AND EFFICIENCy

MARKETING INSIGHT

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Marketing consultant Pat LaPointe sees marketing dashboards as providing all the up-to-the-minute information necessary to run the business operations for a company—such as sales versus forecast, distribution channel effectiveness, brand equity evolution, and human capital development. According to LaPointe, an effective dashboard will focus thinking, improve internal communications, and reveal where marketing investments are paying off and where they are not. LaPointe observes four common measurement “pathways” marketers are pursuing today (see Figure 4.2): The customer metrics pathway looks at how prospects become customers, from awareness to preference to trial to repeat purchase. This area also examines how the customer experience contributes to the perception of value and competitive advantage.

The unit metrics pathway reflects what marketers know about sales of product/service units—how much is sold by product line and/or by geography; the marketing cost per unit sold as an efficiency yardstick; and where and how margin is optimized in terms of characteristics of the product line or distribution channel. The cash-flow metrics pathway focuses on how well marketing expenditures are achieving short-term returns. Program and campaign ROI models measure the immediate impact or net present value of profits expected from a given investment. The brand metrics pathway tracks the development of the longer-term impact of marketing through brand equity measures that assess both the perceptual health of the brand from customer and prospective customer perspectives as well as the overall financial health of the brand.

Technically Sound But Ad-Hoc Efforts Across Multiple Measurement Silos

Customer Metrics

Unit Metrics

Cash-Flow Metrics

Brand Metrics

Hierarchy of Effects

Product/Category Sales

Program and Campaign ROI

Brand Imagery & Attributes

Satisfaction/ Experience

Marketing Cost per Unit

Media Mix Models

Equity Drivers

Attitude/Behavior Segment Migration

Margin Optimization

Initiative Portfolio Optimization

Financial Valuation

Figure 4.2 Marketing Measurement Pathway

100s of Reports But Very Little Knowledge Integration or Learning Synthesis

LaPointe feels a marketing dashboard can present insights from all the pathways in a graphically related view that helps management see subtle links between them. A well-constructed dashboard can have a series of “tabs” that allow the user to toggle easily between different “families” of metrics organized by customer, product, brand, experience,

channels, efficiency, organizational development, or macroenvironmental factors. Each tab presents the three or four most insightful metrics, with data filtered by business unit, geography, or customer segment based upon the users’ needs (see Figure 4.3 for example).

ChaPter 4 ó Conducting Marketing research 131 Figure 4.3 Example of a Marketing Dashboard Source: Adapted from Patrick LaPointe, Marketing by the Dashboard Light, Association of National Advertisers, 2005, www.MarketingNPV.com; Patrick LaPointe, Marketing by the Dashboard Light—How to Get More Insight, Foresight, and Accountability from your Marketing Investments. © 2005, Patrick LaPointe.

Summary 4.1 THE MARKETING RESEARCH SYSTEM

What is marketing research? It is the systematic design, collection, analysis, and reporting of findings relevant to a marketing situation a company faces. Companies often hire outside firms to do their market research. These firms fall into three categories: syndicated-service research firms, custom marketing research firms, and specialty-line marketing research firms. Smaller companies without the budget for hiring can engage students or professors to create projects, use the Internet, and keep a close tab on their rivals as means for conducting research.

4.2 THE MARKETING RESEARCH PROCESS

Once the approach has been determined, the instrument of research has to be decided. Questionnaires are the most common instrument due to their flexibility and ease of administration. Qualitative measures is sometimes preferred due to its freedom of responses. It entails several techniques: observing and keeping track of customers, extreme user interviews, and using a diverse group of respondents. Technological devices include sophisticated means like galvanometers and body sensors to determine the emotional responses of those researched. The researcher then designs a sampling plan, taking into consideration the target sample, the sample size, and the selection procedure of the respondents. There are several means by which the researcher can contact the subject: through a mail questionnaire, by telephone, or face-to-face or online interviews. ■

■

■

The marketing research process comprises six steps.

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Step 1: Defining the problem Marketing managers should not define the problem too broadly or narrowly. Marketing managers must also weigh the cost of the research against other alternatives. The purposes of research range from exploratory to descriptive to causal. Step 2: Developing the research plan The cost of the most efficient research plan cannot exceed the projected long-term yield the plan brings about. Data sources can be split into primary and secondary: Primary research is research that a company starts from scratch and usually has proprietary ownership over. Secondary research is research that has already been done, and is usually the starting point of another research due to its availability and lower costs. When secondary data is inadequate to address all the issues, primary data will have to be collected via six research approaches: observational research, ethnographic research, focus group research, survey research, behavioral data research, and experimental research. ■

■

Step 3: Collecting the information Data collection occasionally runs into major problems when respondents are not contactable, biased, or uncooperative. However, methods are rapidly improving with the aid of computers and technology. The personal information of respondents and their anonymity should be protected by the researchers. Step 4: Analyzing the information This step involves extracting trends, behaviors, and findings from the information. Advanced statistical techniques are utilized for more detailed analyses. Step 5: Presenting the findings The researcher will then present the findings to the company, which will include the consolidated respondent opinions, proposed marketing measures, and the accompanying benefits and costs of such measures. Step 6: Making the decision The marketing manager will then make the decision on whether the findings make sense, whether to adopt the measures suggested, or even whether to undertake more research.

4.3 MARKETING RESEARCH IN ASIA

It can also be differentiated into external (consumer loyalty and satisfaction, distribution, and perceived quality) and internal (goals, staffing, and innovation) metrics. What does marketing-mix modeling achieve? It analyzes data from several sources to discern the effects of specific marketing activities. The findings are then used to streamline the company’s budget, eliminating excess expenditure on inefficient practices. Why do companies use marketing dashboards? It comprises indicators which analyze the information provided to track the efficiency of the metrics employed. Companies use customer and stakeholder-performance scorecards to track their satisfaction levels. The Marketing Measurement Pathway describes four avenues that companies are pursuing to improve effectiveness and efficiency. See Figure A Marketing Measurement Pathway.

4.4 MEASURING MARKET PRODUCTIVITY

What is marketing metrics? It is a set of measures that help firms to quantify, compare, and interpret their marketing performance. It can be split into short- and long-term evaluation and long-term evaluation of results.

Technically Sound But Ad-Hoc Efforts Across Multiple Measurement Silos

ChaPter 4 ó Conducting Marketing research

In Asia, research instruments are not fully used. Even with secondary data, the standards of data collection and respondent accuracy are not similar across the region. Asian cultures tend to answer according to what is generally accepted rather than express their true opinions. The same research conducted in different regions might face the problem of language barrier because the same question can have varying meanings or connotations across different languages.

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Customer Metrics

Unit Metrics

Cash-Flow Metrics

Brand Metrics

Hierarchy of Effects

Product/Category Sales

Program and Campaign ROI

Brand Imagery & Attributes

Satisfaction/ Experience

Marketing Cost per Unit

Media Mix Models

Equity Drivers

Attitude/Behavior Segment Migration

Margin Optimization

Initiative Portfolio Optimization

Financial Valuation

Figure A Marketing Measurement Pathway

100s of Reports But Very Little Knowledge Integration or Learning Synthesis

Applications Marketing Debate—What is the Best Type of Marketing Research? Many market researchers have their favorite research approaches or techniques, although different researchers often have different preferences. Some researchers maintain that the only way to really learn about consumers or brands is through in-depth, qualitative research. Others contend that the only legitimate and defensible form of marketing research involves quantitative measures. Take a position: Marketing research should be quantitative versus Marketing research should be qualitative.

Marketing Discussion When was the last time you participated in a survey? How helpful do you think was the information you provided? How could the research have been done differently to make it more effective?

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Marketing Lesson NESTLÉ MALAYSIA: LACTOGEN 4 Nestlé Malaysia began its operations in 1912 as the AngloSwiss Condensed Milk Company in Penang. Launching its production facilities in 1962, Nestlé Malaysia has built an extensive distribution network in the country for its goods, which include instant cup noodles, children’s breakfast cereals, coffee whiteners, dried ready meals, dehydrated soup, and dried baby food. Nestlé Malaysia tailors its products to best serve the local needs of the majority Muslim population. It was the first multinational corporation to request halal certification voluntarily for all its products when the certification was initiated in Malaysia in 1994. It now has an internal Nestlé Halal Committee that scrutinizes and vets all aspects of production to ensure compliance with the halal certification. By adopting this practice early, Nestlé Malaysia gained brand loyalty amongst the majority of the local Muslims as a brand that manufactures, imports, and distributes products in accordance with the strict regulations required by their religion. Boasting a strong product line consisting of over 300 halal food products in Malaysia, it comes as

Table 1 Nestlé (Malaysia) Bhd Competitive Position 2014 Product Type Baby Food Breakfast Cereals Chocolate Confectionery Sugar Confectionery Drinking Milk Products Yoghurt and Sour Milk Other Diary Dried Processed Food Ice Cream Meal Replacement Noodles Pasta Sauces, Dressings, and Condiments Soup

Retail Value Share (%) 19 39.8 21.8 2.7 33.6 25.6 3 10 35.5 1.1 41 2.4 12.9 6.7

Rank 2 1 2 11 1 2 4 3 1 6 1 5 1 3

Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Nestle Malaysia Bhd 10%

3% 4% 3% 3%

Dutch Lady Milk Industries Bhd Serba Wangi Sdn Bhd Lam Soon (M) Bhd

77%

Jasmine Food Corp Sdn Bhd Others

Figure 1 Company Market Shares of Packaged Food in 2014 (%) Source: Euromonitor International

As Table 1 shows, despite leading in product areas such as noodles with a 41 percent market share and the diary segment with a 26 percent market share, Nestlé Malaysia ranked second in baby food with a 19 percent market share. It wanted to do better in this market. The Nestlé team discovered that its current key product offering in the market for baby food formula powder, Lactogen 1-3, for children aged one to three years, was not generating sufficient revenue within the baby-food sector. This can be seen in Table 2, which shows that the retail value of Lactogen has been declining since 2011.

Table 2 Percentage of Brand Share of Nutrition/Staple (by Retail Value) Product/Brand Lactogen

Company Nestlé (Malaysia) Bhd

2011 1.02

2012 1.00

2013 0.98

2014 0.97

Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

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no surprise that Nestlé Malaysia houses many trusted household brands such as Nescafé, Milo, Maggi, Nespray, and Kit Kat. Nestlé Malaysia is 73 percent owned by Nestlé SA and draws its research and development from the Global Nestlé Research Centre in Lausanne, Switzerland. As shown in Figure 1, it leads in overall packaged food in Malaysia, with a market share of 10.34 percent in 2014. Table 1 shows Nestlé Malaysia’s competitive rankings among its various product types.

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Baby food is expected to have expected sales of about 2,062 million ringgit in 2019, up from an estimated 1,667 million ringgit in 2014, as shown by Table 3. For

an important market such as this, Nestlé realized that it was not tapping into this potential growth opportunity.

Table 3 Forecast Sales of Baby Food MYR million Baby Food 

2014 1,667.70

2015 1,735.17

2016 1,810.73

2017 1,891.19

2018 1,973.96

2019 2,062.33

Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

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By offering a new product targeting the average mainstream Malay mother who was concerned with providing healthy food to her children, Nestlé Malaysia not only satisfied their key concern but also offered a product that would be deemed affordable. About 75 percent of the Malaysian population is made up of Malays. Nestlé Malaysia reached out to Malay mothers by having health care professionals working in government clinics explain the nutritional benefits of Lactogen 4 to them. This added an air of credibility to its new product among rural Malaysians who were not wellversed in food nutrition. Nestlé also organized roadshows during which these professionals explained the benefits to the locals. Lactogen 4 remains one of Nestlé’s most successful product launches in the southeast Asia region, with sales growing by over 74 percent one year after its launch. According to the Nielsen Breakthrough Innovation Report, Lactogen 4 is one of the top three most successful brands in southeast Asia. As such, Nestlé Malaysia is poised to increase its sales with its timely and wellresearched breakthrough in the baby food market in Malaysia. Tables 4 and 5 show the market share and pricing data respectively.

Nestlé research revealed that parents were switching to other brands to provide for their children’s formula powder after the age of three. Having used the Nestlé Lactogen 1-3 formula powder for the first three years, parents had discovered that there were no available options under the Nestlé brand. Seeing the need to expand its current Lactogen range to children above the age of three, Nestlé launched Lactogen 4 formula powder, catering to a new target market of parents of children beyond the age of three. The launch of this new product was not without sound research backing by Nestlé that focused on a fundamental need—Malaysian mothers wanted their children to be healthy, happy, and free of digestive problems. Nestlé wanted to address these mothers’ concerns through the creation of Lactogen 4, which claimed to have nutrients that prevented children’s digestive pains or constipation. Research on consumer behavior trends by Euromonitor has shown that parents want to buy baby food that has a high nutritional value and helps to develop mental health and growth. However, the research also revealed that parents were value-conscious as well and had an abundance of brands to choose from. It was seen that brands with premium pricing tended to lose out to those that were viewed as offering more value for money by consumers.

Table 4 Brand Market Shares of Baby Food by Company (%) Company/Brand Danone Dumex (M) Sdn Bhd - Dumex - Mamil Gold - Mamex - Bebelac Nestlé (Malaysia) Bhd - Lactogen - Nestlé - Nespray - Nan - Neslac

2011

2012

2013

2014

24.27 1.45 1.54 0.25

24.39 1.45 1.54 0.24

25.9 1.49 1.55 0.23

26.2 1.51 1.51 0.22

10.1 4.24 3.72 1.66 3.35

9.86 4.19 3.47 1.64 3.31

9.69 4.11 3.67 1.67

9.55 4.01 3.6 1.67

-

-

14.82

15.76

15.86

0.7

0.68

0.67

5.45 2.6 1.79 1.61 1.32

5.84 2.75 1.86 1.61 1.32

5.97 2.84 1.87 1.63 1.33

2.29 1.74 1.74 1.7 0.33

2.46 1.83 1.83 1.65 0.32

2.44 1.8 1.8 1.63 0.31

1.61 1.59 0.91 0.75

1.66 1.6 0.89 0.71

1.62 1.57 0.88 0.68

2.08 0.65

2.18 0.69

2.2 0.7

1.43 0.57

1.42 0.57

1.41 0.55

1.78 0.44 2.01 100.00

1.69 0.42 1.95 100.00

1.63 0.41 1.93

ChaPter 4 ó Conducting Marketing research

Dutch Lady Milk Industries Bhd - Dutch Lady 14.75 - Frisolac 0.71 Bristol-Myers Squibb (M) Sdn Bhd - Enfagrow 5.05 - Enfakid 2.41 - Enfalac 1.71 - Enfapro 1.6 - Sustagen 1.32 Abbott Laboratories (M) Sdn Bhd - Pediasure 2.24 - Gain 1.75 - Grow 1.75 - Similac 1.78 - Isomil 0.34 Wyeth (M) Sdn Bhd - Promise 1.53 - Progress 1.51 - S-26 0.94 - Promil 0.78 Fonterra Brands (M) Sdn Bhd - Anmum 2.1 - Fernleaf 0.7 Heinz (M) Sdn Bhd - Heinz 1.43 - Farley’s 0.57 Snow Brand Marketing Sdn Bhd - Snow Brand 1.88 Kalbe Pharma (M) Sdn Bhd 0.46 Others 2.11 Total 100.00

137

100.00

Source: Euromonitor International

Table 5 Pricing of Nestlé Lactogen’s Existing Product Line and of Its Competitors (by weight and category) Powder Standard Milk Formula

Powder Follow-on Milk Formula

Power Toddler Milk Formula

Pack Size (g)

Price (MYR)

Lactogen 1

Nestlé (M) Bhd

-

-

-

-

350

Lactogen 1

Nestlé (M) Bhd

-

-

-

-

650

18.5

Dumex Active Step 4

Danone Dumex (M) Sdn Bhd

-

-

-

-

1800

88.9

Dumex Dulac

Danone Dumex (M) Sdn Bhd

-

-

-

-

1600

47.3

Dutch Lady 1

Dutch Lady Milk Industries Bhd

-

-

-

-

650

20.2

-

-

-

9.26

Lactogen 2

Nestlé (M) Bhd

-

-

650

18.5

Lactogen 2

Nestlé (M) Bhd

-

-

600

16.6

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-

-

Dumex Pro

Danone Dumex (M) Sdn Bhd

-

-

1000

26.5

-

-

Dumex Pro

Danone Dumex (M) Sdn Bhd

-

-

1600

47.3

-

-

Dumex Pro

Danone Dumex (M) Sdn Bhd

-

-

650

19.4

-

-

Dutch Lady 2 Dutch Lady Milk Industries Bhd

-

-

1000

27.2

-

-

Dutch Lady 2 Dutch Lady Milk Industries Bhd

-

-

650

17.475

-

-

Dutch Lady 2 Dutch Lady Milk Industries Bhd

-

-

650

18.5

-

-

-

-

Lactogen 3

Nestlé (M) Bhd

600

18.9

-

-

-

-

Lactogen 3

Nestlé (M) Bhd

650

18.9

-

-

-

-

Lactogen 3

Nestlé (M) Bhd

1300

32.8

-

-

-

-

Dumex Dugro Danone Dumex 3 Plus (M) Sdn Bhd

650

18.2

-

-

-

-

Dumex Dugro Danone Dumex 3 Plus (M) Sdn Bhd

900

19.8

-

-

-

-

Dutch Lady 456

1000

27.9

-

-

-

-

Dutch Lady 456

Dutch Lady Milk Industries Bhd Dutch Lady Milk Industries Bhd

650

16.99

Source: Euromonitor International

Questions 1. What research approach should Nestlé Malaysia have used in developing Lactogen 4? Why? 2. Which would have been the most efficient and reliable contact method for Nestlé Malaysia in gathering its data? 3. What marketing communication tools could Nestlé Malaysia have used to convey the benefits of Lactogen 4 to its potential customers? 4. Imagine that you are Nestlé Malaysia’s local competitor. Outline the steps in the marketing research process that your company would undertake. Sources: “Nestlé Malaysia Proudly Serves the International Halal Market,” New Straits Times, 6 May 2008, p. 9; Nielson Breakthrough Innovation Report, Southeast Asia 1st Edition, 2014; “Nestlé (Malaysia) Bhd”, Euromonitor International, accessed on 1 July 2015; “Baby Food in Malaysia,” Euromonitor International, accessed on 1 July 2015; “Packaged Food in Malaysia,” Euromonitor International, accessed on 1 July 2015; www.Nestlé.com.my.

Marketing Lesson How does Procter & Gamble (P&G), the manufacturer of such leading consumer products as Tide, Crest, Pantene, and Gillette stay on top? It understands its consumers. P&G has a market research function called Consumer and Market Knowledge (CMK). Its goal is to bring consumer insights to decision making at all levels. These CMKs are set up to work for P&G businesses worldwide, including Global Business Units (GBUs) and Market Development Organizations (MDOs). GBUs focus on long-term brand equity and initiative development, while MDOs focus on small market expertise and retail partnerships. The CMK groups work in several ways. In partnership with the line businesses, CMKs develop proprietary research methods, apply their core research competencies for expert application and cross-business learning, and share their services and infrastructure. Some of the research methods are the traditional ones such as brand tracking, while leading edge research approaches are also invented. The latter includes experiential consumer contacts, proprietary modeling methods, and scenarioplanning or knowledge synthesis events. Findings from such research influence not only day-today operational choices such as what product formulations to launch, but also long-term plans such as what corporate acquisitions to make for a complete product portfolio. Here are two examples of how P&G’s research influenced their marketing decisions—Pampers in China and India, and Venus razor in the United States. More than a decade ago, when P&G launched Pampers in China, its challenge was not to convince parents that they were superior to another brand of disposable diapers. Its challenge was to convince them that they needed diapers. The cultural norm then was for babies to wear cloth diapers, if at all. In China, toilet training begins as early as six months. Children wear kaidangku (开裆裤)—pants with an opening that let children squat and relieve themselves. Initially, P&G did not understand the China market. It wrongly assumed that Chinese parents would buy its diapers if they were cheap enough. Hence, it introduced a lower-quality product. Far from being comfortable, the diapers felt plasticky, not soft. It took a while before P&G

ChaPter 4 ó Conducting Marketing research

PROCTER & GAMBLE

realized that softness is just as important to mothers in developing markets as it is in developed markets. It then revamped its diapers, making them softer with a less plastic feel, and increased the absorption capability. Each diaper was sold at 10 cents, less than half the cost of a Pampers diaper in the United States. Still, P&G had to overcome the cultural barrier of having mainland babies wear diapers. It conducted two exhaustive experiments with the Beijing Children’s Hospital’s Sleep Research Center, involving 6,800 home visits and more than 1,000 babies in eight Chinese cities. Its research findings revealed that compared to cloth diapers, babies who slept in Pampers disposable diapers fell asleep 30 percent faster and slept an extra 30 minutes every night versus those using cloth. By this time, P&G understood that Chinese parents were obsessed with academic achievement. P&G used this understanding to its advantage by linking extra sleep to improved cognitive development. The scientific results were used to drive P&G’s “Golden Sleep” campaign. It included mass carnivals and in-store campaigns in China’s urban areas. A viral campaign on the Pampers Chinese Web site asked parents to upload pictures of their sleeping babies to reinforce the campaign message of a good sleep. Some 200,000 photos were received. P&G used them to create a 660 square meter-photomontage at a retail store in Shanghai. The campaign also featured the scientific findings such as “Baby Sleeps with 50% Less Disruption” and “Baby Falls Asleep 30% Faster.” The campaign has been lauded as one that broke through the clutter without appearing paternalistic. The scientific backing and the idea that Pampers can help give children an edge distinguished Pampers from its competition. Pampers is now the leading brand of disposable diapers in China. In India, P&G also successfully wooed mothers with its marketing insights. After speaking to consumers and retailers in the market with the most number of babies, Pampers developed a bikini design that suited India’s tropical heat. To allow frequent checks by mothers, Pampers also introduced an easily re-sealable fastening system in place of tapes which wear out more quickly. Another example of P&G’s market research at work is its launch of Venus razor under its Gillette brand. The Venus razor is the most successful female shaving line ever, holding more than 50 percent of the global women’s shaving market. P&G’s insightful consumer research influenced the product design, packaging, and advertising cues that better satisfied female shaving needs. Gillette conducted extensive consumer research and performed numerous market tests before launching Venus. Previously, women’s razors were colored or repackaged versions of men’s razors. Venus is a departure from previous women’s razors. Its research

139

showed that women change their grip on a razor about 30 times during each shaving session. Given this information on usage behavior, Gillette designed the Venus with a wide, sculpted rubberized handle that offers superior grip and control. For convenience, the oval-shaped blade comes in a storage case that can stick to shower walls. Gillette also observed that women were reluctant to leave the shower

to replace a dull blade. Therefore, the storage case was made to hold spare blade cartridges. Additionally, market research revealed that there are four distinct segments of women shavers—perfect shave seekers (no missed hairs), skin pamperers, pragmatic functionalists, and EZ seekers. Based on their profiles, Gillette developed Venus products for each of them.

Questions 1. How would market research be different or similar for P&G in countries such as China versus the United States where cultural norms and economic characteristics may be different? 2. What do the two examples tell you about the quality of market research at P&G? Do you think P&G should outsource such market research and focus only on developing the products? 3. If market research reveals differences in consumer preferences from country to country, do you think P&G should modify its products accordingly or ignore the research findings and offer a standardized product? Sources: Mya Frazier, “How P&G Brought the Diaper Revolution to China,” www.bnet.com, 7 January 2010; Erica Tay, “P&G Asia Chief Aims to Grow Market with Low-Cost, Quality Wares,” www.asiaone.com.sg, 24 September 2007; 1994 Survey of Market Research, eds. Thomas Kinnear and Ann Root (Los Angeles: American Marketing Association, 1994); Jenn Abelson, “Gillette Sharpens Its Focus on Women,” Boston Globe, 4 January 2009; A.G. Lafley, interview, “It Was a No-Brainer,” Fortune, 21 February 2005, p. 96; Naomi Aoki, “Gillette Hopes to Create a Buzz with Vibrating Women’s Razor,” Boston Globe, 17 December 2004; Chris Reidy, “The Unveiling of a New Venus,” Boston Globe, 3 November 2000; Natalie Zmuda, “Tropicana Line’s Sales Plunge 20% Post-Rebranding,” Advertising Age, 2 April 2009.

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PART 3

Connecting with Customers

5

C H A P T E R

T

Creating Customer Value, Satisfaction, and Loyalty Today, companies face their toughest competition ever. The cornerstone of a well-conceived marketing orientation is strong customer relationships. Marketers must connect with customers—informing, engaging, and maybe even energizing them in the process. Customer-centered companies are adept at building customer relationships, not just products; they are skilled in market engineering, not just product engineering. Technology plays an increasing role for many companies, offering new ways to satisfy customer needs and build loyalty.

he Ritz-Carlton hotel chain, owned by Marriott International, is known throughout the world for its singular focus on providing guests with luxurious amenities and exceptional service. Each of its 38,000 employees has more than 100 hours of customer service training annually; he or she is the customer service department and will break away from his or her duties to help a guest. This customer-centered approach is expressed by the company’s motto: “We are ladies and gentlemen serving ladies and gentlemen.” Guests at any of the 79 Ritz-Carlton hotels in 26 countries notice the brand’s famed personal touch immediately upon checking in, when they are greeted by name. To ensure guests’ total experience at the hotel is of the utmost quality, Ritz-Carlton creates a daily “Service Quality Index” (SQI) at each of its locations, so employees can continually monitor key guest service processes and swiftly address potential problem areas.

At the brand’s corporate headquarters in Maryland, SQIs for each hotel are displayed in a central command room, allowing instant analysis of how well a single location is performing. Other customer service initiatives include the CLASS (Customer Loyalty Anticipation Satisfaction System) database, which contains the preferences and requirements of repeat Ritz-Carlton guests; and a revolutionary room maintenance system known as CARE (Clean and Repair Everything), which ensures all guestrooms are free of defects every 90 days. These initiatives helped Ritz-Carlton win its second Malcolm Baldrige National Quality Award in 1999, becoming the only service company to win it twice. Its dedication to its customers also enables Ritz-Carlton to forge lasting relationships with them, as evidenced by its Beijing, Kuala Lumpur, Shanghai, Singapore, and Tokyo hotels ranked in Condé Nast Traveler Gold List 2012.1

In this chapter, we will address the following questions: 1. What are customer value, satisfaction, and loyalty, and how can companies deliver them? 2. What is the lifetime value of customers and how can marketers maximize it? 3. How can companies cultivate strong customer relationships? 4. How can companies both attract and retain customers?

A

s Ritz-Carlton’s experience shows, successful marketers are the ones that fully satisfy their customers. In this chapter, we detail how companies can go about winning customers and beating competitors. The answer lies largely in doing a better job of meeting or exceeding customer expectations.

5.1 Building Customer Value, Satisfaction, and Loyalty Managers who believe the customer is the company’s only true “profit center” consider the traditional organization chart in Figure 5.1(a)—a pyramid with the president at the top, management in the middle, and frontline people and customers at the bottom—obsolete. Successful marketing companies invert the chart (see Figure 5.1(b)). At the top are customers; next in importance are frontline people who meet, serve, and satisfy customers; under them are the middle managers, whose job is to support the front-line people so that they can serve customers well; and at the base is top management, whose job is to hire and support good middle managers. We have added customers along the sides of Figure 5.1(b) to indicate that managers at every level must be personally involved in knowing, meeting, and serving customers.

(b) Modern Customer-Oriented Organization Chart

Top management

Frontline people

T

U

R S

C

E

CUSTOMERS

Top management

S

T

M

Part 3 ó Connecting with Customers

Middle management

O

Frontline people

O

144

M

S

E

U

R

C

Middle management

CUSTOMERS

S

(a) Traditional Organization Chart

Figure 5.1 Traditional Organization Chart versus Modern Customer-oriented Organization Chart

Some companies have been founded with the customer-on-top business model and customer advocacy has been their strategy—and competitive advantage—all along. With the rise of digital technologies such as the Internet, increasingly informed consumers today expect companies to do more than connect with them, more than satisfy them, and even more than delight them. They expect companies to listen and respond to them.

5.1.1 Customer Perceived Value Consumers are more educated and informed than ever, and they have the tools to verify companies’ claims and seek out superior alternatives.2 Dell—Dell rode to success by offering low-priced computers, logical efficiency, and after-sales service. The firm’s maniacal focus on low costs has been a key ingredient in its success. When the company shifted its customer-service call centers to India and the Philippines to cut costs, however, understaffing frequently led to 30-minute waits for customers. Almost half the calls required at least one transfer. To discourage customer

calls, Dell even removed its toll-free service number from its Web site. With customer satisfaction slipping, and competitors matching its product quality and prices and offering improved service, Dell’s market share declined sharply. Dell ended up hiring more North American call center employees. “The team was managing cost instead of managing service and quality,” Michael Dell confesses.3

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

When Dell cut costs too much on its customer service, customer satisfaction dropped and the company’s stock price sank.

How do customers ultimately make choices? Customers tend to be value-maximizers, within the bounds of search costs and limited knowledge, mobility, and income. Customers estimate which offer will deliver the most perceived value and act on it (see Figure 5.2). Whether or not the offer lives up to expectation affects customer satisfaction and the probability they will purchase the product again. Customer perceived value (CPV) is the difference between the prospective customer’s evaluation of all the benefits and all the costs of an offering and the perceived alternatives. Total customer value is the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering. Total customer cost is the bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the given market offering, including monetary, time, energy, and psychic costs. Customer perceived value is thus based on the difference between what the customer gets and what he or she gives for different possible choices. The customer gets benefits and assumes costs. The marketer can increase the value of the customer offering by some combination of raising functional or emotional benefits and/or reducing one or more of the various types of costs. The customer who is choosing between two value offerings, V1 and V2, will examine the ratio V1:V2 and favor V1 if the ratio is larger than one, favor V2 if the ratio is smaller than one, and will be indifferent if the ratio equals one.

Applying Value Concepts Suppose the buyer for a large construction company wants to buy a tractor from Caterpillar or Komatsu. The competing salespeople carefully describe their respective offers. The buyer wants to use the tractor in residential construction work. He would like the tractor to deliver certain levels of reliability, durability, performance, and resale value. He evaluates the tractors and decides that Caterpillar has a higher product value based on perceptions of those attributes. He also perceives differences in the accompanying services—delivery, training, and maintenance—and decides that Caterpillar provides better service and more knowledgeable and responsive personnel. Finally, he places higher value on Caterpillar’s corporate image. He adds up all the values from these four sources—product, services, personnel, and image—and perceives Caterpillar as delivering greater customer benefits.

145

CustomerDelivered Value

Total customer value

Total customer cost

Product value

Monetary cost

Services value

Time cost

Personnel value

Energy cost

Image value

Psychic cost

Figure 5.2 Determinants of Customer-Delivered Value

Does he buy the Caterpillar tractor? Not necessarily. He also examines his total cost of transacting with Caterpillar versus Komatsu, which consists of more than the money. As Adam Smith observed over two centuries ago, “The real price of anything is the toil and trouble of acquiring it.” Total customer cost includes the buyer’s time, energy, and psychic costs. The buyer evaluates these elements together with the monetary cost to form a total customer cost. Then the buyer considers whether Caterpillar’s total customer cost is too high in relation to the total customer value it delivers. If it is, the buyer might choose the Komatsu tractor. The buyer will choose whichever source he thinks delivers the highest perceived customer value. Now let us use this decision-making theory to help Caterpillar succeed in selling to this buyer. Caterpillar can improve its offer in three ways. First, it can increase total customer value by improving product, services, personnel, and/or image benefits. Second, it can reduce the buyer’s non-monetary costs by reducing the time, energy, and psychic costs. Third, it can reduce its product’s monetary cost to the buyer. Suppose Caterpillar concludes that the buyer sees its offer as worth $20,000. Further, suppose Caterpillar’s cost of producing the tractor is $14,000. This means that Caterpillar’s offer potentially generates $6,000 over the company’s cost, so Caterpillar needs to charge a price between $14,000 and $20,000. If it charges less than $14,000, it will not cover its costs; if it charges more than $20,000, it will price itself out of the market. The price Caterpillar charges will determine how much value will be delivered to the buyer and how much will flow to Caterpillar. For example, if Caterpillar charges $19,000, it is creating $1,000 of customer perceived value and keeping $5,000 for itself. The lower Caterpillar sets its price, the higher is the customer perceived value and, therefore, the higher is the customer’s incentive to purchase. To win the sale, Caterpillar must offer more customer perceived value than Komatsu does.4 Caterpillar is well aware of the importance of taking a broad view of customer value.

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Caterpillar’s market success is partly a result of how well the firm creates customer value.

Caterpillar—Caterpillar has become a leading firm by maximizing total customer value in the construction-equipment industry, despite challenges from a number of able competitors such as Komatsu, Hitachi, and John Deere. First, Caterpillar produces highperformance equipment known for reliability and durability—key purchase considerations

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

in heavy industrial equipment. The firm also makes it easy for customers to find the right product by providing a full line of construction equipment and a wide range of financial terms. Caterpillar maintains the largest number of independent construction-equipment dealers in the industry. These dealers carry a complete line of Caterpillar products and are typically better trained and perform more reliably than competitors’ dealers. Caterpillar has also built a worldwide parts and service system second to none in the industry. Customers recognize the value Caterpillar creates in its offerings, allowing the firm to command a premium price 10 to 20 percent higher than competitors. Caterpillar’s biggest challenges are a reenergized Komatsu, which has made a strong, push in China, and some supply chain issues in introducing new products.5

Very often, managers conduct a customer value analysis to reveal the company’s strengths and weaknesses relative to those of various competitors. The steps in this analysis are: 1.

Identify the major attributes and benefits that customers value. Customers are asked what attributes, benefits, and performance levels they look for in choosing a product and vendors.

2.

Assess the quantitative importance of the different attributes and benefits. Customers are asked to rate the importance of the different attributes and benefits. If their ratings diverge too much, the marketer should cluster them into different segments.

3.

Assess the company’s and competitors’ performances on the different customer values against their rated importance. Customers describe where they see the company’s and competitors’ performances on each attribute and benefit.

4.

Examine how customers in a specific segment rate the company’s performance against a specific major competitor on an individual attribute or benefit basis. If the company’s offer exceeds the competitor’s offer on all-important attributes and benefits, the company can charge a higher price (thereby earning higher profits), or it can charge the same price and gain more market share.

5.

Monitor customer values over time. The company must periodically redo its studies of customer values and competitors’ standings as the economy, technology, and features change.

Gillette—When Gillette introduced the five-blade Fusion in Japan, its market share jumped from 21 percent to 33 percent. Prior to that, Gillette had stagnant or single-digit growth. What prompted this success? Gillette began to dissect its shortcomings and understand the Japanese market better. While the Japanese were moving toward preferring ads featuring local celebrities and athletes rather than foreign models, Gillette was slow to pick up on this changing trend. It was also targeting at hyper-masculine Western men, which did not go down well with Japanese men. Through its research, Gillette began to understand the market better: Japanese tend to favor electric razors over wet shavers; Japanese men often shower in the evening and shave the next morning; and they shave less frequently than men in other parts of the world. Then, for the first time, Gillette appointed a local to run its Japanese operations. It also intensified its advertising, customized its merchandise, and negotiated better shelf space and long-term displays at stores. One such effort was an alliance with the Japanese barbers’ association to run a shaving bar in the Tokyo financial district. Some barbers even sold Fusion blades and razors in their shops. Gillette’s understanding of its market was evident in the launch of its black and silver version of the Fusion. Following the Japanese trend, Gillette, for the first time, featured local athletes and celebrities like DJ Chris Peppler and swimmer Kosuke Kitajima. Also, the razor was not called Phantom, as it was in the rest of world, because it did not translate well in Japan. Instead, it was called Air.6

147

Gillette adapted to the Japanese market after its research showed that Japanese men shave less frequently than men from other parts of the world; and that they shower in the evening and shave the next morning.

Choice Processes and Implications Some marketers might argue that the process we have described is too rational. Suppose the customer chooses the Komatsu tractor. How can we explain this choice? Here are three possibilities: 1.

The buyer might be under orders to buy at the lowest price. The Caterpillar salesperson’s task is to convince the buyer’s manager that buying on price alone will result in lower longterm profits.

2.

The buyer will retire before the company realizes that the Komatsu tractor is more expensive to operate. The buyer will look good in the short run; he is maximizing personal benefit. The Caterpillar salesperson’s task is to convince other people in the customer company that Caterpillar delivers greater customer value.

3.

The buyer enjoys a long-term friendship with the Komatsu salesperson. In this case, Caterpillar’s salesperson needs to show the buyer that the Komatsu tractor will draw complaints from the tractor operators when they discover its high fuel cost and need for frequent repairs.

The point is clear: Buyers operate under various constraints and occasionally make choices that give more weight to their personal benefit than to the company’s benefit. Customer-perceived value is a useful framework that applies to many situations and yields rich insights:7

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1.

The seller must assess the total customer value and total customer cost associated with each competitor’s offer to know how his or her offer rates in the buyer’s mind.

2.

The seller who is at a customer-perceived value disadvantage has two alternatives: to increase total customer value or to decrease total customer cost. The former calls for strengthening or augmenting the offer’s product, services, personnel, and image benefits. The latter calls for reducing the buyer’s costs by reducing the price, simplifying the ordering and delivery process, or absorbing some buyer risk by offering a warranty.

Delivering High Customer Value Consumers have varying degrees of loyalty to specific brands, stores, and companies. Loyalty is defined as “a deeply held commitment to re-buy or re-patronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior.”8 Table 5.1 displays brands with the greatest degree of customer loyalty according to one 2016 survey.9 Table 5.1 Top 10 Brands in Customer Loyalty Rankings

Brand

Category

1

Google

Search Engines

2

Amazon

Online Retail

3

Apple

Tablets

4

Netflix

Video Sharing

5

Facebook

Social Network

6

Apple

Smartphone

7

Amazon

Tablets

8

YouTube

Social Networking

9

Amazon

Video Streaming

10

WhatsApp

Instant Messaging

Sources: “2016 Customer Loyalty Engagement Index,” www.brandkeys.com

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

The value proposition consists of the who le cluster of benefits the company promises to deliver; it is more than the core positioning of the offering. For example, Volvo’s core positioning has been “safety,” but the buyer is promised more than just a safe car; other benefits include a long-lasting car, good service, and a long warranty period. Basically, the value proposition is a statement about the resulting experience customers will gain from the company’s market offering and from their relationship with the supplier. The brand must represent a promise about the total experience customers can expect. Whether the promise is kept depends on the company’s ability to manage its value-delivery system. The valuedelivery system includes all the experiences the customer will have on the way to obtaining and using the offering. Singapore Airlines (SIA)—SIA continues its efforts to provide customers with an excellent pre- and on-board flight experience. Its online services allow customers to select their seats from those available at the time of booking, as well as check-in from 48 hours up to 2 hours before departure. SIA automatically notifies passengers of flight alerts through text and email messages. Passengers can also access up-to-date information on SIA’s services via their personal digital assistant (PDA) or mobile phone. Firstand business-class passengers enjoy a myriad of exclusive privileges. They are escorted to a reception lounge to relax while check-in is handled by a Premium Services Officer. A private entrance from the lounge leads them directly to immigration customs and then to the boarding gate. A Book the Cook service is available in advance where passengers can order exclusive meals created by its international panel of chefs. Additionally, such passengers will find porters waiting to unload their baggage when they arrive at the airport.10

5.1.2 Total Customer Satisfaction In general, satisfaction is a person’s feelings of pleasure or disappointment resulting from comparing a product’s perceived performance (or outcome) in relation to his or her expectations. If the performance falls short of expectations, the customer is dissatisfied. If the performance matches the expectations, the customer is satisfied. If the performance exceeds expectations, the customer is highly satisfied or delighted.11

149

Although the customer-centered firm seeks to create high customer satisfaction, that is not its ultimate goal. If the company increases customer satisfaction by lowering its price or increasing its services, the result may be lower profits. The company might be able to increase its profitability by means other than increased satisfaction (e.g., by improving manufacturing processes or investing more in R&D). Also, the company has many stakeholders, including employees, dealers, suppliers, and stockholders. Spending more to increase customer satisfaction might divert funds from increasing the satisfaction of other “partners.” Ultimately, the company must operate on the philosophy that it is trying to deliver a high level of customer satisfaction subject to delivering acceptable levels of satisfaction to the other stakeholders, given its total resources. How do buyers form their expectations? From past buying experience, friends’ and associates’ advice, and marketers’ and competitors’ information and promises. If marketers raise expectations too high, the buyer is likely to be disappointed. However, if the company sets expectations too low, it will not attract enough buyers (although it will satisfy those who do buy).12 Some of today’s most successful companies are raising expectations and delivering performances to match. Korean automaker Kia found success in the United States by launching low-cost, highquality cars with enough reliability to offer 10-year warranties.

5.1.3 Monitoring Satisfaction Many companies are systematically measuring how well they treat customers, identifying the factors shaping satisfaction, and changing operations and marketing as a result.13 A company would be wise to measure customer satisfaction regularly because one key to customer retention is customer satisfaction. A highly satisfied customer generally stays loyal longer, buys more as the company introduces new products and upgrades existing products, talks

Although low price is Kia’s core position, the value proposition the firm offers customers includes other benefits such as a 10-year warranty.

favorably about the company and its products, pays less attention to competing brands and is less sensitive to price, offers product or service ideas to the company, and costs less to serve than new customers because transactions are routine.14 The link between customer satisfaction and customer loyalty, however, is not proportional. Suppose customer satisfaction is rated on a scale from one to five. At a very low level of customer satisfaction (level one), customers are likely to abandon the company and even bad-mouth it. At levels two to four, customers are fairly satisfied but still find it easy to switch when a better offer comes along. At level five, the customer is very likely to repurchase and even spread good word of mouth about the company. High satisfaction or delight creates an emotional bond with the brand or company, not just a rational preference. Xerox’s senior management found out that its “completely satisfied” customers were six times more likely to repurchase Xerox products over the following 18 months than its “very satisfied” customers.15 The company needs to recognize that customers vary in how they define good delivery. It could mean early delivery, on-time delivery, order completeness, and so on. The company must also realize that two customers can report being “highly satisfied” for different reasons. One may be easily satisfied most of the time and the other might be hard to please but was pleased on this occasion.16

Measurement Techniques Periodic surveys can track customer satisfaction directly. Respondents can also be asked additional questions to measure repurchase intention and the likelihood or willingness to recommend the company and brand to others.

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Companies can monitor the customer loss rate and contact customers who have stopped buying or who have switched to another supplier to learn why this happened. Finally, companies can hire mystery shoppers to pose as potential buyers and report on strong and weak points experienced in buying the company’s and competitors’ products. Managers themselves can enter company and competitor sales situations where they are unknown and experience firsthand the treatment they receive, or phone their own company with questions and complaints to see how the calls are handled.

Influence of Customer Satisfaction For customer-centered companies, customer satisfaction is both a goal and a marketing tool. Companies need to be especially concerned today with their customer satisfaction level because the Internet provides a tool for consumers to spread bad word of mouth—as well as good word of mouth—to the rest of the world. For instance, Chinese consumers are twice as active in posting comments in online forums compared to consumers elsewhere. Unlike their Western counterparts, Chinese consumers do less work online, preferring to play games, chat, or download music or movies. Hence, word-of-mouth communication may be more prevalent among Chinese consumers.17 Some customers set up their own Web sites to air grievances and protests, targeting at high-profile brands.18

5.1.4 Product and Service Quality Satisfaction will also depend on product and service quality. What exactly is quality? Various experts have defined it as “fitness for use,” “conformance to requirements,” “freedom from variation,” and so on.19 We will use the American Society for Quality Control’s definition: Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs.20 This is clearly a customer-centered definition. We can say that the seller has delivered quality whenever the seller’s product or service meets or exceeds the customers’ expectations. A company that satisfies most of its customers’ needs most of the time is called a quality company, but it is important to distinguish between conformance quality and performance quality (or grade). A Lexus provides higher performance quality than a Hyundai: the Lexus rides smoother, goes faster, and lasts longer. Yet both a Lexus and a Hyundai can be said to deliver the same conformance quality if all the units deliver their respective promised quality.

UNIQLO—This trendy Japanese clothing retailer prides itself in selling quality but affordable apparel. Because Japanese shoppers are very demanding when it comes to quality, UNIQLO does not merely outsource production to Chinese factories; it sends specialists in textiles and manufacturing to oversee production. These specialists help UNIQLO compete not only on price points but also on quality.21

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

UNIQLO ensures product quality to keep customers coming back. Specialists are sent to troubleshoot and oversee production.

Impact of Quality Product and service quality, customer satisfaction, and company profitability are intimately connected. Higher levels of quality result in higher levels of customer satisfaction, which support higher prices and (often) lower costs. Studies have shown a high correlation between relative product quality and company profitability.22 Companies that have lowered costs to cut corners have paid the price when the quality of the customer experience suffers.23 Total quality is everyone’s job, just as marketing is everyone’s job. Marketers can help companies identify and deliver high-quality goods and services in the following ways: They correctly identify customers’ needs and requirements. They communicate customer expectations properly to product designers. They make sure customers’ orders are filled correctly and on time. They check that customers have received proper instructions, training, and technical assistance in the use of the product. They stay in touch with customers after the sale to ensure they are, and remain, satisfied. They gather customer ideas for product and service improvements and convey them to the appropriate departments. When marketers do all this, they make substantial contributions to total quality management and customer satisfaction as well as to customer and company profitability.

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5.2 Maximizing Customer Lifetime Value Ultimately, marketing is the art of attracting and keeping profitable customers. Yet every company loses money on some of its customers. The well-known 20–80 rule says that the top 20 percent of the customers may generate as much as 80 percent of the company’s profits. In some cases the profit distribution may be more extreme—the most profitable 20 percent of customers (on a per capita basis) may contribute as much as 150 percent to 300 percent of profitability. The least profitable 10 percent to 20 percent of customers, on the other hand, can actually reduce profits between 50 percent and 200 percent per account, with the middle 60 percent to 70 percent breaking even.24 The implication is that a company could improve its profits by “firing” its worst customers. It is not always the company’s largest customers who yield the most profit. The largest customers demand considerable service and receive the deepest discounts. The smallest customers pay full price and receive minimal service, but the costs of transacting with small customers reduce their profitability. The midsize customers receive good service and pay nearly full price, and are often the most profitable.

5.2.1 Customer Profitability A profitable customer is a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling, and servicing that customer. Note that the emphasis is on the lifetime stream of revenue and cost, not on the profit from a particular transaction.25 Customer profitability can be assessed individually, by market segment, or by channel. Many companies measure customer satisfaction, but few measure individual customer profitability.26 Banks claim that this is a difficult task because a customer uses different banking services and the transactions are logged in different departments. However, the number of unprofitable customers in their customer base has appalled banks that have succeeded in linking customer transactions. Some banks report losing money on over 45 percent of their retail customers.

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Customer Profitability Analysis A useful type of profitability analysis is shown in Figure 5.3.27 Customers are arrayed along the columns and products along the rows. Each cell contains a symbol for the profitability of selling that product to that customer. Customer 1 is very profitable; he buys two profit-making products (P1 and P2). Customer 2 yields a picture of mixed profitability; he buys one profitable product and one unprofitable product. Customer 3 is a losing customer because he buys one profitable product and two unprofitable products. What can the company do about Customers 2 and 3? It can (1) raise the price of its less profitable products or eliminate them, or (2) try to sell them its profit-making products. Unprofitable customers who defect should not concern the company. In fact, the company should encourage these customers to switch to competitors. Customer profitability analysis (CPA) is best conducted with the tools of an accounting technique called activity-based costing (ABC). ABC accounting tries to identify the real costs Customers C1

C2

C3

P1

+

+

+

P2

+

Products

Profitable product

–

P3 P4 High-profit customer

Highly profitable product

Mixed-bag customer

–

Losing product

–

Mixed-bag product

Losing customer

Figure 5.3 Customer-Product Profitability Analysis

associated with serving each customer—the costs of products and services based on the resources they consume. The company estimates all revenue coming from the customer, less all costs.

Companies that fail to measure their costs correctly are also not measuring their profit correctly, and are likely to misallocate their marketing effort. The key to effectively employing ABC is to define and judge “activities” properly. One time-based solution calculates the cost of one minute of overhead and then decides how much of this cost each activity uses.28

5.2.2 Measuring Customer Lifetime Value The case for maximizing long-term customer profitability is captured in the concept of customer lifetime value. Customer lifetime value (CLV) describes the net present value of the stream of future profits expected over the customer’s lifetime purchases. The company must subtract from the expected revenues the expected costs of attracting, selling, and servicing that customer, applying the appropriate discount rate (e.g., 10–20 percent depending on the cost of capital and risk attitudes). Many methods exist to measure CLV.29 Marketing Memo: Calculating Customer Lifetime Value illustrates one. CLV calculations provide a formal quantitative framework for planning customer investment and help marketers to adopt a long-term perspective. However, one challenge in applying CLV concepts is to arrive at reliable cost and revenue estimates. Marketers who use CLV concepts must also be careful not to forget the importance of short-term, brandbuilding marketing activities that will help to increase customer loyalty.

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

With ABC, the costs should include the cost not only of making and distributing the products and services, but also of taking phone calls from the customer, traveling to visit the customer, paying for entertainment and gifts—all the company’s resources that go into serving that customer. ABC also allocates indirect costs like clerical costs, office expenses, supplies, and so on, to the activities that use them, rather than in some proportion to direct costs. Both variable and overhead costs are tagged back to each customer.

5.2.3 Attracting and Retaining Customers Companies seeking to expand their profits and sales have to spend considerable time and resources searching for new customers. To generate leads, the company develops ads and places them in media that will reach new prospects; it sends direct mail and email and makes phone calls to possible new prospects; its salespeople participate in trade shows where they might find new leads; it purchases names from list brokers; and so on. Different types of acquisition methods can yield different types of customers with varying CLVs. One study showed that customers acquired through the offer of a 35 percent discount had about one-half the long-term value of customers acquired without any discount.30

Reducing Defection It is not enough to attract new customers; the company must keep them and increase their business. Too many companies suffer from high customer churn—high customer defection. It is like adding water to a leaking bucket. Telecommunication companies, for example, are plagued with “spinners,” customers who switch carriers often to look for the best deal. Other times, companies lose customers because of service failure. Companies then engage in activities to win customers back. Marketing Insight: Seven Lessons from Samsung’s Note 7 Crisis discusses how companies can overcome a failure to win back customers. To reduce the defection rate, the company must: 1.

Define and measure its retention rate. For a magazine, subscription renewal rate is a good measure of retention. For a college, it could be the first- to second-year retention rate, or the class graduation rate.

2.

Distinguish the causes of customer attrition and identify those that can be managed better. Not much can be done about customers who leave the region or go out of business, but much can be done about those who leave because of poor service, shoddy products, or high prices.31

3.

Compare the lost profit equal to the customer’s lifetime value from a lost customer to the costs to reduce the defection rate. As long as the cost to discourage defection is lower than the lost profit, the company should spend the money to try to retain the customer.

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MARKETING MEMO

CALCuLATINg CuSToMEr LIFETIME VALuE (see Table 5.2). In this example, the firm acquires 100 customers with an acquisition cost per customer of $ 40. Therefore, in Year 0, it spends $ 4,000. Some of these customers defect each year. The present value of the profits from this cohort of customers over 10 years is $ 13,286.52. The net CLV (after deducting acquisition costs) is $ 9,286.52 (net CLV) or $ 92.87 (net CLV per customer.) Using an infinite time horizon avoids using an arbitrary time horizon for calculating CLV. In the case of an infinite time horizon, researchers have shown that if margins (price minus cost) and retention rates stay constant over time, then the future CLV of an existing customer simplifies to the following:

Researchers and practitioners have used many different approaches for modeling and estimating customer lifetime value (CLV). Gupta and Lehmann recommend the following formula to estimate the CLV for a not-yet-acquired customer: T

CLV =

∑

t=0

(pt − ct )rt (1 + i )t

− AC

(1)

where pt = price paid by a consumer at time t ct = direct cost of servicing the customer at time t i = discount rate or cost of capital for the firm rt = probability of customer repeat buying or being “alive” at time t AC = acquisition cost T = time horizon for estimating CLV

CLV =

∞

mr t

∑ (1 + i )

t

=m

t =1

r (1 + i – r )

(2)

In other words, CLV simply becomes margin (m) times a margin multiple [r/(1 + i − r)]. Table 5.3 shows the margin multiple for various combinations of r and i. This table shows a simple way to estimate CLV of a customer. For example, when retention rate is 80 percent and discount rate is 12 percent, the margin multiple is about twoand-a-half. Therefore, the future CLV of an existing customer in this scenario is simply his annual margin multiplied by 2.5.

A key decision is what time horizon to use for estimating CLV. Typically, 3–5 years is reasonable. With this information and estimates of other variables, we can calculate CLV using spreadsheet analysis. Sunil Gupta and Donald Lehmann illustrate their approach by calculating the CLV of 100 customers over a 10-year period Table 5.2 A Hypothetical Example to Illustrate CLV Calculations

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Number of customers

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

100

90

80

72

60

48

34

23

12

6

2

100

110

120

125

130

135

140

142

143

145

70

72

75

76

78

79

80

81

82

83

30

38

45

49

52

56

60

61

61

62

2,700

3,040

3,240

2,940

2,496

Revenue per customer Variable cost per customer Margin per customer Acquisition cost per customer

Year 10

40

Total cost or profit

−4,000

1,904

1,380

732

366

124

Present value

−4,000 2,454.55 2,512.40 2,434.26 2,008.06 1,549.82 1,074.76

708.16

341.48

155.22

47.81

Table 5.3 Margin Multiple r 1+i—r

Discount Rate Retention Rate

10%

12%

14%

16%

60%

1.20

1.5

1.11

1.07

70%

1.75

1.67

1.59

1.52

80%

2.67

2.50

2.35

2.22

90%

4.50

4.09

3.75

3.46

Sources: Sunil Gupta and Donald R. Lehmann, “Models of Customer Value,” Handbook of Marketing Decision Models, Berend Wierenga ed. (Berlin, Germany: Springer Science and Business Media, 2007); Sunil Gupta and Donald R. Lehmann, “Customers as Assets,” Journal of Interactive Marketing, Winter 2006, 17(1), pp. 9–24; Sunil Gupta and Donald R. Lehmann, Managing Customers as Investments, (Upper Saddle River, NJ: Wharton School Publishing, 2005); Peter Fader, Bruce Hardie, and Ka Lee, “RFM and CLV: Using Iso-Value Curves for Customer Base Analysis,” Journal of Marketing Research, November 2005, 42(4), pp. 415–430; Sunil Gupta, Donald R. Lehmann, and Jennifer Ames Stuart, “Valuing Customers,” Journal of Marketing Research, February 2004, 41(1), pp. 7–18; Werner J. Reinartz and V. Kumar, “On the Profitability of Long-Life Customers in a Noncontractual Setting: An Empirical Investigation and Implications for Marketing,” Journal of Marketing, October 2000, 64, pp. 17–35.

MARKETING INSIGHT

SEVEN LESSoNS FroM SAMSuNg’S NoTE 7 CrISIS

1. Beware of Over-Ambition The feature-rich Note 7 could have set a new benchmark in the highly-competitive smartphone business. Some reviewers even labelled it “the best phone ever made.” Buoyed by speculation that Apple’s upcoming iPhone 7 would be a relatively modest and uninspiring upgrade, Samsung seems to have become overly focused on beating its rival. Samsung’s designers worked hard to pack the phone with

the most up-to-date technology and features, promising a long lasting battery. While they have maintained the size of the Note 7’s screen, they shrank the overall size of the phone. The reduced size has posed a huge challenge for Samsung’s engineers; the new software demands more power, but there is less physical room for the battery itself. 2. Speed Comes at a Price The race to beat Apple suited Samsung’s corporate culture well. In 20 years, Samsung has transformed itself from a low-end components maker into a premium technology brand. It has achieved this through a deeply entrenched top-down structure that demands speed and execution. Since the iPhone 7’s launch date was set in September, Samsung gave itself an impossible deadline for which the engineers had to work around the clock. Moreover, such an adrenaline-driven approach to product development can deprioritize the boring but very necessary stage of testing. Speed may be important, but what matters most is reliability. Apple’s iPhone 7—boring or not—is safe and actually works.

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

In September 2016, Samsung introduced the Galaxy Note 7. It was a great product but had one big problem—the unpredictable tendency of its lithium battery to burst into flames. Fortunately, there have been no reports of serious injuries. Indeed, the biggest victim of the Note 7 debacle is Samsung itself. The mishandling of this crisis has battered the tech giant’s reputation, wiping billions of dollars off its share price and brand value. It has also killed off a flagship phone that could have given its rival, Apple, a run for its money. Here are seven lessons Samsung and other firms can take from this saga:

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3. Listen to the Silent Voices Samsung’s position in the premium mobile market was founded on its ability to keep churning out new and more powerful devices. It has been highly successful at doing so, yet this may also have bred an overconfidence among senior management about the firm’s capabilities. Lower down, some employees must have sensed problems with the Note 7; however, none felt that they could raise questions and risk delaying the launch. Operating at the cutting edge of technology can bring high rewards, but when problems arise it’s important to acknowledge that those at the frontlines are often the best at spotting it. 4. Brand Reputation Is Hard Won but Easily Lost Samsung was not as big 20 years ago and has worked hard to build its brand. The company doesn’t just produce smartphones, nor was Note 7 its only phone. Yet in a world connected by social media that thrives on bad news, the poor handling of the Note 7 crisis has become a black mark against the Samsung name. This undermines key intangible aspects like customer loyalty, prestige, desirability, and positive brand recognition. This is especially serious for a company that positions itself as the only competitor, in the premium end of the smartphone market, capable of taking on Apple, a company widely regarded as the most valuable brand in the world.

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5. Make Sure You Fix It Right the First Time For an organization that prides itself on rapid action and execution, Samsung was relatively quick to find a fix when problems first emerged with Note 7. However, it became apparent that the solution was not really a fix as reports about replacement phones bursting into flames emerged. Fixing a problem with the right solution shows customers that the company knows what the problem is and how it can

be solved. In this case, instead, it became apparent to many that Samsung had no idea what the fundamental problem was: a bad place to be for a tech firm. 6. Strike the Right Note with Customers and Stakeholders Samsung may have acted quickly in some senses, but its communication was widely criticised for appearing guarded and slow. The first rule of crisis management is to communicate openly and transparently. This is even more important in the tech world, where bad news goes viral very quickly. Like many large companies, Samsung has a tendency toward undue secrecy and aloofness. For example, the first Note 7 recall in the United States was launched without required coordination with the Consumer Product Safety Commission. Moreover, the recall was initially branded as an “exchange program,” an attempt to put a spin on what, in many consumers’ eyes, was the sale of a potentially dangerous product. This went from bad to worse when it became apparent that the problem had not been fixed in the replacement phones. 7. The Culture Must Adapt to Complexity Competing in the premium smartphone market means constantly pushing the boundaries of technology. Samsung needs to be innovative, nimble, and creative—this requires strong management but also creative initiatives being taken by low-level employees. In a giant company like Samsung, this does not sit easily with a culture that historically has followed a top-down approach to organization. It therefore can actually lead to damaging conflict. Balancing speed and execution with creativity and initiative is a trade-off, and in the fast-changing tech sector, getting this balance right is what matters. The Note 7 story shows what can happen when this goes wrong.

Source: Adapted from Sea-Jin Chang, “Striking the Wrong Note: 7 Lessons from Samsung’s Phone Crisis,” Think Business, 19 October 2016. Partially reproduced with permission from Think Business, NUS Business School, National University of Singapore (http://thinkbusiness.nus.edu). Copyright NUS Business School.

Sometimes, such defection is due to customer variety-seeking. Pepsi, in Japan, has turned this trend to its advantage:

Variety seeking, a trend prominent among Japanese youths, led to Pepsi introducing a variety of “limited edition” flavored drinks such as Salty Watermelon.

Pepsi—In Japan, where some 1,500 drinks come into the market each year, only a handful survive long enough to win a loyal following. To counter this high defection and capitalize on Japanese attraction to gentei or “limited edition,” Pepsi began introducing drinks with the intention to discontinue them during the peak of their popularity. One such drink is Ice Cucumber. Within days of its introduction, clips of people drinking the pale green soda were showing up on YouTube. A couple of weeks later, all 4.8 million bottles of Ice Cucumber were sold out. But instead of ratcheting up production, Pepsi Japan discontinued the drink. It considered that the value of Ice Cucumber was that it was already gone. Other flavors launched included Salty Watermelon. Previously, short-lived but successful launches included Pepsi Blue, Pepsi Red, Carnival, and Gold. These were drinks that had seen longer runs in other countries. Pepsi is careful not to overdo its gentei offerings, and limits them to three or four times a year.32

Retention Dynamics

Target market

Aware

I have heard of the brand.

Open to trial

I am open to trying the brand but have not done so.

Trier (nonrejecters)

I have tried the brand and would use again but have not done so in the past 3 months.

Recent user (e.g., Once in past 3 months)

I have used the brand in the past 3 months but am not a regular user.

Regular user Most (e.g., At least once every often used 2 weeks) I am a regular user but this is not my most often used brand.

I use this brand most often even though I do use other brands.

Loyal

I always use this brand as long as it is available.

Figure 5.4 The Marketing Funnel

By calculating conversion rates—the percentage of customers at one stage who move to the next—the funnel allows marketers to identify any bottleneck stage or barrier to building a loyal customer franchise. If the percentage of recent users is significantly lower than triers, for instance, something might be wrong with the product or service that prevents repeat buying. The funnel also emphasizes how important it is not just to attract new customers, but to retain and cultivate existing ones. Satisfied customers are the company’s customer relationship capital. If the company were sold, the acquiring company would pay not only for the plant and equipment and brand name, but also for the delivered customer base, the number and value of customers who will do business with the new firm. Here are some interesting facts about customer retention:33 Acquiring new customers can cost five times more than the costs involved in satisfying and retaining current customers. It requires a great deal of effort to induce satisfied customers to switch away from their current suppliers. The average company loses 10 percent of its customers each year. A 5 percent reduction in the customer defection rate can increase profits by 25 percent to 85 percent, depending on the industry. Profit rate tends to increase over the life of the retained customer due to increased purchases, referrals, price premiums, and reduced operating costs to service.

Managing the Customer Base Customer profitability analysis and the marketing funnel help marketers decide how to manage groups of customers that vary in loyalty, profitability, and other factors.34 A key driver of shareholder value is the aggregate value of the customer base. Winning companies improve that value by excelling at strategies like the following: Reducing the rate of customer defection—Selecting and training employees to be knowledgeable and friendly increases the likelihood that customers’ shopping questions will be answered satisfactorily. Increasing the longevity of the customer relationship—The more engaged with the company, the more likely a customer is to stick around. Nearly 65 percent of new Honda purchases replace an older Honda. Drivers cited Honda’s reputation for creating safe vehicles with high resale value.

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

Figure 5.4 shows the main steps in the process of attracting and retaining customers in terms of a funnel and some sample questions to measure customer progress through the funnel. The marketing funnel identifies the percentage of the potential target market at each stage in the decision process, from merely aware to highly loyal. Consumers must move through each stage before becoming loyal customers. Some marketers extend the funnel to include loyal customers who are brand advocates or even partners with the firm.

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Enhancing the growth potential of each customer through “share of wallet,” crossselling, and up-selling 35—Sales from existing customers can be increased with new offerings and opportunities. Harley-Davidson sells more than motorcycles and accessories like gloves, leather jackets, helmets, and sunglasses. Its dealerships sell more than 3,000 items of clothing—some even have fitting rooms. Licensed goods sold by others range from predictable items (shot glasses and cue balls) to the more surprising (cologne, dolls, and mobile phones). Making low-profit customers more profitable or terminating them—To avoid the direct need for termination, marketers can encourage unprofitable customers to buy more or in larger quantities, forgo certain features or services, or pay higher amounts or fees.36 Banks, phone companies, and travel agencies charge for once-free services to ensure minimum revenue levels. Firms can also discourage those with questionable profitability prospects. Some companies screen customers and divert the potentially unprofitable to competitors. However, “free” customers who pay little or nothing and are subsidized by paying customers may still create useful direct and indirect network effects.37 Focusing disproportionate effort on high-profit customers—The most profitable customers can be treated in a special way. Thoughtful gestures such as birthday greetings, small gifts, or invitations to special sports or arts events can send them a strong positive signal.

5.2.4 Building Loyalty Creating a strong, tight connection with customers is the dream of any marketer and often the key to long-term marketing success. Companies that want to form strong customer bonds need to attend to a number of different considerations: Create superior products, services, and experiences for the target market. Get cross-departmental participation in planning and managing the customer satisfaction and retention process.

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Organize and make accessible a database of information on individual customer needs, preferences, contacts, purchase frequency, and satisfaction.

Part 3 ó Connecting with Customers

Integrate the “Voice of the Customer” to capture their stated and unstated needs or requirements in all business decisions.

Make it easy for customers to reach appropriate company staff and express their needs, perceptions, and complaints. Assess the potential of frequency programs and club marketing programs. Run award programs recognizing outstanding employees. One set of researchers see retention-building activities as adding financial benefits, social benefits, or structural ties.38 The following sections explain three important types of marketing activities that companies use to improve loyalty and retention.

Interacting with Customers Listening to customers is crucial to CRM. Some companies have created an ongoing mechanism that keeps senior managers permanently plugged in to frontline customer feedback. Goodbaby, a Chinese baby-care product company, nurtures customer loyalty by offering valuable services on its Web site. It makes itself a continual presence in the lives of young mothers with a Web site that hosts blogs, baby-care tips, and doctor referrals.39 Build-A-Bear Workshop uses a “Cub Advisory Board” as a feedback and decision-input body. The board is made up of twenty 8- to 12-year-olds who review new-product ideas and give a “paws up or down.” Many products in the stores are customer ideas.40 But listening is only part of the story. It is also important to be a customer advocate and, as much as possible, take the customers’ side on issues, understanding their point of view.41

Developing Loyalty Programs Frequency programs (FPs) are designed to provide rewards to customers who buy frequently and in substantial amounts.42 They can help build long-term loyalty with high CLV customers, creating cross-selling opportunities in the process. Typically, the first company to introduce an FP gains the most benefit, especially if competitors are slow to respond. After competitors respond, FPs can become a financial burden to all the offering companies, but some companies are more efficient and creative in managing an FP. For example, airlines run tiered loyalty programs in which they offer different levels of rewards to different travelers. They may offer one frequent-flier mile for every mile flown to occasional travelers and two frequent-flier miles for every mile flown to top customers. For example, Singapore Airlines’ KrisFlyer program offers its Elite Silver and Elite Gold travelers bonus miles compared to its regular flyers. Club membership programs can be open to anyone who purchases a product or service, or it can be limited to an affinity group, or to those willing to pay a small fee. Although open clubs are good for building a database or snagging customers from competitors, limited membership clubs are more powerful long-term loyalty builders. Fees and membership conditions prevent those with only a fleeting interest in a company’s products from joining. These clubs attract and keep those customers who are responsible for the largest portion of business. Apple has a highly successful club. Apple—Apple encourages owners of its computers to form local Apple-user groups. These groups range in size from fewer than 30 members to over 1,000. The groups provide Apple owners with opportunities to learn more about their computers, share ideas, and get product discounts. They sponsor special activities and events, and perform community service. A visit to Apple’s Web site will help a customer find a nearby user group.43

Creating Institutional Ties The company may supply customers with special equipment or computer links that help customers manage orders, payroll, and inventory. Nestlé in Asia has supported its retailers with several activities to help them in inventory management.

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

Interacting with customers, such as getting their feedback, helps Build-A-Bear Workshop develop new-product ideas.

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Nestlé—Nestlé maintains close relations with its trade partners. In Japan, it pioneered the extensively used point-of-sale merchandising activities. In Thailand, it provided supermarkets with inventory control systems such as Nielsen’s Spaceman, and trained them on its use.

5.2.5 Win-Backs Regardless of the nature of the category or how hard companies may try, some customers inevitably become inactive or drop out. The challenge is to reactivate dissatisfied customers through win-back strategies.44 It is often easier to re-attract ex-customers (because the company knows their names and histories) than to find new ones. The key is to analyze the causes of customer defection through exit interviews and lost-customer surveys, and win back only those who have strong profit potential.45

5.3 Cultivating Customer Relationships Companies are using information about customers to enact precision marketing designed to build strong customer relationships. Information is easy to differentiate, customize, personalize, and dispatch over networks at incredible speed. But information cuts both ways. For instance, customers now have a quick and easy means of doing comparison shopping through sites such as BizRate, Shopping.com, and PriceGrabber. com. The Internet also facilitates communication between customers. Web sites such as Epinions and Amazon.com enable customers to share information about their experiences with various products and services. Customer empowerment has become a way of life for many companies that have had to adjust to a shift in power in their customer relationships.

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5.3.1 Customer Relationship Management (CRM) Customer relationship management (CrM) is the process of carefully managing detailed information about individual customers and all customer “touch points” to maximize customer loyalty. A customer touch point is any occasion on which a customer encounters the brand and product, from actual experience to personal or mass communications to casual observation. For a hotel, the touch points include reservations, check-in and check-out, frequent-stay programs, room service, business services, exercise facilities, laundry service, restaurants, and bars. For instance, the Four Seasons relies on personal touches, such as a staff that always addresses guests by name, high-powered employees who understand the needs of sophisticated business travelers, and at least one best-in-region facility, such as a premier restaurant or spa.46 CRM enables companies to provide excellent real-time customer service through the effective use of individual account information. Based on what they know about each valued customer, companies can customize market offerings, services, programs, messages, and media. South Korea-based retailer 2001 Outlet, for instance, has a CRM database to identify high-value customers as well as plan and execute targeted promotions to retain these customers. Companies’ increased ability to track and market to individual customers is not without its controversies, as Marketing Insight: The Behavioral Targeting Controversy highlights.

Personalizing Marketing The widespread use of the Internet allows marketers to abandon the mass market practices that built brands in the 1970s for new approaches that seem similar to early years when merchants knew their customers by name. Personalizing marketing is about making sure the brand and its marketing are as relevant as possible to as many customers as possible—a challenge, given that no two customers are identical. An increasingly essential ingredient for the best relationship marketing is the right technology. Dell could not customize computer ordering for its global corporate customers without advances in Web technology. Companies are using email, Web sites, call centers, databases, and database software to foster continuous contact between company and customer. Such is the case of Domino’s Pizza in Japan:

MARKETING INSIGHT

ThE BEhAVIorAL TArgETINg CoNTroVErSy neighborhood with ads designed to reach them before 10 am, when they’re most likely to be planning their evening meal. Or if a person clicks on three Web sites related to auto insurance and then visits an unrelated site for sports or entertainment, auto insurance ads may show up on that site. Microsoft claims behavioral targeting can increase the likelihood a visitor clicks an ad by as much as 76 percent. Proponents of behavioral targeting maintain that it also brings consumers more relevant ads. Because the ads are more effective as a result, more ad revenue is available to support free online content. Supporters also maintain that many consumers would be less concerned if they knew exactly how tracking worked. They argue that practices conform with the online ad industry’s self-regulation norms, ensuring anonymity by not giving firms access to “personal identifiable information” (PII). Identity information is removed, protected, or separated from browsing history in different ways. For example, a Web site can use a formula to turn its users’ e-mail addresses into jumbled strings of numbers and letters, as can an advertiser. Both can send their jumbled lists to a third company that looks for matches so the Web site can show an ad targeted to a specific person without any real e-mail addresses changing hands. Nevertheless, as Chapter 3 pointed out, consumers have significant misgivings about advertisers tracking them online. A single Web page can contain computer code from dozens of different ad companies or tracking firms. Government regulators wonder whether industry self-regulation will be sufficient or whether legislation is needed.

Source: Elisabeth Sullivan, “Behave,” Marketing News, 15 September 2008, pp. 12–15; Stephanie Clifford, “Two-Thirds of Americans Object to Online Tracking,” New York Times, 30 September 2009; Jessica Mintz, “Microsoft Adds Behavioral Targeting,” Associated Press, 28 December 2006; Laurie Birkett, “The Cookie That Won’t Crumble,” Forbes, 18 January 2010, p. 32; Alden M. Hayashi, “How Not to Market on the Web,” MIT Sloan Management Review, Winter 2010, pp. 14–15; Deborah L. Golemon and Laurie A. Babin, “How Marketers Are Dealing With the Controversy Surrounding Behavioral Targeting,” International Journal of Business, Marketing and Decision Sciences, Spring 2011, 4, pp. 127-141; Jennifer Valentino-Devries and Jeremy Singer-Vine, “They Know What You’re Shopping For,” Wall Street Journal, 7 December 2012.

Domino’s—Pizza is popular in Japan and the market is saturated. Thus, to stand out from competition in offering superior quality and service, Domino’s Pizza provided personalized marketing. It used mobile technology to create a smartphone app that allows customers to take delivery of their pizza order in any location, instead of a fixed address. By using the phone’s GPS function, Domino’s staff can accept orders from and deliver to customers in locations such as the beach, a field, outside a temple, or in the middle of a busy shopping district. This app placed Domino’s top of mind among Japanese wanting a snack in the open air and effectively created a new fast food market. This initiative generated over $2 million in sales and became the most downloaded app in the iTunes App Store in Japan. It also generated a large amount of interest across Twitter and blogs.47

To break through the clutter in Japan, Domino’s Pizza offered personalized marketing. Using the GPS function in a smartphone app, Domino’s can deliver the pizzas to customers in any location instead of a fixed address.

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

The emergence of behavioral targeting is allowing companies to track the online behavior of target customers and find the best match between ads and prospects. Tracking an individual’s Internet usage behavior relies on cookies—randomly assigned numbers, codes, and data that are stored on the user’s computer hard drive and reveal which sites have been visited, the amount of time spent there, which products or pages were viewed, and which search terms were entered. The Wall Street Journal reviewed 1,000 top Web sites and found that 75 percent included code from social networks such as Facebook’s “like” and Twitter’s “tweet” buttons. The code could match people’s identities with their Web-browsing activities, tracking a user’s arrival on a page even if the Facebook or Twitter button was never clicked. Another Wall Street Journal study showed that roughly a quarter of the times a user logged into one of 70 popular Web sites, the user’s real name and e-mail address or other personal details, such as the username, were passed on to third-party companies. A new customer signing up with Microsoft for a free Hotmail email account, for example, is required to give the company his or her name, age, gender, and zip code. Microsoft can then combine those facts with information such as observed online behavior and characteristics of the area in which the customer lives to help advertisers better understand whether, when, and how to contact that customer. Although Microsoft maintains that it carefully preserves consumer privacy—it claims it won’t purchase an individual’s income history—it can still provide advertising clients with behavioral targeting information. For example, Microsoft can help a Dining In franchisee zero in on working mothers between the ages 30 and 40 in a given

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Companies are also recognizing the importance of the personal component to CRM and what happens once customers make contact with the company. Employees can create strong bonds with customers by individualizing and personalizing customer relationships. In essence, thoughtful companies turn their customers into clients. Here is the distinction: Customers may be nameless to the institution; clients cannot be nameless. Customers are served as part of the mass or as part of larger segments; clients are served on an individual basis. Customers are served by anyone who happens to be available; clients are served by the professional assigned to them.48 To adapt to customers’ increased desire for personalization, marketers have embraced concepts such as permission marketing and one-to-one marketing. Permission marketing, the practice of marketing to consumers only after gaining their expressed permission, is based on the premise that marketers can no longer use “interruption marketing” via mass media campaigns. Marketers develop stronger consumer relationships by respecting consumers’ wishes and sending messages only when they express a willingness to become more involved with the brand. Permission marketing works because it is “anticipated, personal, and relevant.”49 Permission marketing presumes consumers know what they want. But in many cases, consumers have undefined, ambiguous, or conflicting preferences. “Participatory marketing” may be a more appropriate concept than permission marketing because marketers and consumers need to work together to find out how the firm can best satisfy consumers. Don Peppers and Martha Rogers outline a four-step framework for one-to-one marketing that can be adapted to CRM marketing as follows:50

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1.

Identify your prospects and customers. Do not go after everyone. Build, maintain, and mine a rich customer database with information derived from all the channels and customer touch points.

2.

Differentiate customers in terms of (1) their needs, and (2) their value to your company. Spend proportionately more effort on the most valuable customers (MVCs). Apply activitybased costing and calculate CLV. Estimate net present value of all future profits coming from purchases, margin levels, and referrals, less customer-specific servicing costs.

3.

Interact with individual customers. It is important to improve your knowledge about their individual needs and build stronger relationships. Formulate customized offerings that are communicated in a personalized way.

4.

Customize products, services, and messages to each customer. Facilitate customer/ company interaction through the company contact center and Web site.

One-to-one marketing is not for every company. The required investment in information collection, hardware, and software may exceed the payout. It works best for companies that normally collect a great deal of individual customer information, carry a lot of products that can be cross-sold, carry products that need periodic replacement or upgrading, and sell products of high value.

Customer Empowerment Marketers are helping consumers become ambassadors for brands by providing them resources and opportunities to demonstrate their passion. Doritos held a contest to let consumers name their next flavor. Converse asked amateur filmmakers to submit 30-second short films that demonstrated their inspiration from the iconic sneaker brand. Here’s one about Pepsi in China: Pepsi—Pepsi is using the Internet in a big way to reach out to Chinese drinkers. To mark the 60th anniversary of the founding of the People’s Republic of China, Pepsi launched the “Pepsi Creative Challenge,” giving the public an opportunity to send online birthday wishes to the nation. It also launched the “Go China” promotion, encouraging the Chinese to send patriotic slogans and pictures of themselves. Pepsi received 28 million submissions and more than 122 million votes to decide the winners, whose photos and winning slogans were printed on its soda cans. Pepsi also engaged Internet users to submit scripts for a TV commercial.51

However, it is still true that only some consumers want to get involved with some of the brands they use and, even then, only some of the time.

Customer Reviews and Recommendations

Taobao.com—Foreign online companies keen on tapping the Chinese market can learn from Taobao, the Chinese eBay equivalent. To ease anxieties over merchandise quality bought from its online site, Taobao offers refunds to buyers who felt they have been cheated. It also encourages buyers to rate sellers, and displays these ratings on its site. Such guarantee and reviews help Taobao to garner consumer loyalty and allowed it to seize a commanding 85 percent share of the consumer-to-consumer online market.52 There are also blogs with product reviews. Blogs are often among the top links returned in online searches for certain brands or categories. A security breach of the personal details of Sony PlayStation’s user accounts sparked comments on the PlayStation blog and Facebook page. A company’s PR department may track popular blogs via online services such as Google alert.

DiGi—Malaysian mobile network provider, DiGi, has a dedicated team that focuses on public forums on its Facebook page where disgruntled customers gripe about everything from wonky broadband lines to chaotic queues at new iPhone launches. Says its head of online services, “By ‘hanging out’ where the customers are, DiGi is not only able to provide real-time support and assistance to customers, but also get direct feedback from them.”53 Online retailers often add their own recommendations. On Amazon.com, when you search for a particular movie title, the site will recommend other movies as well by saying “Customers with similar searches purchased . . . .” One source estimated that recommendation systems contribute 10 to 30 percent to an online retailer’s sales.54 At the same time, online companies need to make sure their attempts to create relationships with customers do not backfire, as when customers are bombarded by computer-generated recommendations that consistently miss the mark.

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

Although the strongest influence on consumer choice remains “recommended by relative/friend,” an increasingly important decision factor is “recommendation from consumers.” With increasing mistrust of some companies and their advertising, online customer ratings and reviews are playing an important role for Internet retailers such as Amazon.com and taobao.com.

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Summary 5.1 BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY

How do customers perceive value? Customer perceived value (CPV) is the difference between total customer value and total customer cost. The components of each are summarized in Figure A below. CustomerDelivered Value

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Total customer value

Total customer cost

Product value

Monetary cost

Services value

Time cost

Personnel value

Energy cost

Image value

Psychic cost

Part 3 ó Connecting with Customers

Figure A Determinants of Customer-Delivered Value

Customers will buy the offering where customer value exceeds customer cost the most. How do companies conduct a customer value analysis? Companies identify and rate the major attributes and benefits which customers look for. Companies then compare the customer perceived value of their product in relation to their competitors’. Lastly, companies monitor customer values over time for relevancy and attractiveness in changing market environments. What are some choices and implications a customer grapples with when buying a product? The buyer may be under orders to buy at the lowest price. This order ignores value brought about by lower operating costs, cheaper maintenance and servicing, and greater output. The buyer enjoys a good relationship with a certain company. The buyer tends to overlook greater value offerings from other competitors.

Who are the parties that a company has to keep satisfied? Satisfaction is defined as the feelings of pleasure or disappointment resulting from comparing a product’s perceived performance (or outcome) to the expectations of the product. The customer will be satisfied if the performance of the product matches or exceeds his or her expectations. However, the company has to keep its stakeholders, employees, and suppliers satisfied as well, and thus must refrain from maximizing customer satisfaction by making the profit margin too low. Why do companies measure customer satisfaction? Customers who are highly satisfied will not only buy from the same company in the future, but also may espouse the benefits of buying from that company. With the Internet being such a ubiquitous tool today, bad customer experiences can affect many more potential and existing customers than ever before. How do companies measure customer satisfaction? Companies can employ periodic surveys to track customer satisfaction directly. Companies can use the customer loss rate as an indicator of customer satisfaction, and even contact customers who have switched brands to discover the reasons behind this change. What is quality in a product? Quality is the totality of features and characteristics of a product or service that bears on its ability to satisfy stated or implied needs. Performance quality refers to the stand-alone features of a product or service compared to others in the market. Conformance quality refers to the features of a product or service meeting or exceeding customers’ expectations of them.

5.2 MAXIMIZING CUSTOMER LIFETIME VALUE

There are three tiers of customers: the largest and most loyal customers who buy in huge volumes and enjoy large discounts; the midsize customers who pay almost full price and require moderate service; and the smallest customers who pay in full and get minimum service.

What is customer lifetime value? Customer lifetime value (CLV) measures the stream of future profits expected from a customers’ lifetime purchases in terms of today’s net value. How does a company increase the value of their customer base? The company can increase the size of their customer base either by reducing the rate of defection or increasing the duration of the customer relationship. It can enhance the growth potential of each customer relationship by offering diverse products together with the original product or service. It should focus greater efforts on satisfying and retaining higher-value customers, and terminating low-value customers or making them more profitable. How can a company reduce its defection rate? The company must first define and measure its defection rate. The causes of defection should be identified to pinpoint the area where the company can improve. If the cost of retaining the customer is less than the customer’s lifetime lost profit, it is worthwhile for the company to retain the customer. Why do companies focus so much on retaining customers? Figure B depicts the funnel process of attracting and retaining customers. Satisfied customers make up the customer relationship capital, which is a viable consumer base that the company can rely on in the long run.

Target market

Aware

I have heard of the brand.

Open to trial

I am open to trying the brand but have not done so.

Trier (nonrejecters)

I have tried the brand and would use again but have not done so in the past 3 months.

Recent user (e.g., Once in past 3 months)

I have used the brand in the past 3 months but am not a regular user.

Regular user Most (e.g., At least once every often used 2 weeks) I am a regular user but this is not my most often used brand.

I use this brand most often even though I do use other brands.

Loyal

I always use this brand as long as it is available.

Figure B The Marketing Funnel

Acquiring new customers is many times more costly than merely retaining old customers. The customer profit rate tends to increase over the lifetime of the retained customer. How do companies improve customer loyalty? Company members interact with customers to build a strong working relationship. Companies develop loyalty programs, which are further split into club membership programs and frequency programs. Companies create institutional ties.

5.3 CULTIVATING CUSTOMER RELATIONSHIPS

What does successful customer relationship management entail? Customer relationship management (CRM) is the process of handling detailed information about individual customers and their “touch points,” that is, occasions where the customer encounters the brand and product. This enables companies to customize their market offerings to meet individual customers’ needs, and subsequently retain them in the long run. What is personalizing marketing? Personalizing marketing means ensuring that the brand and its marketing stay relevant to customers. Technology such as the Internet allows for marketers to engage in personalizing marketing. How does a company practice one-to-one marketing? The company has to identify a specific group of prospects and customers. It then segments them into different tiers according to their value to the company.

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

What makes a customer profitable to a company? A profitable customer is an entity that yields a lifetime revenue stream that exceeds by an acceptable amount the cost stream of attracting, selling, and servicing that customer. Tracking individual customer profitability is crucial because this gives the company an idea of the percentage of customers they are losing money on, so they can take measures to limit their losses. Customer profitability analysis (CPA) segments customers into different tiers of profitability. Companies look to upgrade their customers into the next profit tier, or dropping the unprofitable customers to reduce losses. Activity-based costing (ABC) identifies the real costs associated with serving each customer.

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Next, it develops personal interactions with customers to build a good rapport and understand their needs better. Lastly, it develops or modifies product offerings to suit the needs of each customer.

What is customer empowerment? Customers are increasingly capable of influencing how marketers develop a product. Customers also influence consumer choice through online reviews.

Applications Marketing Debate—Online Versus Offline Privacy? As more and more firms practice relationship marketing and develop customer databases, privacy issues are emerging as an important topic. Consumers and public interest groups are scrutinizing—and sometimes criticizing—the privacy policies of firms. Concerns are also being raised about potential theft of online credit card information or other potentially sensitive or confidential financial information. Others maintain that the online privacy fears are unfounded and that security issues are every bit as much a concern in the offline world. They argue that the opportunity to steal information exists virtually everywhere and that it is up to the consumer to protect his or her interests. Take a position: Privacy is a bigger issue in the online world than the offline world versus privacy is no different online than offline.

Marketing Discussion

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Consider the lifetime value of customers (CLV). Choose a business and show how you would go about developing a quantitative formulation that captures the concept. How would organizations change if they totally embraced the customer equity concept and maximized CLV?

FOOD SCANDALS IN TAIwAN: THE CASE OF TIN HSIN INTERNATIONAL GROUP Written by Elison A.C. Lim and MingMin Yeh, Institute of Asian Consumer Insight, Nanyang Business School The Tin Hsin International Group (THIG) is one of the largest food manufacturers in Taiwan with an annual turnover of $78.5 billion in 2013. Owned by the Wei family, THIG operates in four main areas: food manufacturing, property, oil, and logistics and restaurants. Each area is helmed by one of four brothers from the Wei family (see Figure 1). Among the four business units, more than 80 percent of the revenue comes from Ting Yi (Cayman Islands) Holdings Corporation and Wei Chuan Food Corporation. Tin Hsin International Group Wei Ing Xing

Wei Ing Chou

Wei Ing Jiao

Wei Ing Chung

Food Manufacturing

Property Business

Oil Business

Logistics and restaurant Business

Tingyi (Cayman Islands) Holding Corp.

8 Construction company

Tin Hsin Oil Manufacturing

Master Kong Chef's Table (China)

CHENG I FOOD CO.,LTD

Matusei Supermarket

Master Kong

Including Tin Ji, Tin He

Taipei 101

(50% of market share in the lard business) Wei Chuan Food Corporation (31 brands and 632 products)

FamilyMart (China) Convenience store Dicos Fried Chicken

Figure 1 Main Businesses of Tin Hsin International Group

THIG started out in the oil industry back in 1958. Over the years, THIG expanded steadily to acquire a significant stake in the food business. As part of its growth strategy, THIG acquired Wei Chuan Foods Corporation in 1998. At that time, Wei Chuan was the second largest food producer in Taiwan, and one of the most wellknown amongst local consumers. With this acquisition, THIG owned more than 30 brands, including Master Kong 康師傅 (instant noodles), FamilyMart 全家便利商店 (a convenience store), Matsusei 松青超市 (a supermarket chain), Lin Feng Ying 林鳳營鮮乳(milk) and Cheng I 正義 油品 (olive oil).

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

Marketing Lesson

Given THIG’s huge market coverage, many Taiwanese consumers had the expectation that the enterprise had their welfare at heart and would uphold high standards of food safety. However, in November 2013, a food scandal involving one of THIG’s suppliers shocked the Taiwanese community. News broke out that one of THIG’s oil suppliers, Chang Chi Foodstuff Factory Company, had used copper chlorophyllin1 in its olive oil and diluted its high-end cooking oil with cheaper cottonseed oil. Once the news broke, all affected THIG products, which were sold under Wei Chuan’s name, were removed from the shelves. The general manager of Wei Chuan at that time, Chiao Hua Chang, claimed that he had simply trusted the parent company for the source of the products. However, according to the chairman of Chang Chi Foodstuff Factory Company, THIG management was well aware of the use of contaminated oil. Despite this, it took 19 days after the news broke for Chang to face the public. THIG’s management denied all associations with Chang Chi Foodstuff Company. They reassured the public that its food manufacturing was a conscientiously run business and that the company took food safety very seriously. About a month later, Chang Chi Foodstuff Company identified THIG as one of their customers, causing THIG’s management to retract their earlier denials of noninvolvement with its troubled supplier. Chiao Hua Chang retired as general manager a year after the scandal. About a year later, in September 2014, THIG was hit by another scandal involving THIG and over two hundred downstream food-related businesses. It was discovered that another of THIG’s suppliers, Chang Guann Company, had been selling cooking oil contaminated with gutter oil to the group. THIG was investigated for reselling this contaminated oil under a different brand name and for using the oil in Wei Chuan’s meat processing plants to produce meat sauce and meat floss. Barely a month after this episode, Cheng I, one of the brands under THIG, was found to be using feed-grade oil to replace lard in its products. It seemed that the food scandals followed one after another (refer to Figure 2 for a visual depiction of the key scandals involving THIG from 2013 to 2014). On 11 October 2014, Wei Ing Chung, one of THIG’s founders who was also in charge of its oil business and the Wei Chuan brand, openly apologized to the public at a press conference. Both the general managers of Chang Chi Foodstuff and Tin Hsin oil manufacturing resigned from their positions. Wei too resigned from his management role and stepped down as the chairman of Taiwan Good Manufacturing Practices Association. In addition, THIG set up a Consumer Trust fund ($1.6 million) and made a donation of $96 million toward food safety. The credibility of THIG hit rock bottom after the series of food scandals. Taiwanese consumers, many of whom

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16th Oct 2013

4th Sep 2014

8th Oct 2014

Chang Chi's olive oil scandal

Gutter oil incident with Chang Guann

Feed grade oil incident with Cheng I

Mixed olive oil with cottonseed oil

Used and sold oil derived fromused lard and gutter oil

Lard is replaced with animal feed grade oil

11th Oct 2014

26th Oct 2014

Open Apology by Master Kong official Wei Ing Chung announcement

Apologizeto the publicon THIG’s official website

Master Kong ceased trademark authorization to Wei Chuan

Figure 2 Timeline of Key Events (Source: Central News Agency)

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grew up with the brands owned by THIG, were shocked to hear that such a conglomerate would be associated with unethical practices and betray the trust of its loyal customers. To make matters worse, several doctors pointed out the potential link between the long-term consumption of cottonseed oil and infertility. The public was furious. They boycotted all brands under THIG. Local government authorities, countless restaurants, traditional markets, and schools refused to buy any of the conglomerate’s products. One consumer expressed her loss of faith with local produce to the Taipei Times, saying, “Now, who knows what’s safe to eat? Maybe I should start looking for (food with labels that say) ‘made in China’ instead.” The food scandals sent shockwaves throughout the entire THIG eco-system. All brands related to THIG, especially those housed under the Wei Chuan brand, now found themselves under the spotlight of public scrutiny. Household brands such as Master Kong and Lin Feng Ying, both of which were owned by THIG, were not spared despite being popular local brands. Consumers who boycotted THIG’s products refused to buy Master Kong’s instant noodles. Master Kong, which dominated the instant noodle category in Taiwan, was quickly removed from the Taiwanese market. It distanced itself from the THIG brand after the scandals broke, stating that none of their ingredients was sourced from within Taiwan. However, despite their efforts to stay clear of the chaotic situation, they were still hit hard by what was happening to its parent brand. The total revenue of Master Kong dropped dramatically after the scandal from $542,531 in September 2014 to $133,777 in March 2015. Equally affected was another THIG brand, Lin Feng Ying, which was the number one milk brand in Taiwan before the scandals began. In a bid to win back customers, Lin Feng Ying ran a buy-one-get-one-free campaign. However, this did not improve sales. In mid-2015, the company released a new commercial shot from the

farmers’ viewpoint. This commercial shifted consumers’ focus to the farmers behind the milk product and the quality of the milk itself. The move seemed to allay some of the unwanted attention from the brand’s link with its parent company and the on-going scandals surrounding it. After this campaign, sales started to pick up again, restoring the brand back to third place in the milk business in Taiwan. Many months after the oil scandals, Taiwanese consumers are slowly going back to purchasing THIG’s products. The media seems to have stopped focusing on the negative coverage of the food scandals linked to THIG. Consumers too seem to have lost interest in such news. Some people have even questioned whether the alleged gutter oil scandals were even true. A laboratory report in July 2015 revealed that the composition of the alleged gutter oil sample was compliant with existing food standards. During the investigation, confusing information such as misinterpretation of testimony and unstandardized means of taking samples contributed to a confused case. As of October 2015, almost a year after the scandal broke, THIG is still facing on-going lawsuits. THIG persists in fighting against accusations of unethical practices and in restoring their brand’s reputation. Has the unraveling of food scandals like the ones THIG is involved in helped or hurt Taiwanese consumers? On the one hand, the outbreak presented an opportunity to expose unethical practices and thereby raise the overall standards of food safety in Taiwan. On the other hand, consumers’ confidence in Taiwanese brands has been shaken to its core. The nagging thought in the minds of Taiwanese consumes was this: If one of their most trusted food conglomerates could risk putting harm in their customers’ way, what could they expect from smaller operations? With legislation pertaining to food safety still unclear, it seems like the biggest losers in this saga are the consumers.

Questions

Sources: Based on a case study by MingMin Yeh, a research associate at the Institute on Asian Consumer Insight (ACI), and Elison Lim, a fellow at ACI and Assistant Professor, Division of Marketing and International Business, Nanyang Business School; Han Tingting, “Top Big New Turnover of 2.5 Trillion,” Central News Agency, 14 October 2014; Pan Jie, “After the “Black Oil” Acceleration Event Master Seize Market,” International Finance News, 22 June 2015; “Key Insider Confessed Ko Chun Lee Ting Hsin had Known Contaminated Bite,” Eastern Broadcasting Company, 9 November 2013; “Wei Chuan 21 Oil at Elevated Talk Conscience Had Known to Steal Oil Mixed with a Large System,” Apple Daily, 4 November 2013; Zhang Rongxiang Tainan, “Justice Oil Caught Hunchong Edible Oil Feed,” Central News Agency, 8 October 2014; Han Tingting, “Wei Should Be Sufficient: Let 50 Million Consumers Reserve,” Central News Agency, 5 November 2013; “Storm New Flat Top 3 Billion Yuan to Donate Food Security Fund,” Central News Agency, 16 October 2014; Yang Shu Min, “Wei Called On the Experts to Be Filled Immediately Apologize Useless Custody,” Central News Agency, 11 October 2014; “‘Ting Hsin Fear the Withdrawal of Taiwan,’ Wei Chuan Cut Top Sony Mainland Insurance Market,” www.ksnews.com.tw, 28 October 2014; “Ting Hsin Boycott Spread to the Continent: Master Kong,” Sina Finance, 16 October 2014; Han Tingting, “Lin Feng 3rd Battalion Stand Those Firms Market Share Second,” Central News Agency, 12 September 2015.

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

1. Whose responsibility is it to ensure that food safety standards are adhered to? Is this the job of the government, the food manufacturers, or the consumers? Discuss. 2. Do you feel that THIG has done enough to regain consumers’ trust? What did the company do right, and what should it not have done? 3. To what extent do the actions of a parent brand like THIG affect the individual brands that it owns? 4. In your opinion, do you think brands can recover fully from scandals? Is it possible to restore consumer trust in a brand after it suffers a scandal?

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Marketing Lesson TESCO

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If you asked a customer of U.K. supermarket chain Tesco what the shopping experience there was like in the early 1980s, “customer friendly” would probably not be the answer. Though it began upgrading its stores and product selection in 1983, Tesco continued to suffer from a reputation as a “pile it high and sell it cheap” mass market retailer. Tesco needed to reverse the public perception of its stores. It decided to improve the shopping experience and highlight improvements with an image campaign to “lift us out of the mold in our particular sector.” Between 1990 and 1992, Tesco launched 114 separate initiatives to improve the quality of its stores, including adding baby-changing rooms, stocking specialty items such as French free-range chickens, and introducing a value-priced line of products. It developed a campaign entitled “Every Little Helps” to communicate these improvements with 20 ads, each focused on a different aspect of its approach: “doing right by the customer.” As a result, between 1990 and 1995, Tesco attracted 1.3 million new customers and became the market leader in 1995. Tesco then introduced an initiative that would make it a world-class example of how to build lasting relationships with customers: the Tesco Clubcard frequent-shopper program. The Clubcard not only offered discounts and special offers tailored to individual shoppers, but also acted as a powerful data-gathering tool, enabling Tesco to understand the shopping patterns and preferences of its customers better than any competitor could. Using Clubcard data, Tesco created a unique “DNA profile” for each customer based on shopping habits. To build this profile, it classified each product purchased by a customer on a set of up to 40 dimensions, including price, size, brand, ecofriendliness, convenience, and healthiness. Based on their DNA profile, Tesco shoppers received one of 4 million different variations of the quarterly Clubcard statement, which contained targeted special offers and other promotions. The company also installed kiosks in its stores where Clubcard shoppers could get customized coupons. The Clubcard data helped Tesco run its business more efficiently. Tracking Clubcard purchases helped uncover each product’s price elasticity and helped set promotional

schedules, which saved Tesco over $500 million. Tesco used its customer data to determine the range of products and the nature of merchandising for each store, and even the location of new stores. Within 15 months of introduction, more than 8 million Clubcards had been issued, of which 5 million were used regularly. Tesco’s customer focus strategies enhanced by the Clubcard helped propel Tesco to even greater success than in the early 1990s. The company’s market share in the United Kingdom rose to 15 percent by 1999, and that year other British companies voted Tesco Britain’s most admired company for the second year in a row. In the following years, Tesco continued to apply its winning formula of using customer data to dominate the British retail landscape. Tesco moved beyond supermarkets to “bigbox” retailing of general merchandise, or nonfood products. This strategic growth not only provided additional convenience to consumers who preferred shopping under one roof, but also improved overall profitability. In 2003, the average profit margin was 9 percent for nonfood products versus 5 percent for food. Nearly 20 percent of Tesco’s revenues came from nonfood items. That year, the company sold more CDs than Virgin Megastores and its apparel line, Cherokee, was the fastest-growing brand in the United Kingdom. Tesco continues to diversify its product and service offerings in order to reach more consumers. In the late 1990s, Tesco launched its own ISP service, Tesco Broadband, to provide Internet access to homes and businesses. During the 2000s, the company partnered with existing telecoms to create Tesco Mobile and Tesco Home Phone. It also joined forces with the Royal Bank of Scotland to create a banking division, Tesco Bank. In addition, Tesco offers insurance policies, dental plans, music downloads, and financial services. Tesco appeals to all segments of the market by creating three distinctive Tesco-branded price ranges to appeal to everyone: “Finest,” “Mid-range,” and “Value.” In addition, Tesco has categorized its stores into six different formats, depending on where they are located and whom they are targeting. From largest to smallest, these stores include Tesco Extra, Tesco Superstores, Tesco Metro, Tesco Express, One Stop, and Tesco Homeplus. In 2012, Tesco launched its own brand Tesco value range as “Tesco Everyday Value” with new packaging and recipes to meet the needs of budget customers. Throughout Tesco’s massive expansion, both globally and through its product and service offerings, Tesco has stayed true to the importance of its Clubcard loyalty program. Consumers can now earn points on their Clubcard every time they shop at a Tesco store, use one of Tesco’s services (Tesco Mobile, Tesco Home Phone, Tesco Broadband, Tesco Credit Card, or Tesco Financial), or use one of Tesco’s partners’ services.

card earn points which are mailed to them on a quarterly basis as cash vouchers redeemable at Tesco stores. There are more than 150,000 different combinations of coupons mailed through this targeted local mailing program. Over in Thailand, Tesco is so successful that there is some concern from the public that it is running smaller retailers out of business. Those that have survived are buying their stock from Tesco because Tesco undercuts most suppliers. However, in Japan, Tesco is struggling to break even. Given its success, Tesco is building 80 shopping malls in China over the next five years. It also has a joint venture with Tata in India. It attempted to acquire competitor Carrefour’s 40 supermarkets in Thailand, but lost the bid to France’s Casino. In 2014, Tesco’s profits reached £3.3 billion on revenue of £64.1 billion. Asia accounted for £10.3 billion in revenue and £692 million in profits.

Questions 1. What is next for Tesco? Where and how can it grow? Who will it target? 2. How can Tesco take its customer loyalty programs to the next level? Sources: Richard Fletcher, “Leahy Shrugs Off Talk of a ‘Brain Drain,’” Sunday Times (London), 29 January 2006; Elizabeth Rigby, “Prosperous Tesco Takes Retailing to a New Level,” Financial Times, 21 September 2005, p. 23; Laura Cohn, “A Grocery War That’s Not about Food,” BusinessWeek, 20 October 2003, p. 30; “The Prime Minister Launches the 10th Tesco Computers for Schools Scheme,” M2 Presswire, 26 January2001; Ashleye Sharpe and Joanna Bamford, “Tesco Stores Ltd,” paper presented at Advertising Effectiveness Awards, 2000; Hamish Pringle and Marjorie Thompson, Brand Spirit (New York: John Wiley & Sons, 1999); Hannah Liptrot, “Tesco: Supermarket Superpower,” BBC, 3 June 2005; Andrea Felsted, “Tesco Plots Sales Push in China,” www .ft.com, 22 November 2010; Tom Bawden, “Tesco Looks to Expand in Asia by Buying Carrefour Supermarkets,” www.guardian.co.uk, 8 November 2010; Stefan Wagstyl, “Tesco: Asia Overtakes Europe,” Financial Times, 19 April 2011; “Thailand’s Tesco Saga,” www.whatismatt.com, 4 June 2008; Deborah Joy, “Tesco Adds ‘Mass Personalization’ to Cart,” www.marketing-interactive.com, 23 July 2010; Tessa Thorniley, “New Tesco Boss Plans Asian Quest,” www.dailymail.co.uk, 15 September 2010; Annual Report and Financial Statements 2014, www.tescoplc.com

ChaPter 5 ó Creating Customer Value, Satisfaction, and Loyalty

Tesco sought growth overseas in the mid-2000s and today, the company employs 500,000 employees in 13 countries, with a strong focus on high-growth markets in Asia. The company has used the same customercentered strategies that worked in the United Kingdom to expand into these new markets. Its Asian outlets showed the greatest improvement. Tesco feels that the Asian markets offer long-term growth opportunity. By bringing its “bigbox” model to Asia, it believes that its Asian operations will have the edge over competitors because its super-efficient distribution network allows Tesco to make suppliers cut their prices. In contrast, its competitor, Carrefour, conducts supplier negotiations on a store-bystore basis rather than streamlining them through central distribution hubs. Its Clubcard is also used in Asian markets such as Malaysia. Malaysian customers who swipe the loyalty

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C H A P T E R

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Analyzing Consumer Markets Marketers must have a thorough understanding of how consumers think, feel, and act, and offer clear value to each and every target consumer.

hile Westerners tan to appear attractive, Asians buy products that promise to lighten their skin. One study found that 38 percent or more of women in Hong Kong, Korea, Malaysia, the Philippines, and Taiwan use skin whitening products. In Southeast Asia, light skin historically conveyed nobility, aristocracy, wealth, and status; while dark skin is associated with those who toiled in the fields. Only the rich could afford to stay indoors, while peasants withstood the hot sun in the rice fields. A Chinese saying goes, “One white covers up three ugliness.” Major Asian and Western cosmetic companies such as Shiseido, Olay, and L’Oréal have jumped on the bandwagon in this growing market.

For Shiseido, the popularity of its whitening products has led it to launch a new whitening item for the neck and decolletage area. Whitening ingredients have also found their way into deodorant roll-ons in Indonesia. In India, there is also skin-lightening cream for men. The Fair-andHandsome range is endorsed by Shah Rukh Khan, one of Bollywood’s biggest film stars. The quest for fair skin even extends to Facebook. Vaseline introduced a skinlightening application for Facebook in India, enabling users to make their skin whiter in their profile pictures. This download was part of a campaign to promote Vaseline’s range of skin-lightening creams for men.1

In this chapter, we will address the following questions: 1. How do consumer characteristics influence buying behavior? 2. What major psychological processes influence consumer responses to the marketing program? 3. How do consumers make purchasing decisions? 4. In what ways do consumers stray from a deliberative, rational decision process?

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uccessful marketing requires that companies fully connect with their customers. Adopting a holistic marketing orientation means understanding consumers—gaining a 360-degree view of both their daily lives and the changes that occur during their lifetimes so that the right products are marketed to the right consumers in the right way.

6.1 What Influences Consumer Behavior? Consumer behavior is the study of how individuals, groups, and organizations select, buy, use, and dispose of goods, services, ideas, or experiences to satisfy their needs and wants. Marketers must fully understand both the theory and reality of consumer behavior. A consumer’s buying behavior is influenced by cultural, social, and personal factors. Cultural factors exert the broadest and deepest influence.

6.1.1 Cultural Factors Culture, subculture, and social class are particularly important influences on consumer buying behavior. Culture is the fundamental determinant of a person’s wants and behavior. The growing child acquires a set of values, perceptions, preferences, and behaviors through his or her family and other key institutions. A child growing up in many parts of Asia is exposed to such values as filial piety, hard work, obedience to authority, and collectivism. For instance, the value of krengjai, or deference to or consideration of others, is pervasive in Thai culture.

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Fukubukuro are lucky mystery bags started by Ginza Matsuya Department Store and has since spread to most Japanese retailers. This Japanese custom has spread to other cultures.

Fukubukuro—Marketers use cultural factors to their advantage. In Japan, for instance, it is a New Year’s custom for merchants to offer fukubukuro (福袋) or lucky mystery bags. These grab bags are filled with unknown random products and sold to customers at a substantial discount. The low prices are to attract customers to shop at the store during the new year. In major department stores, these grab bags are usually themed to specific departments. For instance, the shoe department will have several high-priced shoes in the bag. Some stores include extra items such as expensive purses, travel tickets, and vouchers for electronics to entice shoppers to take a chance and shop at their store. The randomness of such inserts is why fukubukuro are sometimes known as lucky bags.

Each culture consists of smaller subcultures that provide more specific identification and socialization for their members. Subcultures include nationalities, religions, racial groups, and geographic regions. When subcultures grow large and affluent enough, companies often design specialized marketing programs to serve them. Multicultural marketing grew out of careful marketing research, which revealed that different ethnic and demographic niches did not always respond favorably to mass marketing. Chinese consumers, for instance, may respond differently from Indian, Malay, or Filipino consumers. To the Chinese, especially those of the Cantonese dialect group, feng shui (literally meaning wind water) or geomancy is important. Some Chinese avoid buying houses with the number four in the address because it sounds like, and thus connotes, “death;” while favoring the number eight as it sounds like “prosperity.” The Beijing Olympics was officially opened on 8 August 2008 (8-8-08) at 8:08 pm. Virtually all human societies exhibit social stratification. Stratification sometimes takes the form of a caste system where the members of different castes are reared for certain roles and cannot change their caste membership. Such caste systems still operate in rural India. More frequently, it takes the form of social classes, relatively homogeneous and enduring divisions in

Hong Kong Disneyland employed feng shui when developing the theme park and hotels.

a society, which are hierarchically ordered and whose members share similar values, interests, and behavior. One classic depiction of social classes defined seven ascending levels, as follows: (1) lower lowers, (2) upper lowers, (3) working class, (4) middle class, (5) upper middles, (6) lower uppers, and (7) upper uppers.3 Social classes have several characteristics. First, those within each class tend to behave more alike than persons from two different social classes. Social classes differ in dress, speech patterns, recreational preferences, and many other characteristics. Second, people are perceived as occupying inferior or superior positions according to social class. Third, social class is indicated by a cluster of variables—for example, occupation, income, wealth, education, and value orientation—rather than by any single variable. Fourth, individuals can move up or down the social class ladder during their lifetimes. The extent of this mobility varies according to how rigid the social stratification is in a given society. Social classes show distinct product and brand preferences in many areas, including clothing, home furnishings, leisure activities, and automobiles. Social classes differ in media preferences, with upper-class consumers often preferring magazines and books, and lower-class consumers often preferring television. Even within a media category such as TV, upper-class consumers tend to prefer news and drama, and lower-class consumers tend to prefer soap operas and sports programs. There are also language differences among the social classes. Advertising copy and dialogue must ring true to the targeted social class.

6.1.2 Social Factors In addition to cultural factors, a consumer’s behavior is influenced by such social factors as reference groups, family, and social roles and statuses.

Reference Groups A person’s reference groups consist of all the groups that have a direct (face-to-face) or indirect influence on his or her attitudes or behavior. Groups having a direct influence on a person are called membership groups. Some membership groups are primary groups, such as family, friends, neighbors, and coworkers—those with whom the person interacts fairly continuously and informally. People also belong to secondary groups, such as religious, professional, and tradeunion groups, which tend to be more formal and require less continuous interaction.

ChaPter 6 ó analyzing Consumer Markets

Disney—Disney officials consulted feng shui experts in building Hong Kong’s Disneyland. The park faces water with mountains behind to suggest plentiful inflow of revenue and visitors, while being protected at the rear. The park’s front gate was shifted 12 degrees to bring prosperity. To ensure the flow of positive energy or chi, Disney put a bend in the walkway from the train station to the gate. Water is heavily used in the park in the form of lakes, streams, and waterfalls placed strategically to accumulate good fortune and wealth. In kitchens, stoves are placed in lucky locations and some areas are designated “no fire zones” to balance the five elements and reduce accidents. The lucky color red frequently accents Main Street. Lucky numbers have also been incorporated throughout the theme park facilities. Disneyland Hotel’s main ballroom measures 888 square meters and the chandelier in its Chinese restaurant contains 2,238 crystal lotuses, a number which sounds like the characters “easily generate wealth” in Cantonese. Both Disney hotels have no fourth floors. No clocks are sold as merchandise in Disney stores because the phrase “giving a clock” sounds the same as “going to a funeral.” The park’s groundbreaking and opening dates were also picked for their auspiciousness.2

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Reference groups influence members in at least three ways. They expose an individual to new behaviors and lifestyles, and influence attitudes and self-concept; they create pressures for conformity that may affect actual product and brand choices. People are also influenced by groups to which they do not belong. Aspirational groups are those a person hopes to join; dissociative groups are those whose values or behavior an individual rejects. Where reference group influence is strong, marketers must determine how to reach and influence opinion leaders in these reference groups. An opinion leader is the person in informal, product-related communications who offers advice or information about a specific product or product category, such as which of several brands is best or how a particular product may be used.4 Marketers try to reach opinion leaders by identifying demographic and psychographic characteristics associated with opinion leadership, identifying the media read by opinion leaders, and directing messages at opinion leaders. In Japan, high school girls have often been credited with creating the buzz that makes some products a big hit.

Cliques Society can be seen as consisting of cliques, small groups whose members interact frequently. Clique members are similar, and their closeness facilitates effective communication but also insulates the clique from new ideas. The challenge is to create more openness so cliques exchange information with others in society. This openness is helped along by people who function as liaisons, connecting two or more cliques without belonging to either, and by bridges, people who belong to one clique and are linked to a person in another.

Family

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In Asia, the family is a strong reference group, influencing members on numerous aspects of their daily life.

The family is the most important consumer buying organization in society, and family members constitute the most influential primary reference group.5 We can distinguish between two families in the buyer’s life. The family of orientation consists of parents and siblings. From parents, a person acquires an orientation toward religion, politics, and economics, and a sense of personal ambition, self-worth, and love.6 Even if the buyer no longer interacts very much with his or her parents, their influence on behavior can be significant. In Asia, where parents live with grown children, their influence can be substantial. A more direct influence on everyday buying behavior is the family of procreation—namely, one’s spouse and children. Korean car makers—Korean car makers are taking women more seriously as they represent 30 percent of domestic sales. Hyundai introduced the Sonata Elegance Special, a female-oriented version of its flagship midsized sedan. To provide a more feminine touch to its cars, Kia Motors focused on fashionable appearances. For its sports-utility vehicle, it offered a variety of unique colors such as Hawaiian Blue and Coffee Brown, with primary colors for the interior. Daewoo’s Lacetti model featured a telescopic steering column which enables drivers to adjust the column length for comfort. This feature is particularly useful to women as they are generally shorter than men.7 Marketers are interested in the roles and relative influence of family members in the purchase of a large variety of products and services. These roles vary widely in different countries and social classes. For example, among traditional Chinese and Japanese households, it is not uncommon for the husband to give his wife his pay packet as she manages the family’s expenditure. In contrast, India is a patriarchal society where the husband makes the most decisions. Given women’s increasing wealth and income-generating ability, household purchasing patterns are gradually changing in Asia. Thus, marketers of products traditionally purchased by men are now thinking about women as possible buyers. Indeed, women are becoming an economic force in Asia. In China, women are at the forefront of consumer spending. Urban women are spending more of their hard-earned cash on personal travel and related recreational activities, dining out, shopping, as well as buying cars and pursuing urban leisure lifestyles. Their spending will help to determine which foreign brands will succeed in China. Analysts say that Chinese women are particularly susceptible to advertising by foreign brands like Louis Vuitton.8 In India, Hindustan Unilever launched the Fair & Lovely Foundation to economically empower women and avail them with opportunities for education and skills training.

Men and women may respond differently to marketing messages.9 Women value connections and relationships with family and friends, and place a high priority on people. Men, on the other hand, relate more to competition and place a high priority on action. Another shift in buying patterns is an increase in the amount of dollars spent and the direct and indirect influence wielded by children and teens.10 Direct influence describes children’s hints, requests, and demands—“I want to go to McDonald’s.” Indirect influence means that parents know the brands, product choices, and preferences of their children without hints or outright requests.

Today, companies are also likely to use the Internet to show products to children and to solicit personal information from them, offering freebies in exchange. Many have come under fire for this practice, and for not clearly differentiating ads from games or entertainment. In China and Hong Kong, there is concern over businesses like Internet cafés offering online games targeting children. Numerous kids devote long hours at a stretch to playing games on computer terminals against parental objections.

Roles and Statuses A person participates in many groups—family, clubs, and organizations. The person’s position in each group can be defined in terms of role and status. A role consists of the activities a person is expected to perform. Each role carries a status. A senior vice president of marketing has more status than a sales manager, and a sales manager has more status than an office clerk. People choose products that reflect and communicate their role and actual or desired status in society. Marketers must be aware of the status symbol potential of products and brands. Like the family, roles and statuses in Asia are undergoing gradual changes as well. Such changes are reflected in ads featuring men in formerly traditional women’s roles and smartlooking women in the workplace. Nevertheless, Asia’s hierarchical society still emphasizes the relative position of an individual in a group context. Thus, the concept of mianzi or “face,” requiring individuals to abide by social norms, is vital among the Chinese (see Marketing Insight: Face-Saving and the Chinese Consumer).

MARKETING INSIGHT

FACe-SAvIng And the ChIneSe ConSuMer

In Chinese culture, there are two types of “face.” Lian (脸) is the confidence of the society on an individual’s moral character, while mianzi (面子) is the prestige accorded through success and ostentation. Saving one’s face is important to traditional Chinese. This has implications on consumer behavior: Influence of referent others—To accord respect to others and give them their mianzi, Chinese consumers heed the advice given by others, particularly opinion leaders. Complying with the social norm also preserves the consumer’s lian as such behavior demonstrates one’s willingness to be with the majority. Ostentatious living—The mianzi factor also suggests that Chinese are sensitive to their hierarchical position in social structures. To enhance and protect one’s social standing, Chinese engage in ostentatious activities such as driving Mercedes-Benzes, throwing lavish banquets, and donning brand-name items. Given that displaying wealth is ingrained into Chinese culture, this translates into growing purchases of luxury products.

Fewer complaints—Chinese consumers are also less likely to complain when dissatisfied with a purchase. To complain is to make the other party lose his lian because he sold a poor product. The complainant also loses his lian because he is admitting that he had been taken in. Instead, harmony is strived for. Comparative advertising—Chinese are uncomfortable with comparative ads because they are shameless with bravado and put down the other brand. This is considered an insult to the moral character of the advertised brand. The brand therefore does not deserve honor (meiyou mianzi or “has no face”). Negotiation—Chinese are also likely to cover up mistakes made. Thus, during negotiations, it would be impolite to identify mistakes made by a Chinese counterpart. Also, as a face-saving strategy, Chinese businesses usually use a mediator during negotiations to protect their prestige.

ChaPter 6 ó analyzing Consumer Markets

Television can be especially powerful in reaching children, and marketers are using television to target children at younger ages than ever before. By the time children are around 2 years old, they can often recognize characters, logos, and specific brands. Marketers are tapping into that audience with product tie-ins such as Disney Princesses water bottles and school bags.

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6.1.3 Personal Factors A buyer’s decisions are also influenced by personal characteristics. These include the buyer’s age and stage in the life cycle; occupation and economic circumstances; personality and selfconcept; and lifestyle and values. Because many of these characteristics have a very direct impact on consumer behavior, it is important for marketers to follow them closely.

Age and Stage in the Life Cycle People’s taste in food, clothes, furniture, and recreation is often age-related. For instance, some Japanese teenagers dye their hair fire-engine red and wear the latest street fashion which includes tutus over pants. They quit school because the strict discipline in schools is not compatible with what they want at this stage of their life cycle. In China, while thrift is valued among the older generation, brand and status consciousness have emerged as an important purchase consideration among the young. Their independence and confidence, coupled with the rise of individuality, has fueled their desire for things that express these traits. The aging population, especially in Japan, affects what products are purchased.

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Japan’s aging population has seen the introduction of a plethora of elderly-friendly products such as therapeutic electronic pets like Paro, the furry robot seal.

Japan’s aging population—Japan’s expanding silver market has changed the retail landscape. About 23 percent of its 128 million people are aged 65 or older. Besides hearing aids and orthopaedic socks, elderly-friendly product choices include cars with dashboards with large numbers and letters, and swivelling seats that make it easier to get in and out. Supermarkets have wider aisles for motorized wheelchairs. Japan’s robotics tradition has seen innovations such as robots to help the elderly do their shopping and household chores. Paro, a furry robot seal that responds to patting by moving its tail and opening and closing its eyes, is used in nursing homes for dementia sufferers. RIBA II, an electronic nurse, lifts patients from their futons on the floor into a wheelchair. There is also a robotic bed that can transform into a wheelchair and be driven around the home and even on the street. To prevent bedsores, it turns over its occupant while he is sleeping.11

Consumption is also shaped by the family life cycle and the number, age, and gender of people in the household at any point in time. Some households in Asia are increasingly fragmented—the traditional family with a husband, wife, and kids makes up a smaller percentage of total households than before. In addition, psychological life cycle stages may matter. Adults experience certain “passages” or “transformations” as they go through life.12 Marketers should also consider critical life events or transitions— marriage, childbirth, illness, relocation, divorce, career change, widowhood—as giving rise to new needs. These should alert service providers—banks, lawyers, and insurance agents—to ways they can help.13

Occupation and Economic Circumstances

Eversoft realizes that in Asia, being a mother is a critical life event. In a symbiotic way, Eversoft cares for your skin, just like how a mother cares for her child.

Occupation also influences consumption patterns. Marketers try to identify the occupational groups that have above-average interest in their products and services. Product choice is greatly affected by economic circumstances: spendable income (level, stability, and time pattern), savings and assets (including the percentage that is liquid), debts, borrowing power, and attitudes toward spending and saving. Purchasing discretionary items on credit has risen in Asia. For example, while visitors to China 20 years ago had a hard time explaining what a credit card was, the majority of Chinese businesspeople now carry it around. Nonetheless, if economic indicators point to a recession, marketers can take steps to redesign, reposition, and reprice their products or introduce or increase the emphasis on discount brands so that they can continue to offer value to target customers.

Growing middle class—China’s emerging middle class is growing. There are not necessarily the richest, but as a large number of young people are put into this category, they are promised more wealth, with higher purchasing power. Many aspire to own cars. They are drawn to modern technology such as the Internet, smartphones, and tablets. On an annualized basis, China’s emerging middle class is expected to spend 49 billion yuan on luxury watches, 36 billion yuan on female skincare products, and 300 billion yuan on overseas travel; to drink 2.7 billion cups of coffee and 56 million bottles of whisky or brandy; and to buy 50 million smartphones, 16 million laptops, 12 million TV sets, and 7.2 million tablets.14

Personality and Self-concept Personality is a set of distinguishing human psychological traits that lead to relatively consistent and enduring responses to environmental stimuli. It is often described in terms of such traits as self-confidence, dominance, autonomy, deference, sociability, defensiveness, and adaptability.15 Personality can be a useful variable in analyzing consumer brand choices. The idea is that brands also have personalities, and consumers are likely to choose brands whose personalities match their own. We define brand personality as the specific mix of human traits that may be attributed to a particular brand. Jennifer Aaker conducted research into brand personalities and identified the following seven brand personalities:16 1. 2. 3. 4. 5. 6. 7.

Sincerity (down-to-earth, honest, wholesome, and cheerful)—For example, Hello Kitty Excitement (daring, spirited, imaginative, and up-to-date)—For example, MTV Competence (reliable, intelligent, and successful)—For example, Samsung Sophistication (upper-class and charming)—For example, Shiseido Ruggedness (outdoorsy and tough)—For example, Timberland Passion (emotional intensity, spirituality, and mysticism)—For example, Zara Peacefulness (harmony, balance, and natural)—For example, Yamaha

A cross-cultural study exploring the generalizability of Aaker’s scale outside the United States found that three of the five factors applied in Japan and Spain, but a “peacefulness” dimension replaced “ruggedness” both in Japan and Spain, and a “passion” dimension emerged in Spain instead of “competence.”17 Research on brand personality in Korea revealed two culture-specific factors— passive likeableness and ascendancy—reflecting the importance of Confucian values in Korea’s social and economic systems.18 Consumers often choose and use brands that have a brand personality consistent with their own actual self-concept (how one views oneself ), although in some cases the match may be based on consumer’s ideal self-concept (how one would like to view oneself ) or even others’ self-concept (how one thinks others see one) rather than actual self-image.19 These effects may also be more pronounced for publicly consumed products as compared to privately consumed goods.20 However, consumers who are high “self-monitors”—that is, sensitive to how others see them—are more likely to choose brands whose personalities fit the consumption situation.21

Lifestyle and Values People from the same subculture, social class, and occupation may lead quite different lifestyles. A lifestyle is a person’s pattern of living in the world as expressed in activities, interests, and opinions. Lifestyle portrays the “whole person” interacting with his or her environment. Vietnamese’ lifestyle, for example, is changing rapidly. Consumers are quickly leapfrogging in their purchases.

Hello Kitty has a wholesome, sincere personality. Consumers who see themselves as being honest and down-to-earth are more likely to purchase Hello Kitty products than those who have a different self-concept.

ChaPter 6 ó analyzing Consumer Markets

Luxury-goods makers such as Gucci, Prada, and Louis Vuitton do well when the economy is booming.

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In personal care, increasing numbers of Vietnamese are buying more sophisticated products. Thus, luxury-goods distributors for Hermés and Kenzo find the market growing dramatically because of the change in lifestyle.22 Marketers search for relationships between their products and lifestyle groups. For example, a computer manufacturer might find that most computer buyers are achievement-oriented. The marketer may then aim the brand more clearly at the achiever lifestyle. Marketers are always uncovering new trends in consumer lifestyles.

Neko cafes—Neko, or cat cafes, first appeared in Taipei. It soon became a tourist destination. However, this concept of paying an hourly fee for supervised indoor pet rental has taken Japan by storm. As many apartments in Japan forbid pets, the Japanese are turning to Neko cafes to play with cats for an hour or so, helping them to de-stress from their hectic urban life. Neko cafes have become a popular destination for Japanese customers looking for companionship and comfort.

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Neko or cat cafés are popular in Japan as many Japanese live in small apartments that do not allow pets. These indoor pet rentals offer companionship and comfort to Japanese who are harried by their hectic lifestyle.

Lifestyles are shaped partly by whether consumers are money-constrained or timeconstrained. Companies aiming to serve money-constrained consumers will create lower-cost products and services. Local brands usually fill this need in many emerging markets, while their foreign counterparts target more affluent consumers. Consumers who experience time famine are prone to multitasking, that is, doing two or more things at the same time. They will also pay others to perform tasks because time is more important than money. Companies aiming to serve them will create convenient products and services for this group. Much of the wireless revolution is fueled by the multitasking trend. During the World Cup, Chinese were simultaneously using three screens to keep updated. They were following the soccer matches on TV, accessing video streaming, and reading online articles.23 In some categories, notably food processing, companies targeting time-constrained consumers need to be aware that these consumers seek the illusion that they are not operating within time constraints. The food processing industry labels those who seek both convenience and some involvement in the cooking process the “convenience involvement segment.”24 Consumer decisions are also influenced by core values, the belief systems that underlie consumer attitudes and behaviors. Core values go much deeper than behavior or attitude, and determine, at a basic level, people’s choices and desires over the long term. Marketers who target consumers on the basis of their values believe that by appealing to people’s inner selves, it is possible to influence their outer selves—their purchase behavior.

6.2 Key Psychological Processes The starting point for understanding consumer behavior is the stimulus-response model shown in Figure 6.1. Marketing and environmental stimuli enter the consumer’s consciousness. A set of psychological processes combine with certain consumer characteristics to result in decision processes and purchase decisions. The marketer’s task is to understand what happens in the consumer’s consciousness between the arrival of the outside marketing stimuli and the ultimate purchase decisions. Four key psychological processes—motivation, perception, learning, and memory—fundamentally influence consumer responses.

Consumer Psychology Other Stimuli

Products & services Price Distribution Communications

Economic Technological Political Cultural

Motivation Perception Learning Memory

Consumer Characteristics Cultural Social Personal

Buying Decision Process

Purchase Decision

Problem recognition Information search Evaluation of alternatives Purchase decision Postpurchase behavior

Product choice Brand choice Dealer choice Purchase amount Purchase timing Payment method

Figure 6.1 Model of Consumer Behavior

6.2.1 Motivation: Freud, Maslow, Herzberg A person has many needs at any given time. Some needs are biogenic, arising from physiological states of tension such as hunger, thirst, or discomfort. Other needs are psychogenic, arising from psychological states of tension such as the need for recognition, esteem, or belonging. A need becomes a motive when it is aroused to a sufficient level of intensity. A motive is a need that is sufficiently pressing to drive the person to act. Motivation has both direction—we select one goal over another—and intensity—we pursue the goal with more or less vigor. Three of the best-known theories of human motivation—those of Sigmund Freud, Abraham Maslow, and Frederick Herzberg — carry quite different implications for consumer analysis and marketing strategy.

Freud’s Theory Sigmund Freud assumed that the psychological forces shaping people’s behavior are largely unconscious, and that a person cannot fully understand his or her own motivations. When a person examines specific brands, he or she will react not only to their stated capabilities, but also to other, less conscious cues. Shape, size, weight, material, color, and brand name can all trigger certain associations and emotions. A technique called laddering can be used to trace a person’s motivations from the stated instrumental ones to the more terminal ones. Then the marketer can decide at what level to develop the message and appeal.25 Motivation researchers often collect “in-depth interviews” with a few dozen consumers to uncover deeper motives triggered by a product. They use various projective techniques such as word association, sentence completion, picture interpretation, and role playing.

Maslow’s Theory Abraham Maslow sought to explain why people are driven by particular needs at particular times.26 Why does one person spend considerable time and energy on personal safety and another on pursuing the high opinion of others? Maslow’s answer is that human needs are arranged in a hierarchy, from the most pressing to the least pressing. In order of importance, they are physiological needs, safety needs, social needs, esteem needs, and self-actualization needs (see Figure 6.2). People will try to

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satisfy their most important needs first. When a person succeeds in satisfying an important need, he or she will then try to satisfy the next-most-important need. For example, a starving man (need 1) will not take an interest in the latest happenings in the art world (need 5), nor in how he is viewed by others (need 3 or 4), nor even in whether he is breathing clean air (need 2); but when he has enough food and water, the next-most-important need will become salient.

5 Selfactualization Needs (self-development and realization)

4

Esteem Needs (self-esteem, recognition, status)

3

2 1

Social Needs (sense of belonging, love) Safety Needs (security, protection) Physiological Needs (food, water, shelter)

Figure 6.2 Maslow’s Hierarchy of Needs Source: A. H. Maslow, Motivation and Personality, 2nd ed., (Upper Saddle River, NJ: Prentice Hall, 1970). Reprinted by permission of Prentice Hall Inc.

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Maslow’s theory helps marketers understand how various products fit into the plans, goals, and lives of consumers. Here is a Singaporean example:

Young Singaporeans are relationship conscious and do not like to force their opinion on others.

Singaporean youth market—A study found that youths worldwide are motivated by commune (the need for connection and community), justice (the need to do what is right), and authenticity (the need to see things as they are). However, in Singapore, journeying (the need for exploration, inspiration, and discovery) replaced justice in the top three motivations. Young Singaporeans want to be remembered for the quality of their relationships and not their power or influence. Said one Singaporean, “I want to influence my friends but it’s not like changing their beliefs or opinions . . . It’s good if you can get someone to reflect on what they think about things.” Similarly, brands have to adopt a similar perspective. As young Singaporeans are not going to force their way or opinion on others, they would also expect brands to do the same.27

Some argue that Maslow’s theory does not fully apply in collectivistic societies like Asia.28 It is particularly debatable whether self-actualization is applicable to Asian consumers. These needs may be socially directed instead, given the strong desire of Asians to enhance their image and position through contributions to society. Three types of socially directed needs may be considered the most important for Asians: 1.

Affiliation — This is the acceptance of an individual as a member of a group. Consumers seeking this need will tend to conform to group norms.

2.

Admiration —Once affiliation needs are satisfied, admiration is sought. This is respect from group members, which is earned through acts.

3.

Status—This is esteem received from society at large. Unlike admiration which tends to be at a more intimate level, status requires the regard of outsiders.

Herzberg’s Theory

Herzberg’s theory has two implications. First, sellers should do their best to avoid dissatisfiers (for example, a poor training manual or a poor service policy). Although these things will not sell a product, they might easily unsell it. Second, the seller should identify the major satisfiers or motivators of purchase in the market and then supply them. These satisfiers will make the major difference as to which brand the customer buys. Japanese tourists—Bargain-hunting Japanese tourists visiting Asian countries consider the three Ks in deciding which country they visit. While cost is important, these hygiene factors weigh high on the dissatisfier list should they fail to make the grade. Kitanai, or dirty: Does the country have poor sanitation in restaurants and toilets? Kakkowarui, or unsophisticated: Is it too rural without enough modern amenities? Kowai, or scary: Are there high instances of murder, mugging, and infectious diseases? Kowai appears to have become more salient immediately following the terrorist events. For instance, after the terrorist attack on 11 September 2001. Japanese tourists refrained from visiting U.S. destinations such as Hawaii in favor of Tokyo Disneyland.

ChaPter 6 ó analyzing Consumer Markets

Frederick Herzberg developed a two-factor theory that distinguishes dissatisfiers (factors that cause dissatisfaction) and satisfiers (factors that cause satisfaction).29 The absence of dissatisfiers is not enough; satisfiers must be present to motivate a purchase. For example, a computer that does not come with a warranty would be a dissatisfier. Yet the presence of a product warranty may not act as a satisfier or motivator of a purchase, because it is not a source of intrinsic satisfaction. Ease of use may be a satisfier.

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6.2.2 Perception A motivated person is ready to act. How the motivated person actually acts is influenced by his or her view or perception of the situation. Perception is the process by which an individual selects, organizes, and interprets information inputs to create a meaningful picture of the world.30 Consumers perceive many different kinds of information through their senses, as reviewed in Marketing Memo: the Power of Sensory Marketing. Perception depends not only on the physical stimuli, but also on the stimuli’s relation to the surrounding field and on conditions within the individual. The key point is that perceptions can vary widely among individuals exposed to the same reality. One person might perceive a fast-talking salesperson as aggressive and insincere; another, as intelligent and helpful. Each will respond differently to the salesperson. In marketing, perceptions are more important than the reality, as it is perceptions that will affect consumers’ actual behavior.

MARKETING MEMO

the Power oF SenSory MArketIng

Sensory marketing has been defined as “marketing that engages the consumers’ senses and affects their perception, judgment, and behavior.” In other words, sensory marketing is an application of the understanding of sensation and perception to the field of marketing. All five senses may be engaged with sensory marketing: sight, sound, smell, taste, and feel. Aradhna Krishna offers an excellent review of the rapidly accumulating academic research on this topic. She notes, “Given the gamut of explicit marketing appeals made to consumers every day, subconscious ‘triggers’ which may appeal to the basic senses may be a more efficient way to engage consumers.” In

other words, consumers’ own inferences about a product’s attributes may be more persuasive, at least in some cases, than explicit claims from an advertiser. Krishna argues that sensory marketing’s effects can be manifested in two main ways. One, sensory marketing can be used subconsciously to shape consumer perceptions of more abstract qualities of a product or service (say, different aspects of its brand personality such as its sophistication, ruggedness, warmth, quality, and modernity). Two, sensory marketing can also be used to affect the perceptions of specific product or service attributes such as its color, taste, smell, or shape.

Marketers certainly appreciate the importance of sensory marketing. Many hotels, retailers, and other service establishments use signature scents to set a mood and distinguish themselves. Westin’s White Tea scent was so popular it began to sell it for home use. Although NBC, Intel, and Yahoo have trademarked their brand jingles (or yodels), HarleyDavidson was unsuccessful in trademarking its distinctive engine roar. In packaging, companies try to find shapes that are pleasing to the touch, and in food advertising, visual and verbal depictions try to tantalize consumers’ taste buds. Based on Krishna’s review of academic research in psychology and marketing, we next highlight some key considerations for each of the five senses. Touch (haptics) Touch is the first sense to develop and the last sense we lose with age. People vary in their need for touch, and Peck and Childers have developed a scale to capture those differences. In one application, high need-for-touch (NFT) individuals were more confident and less frustrated about their product evaluations when they could actually touch a product than when they could only see it. For low NFT individuals, touching did not matter one way or another. Written product descriptions helped alleviate the NFT’s level of frustration, though only for more concrete product attributes (such as the weight of a cell phone).

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Smell Scent-encoded information has been shown to be more durable and last longer in memory than information encoded with other sensory cues. People can recognize scents after very long lapses of time, and using scents as reminders can cue all kinds of autobiographical memories. Pleasant scents have also been shown to enhance evaluations of products and stores. Consumers also take more time shopping and engage in more variety seeking in the presence of pleasant scents. Sound (Audition) Marketing communications by their very nature are often auditory in nature. Even the sounds that make up a word can

carry meanings. One study showed that Frosh-brand ice cream sounded creamier than Frish-brand ice cream. Language too can have its own associations. In bilingual cultures where English is the second language—such as Japan, Korea, Germany, and India—use of English in ads signals modernity, progress, sophistication, and a cosmopolitan identity. Ambient music in a store has also been shown to influence consumer mood, time spent in a location, perception of time spent in a location, and spending. Taste Humans can distinguish only five pure tastes: sweet, salty, sour, bitter, and umami. Umami comes from Japanese food researchers and stands for “delicious” or “savory” as it relates to the taste of pure protein or monosodium glutamate (MSG). Taste perceptions themselves depend on all the other senses—the way a food looks, feels, smells, and sounds to eat. Thus many factors have been shown to affect taste perceptions, including physical attributes, brand name, product information (ingredients, nutritional information), product packaging, and advertising. Foreign-sounding brand names can improve ratings of yogurt, and ingredients that sound unpleasant (balsamic vinegar or soy) can affect consumers taste perceptions if disclosed before product consumption. Vision Visual effects have been studied in detail in an advertising context. Many visual perception biases or illusions exist in dayto-day consumer behavior. For example, people judge tall thin containers to contain more volume than short fat ones, but after drinking from the containers, people actually feel they have consumed more from short fat containers than tall thin containers, over-adjusting their expectations. Even something as simple as the way a mug is depicted in an ad can affect product evaluations. A mug photographed with the handle on the right side was shown to elicit more mental stimulation and product purchase intent from right-handed people than if shown with the handle on the left side.

Sources: Aradhna Krishna, Sensory Marketing: Research on the Sensuality of Products (New York: Routledge, 2010); Aradhna Krishna, “An Integrative Review of Sensory Marketing: Engaging the Senses to Affect Perception, Judgment and Behavior,” Journal of Consumer Psychology, July 2012, 22, pp. 332–51; Joann Peck and Terry L. Childers, “To Have and to Hold: The Influence of Haptic Information on Product Judgments,” Journal of Marketing, April 2003, 67, pp. 35–48; Joann Peck and Terry L. Childers, “Individual Differences in Haptic Information Processing: On the Development, Validation, and Use of the ‘Need for Touch’ Scale,” Journal of Consumer Research, December 2003, 30, pp. 430–42; Joann Peck and Terry L. Childers, “Effects of Sensory Factors on Consumer Behaviors,” Frank Kardes, Curtis Haugtvedt, and Paul Herr, eds., Handbook of Consumer Psychology (Mahwah, NJ: Erlbaum, 2008), pp. 193–220; Aradhna Krishna, May Lwin, and Maureen Morrin, “Product Scent and Memory,” Journal of Consumer Research, June 2010, 37, pp. 57–67; Eric Yorkston and Geeta Menon, “A Sound Idea: Phonetic Effects of Brand Names on Consumer Judgments,” Journal of Consumer Research, June 2004, 31, pp. 43–45; Aradhna Krishna and Rohini Ahluwalia, “Language Choice in Advertising to Bilinguals: Asymmetric Effects for Multinationals versus Local Firms,” Journal of Consumer Research, December 2008, 35, pp. 692–705; Richard F. Yalch and Eric R. Spangenberg, “The Effects of Music in a Retail Setting on Real and Perceived Shopping Times,” Journal of Business Research, August 2000, 49, pp. 139–47; France Leclerc, Bernd H. Schmitt, and Laurette Dube, “Foreign Branding and Its Effect on Product Perceptions and Attitudes,” Journal of Marketing Research, May 1994, 31, pp. 263–70; Priya Raghubir and Aradhna Krishna, “Vital Dimensions: Antecedents and Consequences of Biases in Volume Perceptions,” Journal of Marketing Research, August 1994, 36, pp. 313–26; Ryan S. Elder and Aradhna Krishna, “The ‘Visual Depiction Effect’ in Advertising: Facilitating Embodied Mental Simulation through Product Orientation,” Journal of Consumer Research, April 2012, 38, pp. 988–1003.

Cosmetic surgery—Many Koreans undergo cosmetic surgery because they believe that this will help them land a job. Koreans believe in face reading and that good looks bring good fortune. The plastic surgery industry in Korea is worth about five trillion won ($4.3 billion), about a quarter of the global market. There are even reality TV series that show how the looks of ordinary-looking men and women have been transformed. These series have changed people’s attitudes favorably toward plastic surgery.

ChaPter 6 ó analyzing Consumer Markets 185 People can emerge with different perceptions of the same object because of three perceptual processes: selective attention, selective distortion, and selective retention.

Selective Attention Attention is the allocation of processing capacity to some stimulus. Voluntary attention is something purposeful; involuntary attention is grabbed by someone or something. It is estimated that the average person may be exposed to 1,500 ads or brand communications a day. Because consumers cannot possibly attend to all these, they screen most stimuli out—a process called selective attention. Selective attention means that marketers have to work hard to attract consumers’ notice. The real challenge is to explain which stimuli people will notice. Here are some findings: People are more likely to notice stimuli that relate to a current need. A person who is motivated to buy a computer will notice computer ads; he or she will be less likely to notice DVD ads. People are more likely to notice stimuli that they anticipate. A person is more likely to notice computers than radios in a computer store because he or she does not expect the store to carry radios. People are more likely to notice stimuli whose deviations are large in relation to the normal size of the stimuli. A person is more likely to notice an ad offering $100 off the list price of a computer than one offering $5 off. Although people screen out much of the surrounding stimuli, they are influenced by unexpected stimuli, such as sudden offers in the mail, over the phone, or from a salesperson. Marketers may attempt to promote their offers intrusively to bypass selective attention filters.

Tobacco warnings—The Indian government is wrapping tobacco products with photographs of rotting gums and faces eaten away by cancer to try to scare Indians into quitting smoking. Such vivid pictorial scare tactics have been used in Singapore and elsewhere after text warnings failed to deter smokers. Previously, pictorial warnings showed a scorpion or a variation of skull and bones. These were considered too mild to wrest the attention of the smokers and influence them.31 Vivid pictures are used on cigarette packs to capture attention regarding the harmful effects of smoking.

Selective Distortion Even noticed stimuli do not always come across in the way the senders intended. Selective distortion is the tendency to interpret information in a way that will fit our preconceptions. Consumers will often distort information to be consistent with prior brand and product beliefs.32 A stark demonstration of the power of consumer brand beliefs is the typical result of product sampling tests. In “blind” taste tests, one group of consumers samples a product without knowing which brand it is, whereas another group of consumers samples the product knowing which brand it is. Invariably, differences arise in the opinions of the two groups despite the fact that the two groups are consuming exactly the same product!

The size and shape of the glass and the color and smell of the liquid are all cues which may affect consumer perceptions and evaluations when drinking a glass of orange juice.

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When consumers report different opinions between branded and unbranded versions of identical products, it must be the case that the brand and product beliefs, created by whatever means (e.g., past experiences, marketing activity for the brand, etc.), have somehow changed their product perceptions. Selective distortion can work to the advantage of marketers with strong brands when consumers distort neutral or ambiguous brand information to make it more positive. In other words, coffee may seem to taste better, a car may seem to drive more smoothly, the wait in a bank line may seem shorter, and so on, depending on the brand.

Selective Retention People do not remember much information to which they are exposed, but will tend to retain information that supports their attitudes and beliefs. Because of selective retention, we are likely to remember good points about a product we like and forget good points about competing products. Selective retention again works to the advantage of strong brands. It also explains why marketers need to use repetition in sending messages to their target market—to make sure their message is not overlooked.

Subliminal Perception The selective perception mechanisms require active engagement and thought. A topic that has fascinated armchair marketers for ages is subliminal perception. They argue that marketers embed covert, subliminal messages in ads or packages. While consumers are not consciously aware of them, these messages can affect their behavior. Although it is clear many subtle subconscious effects can exist with consumer processing,33 no evidence supports the notion that marketers can systematically control consumers at that level.34

6.2.3 Learning When people act, they learn. Learning involves changes in an individual’s behavior arising from experience. Most human behavior is learned. Learning theorists believe that learning is produced through the interplay of drives, stimuli, cues, responses, and reinforcement. A drive is a strong internal stimulus impelling action. Cues are minor stimuli that determine when, where, and how a person responds. Suppose you buy a Lenovo computer. If your experience is rewarding, your response to computers and Lenovo will be positively reinforced. Later on, when you want to buy a printer, you may assume that because Lenovo makes good computers, it also makes good printers. In other words, you generalize your response to similar stimuli. A countertendency to generalization is discrimination. discrimination means that the person has learned to recognize differences in sets of similar stimuli and can adjust responses accordingly.

Learning theory teaches marketers that they can build demand for a product by associating it with strong drives, using motivating cues, and providing positive reinforcement. A new company can enter the market by appealing to the same drives that competitors use and by providing similar cue configurations, because buyers are more likely to transfer loyalty to similar brands (generalization); or the company might design its brand to appeal to a different set of drives and offer strong cue inducements to switch (discrimination).

Some researchers prefer more active, cognitive approaches when learning depends upon the inferences or interpretations consumers make about outcomes (was an unfavorable consumer experience due to a bad product or did the consumer fail to follow instructions properly?). The hedonic bias says people have a general tendency to attribute success to themselves and failure to external causes. Consumers are thus more likely to blame a product than themselves, putting pressure on marketers to carefully explicate product functions in well-designed packaging and labels, instructive ads and Web sites, and so on.

6.2.4 Emotions Consumer response is not all cognitive and rational; much may be emotional and invoke different kinds of feelings. A brand or product may make a consumer feel proud, excited, or confident. Marketers are increasingly recognizing the power of emotional appeal, especially if these are rooted in some functional aspects of the brand. An emotion-filled brand story can trigger people’s desire to pass on things they hear about brands, through either word-of-mouth or online sharing. Firms are giving their communications a stronger human appeal to engage consumers in their brand stories. Many different kinds of emotions can be linked to brands.

Axe—A pioneer in product development—it established the male body wash category—and in its edgy sex appeal, Unilever’s Axe personal-care brand has become a favorite of young males all over the world. With scents employing different combinations of flowers, herbs, and spices, the Axe line includes deodorant body sprays, sticks, roll-ons, and shampoos. The brand was built on the promise of the “Axe Effect”—an over-the-top notion that using Axe products would get women to enthusiastically and sometimes even desperately pursue the user. For Axe, Unilever employs both traditional and nontraditional media with a heavy dose of sexual innuendo and humor. A recent social media-driven campaign gave a cheeky wink to environmentalism while advocating the practice of “showerpooling.” As one ad proclaimed, “When you Showerpool, you can save water while enjoying the company of a like-minded acquaintance, or even an attractive stranger.” Facebook promotions, YouTube videos, and other social media messages all helped to spread the word. By cleverly serving as the “wing man” for confidence in the “mating game”—especially for 18- to 24-year-old males— the brand has become a key player in the multibillion-dollar male grooming market. Axe has concentrated grassroots marketing efforts on college campuses with brand ambassadors who hand out products, host parties, and generate buzz. A Twitter account dispenses advice and giveaways.

Axe runs edgy promotional campaigns to connect with its young male target audience, like this Showerpooling event hosted by spokesperson and actress Nikki Reed.

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De Beers—De Beers’ savvy advertising and China’s booming middle class has enabled China to be the world’s second largest consumer for diamond jewelry after the United States overtaking Japan. The idea that diamond symbolizes a lifetime of love has taken root in China, a country that traditionally prefers gold and jade. Chinese consumers have learnt to associate diamond with love, and diamond rings are now popular for weddings. Says one bride-to-be, “A diamond ring, in my heart, means eternity and will make me shimmer on my bridal day.” The younger generation of Chinese are influenced by Western lifestyle and culture where diamonds are seen as the most important symbol of love and loyalty. Many Chinese are also buying diamonds for investment purposes. However, unlike their Western counterparts, some Chinese consumers are still ignorant of the pricing systems and basic methods of evaluating diamonds such as the 4Cs (cut, color, carat, and clarity).35

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6.2.5 Memory Cognitive psychologists distinguish between Short-term Memory (StM)—a temporary repository of information—and Long-term Memory (LtM)—a more permanent repository. All the information and experiences individuals encounter as they go through life can end up in their long-term memory. Most widely accepted views of long-term memory structure involve some kind of associative model formulation.36 For example, the associative network memory model views LTM as consisting of a set of nodes and links. Nodes are stored information connected by links that vary in strength. Any type of information—verbal, visual, abstract, or contextual—can be stored in the memory network. A spreading activation process from node to node determines the extent of retrieval and what information can actually be recalled in any given situation. When a node becomes activated because external information is being encoded (e.g., when a person reads or hears a word or phrase) or internal information is retrieved from LTM (e.g., when a person thinks about some concept), other nodes are also activated if they are sufficiently strongly associated with that node. In this model, we can think of consumer brand knowledge as a node in memory with a variety of linked associations. The strength and organization of these associations will be important determinants of the information that can be recalled about the brand. Brand associations consist of all brand-related thoughts, feelings, perceptions, images, experiences, beliefs, attitudes, and so on that become linked to the brand node. Sangaria Oxygen Water—In Japan, bottled water with an extra shot of oxygen is the rage, especially among women. With the trend towards healthier lifestyles, women associate oxygen water as an energy booster and a natural way to obtain extra oxygen molecules. To fortify such brand associations, Sangaria’s bottle comes in white and has O2 written boldly on it.

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Marketing can be seen as making sure that consumers have the right types of product and service experiences such that the right brand knowledge structures are created and maintained in memory. Companies such as Procter & Gamble like to create mental maps of consumers that depict their knowledge of a particular brand in terms of the key associations that are likely to be triggered in a marketing setting and their relative strength, favorability, and uniqueness to consumers. Figure 6.3 displays a very simple mental map highlighting brand beliefs for a hypothetical consumer for the Haier brand.

Memory Processes Memory is a very constructive process because we do not remember information and events completely and accurately. Often we remember bits and pieces, and fill in the rest based upon whatever else we know. Memory encoding refers to how and where information gets into memory. The strength of the resulting association depends on how much we process the information at encoding (how much we think about it, for instance) and in what way.37 In general, the more attention placed on the meaning of information during encoding, the stronger the resulting associations in memory will be.38 Advertising research in a field setting suggests that high levels of repetition for an uninvolving, unpersuasive ad is unlikely to have as much sales impact as lower levels of repetition for an involving, persuasive ad.39

Memory Retrieval Memory retrieval refers to how information gets out of memory. Three factors are important about memory retrieval: 1.

The presence of other product information in memory can produce interference effects. It may cause the information to be either overlooked or confused. One challenge in a category

Convenient

Variety

Affordable Practical

Simple

Young

Appliance

Loyal

Cheap

HAIER

ChaPter 6 ó analyzing Consumer Markets

Friendly

Trusted

Refrigerator

Functional China

Aggressive

Useful

Figure 6.3 Hypothetical Haier Mental Map

crowded with many competitors—for example, airlines, consumer electronics, and food and beverage companies—is that consumers may mix up brands. 2.

The time since exposure to information at encoding affects the strength of a new association— the longer the time delay, the weaker the association. The time elapsed since the last exposure opportunity, however, has been shown generally to produce only gradual decay. Cognitive psychologists believe that memory is extremely durable, so that once information becomes stored in memory, its strength of association decays very slowly.40

3.

Information may be available in memory (i.e., potentially recallable) but may not be accessible (i.e., unable to be recalled) without the proper retrieval cues or reminders. The particular associations for a brand that “come to mind” depend on the context in which the brand is considered. The more cues linked to a piece of information, however, the greater the likelihood that the information can be recalled. The effectiveness of retrieval cues is one reason why marketing inside a supermarket or any retail store is so critical—in terms of the actual product packaging, the use of in-store mini-billboard displays, and so on. The information they contain and the reminders they provide of advertising or other information already conveyed outside the store will be prime determinants of consumer decision making.

Pepsi—Pepsi’s branding strategy is to introduce a new can and bottle designs every few weeks with plans to sell 20 or more new different ones annually in every market. This departure from marketing convention comes as Pepsi believes that consumer attention span is getting shorter and consumers are faced with a proliferation of brands competing for their time. Pepsi intends such cans and bottles as advertising vehicles to remind consumers of the brand, and not just containers for its drinks. Frequent changes are also extended to flavors. In Japan, where consumers are spoilt with multitudes of beverages, Pepsi introduces various flavors such as Ice Cucumber for a limited period. It does not increase the limited production once it has been sold out, even if the drink proves to be very popular. Pepsi’s strategy is to introduce short-lived fads—once the drink is sold out, it is eliminated from the product line. It thinks that with digital marketing and the increasing changes in consumer brand loyalty, there will be more variety seeking, and fad marketing will be more popular. 41

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Pepsi introduces new can and bottle designs as advertising vehicles to keep top-of-mind awareness for the brand, and not just containers for its drink.

Problem recognition

Information search

Evaluation of alternatives

6.3 The Buying Decision Process: The Five-Stage Model These basic psychological processes play an important role in understanding how consumers actually make their buying decisions. Smart companies try to fully understand the customers’ buying decision process—all their experiences in learning, choosing, using, and even disposing of a product.42 Marketing scholars have developed a “stage model” of the buying decision process (see Figure 6.4). The consumer passes through five stages: problem recognition, information search, evaluation of alternatives, purchase decision, and postpurchase behavior. Clearly, the buying process starts long before the actual purchase and has consequences long afterward.43 But consumers do not always pass through all five stages in buying a product. They may skip or reverse some stages. A woman buying her regular brand of toothpaste goes directly from the need for toothpaste to the purchase decision, skipping information search and evaluation.

6.3.1 Problem Recognition Purchase decision

The buying process starts when the buyer recognizes a problem or need. The need can be triggered by internal or external stimuli. With an internal stimulus, one of the person’s normal needs— hunger, thirst, sex—rises to a threshold level and becomes a drive; or a need can be aroused by an external stimulus. A person may admire a neighbor’s new car or see a television ad for a Thai vacation, which triggers thoughts about the possibility of making a purchase.

Postpurchase behavior

Marketers need to identify the circumstances that trigger a particular need by gathering information from a number of consumers. They can then develop marketing strategies that trigger consumer interest. This is particularly important with discretionary purchases such as luxury goods, vacation packages, and entertainment options. Consumer motivation may need to be increased so that a potential purchase is even given serious consideration.

Figure 6.4 Five-stage Model of the Consumer Buying Process

6.3.2 Information Search

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An aroused consumer will be inclined to search for more information. We can distinguish between two levels of arousal. The milder search state is called heightened attention. At this level, a person simply becomes more receptive to information about a product. At the next level, the person may enter an active information search: looking for reading material, phoning friends, going online, and visiting stores to learn about the product.

Information Sources The major information sources to which the consumer will turn fall into four groups: 1.

Personal—Family, friends, neighbors, acquaintances

2.

Commercial—Advertising, Web sites, salespersons, dealers, packaging, displays

3.

Public—Mass media, consumer-rating organizations

4.

Experiential—Handling, examining, using the product

The relative amount and influence of these sources vary with the product category and the buyer’s characteristics. Generally speaking, the consumer receives the most information about a product from commercial sources—that is, marketer-dominated sources. However, the most effective information often comes from personal sources or public sources that are independent authorities. Each information source performs a different function in influencing the buying decision. Commercial sources normally perform an information function, whereas personal sources perform a legitimizing or evaluation function. For example, physicians often learn of new drugs from commercial sources but turn to other doctors for evaluations.

Search Dynamics By gathering information, the consumer learns about competing brands and their features. The first box in Figure 6.5 shows the total set of brands available to the consumer. The individual consumer will come to know only a subset of these brands (awareness set). Some brands will meet initial buying criteria (consideration set). As the consumer gathers more information, only a few will remain as strong contenders (choice set). The consumer makes a final choice from this set.44

Total Set Apple Asus Dell Hewlett-Packard Toshiba Compaq Lenovo Fujitsu

Awareness Set Apple Dell Hewlett-Packard Toshiba Compaq

Consideration Set Apple Toshiba Fujitsu

Choice Set Apple Toshiba

Decision

?

Marketers need to identify the hierarchy of attributes that guide consumer decision making in order to understand different competitive forces and how these various sets get formed. This process of identifying the hierarchy is called market partitioning. Years ago, most car buyers first decided on the manufacturer and then on one of its car divisions (brand-dominant hierarchy). A buyer might favor Toyota cars and, within this set, Altis. Today, many buyers decide first on the nation from which they want to buy a car (nation-dominant hierarchy). Buyers may first decide they want to buy a Japanese car, then Toyota, and then the Altis model of Toyota. The hierarchy of attributes also can reveal customer segments. Buyers who first decide on price are price dominant; those who first decide on the type of car (sports, passenger, station wagon) are type dominant; those who first decide on the car brand are brand dominant. Type/ price/brand-dominant consumers make up a segment; quality/service/type buyers make up another. Each segment may have distinct demographics, psychographics, and mediagraphics, and different awareness, consideration, and choice sets.45 Figure 6.5 makes it clear that a company must strategize to get its brand into the prospect’s awareness set, consideration set, and choice set. If a store-owner arranges shampoo first by brand (like Lux and Pantene) and then by hair type within each brand, consumers will tend to select their shampoo for varying hair types from the same brand. However, if the shampoo had been displayed with all those for dry hair together, then all those for dandruff control, and so on, consumers would probably choose the type of shampoo they want first, and then choose which brand name they would most like for that hair type. The company must also identify the other brands in the consumer’s choice set so that it can plan the appropriate competitive appeals. In addition, the company should identify the consumer’s information sources and evaluate their relative importance. Consumers should be asked how they first heard about the brand, what information came later, and the relative importance of the different sources. The answers will help the company prepare effective communications for the target market.

6.3.3 Evaluation of Alternatives How does the consumer process competitive brand information and make a final value judgment? No single process is used by all consumers or by one consumer in all buying situations. There are several processes, the most current models of which see the process as cognitively oriented. That is, they see the consumer as forming judgments largely on a conscious and rational basis. Some basic concepts will help us understand consumer evaluation processes: First, the consumer is trying to satisfy a need. Second, the consumer is looking for certain benefits from the product solution. Third, the consumer sees each product as a bundle of attributes with varying abilities for delivering the benefits sought to satisfy this need. The attributes of interest to buyers vary by product. For example: Cameras—Picture sharpness, camera speed, camera size, price Hotels—Location, cleanliness, atmosphere, price Tires—Safety, tread life, ride quality, price

ChaPter 6 ó analyzing Consumer Markets

Figure 6.5 Successive Sets Involved in Consumer Decision Making

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Consumers will pay the most attention to attributes that deliver the sought-after benefits. The market for a product can often be segmented according to attributes that are important to different consumer groups.

Beliefs and Attitudes Through experience and learning, people acquire beliefs and attitudes. These in turn influence buying behavior. A belief is a descriptive thought that a person holds about something. People’s beliefs about the attributes and benefits of a product or brand influence their buying decisions. Just as important as beliefs are attitudes. An attitude is a person’s enduring favorable or unfavorable evaluation, emotional feeling, and action tendencies toward some object or idea.46 People have attitudes toward almost everything: religion, politics, clothes, music, food. Attitudes put people into a frame of mind: liking or disliking an object, moving toward or away from it. Attitudes lead people to behave in a fairly consistent way toward similar objects. Because attitudes economize on energy and thought, they can be very difficult to change. A company is well-advised to fit its product into existing attitudes rather than to try to change attitudes. Cosmetic surgery—More teenagers in Singapore are going under the knife. While plastic surgery used to be frowned upon by the older generation, the younger ones feel that such surgery is acceptable and are willing to go for more invasive procedures like double eyelid surgery and liposuction. Several reasons account for the change in attitude. With the Internet, information about various procedures is easily available. Youths are also influenced by the celebrities they see in the media and want to be like them. One teenaged girl underwent surgery for double eyelids to get rid of her “sleepy eyes.” The surgery made her eyes look brighter and more awake. This positive experience enhanced her belief that cosmetic surgery is safe and beneficial and increased her favorable attitude towards it. Her experience encouraged her younger sister to follow suit with a similar surgery.47

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Expectancy-Value Model The consumer arrives at attitudes (judgments, preferences) toward various brands through an attribute evaluation procedure.48 He or she develops a set of beliefs about where each brand stands on each attribute. The expectancy-value model of attitude formation posits that consumers evaluate products and services by combining their brand beliefs—the positives and negatives— according to importance. Suppose Yishan has narrowed her choice set to four laptop computers (A, B, C, D). Assume that she is interested in four attributes: memory capacity, graphics capability, size and weight, and price. table 6.1 shows her beliefs about how each brand rates on the four attributes. If one computer dominated the others on all the criteria, we could predict that Yishan would choose it. But, as is often the case, her choice set consists of brands that vary in their appeal. If Yishan wants the best memory capacity, she should buy A; if she wants the best graphics capability, she should buy B; and so on. Table 6.1 A Consumer’s Brand Beliefs about Computers Attribute Computer

Memory Capacity

Graphics Capacity

Size and Weight

Price

A

10

8

6

4

B

8

9

8

3

C

6

8

10

5

D

4

3

7

8

Note: Each attribute is rated from 0 to 10, where 10 represents the highest level on that attribute. Price, however, is indexed in a reverse manner, with a 10 representing the lowest price, because a consumer prefers a low price to a high price.

Most buyers consider several attributes in their purchase decision. If we knew the weights that Yishan attaches to the four attributes, we could more reliably predict her computer choice. Suppose Yishan assigned 40 percent of the importance to the computer’s memory capacity, 30 percent to graphics capability, 20 percent to size and weight, and 10 percent to price. To find Yishan’s perceived value for each computer, according to the expectancy-value model, we multiply her weights by her beliefs about each computer’s attributes. This computation leads to the following perceived values: Computer A = 0.4(10) + 0.3(8) + 0.2(6) + 0.1(4) = 8.0 Computer B = 0.4(8) + 0.3(9) + 0.2(8) + 0.1(3) = 7.8 Computer C = 0.4(6) + 0.3(8) + 0.2(10) + 0.1(5) = 7.3

An expectancy-model formulation would predict that Yishan will favor computer A, which (at 8.0) has the highest perceived value.49 Suppose most computer buyers form their preferences the same way. Knowing this, a computer manufacturer can do a number of things to influence buyer decisions. The marketer of computer B, for example, could apply the following strategies to stimulate greater interest in brand B: Redesign the computer—This technique is called real repositioning. Alter beliefs about the brand—This technique is called psychological repositioning. Alter beliefs about competitors’ brands—This strategy, called competitive depositioning, makes sense when buyers mistakenly believe a competitor’s brand has more quality than it actually has. Alter the importance weights—The marketer could try to persuade buyers to attach more importance to the attributes in which the brand excels. Call attention to neglected attributes—The marketer could draw buyers’ attention to neglected attributes, such as styling or processing speed. Shift the buyer’s ideals—The marketer could try to persuade buyers to change their ideal levels for one or more attributes.50

Safi—Safi is the leading toiletries brand in Malaysia that adheres to Islamic beliefs. All its products are made from pure natural ingredients and are free from any ingredients of animal origin or alcohol. One of its recent launches is the GOLD skincare treatment. The metal gold is commonly used by Malays not only in jewellery but also for beauty. In old Malay custom, gold is one of the ingredients used for susuk, a traditional Malayan treatment for beauty and ever-lasting youth. However, this practice, which pre-dates the Islamicization of the region, is prohibited by modern Islamic scholars as haram (forbidden). Safi turned this into a positive. It took this as an opportunity to introduce the GOLD skincare concept which is halal (allowed), and draws on Muslims’ belief that gold is a potential skin treatment ingredient. Using nanotechnology, the 24-carat gold comes in nano size that is small enough to penetrate into the second layer of the skin, producing more collagen necessary for firming skin and reducing the appearance of wrinkles. Because of its nano size, the gold does not stay or accumulate under the skin. Instead, it disperses out of the body. Safi explained how the product worked to the Malaysian Islamic Body of Halal Certification, and received the halal endorsement. By ensuring that the new product adheres to Islamic beliefs; introducing gold, which was traditionally but not recently used; and getting the endorsement from the religious body, Safi was able to enhance attitude towards GOLD.

Consumer attitude towards GOLD by Safi is optimized by its adherence to Islamic beliefs, the reminder of gold as a traditional Malayan treatment for beauty, and an endorsement from the religious authority.

ChaPter 6 ó analyzing Consumer Markets

Computer D = 0.4(4) + 0.3(3) + 0.2(7) + 0.1(8) = 4.7

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6.3.4 Purchase Decisions In the evaluation stage, the consumer forms preferences among the brands in the choice set. The consumer may also form an intention to buy the most preferred brand. In executing a purchase intention, the consumer may make up to five subdecisions: brand (brand A), dealer (dealer 2), quantity (one computer), timing (weekend), and payment method (credit card).

Noncompensatory Models of Consumer Choice The expectancy-value model is a compensatory model in that perceived good things for a product can help to overcome perceived bad things. But consumers may not want to invest so much time and energy to evaluate brands. They often take “mental shortcuts” called heuristics or rules of thumb in the decision process. With noncompensatory models of consumer choice, positive and negative attribute considerations do not necessarily net out. For instance, in the Safi example discussed earlier, toiletries for Muslim women have to conform with Islamic beliefs. Regardless of how effective the toiletries may be, if it is not consistent with the religion, then it will not be used. It is noncompensatory. Evaluating attributes more in isolation makes decision making easier for a consumer, but also increases the likelihood that the person would have made a different choice if he or she had deliberated in greater detail. We highlight three such choice heuristics here.

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Evaluation of alternatives

Purchase intention

Attitudes of others

Unanticipated situational factors

1.

With the conjunctive heuristic, the consumer sets a minimum acceptable cutoff level for each attribute and chooses the first alternative that meets the minimum standard for all attributes. For example, if Yishan decided that all attributes had to be rated at least a 5, she would choose computer C.

2.

With the lexicographic heuristic, the consumer chooses the best brand on the basis of its perceived most important attribute (here, memory capacity). With this decision rule, Yishan would choose computer A.

3.

With the elimination-by-aspects heuristic, the consumer compares brands on an attribute selected probabilistically—where the probability of choosing an attribute is positively related to its importance—and brands are eliminated if they do not meet minimum acceptable cutoff levels.

Characteristics of the person (e.g., brand or product knowledge), the purchase decision task and setting (e.g., number and similarity of brand choices and time pressure involved), and social context (e.g., need for justification to a peer or boss) may affect if and how choice heuristics are used.51 Consumers do not necessarily adopt only one type of choice rule in making purchase decisions. In some cases, they adopt a phased decision strategy that combines two or more decision rules. For example, they might use a noncompensatory decision rule such as the conjunctive heuristic to reduce the number of brand choices to a more manageable number and then evaluate the remaining brands using a compensatory model. The Intel Inside campaign made the brand the first cutoff for many consumers who would only buy a PC with an Intel chip. PC makers like IBM and Dell had little choice but to support Intel.

Intervening Factors

Even if consumers form brand evaluations, two general factors can intervene between the purchase intention and the purchase decision (see Figure 6.6). The first factor is the attitudes of others. The extent to which another person’s attitude reduces the preference for an alternative depends on two things: (1) the intensity of the other person’s negative attitude toward the Purchase consumer’s preferred alternative and (2) the consumer’s motivation to comply with the other decision person’s wishes.52 The more intense the other person’s negativism and the closer the other person is to the consumer, the more the consumer will adjust his or her purchase intention. The converse Figure 6.6 Steps Between Evaluation of Alternatives and a Purchase Decision is also true.

Related to the attitudes of others is the role played by infomediaries who publish their evaluations. Examples include Consumer Reports, which provides unbiased expert reviews of all types of products and services; professional movie, book, and music reviewers; customer reviews of books and music on Amazon.com; and the increasing number of chat rooms where people discuss products, services, and companies.

Wipro introduced the “cloth feel” diapers to overcome the attitude Indian grandmothers have towards disposable diapers and satisfy the needs of comfort sought by modern mothers.

The second factor is unanticipated situational factors that may erupt to change the purchase intention. Yishan might lose her job, some other purchase might become more urgent, or a store salesperson may turn her off. Preferences and even purchase intentions are not completely reliable predictors of purchase behavior. A consumer’s decision to modify, postpone, or avoid a purchase decision is heavily influenced by perceived risk.53

1.

Functional risk—The product does not perform up to expectations.

2.

Physical risk—The product poses a threat to the physical well-being or health of the user or others.

3.

Financial risk—The product is not worth the price paid.

4.

Social risk — The product results in embarrassment from others.

5.

Psychological risk—The product affects the mental well-being of the user.

6.

Time risk—The failure of the product results in an opportunity cost of finding another satisfactory product.

The degree of perceived risk varies with the amount of money at stake, the amount of attribute uncertainty, and the amount of consumer self-confidence. Consumers develop routines for reducing risk, such as decision avoidance, information gathering from friends, and preference for national brand names and warranties. Marketers must understand the factors that provoke a feeling of risk in consumers and provide information and support to reduce it.

6.3.5 Postpurchase Behavior After the purchase, the consumer might experience dissonance that stems from noticing certain disquieting features or hearing favorable things about other brands, and will be alert to information that supports his or her decision. Marketing communications should supply beliefs and evaluations that reinforce the consumer’s choice and help him or her feel good about the brand. The marketer’s job therefore does not end with the purchase. Marketers must monitor postpurchase satisfaction, postpurchase actions, and postpurchase product uses.

Postpurchase Satisfaction Satisfaction is a function of the closeness between expectations and the product’s perceived performance.54 If performance falls short of expectations, the consumer is disappointed; if

ChaPter 6 ó analyzing Consumer Markets

Wipro Baby Soft—In India, grandmothers wield a powerful influence. Living in extended families where hierarchical positions are observed, grandmothers are respected for their experience and wisdom. When it comes to baby care, grandmothers are brought up on using cloth, not disposable diapers, on their babies. However, their daughters, the modern mothers, consider disposable diapers a necessary evil. They do not want their babies to be uncomfortable in disposable diapers and yet dread the troublesome features of using cloth diapers. At the same time, they are mindful that grandmothers have a preference for cloth diapers. Understanding the needs of the modern mother and the attitude and influence of the grandmother, Wipro launched its Baby Soft diapers as “Cloth-Feel Diapers.” This reduced apprehensions among grandmothers and improved the acceptability of the Wipro Baby Soft brand. The brand talks about better comfort, better air circulation, and improved absorption, hence, giving Indian mothers the peace of mind that they deserve.

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it meets expectations, the consumer is satisfied; if it exceeds expectations, the consumer is delighted. These feelings make a difference in whether the customer buys the product again and talks favorably or unfavorably about it to others. The larger the gap between expectations and performance, the greater the dissatisfaction. Here the consumer’s coping style comes into play. Some consumers magnify the gap when the product is not perfect, and they are highly dissatisfied; others minimize the gap and are less dissatisfied.55

Postpurchase Actions A satisfied consumer is more likely to purchase the product again and will also tend to say good things about the brand to others. On the other hand, dissatisfied consumers may abandon or return the product. They may take public action by complaining to the company, going to a lawyer, or complaining to other groups (such as business, private, or government agencies). Private actions include making a decision to stop buying the product (exit option) or warning friends (voice option).56 In all these cases, the seller has done a poor job of satisfying the customer.57 Chapter 5 described CRM programs designed to build long-term brand loyalty. Postpurchase communications to buyers have been shown to result in fewer product returns and order cancellations.58 For example, computer companies can send a letter to new owners congratulating them on having selected a fine computer. They can place ads showing satisfied brand owners. They can solicit customer suggestions for improvements and list the location of available services. They can write intelligible instruction booklets. They can send owners a magazine containing articles describing new computer applications. In addition, they can provide good channels for speedy redress of customer grievances. Here is an example of a successful customer satisfaction program in China:

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KFC—KFC implemented a Customer Mania training program in China designed to make everyone in the company “maniacs” about their customers through its operational principles, CHAMPS—Cleanliness, Hospitality, Accuracy, Maintenance, Product, and Speed. “YES! My customers are important to me!”, “YES! My customers are my job!”, and “YES! I can solve any issues you have!” are some slogans used as part of an all-out effort to meet and exceed customer expectations.59

Postpurchase Use and Disposal Marketers should also monitor how buyers use and dispose of the product (see Figure 6.7). A key driver of sales frequency is product consumption rate—the more quickly buyers consume a product, the sooner they may be back in the market to repurchase it.

Get rid of it temporarily

Product

Get rid of it permanently

Keep it

Rent it

Give it away

To be (re)sold

Lend it

Trade it

To be used

Use it to serve original purpose

Sell it

Direct to consumer

Convert it to serve a new purpose

Throw it away

Through middleman

Store it

To intermediary

Figure 6.7 How Customers Use or Dispose of Products Source: Jacob Jacoby, Carol K. Berning, and Thomas F. Dietvorst, “What about Disposition?” Journal of Marketing, July 1977, p. 23. Reprinted with permission of the American Marketing Association.

Consumers may fail to replace products because of a tendency to overestimate product life.60 One strategy to speed up replacement is to tie the act of replacing the product to a certain holiday, event, or time of year. For example, several services run promotions tied in with the lunar festive season (e.g., curtain cleaning services). Another strategy might be to provide consumers with better information on either: (1) when the product was first used or would need to be replaced or (2) the current level of performance. For example, toothbrushes have color indicators on their bristles to indicate when they are too worn. Perhaps the simplest way to increase usage is when actual usage of a product is less than optimal or recommended. In this case, consumers must be persuaded of the merits of more regular usage, and potential hurdles to increased usage must be overcome.

6.3.6 Moderating Effects on Consumer Decision Making The manner or path by which a consumer moves through the decision-making stages depends on several factors, including the level of involvement and extent of variety seeking.

Low-Involvement Consumer Decision Making The expectancy-value model assumes a high level of consumer involvement, or the engagement and active processing the consumer undertakes in responding to a marketing stimulus. Richard Petty and John Cacioppo’s elaboration likelihood model, an influential model of attitude formation and change, describes how consumers make evaluations in both low- and high-involvement circumstances.61 There are two means of persuasion with their model: the central route, where attitude formation or change involves much thought and is based on a diligent, rational consideration of the most important product or service information; and the peripheral route, where attitude formation or change involves comparatively much less thought and is a consequence of the association of a brand with either positive or negative peripheral cues. Peripheral cues for consumers might be a celebrity endorsement, a credible source, or any object that engendered positive feelings. Consumers follow the central route only if they possess sufficient motivation, ability, and opportunity. In other words, consumers must want to evaluate a brand in detail, must have the necessary brand and product or service knowledge in memory, and must be given sufficient time and the proper setting to actually do so. If any one of those three factors is lacking, consumers will tend to follow the peripheral route and consider less central, more extrinsic factors in their decisions. Many products are bought under conditions of low involvement and the absence of significant brand differences. Consider salt. Consumers have little involvement in this product category. They go to the store and reach for the brand. If they keep reaching for the same brand, it is out of habit, not strong brand loyalty. There is good evidence that consumers have low involvement with most low-cost, frequently purchased products. Marketers use four techniques to try to convert a low-involvement product into one of higher involvement. Link the product to some involving issue—as when Komodo toothpaste is linked to avoiding cavities. Link the product to some involving personal situation—for example, Vitagen cultured milk began to offer less sugar for a healthier drink. Design advertising to trigger strong emotions related to personal values or ego defense— as when rice sellers began to advertise the heart-healthy nature of brown rice to adults and the importance of living a long time to enjoy family life. Add an important feature—for example, when the makers of BRAND’S® Essence of Chicken introduced bird’s nest with collagen to combat environmental pollutants.

ChaPter 6 ó analyzing Consumer Markets

If consumers throw the product away, the marketer needs to know how they dispose of it, especially if it can damage the environment (as in the case with batteries, beverage containers, and toner cartridges). Increased public awareness of recycling and ecological concerns as well as consumer complaints about having to throw away beautiful bottles led French perfume maker Rochas to think about introducing a refillable fragrance line.

Oral B toothbrushes come with color indicators to inform consumers when the bristles are worn off and the toothbrushes need to be changed.

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If, regardless of what the marketer can do, consumers still have low involvement with a purchase decision, they are likely to follow the peripheral route. Marketers must pay special attention to giving consumers one or more positive cues that they can use to justify their brand choice, such as frequent ad repetition, visible sponsorships, and vigorous PR to enhance brand familiarity. Other peripheral cues can also be used. A beloved celebrity endorser, attractive packaging, or an appealing promotion might tip the balance in favor of the brand.62

Variety-Seeking Buying Behavior

In Japan, KitKat has a wide offering of flavors such as Green Tea, Creme Brulee, and Canteloupe Melon to satisfy Japanese’ penchant for variety and limited editions.

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Some buying situations are characterized by low involvement but significant brand differences. Here consumers often do a lot of brand switching. Think about roasted peanuts. The consumer has some beliefs about roasted peanuts, chooses a brand of roasted peanuts without much evaluation, and evaluates the product during consumption. Next time, the consumer may reach for another brand out of a wish for a different taste. Brand switching occurs for the sake of variety rather than dissatisfaction. Japanese consumers, especially the young, seek variety. This led KitKat to introduce limited edition flavors such as Cantaloupe Melon and Koshian Maccha (green tea with red bean filling). The market leader and the minor brands in this product category have different marketing strategies. The market leader will try to encourage habitual buying behavior by dominating the shelf space with a variety of related but different product versions, avoiding out-of-stock conditions, and sponsoring frequent reminder advertising. Challenger firms will encourage variety seeking by offering lower prices, deals, coupons, free samples, and advertising that tries to break the consumer’s purchase and consumption cycle and presents reasons for trying something new.

6.4 Behavioral Decision Theory and Behavioral Economics As you might guess from low-involvement decision making and variety seeking, consumers do not always process information or make decisions in a deliberate, rational manner. Research in behavioral decision theory has identified situations in which consumers make seemingly irrational choices. table 6.2 summarizes some findings from this research.63 What all these and other studies reinforce is that consumer behavior is very constructive and the context of decision really matters. Understanding how these effects show up in the marketplace can be crucial for marketers. These also challenge predictions from economic theory and assumptions about rationality, leading to the emergence of the field of behavioral economics.64 Here, we review some of the issues in three broad areas—decision heuristics, framing, and other contextual effects.

6.4.1 Decision Heuristics Other heuristics similarly come into play in everyday decision making when consumers forecast the likelihood of future outcomes or events.65 The availability heuristic—Consumers base their predictions on the quickness and ease with which a particular example of an outcome comes to mind. If an example comes to mind too easily, consumers might overestimate the likelihood of the outcome or event happening. For example, a recent product failure may lead a consumer to inflate the likelihood of a future product failure and make him or her more inclined to purchase a product warranty. The representativeness heuristic—Consumers base their predictions on how representative or similar the outcome is to other examples. One reason that package appearances may be so similar for different brands in the same product category is that they want to be seen as representative of the category as a whole.

Table 6.2 Selected Behavioral Decision Theory Findings Consumers’ predictions of their future tastes are not accurate—they do not really know how they will feel after consuming the same flavor of yogurt or ice cream several times. Consumers often overestimate the duration of their overall emotional reactions to future events (moves, financial windfalls, outcomes of sporting events). Consumers often overestimate their future consumption, especially if there is limited availability. In anticipating future consumption opportunities, consumers often assume they will want or need more variety than they actually do. Consumers are less likely to choose alternatives with product features or promotional premiums that have little or no value, even when these features and premiums are optional (like the opportunity to purchase a collector’s plate) and do not reduce the actual value of the product in any way. Consumers are less likely to choose products selected by others for reasons they find irrelevant, even when these other reasons do not suggest anything positive or negative about the product’s values. Consumers’ interpretations and evaluations of past experiences are greatly influenced by the ending and trend of events. A positive event at the end of a service experience can color later reflections and evaluations of the experience as a whole. When faced with a simple but important decision, consumers can actually make things more complicated than they should.

The anchoring and adjustment heuristic—Consumers arrive at an initial judgment and then make adjustments of that first impression based on additional information. For services marketers, it is critical to make a strong first impression to establish a favorable anchor so that subsequent experiences are interpreted in a more favorable light. Note that marketing managers also may use heuristics and be subject to biases in their decision making.

6.4.2 Framing decision framing is the manner in which choices are presented to and seen by a decision maker. A $200 mobile phone may not seem that expensive in the context of a set of $400 phones, but may seem very expensive if those phones cost $50. Framing effects are pervasive and can be powerful. Framing effects can be found in comparative advertising, where a brand can put its best foot forward by comparing itself to another with inferior features: in unit pricing, where unit prices can make the product seem less expensive (“only $1 a day”); in product information, where larger units can seem more desirable (a 24-month warranty versus a two-year warranty); and with new products, where consumers can better understand a new product’s functions and features by seeing how it compares with existing products. To promote its environmentally friendly cars, Volkswagen incorporated a giant piano keyboard into the steps next to the exit escalator of a subway station. Stair traffic rose 66 percent, a fact VW cleverly captured in a YouTube video seen more than 20 million times.

ChaPter 6 ó analyzing Consumer Markets

Consumers are more likely to choose an alternative (a home bread maker) after a relatively inferior option (a slightly better but significantly more expensive home bread maker) is added to the available choice set. Consumers are more likely to choose an alternative that appears to be a compromise in the particular choice set under consideration, even if it is not the best alternative on any one dimension. The choices consumers make influence their assessment of their own tastes and preferences. Getting people to focus their attention more on one of two considered alternatives tends to enhance the perceived attractiveness and choice probability of that alternative. The way consumers compare products that vary in price and perceived quality (by features or brand name) and the way those products are displayed in the store (by brand or by model type) both affect their willingness to pay more for additional features or a better-known brand. Consumers who think about the possibility that their purchase decisions will turn out to be wrong are more likely to choose better-known brands. Consumers for whom possible feelings of regret about missing an opportunity have been made more relevant are more likely to choose a product currently on sale than wait for a better sale or buy a higher-priced item. Consumers’ choices are often influenced by subtle (and theoretically inconsequential) changes in the way alternatives are described. Consumers who make purchases for later consumption appear to make systematic errors in predicting their future preferences.

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In a clever promotion by VW to emphasize its environmental friendliness, more people used the stairs when they made it into a piano keyboard coming out of a subway station.

6.4.3 Mental Accounting Researchers have found that consumers use mental accounting when they handle their money.66 Mental accounting refers to the manner by which consumers code, categorize, and evaluate financial outcomes of choices. Formally, it has been defined as “the tendency to categorize funds or items of value even though there is no logical basis for the categorization, for example, individuals often segregate their savings into separate accounts to meet different goals even though funds from any of the accounts can be applied to any of the goals.”67 Consider the following two scenarios: 1.

Assume you spend $50 to buy a ticket for a concert. As you arrive at the show, you realize you have lost your ticket. You decide to buy a replacement.

2.

Assume you decided to buy a ticket to a concert at the door. As you arrive at the show, you realize somehow you lost $50 along the way. You decide to buy the ticket anyway.

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Which one would you be more likely to do? Most people choose scenario #2, Although you lost the same amount—$50—in each case, in the first case, you may have mentally allocated $50 for going to the concert. Buying another ticket would exceed your mental concert budget. In the second case, the money you lost did not belong to any account, so you had not yet exceeded your mental concert budget. According to Thaler, mental accounting is based on a set of key core principles: Consumers tend to segregate gains—When a seller has a product with more than one positive dimension, it is desirable to have each dimension evaluated separately. Listing multiple benefits of a large industrial product, for example, can make the sum of the parts seem greater than the whole. Consumers tend to integrate losses—Marketers have a distinct advantage in selling something if its cost can be added to another large purchase. House buyers are more inclined to view additional expenditures favorably given the high price of buying a house. Consumers tend to integrate smaller losses with larger gains—The “cancellation” principle might explain why withholding taxes taken from monthly paychecks are less aversive than large lump sum tax payments—they are more likely to be absorbed by the larger pay amount. Consumers tend to segregate small gains from large losses—The “silver lining” principle might explain the popularity of rebates on big ticket purchases such as cars. The principles of mental accounting are derived in part from prospect theory. Prospect theory maintains that consumers frame decision alternatives in terms of gains and losses according to a value function. Consumers are generally loss-averse. They tend to overweight very low probabilities and underweight very high probabilities.

Summary 6.1 WHAT INFLUENCES CONSUMER BEHAVIOR?

Who are the significant reference groups that influence consumer behavior? Reference groups consist of groups that have a direct or indirect influence on a person. Reference groups influence a person in his or her tastes, behavior, and lifestyle. Groups with a direct influence on a person are called membership groups, further split into primary (frequent interactions) and secondary groups (lesser interaction). People hope to join aspirational groups, and try to move further away from dissociative groups. In groups where peer influence is significant, an opinion leader creates trends and generates interests in new behavior or products. A person enjoys a certain occupational or social status in any group he or she is part of, and is conventionally expected to purchase products befitting of that status. How does the family unit influence purchasing behavior? Women’s growing economic significance is influencing marketers to focus on women as their target consumers. Marketing Stimuli Products & services Price Distribution Communications

Other Stimuli Economic Technological Political Cultural

What are some personal characteristics that influence purchasing decisions? A person’s age and stage in his or her life cycle influence his or her tastes in food, clothes, and recreation. A person’s economic standing and occupation necessitate the purchase of different items. Asia as a region is growing wealthier and exclusive brands are trying to engage this market with new products. People usually buy from companies with a brand personality similar to their own personalities. A company can create a unique brand personality based on the following variables: sincerity, excitement, competence, sophistication, ruggedness, passion, and peacefulness. A person’s lifestyle, mainly determined by his or her financial or time constraints, affects his or her purchasing decisions.

ChaPter 6 ó analyzing Consumer Markets

How do cultural factors affect consumer behavior? Cultures and subcultures have beliefs and practices that influence consumer preferences. These include superstitious beliefs, religious practices, and family traditions. Different members along a social strata or occupational strata exhibit preferences for different products, and use different communication channels.

Teens and children have a great influence on their parents’ spending habits. Television and the Internet are popular communication channels between companies and consumers.

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6.2 KEY PSYCHOLOGICAL PROCESSES

The marketer has to understand the psychological process from marketing stimuli to the final purchasing decision. Below is a summary of the input factors, customer characteristics, leading to the purchase. See Figure A Model of Consumer Behavior.

Consumer Psychology Motivation Perception Learning Memory

Consumer Characteristics Cultural Social Personal

Buying Decision Process Problem recognition Information search Evaluation of alternatives Purchase decision Postpurchase behavior

Figure A Model of Consumer Behavior

Purchase Decision Product choice Brand choice Dealer choice Purchase amount Purchase timing Payment method

What are the motivational theories that implicate consumer reaction? Sigmund Freud’s theory is that subconscious psychological forces govern a person’s behavior, which bears the implication that consumers are stimulated by less conscious cues when looking at a product. A technique called laddering can be used, which traces a person’s motivations from the most obvious to the most intrinsic. Abraham Maslow’s Hierarchy of Needs states that a person will always attempt to satisfy the most basic pressing need before moving on to other less pressing needs along the pyramid of needs. This theory allows marketers to focus on which level of the hierarchy their target market is largely at, and cater products to suit this market or switch markets if they are targeting a wrong consumer base. See Figure B Maslow’s Hierarchy of Needs.

5 Selfactualization Needs (self-development and realization)

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Esteem Needs (self-esteem, recognition, status)

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Social Needs (sense of belonging, love) Safety Needs (security, protection) Physiological Needs (food, water, shelter)

Figure B Maslow’s Hierarchy of Needs

Frederick Herzberg distinguishes between dissatisfiers (factors that cause dissatisfaction) and satisfiers (factors that cause satisfaction). A mere absence of dissatisfiers is insufficient; there must be enough satisfiers for a consumer to buy a product. What is perception and how does it affect consumer purchases? It is the process where the physical stimuli around a person, coupled with his or her relation with the environment and his or her personal characteristics, affect his or her behavior and decisions.

There are three main perceptive processes that explain consumer behavior: selective attention, selective distortion, and selective retention. What is selective attention? People screen out most stimuli because they cannot possibly react to all of them. People are more likely to notice stimuli that (1) relate to a current need, (2) they anticipate, and (3) are out of the ordinary. What is selective distortion? It is the tendency to interpret information in a way that will fit our preconceptions. Certain reputed brands enjoy selective distortion when consumers interpret neutral or ambiguous information of such brands in a positive way. What is selective retention? It is the tendency to only remember pertinent or interesting information. This again benefits strong brands as when consumers tend to overlook negative or seldom repeated comments, and retain only frequent messages and positive points. How does learning affect consumer behavior? A drive is a strong stimulus compelling someone to act, and a cue is a minor stimulus that merely affects someone’s behavior. People learn from past experiences and translate this knowledge into current behavior, through generalization or discrimination. Generalizations occur when one product is satisfactory to the customer, who then assumes that all products by the same company are of the same high quality. Discriminations occur when the product is unsatisfactory and the customer extrapolates his or her dissatisfaction to other products from the same company. Are consumer responses always rational? Sometimes, consumer responses may be emotional. Brands may make consumers feel proud, excited, or confident.

What occurs during the problem recognition stage? The buyer realizes an unfulfilled need. This can be triggered internally (e.g., your tummy growls because you are hungry) or externally (e.g., you see your friend having a plate of delicious noodles). Particularly for discretionary or luxury products, marketers have to identify these external stimuli that trigger needs. How does the buyer search for information? There are two levels of arousal: a heightened attention stage and an active information searching stage. The buyer can source for information from the following four groups:

Personal—Family and friends Commercial—Advertising, Internet, salespeople Public—Mass media Experiential—Using or testing the product

6.3 THE BUYING DECISION PROCESS: THE FIVE-STAGE MODEL

The diagram below depicts the full range of considerations when a consumer decides that he or she needs a product. Sometimes, consumers may skip or reverse certain stages. See Figure C Five-Stage Model of the Consumer Buying Process. Problem recognition

Information search

Consumers follow this chain when choosing which brand to buy: Total set of brands ➔ Awareness set ➔ Consideration set ➔ Choice set ➔ Decision Marketers have to identify the hierarchy of attributes that consumers consider when making a decision. This is called market partitioning. There can be brand, price, type or service dominance that consumers value most when making a decision. How does a consumer evaluate the alternatives? Consumers choose the brand that: Satisfies their needs Offers added benefits Offers the best bundle of attributes to satisfy that need Beliefs and attitudes affect a consumer’s buying choices. The expectancy-value model suggests that consumers evaluate products by the sum of their positive and negative attributes. To leverage this model, companies can apply the following strategies to increase the value of their product: Real repositioning—Redesigning Psychological repositioning—Altering beliefs about the brand ■

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Evaluation of alternatives

Purchase decision

Postpurchase behavior Figure C Five-Stage Model of the Consumer Buying Process

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How does memory affect consumer behavior? Memory can be divided into short- and long-term memory. Nodes are stored information and are connected via links that vary in strength. Strong brand association means that the brand node can be linked to many external stimuli. Memory encoding refers to how and where information enters memory. The stronger and more often the encoding is, the greater is the retention. Memory retrieval refers to how information is extracted from memory. A greater database of retrieval cues aids in quicker retrieval. A stronger brand association translates into greater ease of information retrieval.

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Competitive depositioning—Altering beliefs about competitors’ brands Calling attention to the attributes the brand excels in or neglected attributes Shifting the buyer’s standards for certain attributes

What are noncompensatory models of consumer choice? Consumers may not want to go through the whole evaluation process but choose to simplify their decision through three choice heuristics: 1. With the conjunctive heuristic, the consumer sets a minimum acceptable score for each attribute. 2. With the lexicographic heuristic, the consumer makes a decision on what he or she believes is the most important attribute. 3. With the elimination-by-aspects heuristic, the consumer makes a decision based on a number of attributes, with the more important attributes ranking higher.

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What are some factors that can intervene with a buyer’s decision making? The negative attitudes of others may influence a buyer’s decision. Unforeseen situations may arise to change a buyer’s decision. What must marketers monitor after the purchase? Marketers must take note of a customer’s postpurchase satisfaction. Marketers must also monitor a customer’s postpurchase actions which include public or private actions to warn others against the product. Marketers should take note of postpurchase use and disposal. By doing so, they can estimate the lifespan of the product’s use and the rate of replacement.

What may moderate decision making? The Elaboration Likelihood Model describes how consumers make decisions in low- and highinvolvement environments. Consumers must have the necessary motivation, knowledge, and time to participate in highinvolvement environments. For low-involvement products, marketers have to increase interest in their brand to attract more customers. For certain products, variety-seeking buyers tend to do a lot of brand switching to sample different variations of the same type of product.

6.4 BEHAVIORAL DECISION THEORY AND BEHAVIORAL ECONOMICS

Consumers sometimes make irrational choices. For example, consumers find the lure of “free” almost irresistible.

What are some heuristics that consumers use in decision making? Consumers use the availability heuristic when they base their judgment on the accessibility of precedents. Consumers use the representative heuristic when they base their judgment on the similarity of the outcome to other examples. Consumers use the anchoring and adjusting heuristic when they base their judgment on first impressions and then make minor amendments to that opinion with more information. What is framing? Decision framing is the manner in which choices are presented to and seen by a decision maker. What is mental accounting? It is the process where consumers categorize and evaluate the financial outcomes of choices.

Applications Marketing Debate—Is Target Marketing Ever Bad? As marketers increasingly develop marketing programs tailored to certain target market segments in Asia, some critics have denounced these efforts as exploitative. Examples include marketing cigarettes and alcohol to less-educated Asians, and employing Asian women as clichéd stereotypes and depicting them inappropriately in ads. Others counter that targeting and positioning is critical to marketing in Asia and that these marketing programs are attempts to be relevant to a specific consumer group.

Marketing Discussion—What Are Your Mental Accounts? What mental accounts do you have in your mind about purchasing products or services? Do you have any rules you employ in spending money? Are they different from what other people do? Do you follow Thaler’s four principles in reacting to gains and losses?

ChaPter 6 ó analyzing Consumer Markets

Take a position: Target marketing in Asia is exploitative versus Target marketing in Asia is a sound business practice.

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Marketing Lesson HELLO KITTY

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In 1974, Sanrio, a Japanese design company selling character merchandise with the motto “Small Gift, Big Smile,” created Hello Kitty, a mouth-less feline animated character. A year later, the first Hello Kitty merchandise made its debut. It was a tiny, clear, vinyl coin purse featuring the feline character emblazoned with the word “Hello” over her head, standing between a goldfish in a bowl and a bottle of milk with a straw in it. It retailed for 240 yen, equivalent to less than a dollar today. Hello Kitty was Sanrio’s attempt to cash in on the fledgling but powerful Japanese girl consumers who were becoming a force to be reckoned with in the mid-70s. At that time, Japanese girls were developing their own kind of slang and handwriting. There was an emphasis on fanshii guzzu, or fancy goods, which means frilly stuff, small items. From 1974 to 1977, Sanrio sales in Japan grew sevenfold and profits increased tenfold, all thanks to Hello Kitty. This was followed by its expansion to the United States in 1976, Europe in 1980, and other parts of Asia in 1990. Hello Kitty took the world by storm as a global icon for Japanese cuteness. The merchandising juggernaut grossed more than $5 billion dollars in global annual sales. And with Sanrio’s licensing policy, Hello Kitty products were sold in more than 60 countries, with her face plastered on over 50,000 products. Such longevity exemplifies Sanrio’s effective strategies in building, managing, and sustaining the brand character. Understanding its customers—from the toddler to the teenybopper to the trendy woman—was the key to its success. Hello Kitty is portrayed as a cheerful and energetic little female feline who lives in London. Described as five apples tall and weighing only as much as three apples, she loves to bake and makes delicious cookies. Her favorite food is mama’s homemade apple pie, and her hobbies include traveling, listening to music, reading, eating cookies, and making new friends. Simple as the storyline about her life may be, it resonates with her target segments, who are predominantly female. Her minimalistic look—two black eyes, six whiskers, a yellow button nose and a bow, all on an oval, fluffy white

head—appealing. This small, innocent, young, dependent, and round character attracts people of all ages. Children relate to the small, rounded character as safe and cute, as it exhibits an inherent sense of innocence and comfort. Additionally, consumers can relate her to their own personal situation. Part of this comes from the fact that Hello Kitty has no mouth. As Sanrio likes to point out, she speaks from the heart. The absence of a mouth allows people to ascribe their emotions onto the character. All these aspects make Hello Kitty kawaii. or cute. Kawaii is defined in physical/cognitive and relational/ emotional terms. Physically, the key element of kawaii is miniaturization. Hello Kitty is sufficiently small to appear on small objects such as coin purses, pencils, erasers, and miniature toys. Besides its physical appearance evoking a sense of safety and comfort among children, her popularity can also be attributed to people’s fascination with animals. At the emotional level, Hello Kitty instills a sense of nostalgia. She is associated with sentiments of intimacy, familiarity, and friendship. She represents youthful innocence and enables women to retreat into a childlike state of mind, forming an unbroken cycle of consumption and self-representation corresponding to childhood, girlhood, female adolescence, and womanhood. During the late 1980s, Asian countries, in particular Japan, saw a shrinking youth population. Recognizing an ageing target market, Hello Kitty which was originally marketed for pre-adolescent girls, gradually repositioned itself to broaden its target segment to include adult consumers, matching consumers with different needs and greater spending power. It was important for the company to identify such needs and create merchandise that suited their supporters. Thus, Hello Kitty’s product line was expanded beyond fanshii guzzu, to include items for young women, such as toasters, vacuum cleaners, and motor scooters. The long-term popularity of Hello Kitty even allowed Sanrio to market Hello Kitty as a nostalgic brand that targeted grown-ups who did not have the opportunity to enjoy Hello Kitty merchandise as children. The growth of the Asian economies during the mid1990s spurred Hello Kitty to enter the Hong Kong market in 1994. In 1996, Sanrio Hong Kong began its first brand collaboration for Hello Kitty with a local electronics retail chain, Broadway Photo Supply. In 1999, Sanrio pursued third-party brand collaboration with McDonald’s—the Hello Kitty meal deal. The collaborative promotion with McDonald’s started a craze in the Hong Kong market and met similar success in other Asian countries such as Singapore, Taiwan, and Japan, pushing the brand character through an unparalleled growth phase. Such collaborations allowed Hello Kitty to go outside the boundaries of everyday product or brand categories. It also allowed the brand to leverage their partners’ sales power to widen customer targets, offering something new and different for Hello Kitty fans.

of successful collaborations that have boosted Hello Kitty sales include collaborations with Sephora, a member of a French luxury goods group; Austrian jewelry and cutglass company Swarovski, and footwear brands Vans and Christian Louboutins. In 2015, Sanrio announced a fashion collaboration with renowned designer Yohji Yamamoto to produce a new collection called Kitty’s. Over Hello Kitty’s lifetime, product extensions have ranged from mass-market items such as stationery to such high-end consumer products as jewelry and diamondencrusted figurines and watches. For example, in 2008 the first-ever Hello Kitty-themed maternity hospital started its operations in Taiwan. In 2009, Bank of America offered a Hello Kitty checking account with a Visa debit card featuring a Hello Kitty design. In October 2005, EVA Air launched a campaign that created the “Hello Kitty Jet.” The aircraft featured a Hello Kitty motif on its exterior and interior fittings and features. Most of these jets were used to serve several Japanese domestic and international routes. As consumers often associate Hello Kitty with Sanrio Puroland theme park in Tokyo, the original Hello Kitty—themed jet flies the Taiwan–Tokyo route. EVA Air also introduced a Hello Kitty—themed Airbus A330-200 commercial passenger jet airliner in 2012. In the September of the next year, EVA Air’s sixth Hello Kitty—themed aircraft, the “Sanrio Family Hand-in-Hand Jet,” landed at the Los Angeles International Airport as a part of its strategy to retain and expand its customer base. Crossover promotions, such as with world-renowned designer Anna Sui, have cemented the brand character’s appeal. The collaboration with Anna Sui was an excellent fit, given the designer’s reputation for sweet, feminine fashion with a touch of nostalgia. An attractive element of Hello Kitty is her flexibility to work with different partners. Hello Kitty has different designs and styles that allow Sanrio to rejuvenate the brand image by renewing the product lines and merchandise in a very short time and frequently, to make it seem refreshed to the market. Hello Kitty relies more on word-of-mouth communication than traditional advertising to build interest in their products. For example, the company sponsors many celebrities. In 2009, Sanrio celebrated the character’s 35th anniversary by helping Lady Gaga with a gown made entirely of Hello Kitty plush toys for a photo shoot. It elevated Hello Kitty to a new sexy level, and the event resulted in an immediate 0.8 percent sales growth worldwide. Other stars, such as Britney Spears and Mariah Carey, have also been seen wearing Hello Kitty accessories. Avril Lavigne even made a song named after the character. These efforts demonstrated that, despite being around for so long, Hello Kitty is still popular and trendy.

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In 2010, when Ray Hatoyama took over the helm of Sanrio’s global expansion strategy, Hello Kitty began licensing its products to other manufacturers and retailers in both domestic and international markets, significantly reducing operational costs. He also hired local design talent who adapted product lines or developed new market-specific products. Sanrio establishes very strict rules in sourcing licensing partners. Potential partners without the power to control the launch of its products are not awarded licensing rights. Stringent merchandise approval procedures are implemented to safeguard the quality of licensed products while providing its licensees with the flexibility to localize in foreign markets. Licensees are allowed to alter Hello Kitty’s design under the condition of not damaging the image of Hello Kitty’s “cuteness, friendship, and thoughtfulness.” Another condition for the license is price control. Prices of Hello Kitty products can be increased to enhance the brand’s value. Moreover, Sanrio delegates the power to award licenses to its local subsidiaries as they are equipped with the information to determine which companies can best adapt Sanrio’s products to local flavors. This winning strategy helped Sanrio minimize business risk by licensing and localizing Hello Kitty products. Over the years, numerous characters have been introduced to support Hello Kitty. For example, a male counterpart, Dear Daniel, was created as a childhood friend and purported boyfriend, giving the character a romantic life and creating a buzz for consumers, fans, and supporters. Other members of Hello Kitty’s inner circle include her friends Tracy, Fifi, Jodie, Joey, and Mori. Hello Kitty even has two pets, Charmmy Kitty the cat, and Sugar the hamster. Sanrio’s marketing strategy is to create a fantasy world around Hello Kitty with an infectious sentiment of desire, aspiration, craving, and even euphoria for the character. All the character’s storylines connect to Hello Kitty to create constant interest in the character. The success of Hello Kitty brand extensions is due to the strong emotional bond between the character and its consumers. Hello Kitty’s personality is transferred to the extension categories. Its strategy to sustain consumer interest continues to be that of surprise and delight for fans of all ages with unique designs and products, inspiring happiness and an emotional connection in the consumer. Such new product line extensions increase visibility and generate new revenue sources. To establish a ‘trendy’ brand character, the company’s collaborative focus changed from fast-moving consumer goods to high-fashion brands. By collaborating with popular fashion chains, trendy icons, and famous designers in the market, Hello Kitty has become a fashion icon that has opened a lot more opportunities for the character to expand. Examples

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Perhaps grasping at straws to capture some of the attention showered on newer animated characters, Sanrio announced in 2014 that Hello Kitty is not a cat but a British schoolgirl named Kitty White. As a cartoon character of a little girl, she’s never depicted on all fours, but walks and sits like a two-legged creature, and even has a pet cat of her own. Whether this shocking revelation is a way out for Sanrio to stimulate publicity for the ageing character is anybody’s guess. Hello Kitty continues to evolve as technology and lifestyles change. Sanrio successfully harnessed technology to extend Hello Kitty’s appeal and brand presence among younger generations. For example, the company has an online community and social-networking portal called Sanriotown. The portal provides a discussion forum for fans to express their emotional attachment to Hello Kitty. In addition, fans can use e-mail services with the hellokitty.com domain. Another initiative includes launching Hello Kitty’s online game, providing a unique and engaging experience for fans. Moving into the virtual sphere gives the character a global appeal and further strengthens the emotional bond between Hello Kitty and its brand supporters. Hello Kitty has used several tactics to appeal to old fans of the product while trying to appeal to new people. For example, Sanrio puts together conventions, museum displays, and exhibitions that appeal to fans of the brand. In 2014, to mark the 40th anniversary of Hello Kitty, items from four decades of merchandising, plus Hello Kittyinspired art, were used in a Hello Kitty retrospective at the Japanese American National Museum in Los Angeles.

Hello Kitty remains Sanrio’s leading characters; she is highly recognizable and one of the evergreen characters in the market. However, it is currently only the third topgrossing character in Japan, behind Mickey Mouse and Princess Anna from the Disney’s animated movie Frozen. Despite Hello Kitty’s previous success, many challenges lie ahead for this popular character brand. The most daunting challenge would be to create new consumer experiences without losing its original appeal. The brand-character business is highly competitive. Movie characters from films such as Shrek and Toy Story threaten Hello Kitty’s strong market position. Sanrio also faces the challenges of maturing characters. The business model for Hello Kitty has become more complex, as consumers require constantly changing elements to stimulate their brand interest after the colorful and eventful life Hello Kitty has had in past years. Hello Kitty has remained a top seller for decades due to the combination of a quality product and shrewd marketing. However, the character’s future survival depends on its ability to draw in new fans. Thus, it is essential for Sanrio to continue modernizing the brand. As such, the company is looking to expand the brand into bold new territories. In 2014, Sanrio announced a new Hello Kitty product line for men with a weeklong exhibition in Hankyu Men’s Department Store in Tokyo. They had partnered with many well-known men’s fashion designers in Japan such as Casper John in the production of this new line.

Questions 1. Based on perception theories discussed in this chapter, what distinguishes Hello Kitty from other characters and dolls in its early years? What can be done to maintain Hello Kitty’s distinctiveness as well as consumer attitude in the years to come? 2. What do you think is the decision-making process when it comes to deciding whether to fly on a regular full-service airline versus EVA Air’s Hello Kitty plane? 3. How would launching into the Hello Kitty men’s line affect the perception of Hello Kitty? Sources: Kazuhito Isomura, Kazunori Suzuki, and Katsuyuki Tochimoto, “The Evolution of Characters Business Models in Japan: Duffy, Hello Kitty, and Kumamon,” Strategic Direction, 2015 31(4), pp. 34–37; Peter Roesler, “Four Marketing Lessons Gleaned from Hello Kitty’s 40th Anniversary,” www.inc.com, 27 October 2014; Christina Pazzanese, “Hello Kitty, Hello Profits,” http://news.harvard.edu, 29 October 2014; Stephen W. Wang, “The Experience of Flying with Hello Kitty Livery Featured Theme Jet: Moderating Effects of Destination Image,” Current Issues in Tourism, 2015, 18(2), pp. 99–109; Christopher Shimamoto, “Hello Kitty in Mid-Life Crisis as Sanrio Changes Strategy,” www.bloomberg.com, 23 May 2014; Sameer Hosany, Girish Prayag, Drew Martin, and Wai-Yee Lee, “Theory and Strategies of Anthropomorphic Brand Characters from Peter Rabbit, Mickey Mouse, and Ronald McDonald, to Hello Kitty,” Journal of Marketing Management, 2013, 29(1–2), pp. 48–68; Rezwana Manjur, “Hello Kitty Craze Stalls McDonald’s Site,” www.marketing-interactive.com, 24 April 2014; Sherlyn Goh, “Hello Kitty Carnival to Debut in Singapore This Oct,” www.channlenewsasia.com, 22 September 2015; “How Hello Kitty Became a Global Superstar: Talking Strategy with Ray Hatoyama,” www.nippon.com, 24 December 2014; Julia Rubin, “Forty Years Young: Hello Kitty and the Power of Cute,” www.racked.com, 18 November 2014; Christine Nakamura, “How Hello Kitty Became a Global Success,” www.asiapacific.ca/blog, 20 March 2015; Adam Thompson, “What Happens When You Mix Hello Kitty With Spam? A Snack for Fans,” Wall Street Journal, 23 June 2015; Josh Gardner, “Sanrio Shocker! Company Reveals Hello Kitty Is Not Actually a Cat,” Daily Mail, 28 August 2014; Saya Weissman, “Seven of the Craziest Hello Kitty Brand Extensions,” www.digiday.com, 13 December 2013; Zing Tsjeng, “Hello Kitty and Yohji Yamamoto are Collaborating Now,” www.dazeddigital.com, 25 March 2015; Bruce Einhorn, “Hello Kitty, a Victim of Disney’s Frozen Juggernaut,” www.bloomberg.com, 31 October 2014; Jake Adelstein, “Hello Kitty... For Men! But Can Sanrio’s New Fashion Line Overcome the Pussy Factor?” Forbes, 15 February 2015.

Marketing Lesson Written by Dae Ryun Chang at Yonsei School of Business and Kevin Sproule at Singapore Management University By October 2012, the streets of Gangnam, a district in the south of Seoul, were lined with designer shops, and fashionable women could be seen carrying Louis Vuitton handbags. Once a relatively undeveloped part of the city, the district had undergone significant changes, with an average apartment commanding a sales price of about $716,000. Gangnam was just one example of the changing nature of consumers in South Korea. Not only was there a trend towards purchasing luxury goods, but there was also a rising class of consumer: single South Korean women with significant purchasing power. There were several trends that had led to the creation of this growing consumer segment. The first was the increasing educational levels amongst South Korean women. In 2011, the number of women with university degrees was higher than that of men and women were conferred half of all masters’ degrees. Woman were also getting married later. Between 1970 and 2010, the average age of the first marriage for women in South Korea had gone up from just over 23 years to 29 years. There were also more women who were not getting married at all. Nearly 8 percent of women would never get married in South Korea—up from less than 1 percent in 1970. Third, there was rising disposable income. In 1960, South Korea was one of the poorest countries in the world, but by 2011 it was one of the richest, with a GDP per capita rising above the European Union average to $31,750. Back in the affluent district of Gangnam, these trends were even more pronounced, with high education levels, high incomes and 44 percent of women between the ages of 30 and 34 still unmarried. Single women with significant disposable income had become a large and growing consumer segment, attracting a name of their own: Gold Misses. This group of women in their 30s had both high incomes and high expectations, which left companies asking: who are these consumers and how can we market to them?

Single women with a university or a higher level education background, an annual salary of at least 40–50 thousand dollars [USD], and [who] either owns an apartment or possesses cash assets of 80 thousand dollars [USD] or more.

ChaPter 6 ó analyzing Consumer Markets

GOLD MISSES

Several shifts had taken place in the larger demographic makeup in South Korea. One large shift had been the rise of higher education among women, a shift that took place within a span of only 20 years. For example, in 2009, among adults aged 45 to 54 years, men were twice as likely to hold a university degree. However, for the age group of 25 to 34 years, that gap had disappeared, with women, in fact, holding a slight edge over men. Another change had been the shift from savings to spending as South Korean consumers embraced a new era of prosperity. The impact was significant, with rising consumer spending in what had historically been a savings-oriented society. In 1988, the savings rate was estimated at 25.2 percent, which was higher than most Western and Asian countries. Since then, there had been a fundamental shift in the way people viewed saving money, and in 2012 the rate was only 3.2 percent. The shift had also seen credit cards become increasingly common, and this was one indicator that chronicled a countrywide shift towards consumerism. Clear beneficiaries from these trends were luxury-goods companies. In 2011, the luxury market was estimated to be around $5 billion with a growth rate of 20 percent. This trend showed no sign of slowing down as spending on luxury goods was a fixture of the economy, and the Gold Misses led the charge. Meet Su-Jin Yoo, a 35-year-old asset manager, who boasted an annual income of nearly $600,000 and had become the youngest executive at Samsung Life. She owned three imported cars, employed a ‘personal shopper,’ and often stayed in hotel suites that charged about $6,000 per night. She was not under the traditional pressure to get married but instead wanted to endlessly challenge herself to achieve her goals and self-development. She gained notoriety by appearing on the cable channel tvN as “The 60 Billion [Won] Income Woman” where she was shown not only working but also enjoying leisure activities such as golf, ballet, flower arrangement, and vocal training. Yoo confidently explained that her philosophy of success in life was that people needed to work hard to earn money, which could then be reinvested to make them even better. Yoo was a good example of a Gold Miss. Popular matchmaking company Sunwoo defined Gold Misses as:

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Gold Misses represented a new generation of women who are motivated by self-achievement. This class of single women enjoyed shopping and began to influence consumer trends not only in fashion and beauty, but also in culture, leisure, and the dining industries. Women like Yoo were extremely selective about what they purchased and would only buy brands and eat in restaurants that represented their social status. Their shopping style was supported by their purchasing power, which allowed Gold Misses to look for and purchase specialty goods without being overly concerned about the price tag. What characterizes a Gold Miss, however, is not her consumption style. The key defining trait of the group is their passion for self-growth and their career aspirations. However, underneath the Gold Miss’s seemingly dazzling lifestyle, there is a concern by many that they are left lonely. While several had chosen not to get married in order to pursue their career, this was not always the case. Gold Misses are typically competitive, active, and assertive, and those characteristics led them to view marriage as something to achieve. Unfortunately, Gold Misses are not always able to find a Mr. Right. In South Korea, this would mean someone she considered as educated and successful as herself. If a Gold Miss were to find that Mr. Right, he was often interested in someone younger and with lower social status, as a lot of men in Korea were still not comfortable dating a woman with higher economic and social status. This resulted in some Gold Misses failing to adapt to the reality of Korean society and leaving the country altogether. In many ways, the Gold Misses embody the history of a developing South Korea, the present in terms of lifestyle habits, and a peek into the future. While they have been both envied and mocked in “Gangnam Style,” they are a true economic and social force. Not only are they a tempting target for marketing efforts from a variety of industries, they also helped create a similar, but altogether different group: Doenjang Girls. The Doenjang Girls are a parallel but different group to the Gold Misses, comprising young women who aspire to lavish lifestyles, but cannot afford them. Doenjang is a traditional Korean sauce, but in this case the term is used to mock young women who are inevitably Korean on the inside but adorn themselves with foreign brands and act like a New Yorker. Many people have criticized these Doenjang Girls for their pretentious spending and preoccupation with outer appearances. A typical Doenjang Girl skips breakfast in order to finish her make-up and later drops by a nearby Starbucks for a sugarless Americano. She is known to shop for luxury brands and eats at expensive restaurants although she often does not earn much money, if at all. Some have argued that this obsession with buying luxury brands merely to show-off reflected an unhealthy consumption pattern among young people in South Korean society.

An example of this criticism was often observed in the close connection between the U.S. coffee chain Starbucks and the latter. Critics of the Doenjang Girls and their consumption habits—many of them men—argued that Starbucks’s coffee was too expensive and that consumers were paying more for the brand name rather than for better coffee, and this was something the Doenjang Girl was especially prone to do. The Chosun Ilbo, a South Korean newspaper, wanted to see if this trend was not just limited to girls, and if there was, in fact, also a ‘Doenjang Men’ phenomenon. They conducted a survey that asked 249 university students, “Are there so-called ‘Doenjang’ men or women at your campus?” Some 37.4 percent admitted there were plenty of both, and another 18 percent said that “basically all female students” would fit into that category. The latter comment, as would be expected, often caused considerable resentment among some girls. To this effect, there was also another popularized stereotype that had made its way into the South Korean popular culture lexicon. The term, ‘Gochujang-nam,’ which was the name for an indispensable red pepper paste, was used to describe young men who were viewed as too ‘cheap’. If anything, the Gochujang-nam term was in response to Doenjang Girl. Kim Jeong-un of Myongji University’s Department of Leisure Management diagnosed the problem as stemming from the realities of youth unemployment and associated stresses: It’s common for people who are unhappy to construct an imaginary enemy. Once an object has been identified, a consensus starts to crystallize, and mass-rage, hostility, and illogicality are born. Sung Young-shin, a psychologist at Korea University, was concerned that the Doenjang Girl controversy would rekindle old views that all women who cared about their appearance were unintelligent: Male and female students in their 20s, who need a more mature perspective on each other, have instead been galvanized along gender lines by this black-and-white logic. Perpetuating these misconceptions will be bad for both sides. With Korea also suffering from a prolonged economic downturn since the Lehman shock in 2008, a new version of Doenjang Girls has emerged—Ganjang Girls (from the Korean term for soy sauce). Ganjang is a condiment to make food saltier, and being ‘salty’ was a colloquial description of someone who is frugal in his or her spending. With more ‘Masstige’ (mass production with prestige ingredients) brands, special retails of private-label apparel (S.P.A.), and the rising popularity of brands such as Zara,

Men who are in their 30 and 40 have witnessed and felt the draining effect of the regimented lives of their father’s generation. Instead of passively accepting a similar way of life (including marriage) that might “consume” them, they want to be the consumers of a life that they want to lead as individuals. While the rise of Gold Misses was a particularly noticeable trend in South Korea, it was also seen in several other countries across Asia, most notably in China. As China experienced social changes based on rapid economic growth, a class of women similar to the Gold Misses called the ‘Sheng Nu’ emerged. The term originally meant a ‘leftover woman’—one who could not find a husband. However, the term was also a pun on ‘holy woman,’ connoting a picky woman whom a man would not be able to approach. Women who had received higher education, earned a high income, were attractive and yet did not marry were considered to be ‘Sheng Nu.’ According to a survey conducted by China’s top dating portal Jiyuan.com, as the educational level and annual income went up, so did the incidence of Sheng Nu. The term was popularized through an Internet music video on Youku (China’s answer to YouTube) that satirized Chinese men’s stereotype of Chinese women, as seen in the following lyrics: ‘If you don’t have a car and you don’t have a house, please move aside don’t block my way,’ chimes one girl in the video. ‘I also have a car, I also have a house, and [money] in the bank. So if you’re not as capable as I am, don’t depend on me. I am not your mother,’ says another.

In 2009, it was reported that there were more than 500,000 Sheng Nus in Beijing alone. This special social class emerged as a new consumer target for luxury goods. Over the last 10 years, consumers of luxury goods in China were mainly rich men with high social status, and even those who bought women’s bags and jewelry were mostly men purchasing them as gifts. However, with the increase in the economic power and social status of Chinese women, the proportion of women customers in the luxury market has risen significantly; in 2010, women consumers contributed more than 50 percent of the sales in the $15-billion-dollar luxury market. The possession of luxury products became such a requirement for modern life in China that a key sound bite in a popular movie from 2011, Love Is Not Blind, was the following quote: “Louis Vuitton is a necessity, whereas love is a luxury.” Similarly, in Japan, ‘Arafo’ (short for ‘around forty’), referring to unmarried women in their mid-30s to mid-40s, emerged as a new consumer segment. These women have about 10 years of working experience and thus have both high social status and purchasing power. This generation began their careers when the Japanese economy was still booming and therefore have greater freedom in making choices about jobs and marriage. Arafos do not hesitate to buy luxury goods for the sake of their own satisfaction and became a key marketing focus for many Japanese enterprises. While there is no catchy moniker yet for unmarried professional women in India, there are clear indications that the socio-economic and demographic shift is happening here as well. In urban centers, the annual income of women has doubled in a little more than a decade, and this has increased their freedom, especially as consumers for products ranging from apartments to cars to insurance plans. India’s working population is expected to grow by a third within 30 years, and the growth of working women is projected to outpace that of men. The rise of this segment is likely to impact the marketing strategies directed at India. Y.L.R. Moorthi, a marketing professor at the Indian Institute of Management, Bangalore, commented, “You will see the marketing rulebook thrown out of the window if this new consumption class comes into force.” With consumers packing the streets of Gangnam, the rise of the Gold Misses is just one of many consumer trends in South Korea. They have found their way into popular culture and are impacting how companies needed to market their products. With these demographic changes, companies need to ask themselves how they can serve these consumers, and what lessons they can learn from their rise.

ChaPter 6 ó analyzing Consumer Markets

UNIQLO, and H&M, Ganjang Girls can lower their spending burden and still look reasonably fashionable. The LG Economic Institute coined the term ‘Dealer-Chic’ to convey the simultaneous deal-orientation and styleorientation of the recession-minded consumer. As a direct counterpart to the Gold Misses, a similar segment for men has been labelled the ‘Gold Misters’. These are males who share demographic characteristics with the Gold Misses—aged above 30, single, welleducated, high-income earners, and heavy spenders on personalized products. Ironically, the motivation for the Gold Misters-to remain single and enjoy their consumption style-echoes that of the Gold Misses. According to psychoanalyst Seung-wook Lee, the new generation of Korean men wanted to break away from traditional male gender roles.

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Questions 1. What consumer theories can you apply to explain the Gold Misses’ behavior? 2. What would explain the prevalence of this phenomenon in China, Japan, and India? Sources: Foster Klug and Youkyung Lee, “What Is the Meaning Behind ‘Gangnam Style’ Video?” Associated Press, 19 September 2012; OECD Indicators, “Education at a Glance 2011,” www.oecd-ilibrary.org, p. 37; “The Flight from Marriage,” The Economist, 20 August 2011; Gavin W. Jones, “Changing Marriage Patterns in Asia,” Asia Research Institute, www.ari.nus.edu.sg, January 2012; “South Korea’s Economy: What Do You Do When You Reach the Top?” The Economist, 12 November 2011; Kim Dong-Seop, “Trend for Late Marriages on the Rise,” Chosun Ilbo, 27 March 2009; “Consumer Lifestyles in South Korea, July 2012, Passport GMID,” Euromonitor International, accessed October 2012; Hyun Jin Kim “Luxury Products, if You Want to Live Up to Your Reputation,” Donga Ilbo, 23 February 2012; Gyung Yoon Kang, “How the ‘60 Billion Income Woman’ Lives Life,” Seoul News, 23 July 2010; Nam-hee Lee, “New Human Species in the 21st Century: Elegant Single Women,” Weekly Donga, 13 February 2007, 573(18); Yun-deok Kim, “Vain ‘Deonjang Girl’ vs. PoorLooking ‘Gochoojang-nam’: ‘Emerging Conflict between Men and Women in College’ Controversial Issue of Doenjang Girl vs. Gochujang-nam,” Chosun Ilbo, 4 August 2006; Byoung-ki Seo, “Things to Look at When Discussing ‘Deonjang Girl’ Phenomenon,” Herald Business, 10 August 2006; Hyun-Jin, “The Force of the Ganjang Girls Who Have Pushed Out the Doenjang Girls,” DongA Ilbo, 16 July 2012; So-Yoon Shin, “Older Boys Open Their Eyes to Need for Consumption,” Hangyurae, 7 July 2012; Hae-bum Gi, “If There is a ‘Goldmiss’ in Korea, There is a ‘Sheng Nu’ in China”, http://pictory.chosun.com, 6 January 2011; Christina Larson, “China’s ‘Leftover Ladies’ Are Anything But,” Businessweek, 22 August 2012; Sarah Keenlyside, “You Do Not Want to Be a Single Woman Over 28 in China,” Daily Telegraph, 20 July 2012; Dong-kyu Kim, “Global Trend: Rapid Rise in the Number of Single Women in their 30’s,” Yon-hap News, 9 November 2010; Jung-hyun Park, “[China Watch] Chinese Woman Riding a Maserati . . . ‘Big Customer’ for Luxury Car Market,” Chosun Biz, 13 June 2011; “Love Is Not Blind,” www.imdb.com; Dong-kyu Kim, “Global Trend: Rapid Rise in the Number of Single Women in their 30’s,” Yon-hap News, 9 November 2010.

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PART 3 Connecting with Customers

7

C H A P T E R

A

Analyzing Business Markets Business organizations do not only sell. They also buy vast quantities of raw materials, manufactured components, plant and equipment, supplies, and business services. To create and capture value, sellers need to understand these organizations’ needs, resources, policies, and buying procedures.

t the height of the dot-com boom, Cisco Systems was briefly the most valuable company in the world, with a valuation of $500 billion. Since those heady days, Cisco has faced a number of challenges and obstacles to its market leadership but has taken a series of steps to try to stay ahead. The company prides itself on staying close to its customers and sees its core competency as helping them get through big transitions by breaking down their corporate silos. Long-time CEO John Chambers cites compact and efficient blade servers as a good example of how Cisco helps companies form a common technological vision, noting that Cisco’s is the only computing technology that can handle data, voice, and video. As a technology

company, Cisco is constantly reinventing itself to reflect shifts in the marketplace, whether by tapping into trends to enable voice and video over the Internet or by becoming a major player in cloud computing. Acquisitions play a key role, some notable ones being the $6.9 billion purchase of set-top box maker Scientific Atlanta in 2005 and the $5 billion purchase of video software solutions provider NDS in 2012. Cisco knows that as many as a third of its acquisitions will fail, as was the case when it bought Pure Digitial, maker of the Flip video camera, for $600 million in 2009. Cisco does spend $6 billion annually on research and development, and it generates 55 percent of its revenue and 70 percent of its growth from overseas.

In this chapter, we will address the following questions: 1. What is the business market, and how does it differ from the consumer market? 2. What buying situations do organizational buyers face? 3. Who participates in the business-to-business buying process? 4. How do business buyers make their decisions? 5. How can companies build strong relationships with business customers? 6. How do institutional buyers and government agencies do their buying?

S

ome of the world’s most valuable brands belong to business marketers: FedEx, GE, Hewlett-Packard, IBM, Intel, and Siemens. Some notable Asian business marketers are Huawei Technologies, Nippon Steel, Taiwan Semiconductor, and Tata Consultancy Services. Much of basic marketing also applies to business marketers. They need to embrace holistic marketing principles, such as building strong relationships with their customers, just like any marketer. But there are some unique considerations in selling to other businesses.1 In this chapter, we will highlight some of the crucial differences for marketing in business markets.

7.1 What Is Organizational Buying? Frederick Webster and Jerry Wind define organizational buying as the decision making process by which formal organizations establish the need for purchased products and services and identify, evaluate, and choose among alternative brands and suppliers.2

7.1.1 The Business Market versus the Consumer Market The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. The major industries making up the business market are agriculture, forestry, and fisheries; mining; manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance; distribution; and services.

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More dollars and items are involved in sales to business buyers than to consumers. Consider the process of producing and selling a simple pair of shoes. Hide dealers must sell hides to tanners, who sell leather to shoe manufacturers, who sell shoes to wholesalers, who sell shoes to retailers, who finally sell them to consumers. Each party in the supply chain also has to buy many other goods and services. Business markets have several characteristics that contrast sharply with those of consumer markets: Fewer, larger buyers—The business marketer normally deals with far fewer, much larger buyers than the consumer marketer does. The fortunes of Bridgestone Tire Company and other automotive part suppliers depend on getting contracts from a few major automakers. Close supplier-customer relationship—Because of the smaller customer base and the importance and power of the larger customers, suppliers are frequently expected to customize their offerings to individual business customer needs. Honda sends its engineers to suppliers’ plants to scrutinize operations and achieve savings in operating costs that are split between Honda and its suppliers. Business buyers often select suppliers who also buy from them. An example would be a paper manufacturer that purchases chemicals from a chemical company that buys a considerable amount of its paper. Professional purchasing—Business goods are often purchased by trained purchasing agents, who must follow their organization’s purchasing policies, constraints, and requirements. Many of the buying instruments—for example, requests for quotations, proposals, and purchase contracts—are not typically found in consumer buying. Multiple buying influences—More people typically influence business buying decisions. Buying committees consisting of technical experts and even senior management are common in the purchase of major goods. Business marketers have to send well-trained sales representatives and sales teams to deal with well-trained buyers. Multiple sales calls—Because more people are involved in the selling process, it takes multiple sales calls to win most business orders, and some sales cycles can take years. A study by McGraw-Hill found that it takes four to four-and-a-half calls to close an average industrial sale. In the case of capital equipment sales for large projects, it may take multiple attempts to fund a project, and the sales cycle—between quoting a job and delivering the product—is often measured in years.3

Derived demand—The demand for business goods is ultimately derived from the demand for consumer goods. Thus, the business marketer must closely monitor the buying patterns of ultimate consumers. For instance, automakers in China are driving the boom in the demand for rubber, aluminum, copper, and galvanized steel. As incomes grow, mainland consumers have pushed car sales to record levels, thus driving the demand for these goods. Inelastic demand—The total demand for many business goods and services is inelastic— that is, not much affected by price changes. Shoe manufacturers are not going to buy much more leather if the price of leather falls, nor will they buy much less if the price rises, unless they can find satisfactory substitutes. Demand is especially inelastic in the short run because producers cannot make quick changes in production methods. Demand is also inelastic for business goods that represent a small percentage of the item’s total cost, such as shoelaces.

Geographically concentrated buyers—Business buyers tend to be concentrated in certain regions. The geographical concentration of producers helps to reduce selling costs. At the same time, business marketers need to monitor regional shifts of certain industries. Direct purchasing—Business buyers often buy directly from manufacturers rather than through intermediaries, especially items that are technically complex or expensive (such as mainframes or aircraft).

7.1.2 Buying Situations The business buyer faces many decisions in making a purchase. The number of decisions depends on the buying situation: complexity of the problem being solved, newness of the buying requirement, number of people involved, and time required. There are three types of buying situations: the straight rebuy, modified rebuy, and new task.4

Straight Rebuy In a straight rebuy, the purchasing department reorders on a routine basis and chooses from suppliers on an approved list. The suppliers make an effort to maintain product and service quality and often propose automatic re-ordering systems to save time. “Out-suppliers” attempt to offer something new or to exploit dissatisfaction with a current supplier. Out-suppliers try to get a small order and then enlarge their purchase share over time.

Modified Rebuy The buyer wants to modify product specifications, prices, delivery requirements, or other terms. The modified rebuy usually involves additional participants on both sides. The in-suppliers become nervous and have to protect the account. The out-suppliers see an opportunity to propose a better offer to gain some business.

New Task A purchaser buys a product or service for the first time (e.g., office building, new security system). The greater the cost or risk, the larger the number of participants and the greater their information gathering—and therefore the longer the time needed to make a decision.5 The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. Over time, new-task situations become straight rebuys and routine purchase behavior. New-task buying passes through several stages: awareness, interest, evaluation, trial, and adoption.6 The effectiveness of communication tools varies at each stage.

ChaPter 7 ó analyzing Business Markets

Fluctuating demand—The demand for business goods and services tends to be more volatile than that for consumer goods and services. A given percentage increase in consumer demand can lead to a much larger percentage increase in the demand for plant and equipment necessary to produce the additional output. Economists refer to this as the acceleration effect. Sometimes a rise of only 10 percent in consumer demand can cause as much as a 200 percent rise in business demand for products in the next period; a 10 percent fall in consumer demand may cause a complete collapse in business demand.

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The mass media are most important during the initial awareness stage; salespeople have their greatest impact at the interest stage; and technical sources are the most important during the evaluation stage. In the new-task situation, the buyer must determine product specifications, price limits, delivery terms and times, service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier. Different participants influence each decision, and the order in which these decisions are made varies. Because of the complicated selling involved, many companies use a missionary sales force consisting of their most effective salespeople. The brand promise and the manufacturer’s brand name recognition will be important in establishing trust and the customer’s willingness to consider change. The marketer also tries to reach as many key participants as possible and provides helpful information and assistance. Once a customer is acquired, in-suppliers are continually seeking ways to add value to their market offer to facilitate rebuys. Often they do this by providing customized information to customers.

7.2 Participants in the Business Buying Process Who buys the trillions of dollars’ worth of goods and services needed by business organizations? Purchasing agents are influential in straight-rebuy and modified-rebuy situations, whereas other department personnel are more influential in new-task situations. Engineering personnel usually have a major influence in selecting product components, and purchasing agents dominate in selecting suppliers.7

7.2.1 The Buying Center

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Frederick Webster and Jerry Wind call the decision-making unit of a buying organization the buying center. It is composed of “all those individuals and groups who participate in the purchasing decision making process, who share some common goals and the risks arising from the decisions.”8 The buying center includes all members of the organization who play any of seven roles in the purchasing decision process.9 1.

Initiators—Users or others in the organization who request that something be purchased.

2.

Users—Those who will use the product or service. In many cases, the users initiate the buying proposal and help define the product requirements.

3.

Influencers—People who influence the buying decision. They often help define specifications and also provide information for evaluating alternatives. Technical personnel are particularly important influencers.

4.

Deciders—People who decide on product requirements or on suppliers.

5.

Approvers—People who authorize the proposed actions of deciders or buyers.

6.

Buyers—People who have formal authority to select the supplier and arrange the purchase terms. Buyers may help shape product specifications, but they play their major role in selecting vendors and negotiating. In more complex purchases, the buyers might include high-level managers.

7.

Gatekeepers—People who have the power to prevent sellers or information from reaching members of the buying center. For example, purchasing agents, receptionists, and telephone operators may prevent salespersons from contacting users or deciders.

Several individuals can occupy a given role (such as user or influencer), and an individual may occupy multiple roles.10 A purchasing manager often occupies simultaneously the roles of buyer, influencer, and gatekeeper: He or she can determine which sales reps can call on other people in the organization, what budget and other constraints to place on the purchase; and which firm will actually get the business, even though others (deciders) might select two or more potential vendors who can meet the company’s requirements. The typical buying center has a minimum of five or six members and often has dozens. The buying center may include people outside the target customer organization, such as government officials, consultants, technical advisors, and other members of the marketing channel.

7.2.2 Buying Center Influences Buying centers usually include several participants with differing interests, authority, status, and persuasiveness. Each member of the buying center is likely to give priority to very different decision criteria. For example, engineering personnel may be concerned primarily with maximizing the actual performance of the product; production personnel may be concerned mainly with ease of use and reliability of supply; financial personnel may focus on the economics of the purchase; purchasing personnel may be concerned with operating and replacement costs; union officials may emphasize safety issues, and so on.

ChaPter 7 ó analyzing Business Markets

Business buyers also have personal motivations, perceptions, and preferences that are influenced by the buyer’s age, income, education, job position, personality, attitudes toward risk, and culture. Buyers definitely exhibit different buying styles. There are “keep-it-simple” buyers, “own-expert” buyers, “want-the-best” buyers, and “want-everything-done” buyers. Some younger, highly educated buyers are computer experts who conduct rigorous analyses of competitive proposals before choosing a supplier. Other buyers are “toughies” from the old school and pit the competing sellers against one another. Webster cautions that ultimately, individuals, not organizations, make purchasing decisions.11 Individuals are motivated by their own needs and perceptions to maximize the rewards (pay, advancement, recognition, and feelings of achievement) offered by the organization. Personal needs “motivate” the behavior of individuals but organizational needs “legitimize” the buying decision process and its outcomes. People are not buying “products.” They are buying solutions to two problems: the organization’s economic and strategic problem and their own personal “problem” of obtaining individual achievement and reward. In this sense, industrial buying decisions are both “rational” and “emotional,” as they serve both the organization’s and the individual’s needs.12

7.2.3 Targeting Firms and Buying Centers Successful business-to-business marketing requires that business marketers know which types of companies to focus on in their selling efforts, as well as whom to concentrate on within the buying centers in those organizations.

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Targeting Firms Business marketers may divide the marketplace in many different ways to decide on the types of firms to which they will sell. Finding those business sectors with the greatest growth prospects, most profitable customers, and most promising opportunities for the firm is crucial. Thomson Reuters—Just before it acquired Reuters, global information services giant Thomson Corporation embarked on an extensive research study to better understand its ultimate customers. Thomson sold to businesses and professionals in the financial, legal, tax and accounting, scientific and health care sectors, but it felt it knew much more about how a financial services manager made purchases for an entire department, for example, than about how individual brokers or investment bankers used Thomson data, research, and other resources to make day-to-day investment decisions for clients. Segmenting the market by these end users, rather than by purchasers, and studying how they viewed Thomson versus competitors allowed the firm to identify market segments that offered growth opportunities. To better understand these segments, Thomson conducted surveys and “day in the life” ethnographic research on how end users did their jobs. Using an approach called “three minutes,” researchers combined observation with detailed interviews to understand what end users were doing three minutes before and after they used one of Thomson’s products. Insights from the research helped the company develop new products and make acquisitions that led to significantly higher revenue and profits in the year that followed.13

Targeting within the Business Center Once it has identified the type of businesses on which to focus marketing efforts, the firm must then decide how best to sell to them. To target their efforts properly, business marketers have to figure out: Who are the major decision participants? What decisions do they influence? What is their level of influence? What evaluation criteria do they use? Consider the following example:

Thomson Reuters’ focus on understanding its ultimate users rather than purchasers helped it identify market opportunities.

A number of different people play a role in the purchase of hospital products such as surgical gowns; all these people have their own objectives and interests.

A company sells nonwoven disposable surgical gowns to hospitals. The hospital personnel who participate in this buying decision include the purchasing manager, the operating-room administrator, and the surgeons. The purchasing manager analyzes whether the hospital should buy disposable gowns or reusable gowns. If the findings favor disposable gowns, then the operating-room administrator compares various competitors’ products and prices and makes a choice. This administrator considers absorbency, antiseptic quality, design, and cost, and normally buys the brand that meets the functional requirements at the lowest cost. Surgeons influence the decision retroactively by reporting their satisfaction with the particular brand. The business marketer is not likely to know exactly what kind of group dynamics take place during the decision process, although whatever information he or she can obtain about personalities and interpersonal factors is useful. Small sellers concentrate on reaching the key buying influencers. Larger sellers go for multilevel in-depth selling to reach as many participants as possible. Their salespeople virtually “live” with high-volume customers. Companies will have to rely more heavily on their communication programs to reach hidden buying influences and keep current customers informed.14 Business marketers must periodically review their assumptions about buying center participants. Traditionally, SAP sold its software products to CIOs at large companies. A shift to focus on selling to individual corporate units lower down the organizational chart raised the share of software license sales going to new customers to 40 percent.15

7.3 The Purchasing/Procurement Process In principle, business buyers seek to obtain the highest benefit package (economic, technical, service, and social) in relation to a market offering’s costs. A business buyer’s incentive to purchase will be greater in proportion to the ratio of perceived benefits to costs. The marketer’s task is to construct a profitable offering that delivers superior customer value to the target buyers.

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Business marketers must therefore ensure that customers fully appreciate how the firm’s offerings are different and better. Framing occurs when customers are given a perspective or point of view that allows the firm to “put its best foot forward.” Framing can be as simple as making sure customers realize all the benefits or cost savings afforded by the firm’s offerings, or becoming more involved and influential in the thought process behind how customers view the economics of purchasing, owning, using and disposing product offerings. Framing requires understanding how business customers currently think of and choose among products and services, and then determining how they should ideally think and choose. Supplier diversity is a benefit that may not have a price tag but that business buyers overlook at their risk. A diverse supplier base is a business imperative, especially in Asia.

Pfizer—One of the biggest names in pharmaceuticals, Pfizer views its supplier-diversity program as an essential tool in connecting with customers. Its Chief Diversity Officer directs diversity efforts that include recruitment and talent development inside the company, as well as engaging with customers and suppliers outside the company. For leadership, Pfizer relies on a diversity and inclusion worldwide council and an infrastructure of “ambassadors” throughout the company. Pfizer concentrates its diversity efforts on women, people with disabilities, Asian-Pacific islanders, and others. The company has spent about $700 million with 2,400 minority and women suppliers. Pfizer has even developed a mentoring program that identifies women and minority suppliers that need help growing, whether it is designing a better Web site or building a better business plan. Pfizer managers meet with the owners, often on-site, to figure out what they need.16

In the past, purchasing departments occupied a low position in the management hierarchy, in spite of often managing more than half the company’s costs. Recent competitive pressures have led many companies to upgrade their purchasing departments and elevate administrators to vice presidential rank. These new, more strategically oriented purchasing departments have a mission to seek the best value from fewer and better suppliers. Some multinationals have even elevated

them to “strategic supply departments” with responsibility for global sourcing and partnering. At Caterpillar, purchasing, inventory control, production scheduling, and traffic have been combined into one department. Here are other companies that have benefited from improving their business buying practices. Mitsui & Co. Ltd. is a leading Japanese trading firm that owns more than 850 companies and subsidiaries. When the firm took its purchase orders and payments transactions for one group online, it reduced the cost of purchase transactions by 50 percent and increased customer satisfaction due to greater process efficiencies.17

7.4 Stages in the Buying Process We are ready to describe the general stages in the business buying decision process. Robinson and his associates have identified eight stages and called them buyphases.19 The stages are shown in Table 7.1. This model is called the buygrid framework. In modified-rebuy or straight-rebuy situations, some stages are compressed or bypassed. For example, in a straight-rebuy situation, the buyer normally has a favorite supplier or a ranked list of suppliers, and can skip the search and proposal solicitation stages. Here are some important considerations in each of the eight stages. Table 7.1 Buygrid Framework: Major Stages (Buyphases) of the Industrial Buying Process in Relation to Major Buying Situations (Buyclasses) Buyclasses

1. Problem recognition

Buyphases

New-Task

ModifiedRebuy

StraightRebuy

Yes

May be

No

2. General need description

Yes

May be

No

3. Product specification

Yes

Yes

Yes

4. Supplier search

Yes

May be

No

5. Proposal solicitation

Yes

May be

No

6. Supplier selection

Yes

May be

No

7. Order-routine specification

Yes

May be

No

8. Performance review

Yes

Yes

Yes

7.4.1 Problem Recognition The buying process begins when someone in the company recognizes a problem or need that can be met by acquiring a good or service. The recognition can be triggered by internal or external stimuli. Internally, some common events lead to problem recognition. The company decides to develop a new product and needs new equipment and materials. A machine breaks down and requires new parts. Purchased material turns out to be unsatisfactory, and the company searches for another supplier. A purchasing manager senses an opportunity to obtain lower prices or better quality. Externally, the buyer may get new ideas at a trade show, see an ad, or receive a call from a sales representative who offers a better product or a lower price. Business marketers can stimulate problem recognition by direct mail, telemarketing, and calling on prospects.

Leading mining and exploration company Rio Tinto has worked with its suppliers to streamline the way it gets paid.

ChaPter 7 ó analyzing Business Markets

Rio Tinto is a world leader in finding, mining, and processing the earth’s mineral resources with a significant presence in North America and Australia. Coordinating with its suppliers was time consuming, so Rio Tinto embarked on an electronic commerce strategy with one key supplier. Both parties have reaped significant benefits from this new arrangement. In many cases, orders are being filled in the suppliers’ warehouse within minutes of being transmitted, and the supplier is now able to take part in a pay-on-receipt program that has shortened Rio Tinto’s payment cycle to around 10 days.18

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Zoom Technologies—Zoom Technologies has the Zoom, Hayes, and Global Village brands under its umbrella. For its Hayes product line, the company uses a “soft” technology approach in developing Asian markets like China. Each time it adds a new product, it translates all the literature and manuals, and organizes a round of conferences or seminars about the new technology. The conferences focus on providing information on how to use the products and better understand the technology.

7.4.2 General Need Description and Product Specification Next, the buyer determines the needed item’s general characteristics and required quantity. For standard items, this is simple. For complex items, the buyer will work with others— engineers, users—to define characteristics like reliability, durability, or price. Business marketers can help by describing how their products meet or even exceed the buyer’s needs. The buying organization now develops the item’s technical specifications. Often, the company will assign a product-value-analysis engineering team to the project. Product value analysis (PVA) is an approach to cost reduction in which components are studied to determine if they can be redesigned or standardized or made by cheaper methods of production. The PVA team will examine the high-cost components in a given product. The team will also identify overdesigned components that last longer than the product itself. Tightly written specifications will allow the buyer to refuse components that are too expensive or that fail to meet specified standards. When Hewlett-Packard received a recycling award through an application of PVA methods, it received this accolade:

7.4.3 Supplier Search

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The buyer next tries to identify the most appropriate suppliers through trade directories, contacts with other companies, trade advertisements, trade shows, and the Internet.20 The move to Internet purchasing has far-reaching implications for suppliers and will change the shape of purchasing for years to come. Companies that purchase over the Internet are utilizing electronic marketplaces in several forms: 21

Catalog sites—Companies can order thousands of items through electronic catalogs distributed by e-procurement software. For example, Samsung Corporation’s online trading catalog contains over 1,000 products in such diverse categories as chemicals, steel, and textiles. Vertical markets—Companies buying industrial products such as plastics, steel, or chemicals, or services such as logistics or media can go to specialized Web sites (called e-hubs). For example, Plastics.com allows plastics buyers to search for the best prices from the thousands of plastics sellers. “Pure Play” auction sites—These are online marketplaces such as eBay, BayanTrade, and Alibaba that could not have been realized without the Internet and for which no business model existed before their formation. Spot (or exchange) markets—On spot electronic markets, prices change by the minute. For example, ChemConnect is an online exchange for buyers and sellers of bulk chemicals such as benzene. Private exchanges—Hewlett-Packard, IBM, and Wal-Mart operate private exchanges to link with specially invited groups of suppliers and partners over the Web. Barter markets—In these markets, participants offer to trade goods or services. Buying alliances—Several companies buying the same goods join together to form purchasing consortia and gain deeper discounts on volume purchases. For example, Transora is a buying alliance formed by Coca-Cola, Sara Lee, Kraft, PepsiCo, Gillette, and Procter & Gamble. Online business buying offers several advantages: it shaves transaction costs for both buyers and suppliers, reduces time between order and delivery, consolidates purchasing systems, and

forges more intimate relationships between partners and buyers. In Asia, an added advantage is increased transparency, since employees cannot now channel business to favored suppliers in return for kickbacks. On the downside, online business buying may erode supplier-buyer loyalty and create potential security problems. Businesses also face a technological dilemma because no single system yet dominates. B2B marketing needs to be adapted to fit the special needs of the Asian business environment. Asian companies must learn from the development of B2B e-commerce in the United States. One lesson is that marketplaces launched by big industrial incumbents have the greatest likelihood of success, especially for industries with only a few large buyers or suppliers. Marketing Insight: The Asian B2B Environment describes the differences and adaptations needed for B2B e-commerce success in Asia.

THE ASIAN B2B ENVIRONMENT

Companies building B2B marketplaces in Asia have to address and adapt to the Asian business environment: Manufacturing dominates—Asia is the workshop of the world. Manufacturers buy more “direct” goods used in the final products rather than “indirect” goods that contribute to the product but are not a part of it. In Asia, direct goods account for 80 percent of the total business purchases, compared to 60 percent in the U.S. trade in direct goods is harder to move online than trade in indirect goods, as the former needs to be tailored to suit a particular production process. Thus, to gain liquidity, B2B markets serving Asian industries need to target direct goods early. Online marketplaces can begin with simple, standard commodities before moving to complex, engineered goods. Digital asset-management software that allows buyers and sellers to transfer engineering designs and specifications will be required. In industries with few buyers, large savings by purchasing direct goods online will be an incentive. South Korea’s B2B online auctions in the chemical industry have yielded savings of 10 to 15 percent. BeXcom, an Asian B2B technology provider, has developed flourishing online marketplaces in the petrochemicals and food industries. Less efficient supply chains—Distribution and logistics account for a larger percentage of cost in Asia than in Europe and the United States. There are usually three or four intermediaries between each seller and buyer in Asia compared to one or two in Europe. Online marketplaces can make supply chains in Asia more efficient by improving communications between the links and by obviating the need for so many links. Li & Fung works with a number of specialist spinners, knitters, weavers, dyers, sewers, and printers, as well as with wholesalers, retailers, and customers for finished goods. Instead of owning them in a traditional, vertically integrated structure, Li & Fung has leveraged Web technology to manage a multitude of production sites. Each link knows what to produce and when.

Less well-developed infrastructure—The e-commerce infrastructure in Asia lags behind that of the United States. Most Asian countries lack an efficient online payment system. There are few third-party logistics providers and the mechanisms for managing suppliers’ credit risk and protecting against defaulting debtors are not welldeveloped. Information on the finances of companies involved is also scarce. Asian marketplaces can fill this void by going beyond the matchmaker role between buyers and sellers. For example, NECX is a consumer electronics marketplace that provides inventory management, financial settlement, and global logistics management services as well as quality assurance checks on Asian suppliers. Smaller markets—B2B markets targeting any single Asian country are unlikely to attract enough home demand for success. To combat the problem of small home markets, Asian B2B marketplaces need to target users in bigger Asian regions and in developed countries. Chinese B2B Web site Alibaba.com had global aspirations from the outset, targeting SMEs worldwide. Its business model focuses on removing the disadvantages SMEs face when conducting international trade. Alibaba has an Englishlanguage Web site catering to international merchants seeking Chinese products to import. It also operates a Chinese-language site which serves buyers and sellers interested in the domestic China trade. Its third Web site, Taobao, is free for individuals to trade through fixed-price or auction transactions. Yahoo! bought a 35 percent stake in Alibaba for $1 billion to expand its exposure in China. By 2012, Alibaba bought back Yahoo!’s stake. Regional players in the same industry can also gain scale by collaborating to form a vertical B2B marketplace as the petrochemical buyers and sellers in China, Indonesia, Korea, Taiwan, and Thailand did when they formed ChemCross, a petrochemical marketplace.

Sources: Rajat K. Dhawan, Ramesh Mangaleswaran, Asutosh Padhi, Shirish Sankhe, Karsten Schween, and Paresh Viash, “The Asian Difference in B2B,” McKinsey Quarterly, 2000, 4, p. 38; Mylene Mangalindan, “Yahoo is in Talks to Buy Alibaba.com Stake,” Asian Wall Street Journal, 10 August 2005, p. A3; “The Long Goodbye,” www.economist.com, 21 May 2012.

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E-Procurement Web sites are organized around two types of e-hubs: vertical hubs centered on industries (plastics, steel, chemicals, paper) and functional hubs (logistics, media buying, advertising, energy management). Here is an example of an Asian vertical hub:

Global Sources—Global Sources Garments & Textiles Online was launched to help international buyers trade more effectively with apparel manufacturers in China, India, and other supply markets. Global Sources helps trading partners reduce uncertainty and maximize trade opportunities, especially after the lifting of trade quotas in China. It provides reliable and current supplier and product information as well as reviews the capabilities of qualified suppliers.22

In addition to using these Web sites, companies can do e-procurement in other ways: Set up direct extranet links to major suppliers. A company can set up extranet links to its major suppliers. For example, it can set up a direct e-procurement account, and its employees can make their purchases this way. Form buying alliances. Several companies in the petrochemical industry from China, Indonesia, South Korea, Taiwan, and Thailand formed an alliance called ChemCross to gain economies of scale in making purchases as well as to provide services such as stock-keeping, financing, insurance, and transportation. Set up company buying sites. Canon’s procurement Web site contains its corporate procurement philosophy, fundamental procurement policies, procurement procedures, green procurement activities, a public quote site, and a suppliers proposal site.

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Moving into e-procurement involves more than acquiring software; it requires changing purchasing strategy and structure. However, the benefits are many: Aggregating purchases across multiple departments gains larger, centrally negotiated volume discounts. There is less buying of substandard goods from outside the approved list of suppliers, and a smaller purchasing staff is required.

Lead Generation The supplier’s task is to get listed in major online catalogs or services, develop a strong advertising and promotion program, and build a good reputation in the marketplace. This often means creating a well-designed and easy-to-use Web site. Suppliers who lack the required production capacity or suffer from a poor reputation will be rejected. Those who qualify may be visited by the buyer’s agents, who will examine the suppliers’ manufacturing facilities and meet their personnel. After evaluating each company, the buyer will end up with a shortlist of qualified suppliers. Many professional buyers have forced suppliers to change their marketing to increase their likelihood of making the cut.

7.4.4 Proposal Solicitation The buyer next invites qualified suppliers to submit proposals. If the item is complex or expensive, the buyer will require a detailed written proposal from each qualified supplier. After evaluating the proposals, the buyer will invite a few suppliers to make formal presentations. Business marketers must be skilled in researching, writing, and presenting proposals. Written proposals should be marketing documents that describe value and benefits in customer terms. Oral presentations should inspire confidence, and position the company’s capabilities and resources so that they stand out from the competition.

7.4.5 Supplier Selection Before selecting a supplier, the buying center will specify and rank desired supplier attributes, often using a supplier-evaluation model such as the one shown in Table 7.2.

Table 7.2 An Example of Vendor Analysis Attributes

Importance Weights

Rating Scale Poor (1) Fair (2) Good (3)

Price

0.30

Supplier reputation

0.20

Product reliability

0.30

Service reliability

0.10

Supplier flexibility

0.10

Excellent (4) X

X X X X

Business marketers need to do a better job of understanding how business buyers arrive at their valuations.23 Researchers have found that business marketers employed eight different customer value assessment (CVA) methods to assess customer value. Companies tended to use the simpler methods, although the more sophisticated ones promise to produce a more accurate picture of the customer perceived value (see Marketing Memo: Developing Compelling Customer Value Propositions).

MARKETING MEMO

DEVElOPINg COMPEllINg CuSTOMER VAluE PROPOSITIONS

To command price premiums in competitive B2B markets, firms must create compelling customer value propositions. The first step is to research the customer. Here are a number of productive research methods: 1. Internal engineering assessment—Company engineers use laboratory tests to estimate the product’s performance characteristics. However, this ignores the fact that in different applications, the product will have different economic value. 2. Field value-in-use assessment—Customers are interviewed about cost elements associated with using the new-product offering compared to an incumbent product. The task is to assess how much each element is worth to the buyer. 3. Focus-group value assessment—Customers in a focus group are asked what value they would put on potential market offerings. 4. Direct survey questions—Customers are asked to place a direct dollar value on one or more changes in the market offering. 5. Conjoint analysis—Customers are asked to rank their preference for alternative market offerings or concepts. Statistical analysis is used to estimate the implicit value placed on each attribute. 6. Benchmarks—Customers are shown a “benchmark” offering and then a new market offering. They are asked how much more they would pay for the new offering or how much less they would pay if certain features were removed from the benchmark offering. 7. Compositional approach—Customers are asked to attach a monetary value to each of three alternative levels of a given

attribute. This is repeated for other attributes. The values are then added together for any offer configuration. 8. Importance ratings—Customers are asked to rate the importance of different attributes and their suppliers’ performance on these attributes. Having done this research, you can specify the customer value proposition, following a number of important principles. First, clearly substantiate value claims by concretely specifying the differences between your offerings and those of competitors on the dimensions that matter most to the customer. For example, Rockwell Automation determined the cost savings customers would realize from purchasing its pump solution instead of a competitor’s by using industry-standard metrics of functionality and performance: kilowatt-hours spent, number of operating hours per year, and dollars per kilowatt-hour. Also, make the financial implications obvious. Second, document the value delivered by creating written accounts of costs savings or added value that existing customers have actually captured by using your offerings. Chemical producer Akzo Nobel conducted a two-week pilot on a production reactor at a prospective customer’s facility to document points-of-parity and points-of-difference of its highpurity metal organics product. Finally, make sure the customer value proposition is well implemented within the company, then train and reward employees for developing a compelling one. Quaker Chemical conducts training programs for its managers that include a competition to develop the best proposals.

Sources: James C. Anderson and Finn Wynstra, “Purchasing Higher-Value, Higher-Price Offerings in Business Markets,” Journal of Business-to-Business Marketing, 2010, 17, pp. 29–61; James C. Anderson, Marc Wouters, and Wouter van Rossum, “Why the Highest Price Isn’t the Best Price,” MIT Sloan Management Review, Winter 2010, pp. 69–76; James C. Anderson, Nirmalya Kumar, and James A. Narus, Value Merchants: Demonstrating and Documenting Superior Value in Business Markets (Boston: Harvard Business School Press, 2007); James C. Anderson, James A. Narus, and Wouter van Rossum, “Customer Value Propositions in Business Markets,” Harvard Business Review, March 2006, pp. 2–10; James C. Anderson and James A. Narus, “Business Marketing: Understanding What Customers Value,” Harvard Business Review, November 1998, pp. 53–65.

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Total score: 0.30(4) + 0.20(3) + 0.30(4) + 0.10(2) + 0.10(3) = 3.5

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The choice and importance of different attributes varies with the type of buying situation.24 Delivery reliability, price, and supplier reputation are important for routine-order products. For procedural-problem products, such as a copying machine, the three most important attributes are technical service, supplier flexibility, and product reliability. For political-problem products that stir rivalries in the organization (such as the choice of a computer system), the most important attributes are price, supplier reputation, product reliability, service reliability, and supplier flexibility.

Overcoming Price Pressures The buying center may attempt to negotiate with preferred suppliers for better prices and terms before making the final selection. Despite moves toward strategic sourcing, partnering, and participation in cross-functional teams, buyers still spend a large part of their time haggling with suppliers on price, particularly in emerging Asian countries. Marketers can counter the request for a lower price in a number of ways. They may be able to show evidence that the “total cost of ownership,” that is, the “life-cycle cost” of using their product is lower than that of competitors’ products. They can also cite the value of the services the buyer now receives, especially if those services are superior to those offered by competitors. Service support and personal interactions as well as the supplier’s know-how and the ability to improve customers’ time to market can be useful differentiators in achieving key-supplier status. Improving productivity helps alleviate price pressures. Some firms use technology to devise novel customer solutions. Others handle price-oriented buyers by setting a lower price but establishing restrictive conditions: (1) limited quantities, (2) no refunds, (3) no adjustments, and (4) no services. Solution selling can also alleviate price pressure, and it comes in different forms: (1) solutions to enhance customer revenues, (2) solutions to decrease customer risks, and (3) solutions to reduce customer costs. More firms are seeking solutions that increase benefits and reduce costs enough to overcome any low-price concerns.

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Risk and gain sharing can offset price reductions that customers request. Suppose Johnson & Johnson (J&J) signs an agreement with Parkway Hospital promising $350,000 in savings over the first 18 months in exchange for getting a tenfold increase in the hospital’s share of supplies. If J&J achieves less than this promised savings, it will make up the difference. If it achieves substantially more, it participates in the extra savings. To make such arrangements work, the supplier must be willing to help the customer build a historical database, reach an agreement for measuring benefits and costs, and devise a dispute resolution mechanism.

Number of Suppliers Companies are increasingly reducing the number of suppliers. These companies want their chosen suppliers to be responsible for a larger component system; they want them to achieve continuous quality and performance improvement while at the same time lowering the supply price each year by a given percentage. They expect their suppliers to work closely with them during product development, and they value their suggestions. There is even a trend toward single sourcing. Companies that use multiple sources often cite the threat of a labor strike as the biggest deterrent to single sourcing. Another reason companies may be reluctant to use a single source is they fear they will become too comfortable in the relationship and lose their competitive edge.

7.4.6 Order-Routine Specification After selecting suppliers, the buyer negotiates the final order, listing the technical specifications, the quantity needed, the expected time of delivery, return policies, warranties, and so on. Many industrial buyers lease heavy equipment like machinery and trucks. The lessee gains a number of advantages: conserving capital, getting the latest products, receiving better service, and some tax advantages. The lessor often ends up with a larger net income and the chance to sell to customers who could not afford outright purchase. Buyers are moving toward blanket contracts rather than periodic purchase orders for maintenance, repair, and operating items. A blanket contract establishes a long-term relationship in which the supplier promises to resupply the buyer as needed, at agreed-upon prices, over a

specified period of time. Because the stock is held by the seller, blanket contracts are sometimes called stockless purchase plans. The buyer’s computer automatically sends an order to the seller when stock is needed. This system locks suppliers in tighter with the buyer and makes it difficult for out-suppliers to break in unless the buyer becomes dissatisfied with the in-supplier’s prices, quality, or service.

7.4.7 Performance Review The buyer periodically reviews the performance of the chosen supplier(s). Three methods are commonly used. The buyer may contact the end users and ask for their evaluations; the buyer may rate the supplier on several criteria using a weighted score method; or the buyer might aggregate the cost of poor performance to come up with adjusted costs of purchase, including price. The performance review may lead the buyer to continue, modify, or end a supplier relationship. Many companies have set up incentive systems to reward purchasing managers for good buying performance, in much the same way that sales personnel receive bonuses for good selling performance. These systems are leading purchasing managers to increase pressure on sellers for the best terms.

7.5 Developing Effective Business-to-Business Marketing Programs Business-to-business marketers are using every marketing tool at their disposal to attract and retain customers. They are embracing systems selling and adding valuable services to their product offerings and employing customer reference programs and a wide variety of online and offline communication and branding activities.

7.5.1 Communication and Branding Activities Business marketers are increasingly recognizing the importance of their brand. Swiss-based ABB is a global leader in power and automation technologies, with 145,000 employees in about 100 countries. The company spends $1 billion on R&D annually to fuel a long tradition of groundbreaking and nation-building projects. An extensive and carefully planned rebranding project in 2011 evaluated five alternative positioning platforms, concluding that ABB should stand for “Power and Productivity for a Better World.” Magazines, posters, brochures, and digital communication were all revamped to give the brand a new look.25 NetApp is another good example of the increased importance placed on branding in business-to-business marketing.26 NetApp—NetApp is a Fortune 1000 company providing data management and storage solutions to medium and large-sized clients. Despite some marketplace success, the company found its branding efforts in disarray by 2007. Several variations of its name were in use, leading to a formal name change to NetApp in 2008. Branding consultants Landor also created a new identity, architecture, nomenclature, tone of voice, and tagline (“Go further, faster.”). Messages emphasized NetApp’s superior technology, innovation, and customer-centric “get things done” culture. Some marketing efforts still left a few things to be desired, however. Called “Frankensites” because they had been modified by so many developers over a 12-year period, the company’s Web sites were streamlined to

ChaPter 7 ó analyzing Business Markets

Companies that fear a shortage of key materials are willing to buy and hold large inventories. They will sign long-term contracts with suppliers to ensure a steady flow of materials. Major companies regard long-term supply planning as a major responsibility of their purchasing managers. For example, Toyota may want to buy from the fewer suppliers who are willing to locate close to its plants and produce high-quality components. In addition, business marketers are using the Internet to set up extranets with important customers to facilitate and lower the cost of transactions. The customers enter orders directly on the computer, and these orders are automatically transmitted to the supplier. Some companies go further and shift the ordering responsibility to their suppliers in systems called vendor-managed inventory. These suppliers are privy to the customer’s inventory levels and take responsibility to replenish it automatically through continuous replenishment programs.

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organize the company’s presentation and make updates easier. The new Web sites were estimated to increase sales leads from inquiries fourfold. Investing heavily in marketing communications despite the recession, NetApp also ran print and online ads and tapped into a number of social media outlets—communities and forums, bloggers, Facebook, Twitter, and YouTube. Social media initiatives helped it in Asia where it did not have an advertising presence. Some business-to-business marketers are adopting marketing practices from business-toconsumer markets to build their brand. Fifty percent of its revenue comes from business services and not copies. Here is how its Marriott ad unfolded:27 Two Marriott bellmen are sitting in an office. “Did you finish last month’s invoices?” one asks the other. “No, but I did pick up your dry cleaning and have your shoes shined,” the second replies. “Well, I made you a reservation at the sushi place around the corner!” the first bellman says. This voiceover follows: “Marriott knows it’s better for Xerox to automate their global invoice processes so they can focus on serving their customers.” Sometimes a more personal touch can make all the difference. Customers considering dropping six or seven figures on one transaction for big-ticket goods and services want all the information they can get, especially from a trusted, independent source. Marketing Memo: Spreading the Word with Customer Reference Programs describes the role of that increasingly important marketing tool.

7.5.2 Systems Buying and Selling

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Many business buyers prefer to purchase a total problem solution from one seller. Called systems buying, this practice originated with government purchases of major weapons and communications systems. The government solicited bids from prime contractors that, if awarded the contract, became responsible for bidding out and assembling the system’s subcomponents from second-tier contractors. The prime contractor thus provided a turnkey solution, so called because the buyer simply had to turn one key to get the job done. Sellers have increasingly recognized that buyers like to purchase in this way, and many have adopted systems selling as a marketing tool. Cisco Systems began to take share from telecommunications rival Avaya by offering customers a one-stop solution for communications technology.28 Technology giants such as Hewlett-Packard, IBM, Oracle, Dell, and EMC are all

SAS—With sales of more than $2.3 billion and a huge ‘fan club’ of IT customers, the business analytics software and services firm SAS seemed to be in an enviable position in 1999. Yet its image was what one industry observer called “a geek brand.” To extend the company’s reach beyond IT managers with PhDs in math or statistical analysis, the company needed to connect with C-level executives in the largest companies—people who either didn’t have a clue what SAS’s software was or didn’t think business analytics was a strategic issue. Working with its first outside ad agency ever, SAS emerged with a new logo, a new slogan (“The Power to Know®”), and a series of TV spots and print ads in business publications such as BusinessWeek, Forbes, and The Wall Street Journal. One TV spot that exemplifies SAS’s rebranding effort ran like this: The problem is not harvesting the new crop of e-business information. It’s making sense of it. With e-intelligence from SAS, you can harness the information. And put the knowledge you need within reach. SAS. The Power to Know. Later research showed that SAS had made the transition to a mainstream business decision-making support brand and was seen as both user-friendly and necessary. Highly profitable and now one of the world’s largest privately owned software companies, more than doubling its revenue stream since the brand change, SAS has met with just as much success inside the company.

MARKETING MEMO

SPREADINg THE WORD WITH CuSTOMER REFERENCE PROgRAMS 1. Establish a formal, organized customer reference program to build an army of advocates. 2. Put references at the center of your growth strategy. 3. Give your customer reference program a seat at the table by using an experienced executive as its leader. 4. Don’t strive for “100 percent referenceability”; put focus on a smaller group of truly committed, impactful company advocates. 5. Revolutionize your customer value proposition; find customers who want to be advocates because of their passion for the company and not as the result of any financial inducement. Research has shown that another potential benefit of a customer reference program is that it can increase the loyalty even of the customer advocates themselves.

Sources: V. Kumar, J. Andrew Petersen, and Robert P. Leone, “Defining, Measuring, and Managing Business Reference Value,” Journal of Marketing, January 2013, 77, pp. 68–86; David Godes, “The Strategic Impact of References in Business Markets,” Marketing Science, March–April 2012, 31, pp. 257–76; Bill Lee, “Customer Reference Programs at the Tipping Point,” HBR Blog Network, 7 June 2012.

transitioning from specialists to competing one-stop shops that can provide the core technology necessary as businesses shift to the cloud.29 One variant of systems selling is systems contracting, in which a single supplier provides the buyer with its entire requirement of supplies. During the contract period, the supplier also manages the customer’s inventory. Shell Oil manages the oil inventories of many of its business customers and knows when they require replenishment. The customer benefits from reduced procurement and management costs and from price protection over the term of the contract. The seller achieves lower operating costs thanks to steady demand and reduced paperwork. Systems selling is a key industrial marketing strategy in bidding to build large-scale industrial projects such as dams, steel factories, irrigation systems, sanitation systems, pipelines, utilities, and even new towns. Project engineering firms must compete on price, quality, reliability, and other attributes to win contracts. Suppliers, however, are not just at the mercy of customer demands. Ideally, they’re active early in the process to influence the actual development of the specifications. Or they can go beyond the specifications to offer additional value in various ways, as the following example shows. Selling to the Indonesian Government—The Indonesian government requested bids to build a cement factory near Jakarta. A U.S. firm made a proposal that included choosing the site, designing the factory, hiring the construction crews, assembling the materials and equipment, and turning over the finished factory to the Indonesian government. A Japanese firm, in its proposal, included all these services, plus hiring and training the workers to run the factory, exporting the cement through its trading companies, and using the cement to build roads and new office buildings in Jakarta. Although the Japanese plan would cost more money, it won the contract. Clearly, the Japanese viewed the problem not just as building a cement factory (the narrow view of systems selling) but as contributing to Indonesia’s economic development. They took the broadest view of the customer’s needs, which is true systems selling.

7.5.3 Role of Services Services play an increasing strategic and financial role for many business-to-business firms primarily selling products. Adding high-quality services to their product offerings allows them to provide greater value and establish closer ties with customers.

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In a networked economy, buyers increasingly rely on the input of others to help them make purchase decisions. One way to entice or reassure potential new buyers is to create a customer reference program in which satisfied existing customers act in concert with the company’s sales and marketing department by agreeing to serve as references. Technology companies such as HP, Lucent, and Unisys have all employed such programs. Buyers can interact with a company and its customers in a variety of ways—via social media; conferences, events, and trade shows; and their own personal and professional networks. Companies need to recognize the importance of peer-to-peer interaction and know how they can assist a potential buyer. One expert offers the following advice:

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A classic example is Rolls-Royce, which has invested heavily in developing giant jet engine models for the new jumbo planes being introduced by Boeing and Airbus. An important source of profits for Rolls-Royce, beyond selling engines and replacement parts, is the add-on “power by the hour” long-term repair and maintenance contracts it sells. Margins are higher because customers are willing to pay a premium for the peace of mind and predictability the contracts offer.30

Mondo combines state-of-the-art running tracks with value-added services to successfully sell to stadiums all over the world.

Technology firms are also bundling services to improve customer satisfaction and increase profits. Like many software firms, Adobe Systems is making the transition to a digital-marketing business with cloud-based monthly subscriptions. Revenue is increasing because the company is able to sell support services, Web site hosting, and server management to its cloud customers. 31

7.6 Managing Business-to-Business Customer Relationships To improve effectiveness and efficiency, business suppliers and customers are exploring different ways to manage their relationships. Closer relationships are driven in part by trends related to supply chain management, early supplier involvement, purchasing alliances, and so on.32 Cultivating the right relationships with business is paramount with any holistic marketing program. Marketing Insight: Rules of Social and Business Etiquette shows how business relationships are handled in Asia.

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Foreign companies would do well to understand that many Asian countries are deeply rooted in Confucian values and ideology. When hiring, for instance, school affiliation and age are important factors that are considered besides merit. The relationships among individuals cultivated through affiliation to the same school, region, or family create strong societal ties that bind these individuals to their communities, and in turn extend to a sense of obligation to the workplace. Confucian influence is implied in many Asian organizations—they are more hierarchical than matrix in structure. This means that finding a functional expert tends to be

MARKETING INSIGHT

RulES OF SOCIAl AND BuSINESS ETIquETTE

Here are some rules of social and business etiquette that marketers should understand when doing business in Asian countries: China—Not letting others lose “face” or esteem is important to the Chinese. This can be achieved by being polite, not doing anything that can be regarded as insulting, and being firm graciously. The Chinese are sensitive about relationships with foreigners. Patience is also crucial as many things take a long time to process in China. The most important ingredient of a business relationship with a foreigner is trust and confidence in you as a person. India—Indians are gracious business hosts and are quite informal and relaxed in their approach to business negotiations. They greet with hands folded, namaste. Except for formal dinners and special meetings, chief executives of companies generally conduct business in casual dress. Although Indians are tolerant people who will overlook many a social faux pas or misunderstanding on the basis that you are a foreign guest in their country, any belittling of their country or culture, or outward display of arrogance and condescension, is likely to alienate them and possibly terminate the relationship. Indians do not operate with stopwatch precision. Appointments are generally

approximate timings as the difficulties of getting through congested traffic may cause delays. Conversely, drop-in visits by foreign businesspeople are equally acceptable. Indonesia—Indonesians are friendly, soft-spoken, and conservative in dress and behavior. Thus, avoid raising your voice or displaying displeasure as embarrassing anyone in public is an insult. When an Indonesian laughs, it may sometimes be to cover feelings of embarrassment or anger as well as amusement. Indonesians like to work with people they know. Therefore, to succeed in business, a high profile is needed by attending social and business functions. Japan—Most Japanese businesspeople know what will be discussed at a meeting, how everyone feels about it, and how it will affect their business before they even get there. The purpose of a meeting is to reach consensus. A flexible agenda is necessary so that discussions flow more freely. There is a ritual to the exchange of business cards. Cards are presented with both hands and facing the recipient so that they can be easily read. Examine carefully each business card you receive to show interest. It is impolite to write anything on somebody else’s card. Diplomacy is required in gift-giving. It is a ritual in Japan and a way to show business contacts your appreciation of their time and assistance.

are influenced by traditional values. Utang na loob is a lifelong sense of obligation for an important favor granted. Amor propio, or pride, is similar to the concept of “face” in other Asian societies. Patience, sensitivity, and persistence are important in business. There is a tendency to reach decisions indirectly or through a third party. Sometimes, important decisions are made even before a meeting to avoid disagreement. Taiwan—Promptness is not regarded as important. Instead, it is how the time is spent that counts. Time should allow for informal conversation, getting to know your family, and extended dining. Business relationships are built on guanxi. The personal bond or contact is thus important. Hence, whenever possible, it is best to seek a mutual acquaintance for an introduction to a potential business associate. Protocol is valued. Sending a senior representative of your firm to make a personal call on a relatively small company in Taiwan will confer a good deal of face and help establish relations on a good footing. The Taiwanese consider splitting a bill the ultimate faux pas. Be prepared to make a show of paying and be gracious of your “failure” when the host pays. At dinners, you will be asked to gan bei—literally, “empty your glass”— the equivalent of “cheers.” Getting mildly drunk is no loss of face and can go toward creating a pleasant ambience. Thailand—An important quality in Thai business is to have fun. If a transaction is not enjoyable, then the Thai businessperson will think there is something wrong with it. Therefore, you must look as if you are enjoying both your job and your negotiations. Another challenge is to correctly pronounce the names of your Thai associates such as Amatakulchai or Chantasakuldrong. Getting their names right enhances their respect for you and improves your chances of success. Thais are also mindful about cleanliness and neatness. Thus, personal appearance, presentation materials, and products must be handled professionally.

Sources: Teresa C. Morrison, Wayne A. Conaway, and Joseph J. Douress, Dun & Bradstreet’s Guide to Doing Business Around the World, (New York: Prentice Hall, 1997); “Tips, Tricks and Pitfalls to Avoid When Doing Business in the Tough But Lucrative Korean Market,” Business America, June 1997, p. 7; Asian Sources Group of Trade Journals; “Business Etiquette—Indonesia,” Rapport Quarterly, October 1995, p. 2; “Asia Business Etiquette and Culture,” www.cyborlink.com, “Business Etiquette,” www.pasadenaisd.org.

relatively more difficult as executives are rotated across divisions. Consensus decision making is also well entrenched in Asia, with few responsibilities allocated to junior executives. Finally, title is regarded highly in Asia. With title comes respect and “face”, which matter a lot in Asian society.33

7.6.1 The Benefits of Vertical Coordination Much research has advocated greater vertical coordination between buying partners and sellers so that they transcend mere transactions to engage in activities that create more value for both parties. These benefits include gaining a more than proportionate increase in market share through mass production and advertising, overcoming barriers to entry when relationships are formed with another company that is already in the industry, and lowering the cost of reproducing products when the same offering is given to multiple clients. Building trust between parties is often seen as one prerequisite to healthy long-term relationships.34 Marketing Insight: Establishing Corporate Trust, Credibility, and Reputation identifies some key dimensions of those concepts. Research has found that buyer-supplier relationships differed according to four factors: availability of alternatives; importance of supply; complexity of supply; and supply market

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Korea—Be sensitive to Korea’s historical animosity toward Japan. Koreans do not like foreigners to assume that their culture is the same as Japan’s. However, Koreans respect Japanese business acumen, and, like the Japanese, still observe Confucian ethics based on respect for authority and the primacy of the group over the individual. A lot of drinking and eating is involved in doing business. Do not be afraid to let your hair down at business social functions, even though Koreans may appear reserved and staid during negotiations. Despite the international trend and new attitudes of its younger generation, Korea is still a male-dominated society. This may affect how a female executive is treated on a business trip. Malaysia—Expect some bureaucratic red tape, especially when dealing with government departments, although the private sector tends to be more efficient. Malaysians are easygoing, relaxed, and informal. Politeness is very important in all social and business interactions. When a business associate visits, the Malaysian will offer tea or coffee, and it is polite to accept and take a few sips when invited to drink. When accepting something from someone, it is polite to stoop a little and accept with both hands. Public demonstrations of affection such as hugging and touching are considered bad manners. Do not wear black, white, or navy blue at weddings as these are colors of mourning. At royal functions, avoid wearing yellow, which is a color associated with royalty. Philippines—Filipinos are not known to hold appointments sacred. However, they are among the most hospitable people in the world. They place great emphasis on personal relations. Pakikisama or a sense of camaraderie, consideration, and sensitivity is important for a successful business relationship. Impersonal goals are meaningless to Filipinos. As such, frequent meetings, consultations, and correspondence are necessary to establish and maintain relationships. It is also not fruitful to be formal and businesslike all the time. Filipinos

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MARKETING INSIGHT

ESTABlISHINg CORPORATE TRuST, CREDIBIlITy, AND REPuTATION

Corporate credibility is the extent to which customers believe a firm can design and deliver products and services that satisfy their needs and wants. It reflects the supplier’s reputation in the marketplace and is the foundation of a strong relationship. Corporate credibility depends on three factors: Corporate expertise, the extent to which a company is seen as able to make and sell products or conduct services. Corporate trustworthiness, the extent to which a company is seen as motivated to be honest, dependable, and sensitive to customer needs. Corporate likability, the extent to which a company is seen as likable, attractive, prestigious, and dynamic. In other words, a credible firm is good at what it does; it keeps its customers’ best interests in mind and is enjoyable to work with. Trust is a firm’s willingness to rely on a business partner. It depends on a number of interpersonal and interorganizational factors, such as the firm’s perceived competence, integrity, honesty, and benevolence. Personal interactions with employees

of the firm, opinions about the company as a whole, and perceptions of trust will evolve with experience. A firm is more likely to be seen as trustworthy when it provides full, honest information. provides employee incentives aligned to meet customer needs. partners with customers to help them learn and help themselves. offers valid comparisons with competitive products. Building trust can be especially tricky in online settings, and firms often impose more stringent requirements on their online business partners than on others. Business buyers worry that they won’t get products of the right quality delivered to the right place at the right time. Sellers worry about getting paid on time—or at all—and debate how much credit they should extend. Some firms, such as transportation and supply chain management company Ryder System, use automated creditchecking applications and online trust services to assess the creditworthiness of trading partners.

Sources: Kevin Lane Keller and David A. Aaker, “Corporate-Level Marketing: The Impact of Credibility on a Company’s Brand Extensions,” Corporate Reputation Review, 1 August 1998, pp. 356–78; Robert M. Morgan and Shelby D. Hunt, “The Commitment–Trust Theory of Relationship Marketing,” Journal of Marketing, 58(3), July 1994, pp. 20–38; Christine Moorman, Rohit Deshpande, and Gerald Zaltman, “Factors Affecting Trust in Market Research Relationships,” Journal of Marketing, January 1993, 57, pp. 81–101; Glen Urban, “Where Are You Positioned on the Trust Dimensions?,” Don’t Just— Relate Advocate: A Blueprint for Profit in the Era of Customer Power (Upper Saddle River, NJ: Pearson Education/Wharton School Publishers, 2005).

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232 dynamism. Based on these four factors, they classified buyer-supplier relationships into eight different categories:35 1.

Basic buying and selling—Relatively simple, routine exchanges with moderately high levels of cooperation and information exchange.

2.

Bare bones—Similar to basic buying and selling but more adaptation by the seller and less cooperation and information exchange.

3.

Contractual transaction—Generally low levels of trust, cooperation, and interaction; exchange is defined by a formal contract.

4.

Customer supply—Traditional custom supply situation where competition rather than cooperation is the dominant form of governance.

5.

Cooperative systems—Although coupled closely in operational ways, neither party demonstrates structural commitment through legal means or adaptation approaches.

6.

Collaborative—Much trust and commitment leading to true partnership.

7.

Mutually adaptive—Much relationship-specific adaptation for buyer and seller, but without necessarily strong trust or cooperation.

8.

Customer is king—Although bonded by a close, cooperative relationship, the seller adapts to meet the customer’s needs without expecting much adaptation or change on the part of the customer in exchange.

Some firms find that their needs can be satisfied with fairly basic supplier performance. They do not want or require a close relationship with a supplier. Alternatively, some suppliers may not find it worth their while to invest in customers with limited growth potential. One study found that the closest relationships between customers and suppliers arose when the supply was important to the customer and when there were procurement obstacles such as complex

purchase requirements and few alternative suppliers.36 Another study suggested that greater vertical coordination between buyer and seller through information exchange and planning is usually necessary only when high environmental uncertainty exists and specific investments are modest.37

7.6.2 Business Relationships: Risks and Opportunism

Li & Fung—Hong Kong’s largest export trading company has transformed itself from being a regional buying agent to a supply chain manager of clothing. Initially, Li & Fung leveraged its knowledge of the region in buying for large U.S. retail chains like The Limited, as its knowledge of which textile quotas have been used up and where to obtain alternative supplies was important. Later, its customers began to ask Li & Fung to develop production programs based on the sketches of their designers. Li & Fung researched the market on different types of yarn and dye swatches and matched the colors to these sketches. Buyers would then assess and modify Li & Fung’s prototypes. Li & Fung creates an entire program for each individual customer by specifying the product mix and production schedule. It contracts for all the supplies, works with factories to plan and monitor production, and coordinates the logistics to ensure on-time delivery. For example, to fulfill an order of 10,000 garments from a European retailer, Li & Fung may buy yarn from Korea and have it woven and dyed in Taiwan. Then, based on quota considerations and labor conditions, it may ship these raw materials to manufacture the garments in Thailand. To ensure quick delivery, it may divide the order across five Thai factories. Effectively, Li & Fung is customizing the value chain to best meet their customers’ needs.40 Specific investments, however, also entail considerable risk to both customer and supplier. Transaction theory from economics maintains that because these investments are partially sunk, they lock in the firms that make the investments to a particular relationship. Sensitive cost and process information may need to be exchanged. A buyer may be vulnerable to holdup because of switching costs; a supplier may be more vulnerable to holdup in future contracts because of dedicated assets and/or expropriation of technology/knowledge. In terms of the latter risk, consider the following example:41 An automobile component manufacturer wins a contract to supply an under-hood component to an original equipment manufacturer (OEM). A one-year, sole-source contract safeguards the supplier’s OEM-specific investments in a dedicated production line. However, the supplier may also be obliged to work (noncontractually) as a partner with the OEM’s internal engineering staff, using linked computing facilities to exchange detailed engineering information and coordinate frequent design and manufacturing changes over the term of the contract. These interactions could reduce costs and/or increase quality by improving the firm’s responsiveness to marketplace changes. But they could also magnify the threat to the supplier’s intellectual property. When buyers cannot easily monitor supplier performance, the supplier might shirk or cheat and not deliver the expected value. Opportunism can be thought of as “some form of cheating or undersupply relative to an implicit or explicit contract.”42 It may involve blatant self-interest and deliberate misrepresentation that violates contractual agreements. Opportunism is a concern because firms must devote resources to control and monitor, that otherwise could be allocated to more productive purposes. Contracts may become inadequate to govern supplier transactions when supplier opportunism becomes difficult to detect; as firms make specific investments in assets that cannot be used elsewhere; and as contingencies are harder to anticipate. Customers and suppliers are more likely to form a joint venture (versus a simple contract) when the supplier’s degree of asset specificity is high, monitoring the supplier’s behavior is

Li & Fung customizes its value chain to satisfy customers’ varied needs. It creates an entire program for each customer depending on their needs.

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Researchers have noted that in establishing a customer-supplier relationship, there is tension between safeguarding and adaptation. Vertical coordination can facilitate stronger customerseller ties but at the same time may increase the risk to the customer’s and supplier’s specific investments. Specific investments are those expenditures tailored to a particular company and value chain partner (e.g., investments in company-specific training, equipment, and operating procedures or systems).38 Specific investments help firms grow profits and achieve their positioning.39 Consider the following example:

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difficult, and the supplier has a poor reputation.43 When a supplier has a good reputation, for example, it is more likely to avoid opportunism to protect this valuable intangible asset. The presence of a significant future time horizon and/or strong solidarity norms so that customers and suppliers are willing to strive for joint benefits can cause a shift in the effect of specific investments, from expropriation (increased opportunism on the receiver’s part) to bonding (reduced opportunism).44

7.7 Relationship Marketing in the Keiretsu and Chaebol No discussion of B2B marketing in Asia is complete without mentioning two unique organizational forms—the Japanese keiretsu and the Korean chaebol. One of the criteria that define these industrial groups is that their members buy and sell among each other, with transactions often brokered by the trading company in the group. In general, the family-owned chaebol is smaller (in terms of sales, workforce, and overseas branches) and more tightly integrated than the keiretsu. However, as they face similar issues, the keiretsu is used as our expository vehicle. More specifically, the production keiretsu will be examined as it sets the most relevant context for B2B relationship marketing.45 The production keiretsu is characterized by the vertical integration of manufacturers and their suppliers. Large automakers like Toyota, Nissan, and Mitsubishi will have a group of primary subcontractors, which in turn distribute work to thousands of little firms. (Honda, which has no suppliers’ organization, is a notable exception.) All subcontractors are integrated into the manufacturer’s production process, and receive extensive technological, managerial, and financial support. Subcontractors are instructed precisely on production runs, prices, and delivery schedules, which they are expected to meet. Hence, manufacturers and their subcontractors are tied by reciprocal obligation: the subcontractor to high quality and low costs; the manufacturer to providing a steady flow of financial and other resources.

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Consequently, the “buy group products” mentality and reciprocal purchasing are prominent in the keiretsu procurement model. If one member buys from another, it can expect the other company to buy its products, although no group member would follow the “buy group” concept to the point of harming its own interest. In this way, long-term cooperative relationships are developed among member firms. Through ongoing interactions and information exchanges, keiretsu members build strong interdependence and social ties, and eventually, mutual trust. However, since the collapse of Japan’s bubble economy in the early 1990s, the keiretsu has been losing its influence. Responding to increased competition and the economic downturn in the late 1990s, many keiretsu-affiliated firms (kankei kaisha) have started expanding their businesses outside their group boundaries. Major Japanese automakers have increased their procurement of key components from independent suppliers (dokuritsu kaisha), other keiretsuaffiliated suppliers, and even foreign parts suppliers. For example, Denso gains only half its sales from parent company Toyota, due to increased sales to Honda and Mitsubishi. These developments may have led to major Japanese automakers pursuing different supplier relationships of late. For example, Toyota has a disproportionately large number of large suppliers, with very few small-sized suppliers, while Mitsubishi has the opposite. Toyota also did not share its higher profits with its suppliers. In contrast, Nissan’s suppliers did not fully share the poor performance of Nissan. It appeared that given its prolonged sales slump, Nissan had lost bargaining power to its suppliers, a situation which was reversed with the appointment of Carlos Ghosn as its CEO. Interestingly, Western automakers like DaimlerChrysler are now trying to develop and maintain long-term relationships with their suppliers. Collectively, these recent trends suggest the beginning of a convergence between the supplier management policies of Japanese and Western automakers.

7.8 Institutional and Government Markets Our discussion has concentrated largely on the buying behavior of profit-seeking companies. Much of what we have said also applies to the buying practices of institutional and government organizations. We now highlight certain special features of these markets.

The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that must provide goods and services to people in their care. Many of these organizations are characterized by low budgets and captive clienteles. For example, hospitals have to decide what quality of food to buy for their patients. The buying objective here is not profit, because the food is provided as part of the total service package; nor is cost minimization the sole objective, because poor food will cause patients to complain and hurt the hospital’s reputation. The hospital purchasing agent has to search for institutional-food vendors whose quality meets or exceeds a certain minimum standard and whose prices are low. In fact, many food vendors set up a separate division to sell to institutional buyers because of these buyers’ special needs and characteristics. Sin Sin, a Singaporean sauce-maker, produces, packages, and prices its sauces differently to meet the requirements of hospitals, colleges, and prisons.

Kuala Lumpur International Airport—The Malaysian government awarded the main contract to build the Kuala Lumpur International Airport to a consortium that included mainly Japanese firms such as Taisei, Kajima, Shimizu, and Hazema. They submitted a bid of $458 million, which was higher than the lowest bidder of $397 million. However, the consortium was awarded the contract because it was the “lowest technically acceptable and evaluated tender.”

Governments will also buy on a negotiated contract basis, primarily for complex projects involving major R&D costs and risks, and in cases where there is little competition. Government purchases have also been marked by kickbacks and bribery in some Asian countries. In some countries, government spending decisions are subject to public review. Hence, government organizations require considerable paperwork from suppliers, who often complain about excessive paperwork, bureaucracy, regulations, decision-making delays, and frequent shifts in procurement personnel. Vendors should also pay attention to cost justification, which is a major consideration for government procurement professionals. Companies hoping to be government contractors need to help government agencies see the bottom-line impact of their offerings. Just as companies provide government agencies with guidelines on how best to purchase and use their products, governments provide would-be suppliers with detailed guidelines describing how to sell to the government. Not following the guidelines properly and filling out forms and contracts incorrectly can create a legal nightmare.46 Suppliers have to master the system and try to find ways to cut through the red tape. Obtaining government contacts requires an investment of time, money, and resources not unlike what is required for entering a new market overseas. There are many reasons why companies selling to governments have not used a marketing orientation. Government procurement policies have traditionally emphasized price, leading suppliers to invest considerable effort in bringing costs down. Where product characteristics are carefully specified, product differentiation is not a marketing factor; nor are advertising and personal selling of much consequence in winning bids. Winning government contracts may not only be a source of revenue but also offers spillover benefits, as other businesses may follow suit in their product adoption. Linux, the software company, found that apart from large businesses and government agencies, many small and medium enterprises were also keen on adopting its offerings. The growth of Linux is expected to be particularly strong in key Asian markets where government endorsements and policies are boosting its visibility.47 Foreign businesses in Asia have also alleged that certain governments have favored local companies in awarding contracts. Thus, tying up with an influential local business may be an effective means of penetrating the government market. Lenovo, China’s leading PC maker, illustrates these points:

ChaPter 7 ó analyzing Business Markets

In most countries, government organizations are a major buyer of goods and services. Government organizations typically require suppliers to submit bids, and normally they award the contract to the lowest bidder. In some cases, the government unit will make allowance for the supplier’s superior quality or reputation for completing contracts on time.

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Lenovo—Lenovo’s guanxi or connections has been a sore point for foreign rivals. The Chinese government’s wanting to have at least one national champion in key industries has contributed to allegations that, as the government’s local champion in the PC market, Lenovo enjoys a competitive advantage. Such support manifests itself in various ways. For example, the Chinese government may promote “buy local” campaigns. Consequently, Lenovo is always on the government’s shortlist of vendors that companies are always urged to consider. Lenovo may also be advantaged by upstream companies in the supply chain that provide bigger discounts to Chinese businesses. This may help Lenovo underprice foreign rivals. To counter these allegations, Lenovo argues that less than 25 percent of its business comes from large corporate customers or state-owned enterprises. Nonetheless, Lenovo’s customers among small- and medium-sized businesses may have chosen the brand due to its visibility in the offices of governmentaffiliated companies. AOL-Time Warner also selected Lenovo with its less popular portal www.fm365.com as its partner in a joint venture over more established private sector sites such as Netease.com, Sina.com, and Sohu.com.48

However, being on good terms with government officials alone may no longer suffice, even in Asia. As China shifts from a low-cost manufacturing center to an innovative market economy, foreign companies will need to develop strategic and sustainable approaches to corporategovernment relationship management, beyond that of personal relationships. China’s unique business situation calls for adherence to a few principles: Interact with all levels of government in China. Develop relations with the government through organizations such as foreign enterprise associations, social organizations, and domestic industry associations. Personal relationship or guanxi is not enough in forging good relations with the government.

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There is no one-size-fits-all solution. Business in China should be conducted by placing the operations in the hands of someone who understands Chinese issues and is familiar with government officials and structures.49 Finally, some companies have pursued government business by establishing separate government marketing departments. Companies such as Gateway and Goodyear anticipate government needs and projects, participate in the product specification phase, gather competitive intelligence, prepare bids carefully, and produce strong communications to describe and enhance their companies’ reputations.

Summary 7.1 WHAT IS ORGANIZATIONAL BUYING?

What are the buying situations that the business buyer faces? In a straight rebuy, the buyer routinely re-orders from its suppliers and chooses its suppliers from a preapproved list. In a modified rebuy, the buyer desires for changes in price, specifications, or other terms of purchase. In a new-task purchase, the buyer buys a product for the first time. Due to the risks and costs involved, many companies engage a missionary sales force consisting of the most effective sales people.

7.2 PARTICIPANTS IN THE BUSINESS BUYING PROCESS

What is the buying center? It comprises entities who participate in the decisionmaking process of purchasing. Members of an organization in a buying center can play any of the following roles: initiators, users, influencers, deciders, approvers, buyers, and gatekeepers. What influences buying center decisions? Each member of the buying center is motivated by different interests and priorities. Different departments focus on different aspects of the product and production process.

How do business centers target decision makers? Smaller sellers target key buying influencers. Larger sellers practice multilevel in-depth selling to reach as many rungs of the decision-making process as possible.

7.3 THE PURCHASING/ PROCUREMENT PROCESS

Business marketers must ensure that customers understand how the firm’s offerings are different and better than others. They can frame the offering such that customers realize all the benefits and cost savings afforded.

7.4 STAGES IN THE BUYING PROCESS

Stage 1: Problem recognition A need that can be met by acquiring a good or service is identified. This can be triggered by external or internal stimuli. Stages 2 and 3: General need description and product specification The buyer stipulates the specifications and quantity desired. This process may involve department specialists to cover all technical aspects. The Product Value Analysis examines whether products can be redesigned to reduce costs. Stage 4: Supplier search The buyer sources for the most appropriate suppliers to meet the company’s needs through trade directories, recommendations, advertisements, and the Internet.

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What is a business market? A business market consists of all organizations that acquire goods and services in the production of other products. There are fewer but larger buyers in a business market compared to a consumer market. Suppliers and customers share a close and sometimes mutually beneficial relationship. Business purchasing follows a strict and professional procedure set up by the organization’s trained purchasing agents. The demand for business goods is derived from consumer demand, and is inelastic and fluctuating.

Buyers are also influenced by their interests, age, risk appetite, and other motivations. Individuals, and not organizations, make purchasing decisions.

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E-procurement is the acquisition of supplies via the Internet. There are vertical hubs that focus on industries, and functional hubs that center on logistics. Companies can set up buying sites with direct links to suppliers, or form alliances to tap on economies of scale. Suppliers have to focus more on marketing to succeed in enticing more professional buyers. Stage 5: Proposal solicitation Companies invite shortlisted suppliers to pitch their proposals, some via formal face-to-face presentations. Stage 6: Supplier selection The buying center establishes the attributes or criteria they look for in suppliers, how important each of these attributes are, and evaluates each supplier on these attributes. The center may try to negotiate the prices with several contenders before making a decision. Companies look toward reducing the number of suppliers to reap the benefits of consistency and price reductions.

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Stage 7: Order-routine specification After settling on the suppliers, the buyer confirms the technicalities of the order. A blanket contract or stockless purchase plan is a long-term binding contract between the buyer and seller, where the seller agrees to resupply, maintain, or repair products as required by the buyer. A vendor-managed inventory, where restocks are done through continuous replenishment programs, shifts the responsibility of restocking entirely to the seller. Stage 8: Performance review The buyer can contact the end user for reviews, calibrate performance ratings on a fixed basket of attributes, or calculate poor performance costs.

7.5 DEVELOPING EFFECTIVE BUSINESS-TO-BUSINESS MARKETING PROGRAMS

Why are communication and branding important? They help to increase sales and spread word-of-mouth through customer reference programs.

What is systems buying? It is the purchase of a total problem solution from one seller. How does service help business-to-business marketing? Services enhance the value of the product offering and help to establish closer ties with customers.

7.6 MANAGING BUSINESSTO-BUSINESS CUSTOMER RELATIONSHIPS

What are the benefits of vertical coordination? Businesses can benefit from mass production and advertising to gain a more than proportionate increase in market share with an increase in spending. To overcome high barriers to entry, a company may form a relationship with another company that is already in the industry. To benefit from low costs of reproducing products or information, a company may provide the same offering to multiple clients. What are the risks of business-to-business relationships? The threat to specific investments—expenditures tailored to a particular company—could increase. Sensitive information about the company may have to be shared. There could be delays in future contracts due to difficulties in reallocating resources, and issues with intellectual property rights. What is opportunism? It is the undersupply or lowering of standards relative to terms in a contractual agreement. It is more probable when supplier performance is not easily monitored.

7.7 RELATIONSHIP MARKETING IN THE KEIRETSU AND CHAEBOL

The Japanese keiretsu and the Korean chaebol practice significant vertical integration of suppliers and buyers. Subcontractors are aided by extensive support during the production process, whereas the manufacturer benefits from higher quality and lower costs.

Companies practice buying by extension, where codependent companies purchase from the same supplier. Due to the loss of influence of the keiretsu model of late, companies are now seeking new supplier relationships.

7.8 INSTITUTIONAL AND GOVERNMENT MARKETS

The institutional market consists of organizations with low budgets and a large consumer base.

Examples include hospitals, schools, and nonprofit organizations. Typically, government contracts are negotiated on a project basis and allocated to the lowest bidder. Government business relationships can offer spillover effects to the winning supplier as other companies may follow and adopt the same supplier. In China, developing relations with the government and forging good relations (guanxi) are necessary.

Marketing Debate—How Different Is Business-to-Business Marketing? Many business-to-business marketing executives lament the challenges of business-to-business marketing, maintaining that many traditional marketing concepts and principles do not apply. For a number of reasons, they assert that selling products and services to a company is fundamentally different from selling to individuals. Others disagree, claiming that marketing theory is still valid and only involves some adaptation in the marketing tactics. Take a position: Business-to-business marketing requires a special, unique set of marketing concepts and principles versus Business-to-business marketing is really not that different and the basic marketing concepts and principles apply.

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Applications

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Marketing Discussion Consider some of the consumer behavior topics from Chapter 6. How might you apply them to business-to-business settings? For example, how might noncompensatory models of choice work?

Marketing Lesson TAGIT Written by Desai Narasimhalu and Sarita Mathur at the Singapore Management University

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Equipped with a bachelor’s degree in history from the then University of Singapore (now National University of Singapore) and a master’s degree in journalism from Pennsylvania State University in the United States, Navtej Singh “Naffi,” co-founder and CEO of Tagit Pte. Ltd., started his career in an advertising agency in Singapore. Within two years, in 1983, Naffi left his job to follow his calling—being an entrepreneur. Naffi’s first venture was in the food-and-beverage industry—he started Satay Anika, a restaurant offering specialty satay—an Indonesian and Malaysian dish consisting of small pieces of meat grilled on a skewer and served with a spiced sauce that typically contained peanuts. Although a staple food for most Singaporeans, the specialty satay restaurant was a new concept that caught on, and Satay Anika made a whopping S$2.5 million ($1.2 million) in its first year. The business expanded rapidly—several outlets were opened across the island, and Naffi also started franchising the concept and supplying the signature dish to hotels and airlines and for home catering. In the 10 years that followed, Naffi established franchises for other fast-food concepts—Healthworks Juice Bars and J. Higby’s Frozen Yogurt. He eventually exited from the food business on a high note in 1993 and went on to build an interactive digital media agency. It was at this time that Naffi met Shankar Narayanan, and the two entered into a partnership. Naffi elaborated, “In the early days, one could earn S$100,000 ($68,490) for a single multimedia CD. But the profit was short-lived. Soon, young entrepreneurs came into the market offering the same service for a fraction of the price. So we decided to move on.” With the rise of the Internet and its related services, Naffi and Narayanan saw exciting new business opportunities in cyber space and decided to set up a technology incubator. They started the incubator with two other partners who, together with a few other

friends, invested S$1 million ($578,000) in the business. Globeweb Technologies was founded in 2000 with its office on Club Street in Singapore. About 20 engineers were hired from India to hatch ideas for developing innovative new business ideas for the Internet. Within two years, Globeweb Technologies managed to interest venture capitalists in funding two of its innovative ideas. One was VASUNAS, a mobile application involving animated icons that could interact with users through its built-in artificial intelligence. The other was CAZH, an online payment platform that enabled secure transactions between customers and merchants. It was during this time that Naffi and Shankar met Parikshit Paspulati, one of the senior engineers working on building the core payment technology for CAZH. In August 2004, CAZH was acquired by Camtech Asia Sdn Bhd, a Malaysian technology services company. Paspulati was engaged by Camtech to implement the CAZH technology in Malaysia. Naffi and Narayanan worked closely with Paspulati and stayed in touch with each other even after the sale of CAZH. Naffi’s entrepreneurial spirit was ready for the next challenge. At that time, mobile applications were just beginning to make their appearance in the first generation of smartphones. Sensing the potential opportunity of this new trend, Naffi and Narayanan dived into a new business venture just a month after they sold CAZH. In April 2004, the two of them incorporated their newest business venture in the mobile space—Tagit. Naffi reminisced, Tagit was formed when Shankar came up with an idea of using mobile phones to scan barcodes. We thought it was a unique concept and started looking at technology partners to help us execute the method of image recognition. I was strolling on the East Coast Park one evening when I met V. Sridhar, the CEO of Xid Technologies Pte. Ltd. He mentioned some innovative image recognition systems they were working on. I was excited. Shortly afterwards, we met Roberto Mariani, the founder and chief technology officer of Xid, and Tagit was on the path to create the product. The year 2002 saw the first generation of mobile phones equipped with integrated cameras and access to the Internet. Mobile technology was still at a nascent stage when Tagit came on the scene, and the founders brainstormed creating a mobile application that leveraged on these new features, building on the work that Mariani’s team was doing in the area of facial recognition systems. It wasn’t long before the business proposition was crystal clear: The idea was to be able to capture the image of

We had to create a network of stakeholders— and the ecosystem—for the business to succeed. Tagit had the technology and we were confident there would be a demand for our offering. We needed content developers to embed the content, such as The Straits Times and MediaCorp. We needed the buy-in of delivery channels such as outdoor advertising companies and telecommunication operators. And we had to get the advertising companies on board to develop creative campaigns for brands to use this new, exciting interactive platform. It wasn’t long before they realized the Herculean task that lay ahead: A young start-up such as Tagit found it hard to convince stakeholders of the value of being part of an open system. Joining such an ecosystem meant sharing information and developing trust among the partners within the network, and this did not come naturally. Some stakeholders felt that Tagit was encroaching into their territory and were therefore less willing to cooperate. Finally, although the potential was immense, the companies were hesitant to invest in the new technology solution, which was “ahead of the time” and had not been tried and tested. To Naffi’s frustration, “Companies were protecting their turf. Even the telecom companies, who ought to have seized the first mover opportunity, were hesitant to tread into uncharted waters.” Disappointed but not defeated, Naffi and Narayanan approached the Infocomm Development Authority of Singapore (IDA), to see if they could back Tagit’s efforts in commercializing the technology. The IDA was very supportive of the business idea and offered Tagit a grant to develop the pilot barcoding application. The pilot, which was branded “EZ Code,” was successfully tested with a few government agencies, and this demonstrated that the technology was viable. Tagit thus received validation from the IDA.

Once the technology was certified, Naffi asked for the IDA’s assistance in approaching the various stakeholders and seeking their involvement in developing a solution to take to customers. IDA delegated the leadership role for this task to the Singapore Infocomm Technology Federation (SITF), an industry association that advocated for the information, communications and media (ICM) industry and helped to accelerate the adoption of ICM technology. SITF facilitated discussions with the key stakeholders, including Singapore Press Holdings, MediaCorp, Starhub and Singtel. However, the outcome was discouraging. Toward the end of 2006, the founding management team decided to move away from the barcode concept as a starting point for a transaction and focus on developing mobile applications for the full m-commerce cycle, from start to finish, with barcodes used as a delivery or fulfilment vehicle instead. The company had evolved over the two years since its inception. Naffi and Narayanan had appointed a board of directors (BoD) that brought in investments and helped the management build a strategic vision for the company. The co-founders also entered into a strategic partnership with Paspulati and his wife Neelima, giving the couple a 26 percent stake in MobileStruct. MobileStruct had developed Mobeix, a proprietary engine that could run m-commerce transactions by pulling data off Web sites and rendering it dynamically on different phone screens. With this technology, it was possible to view real-time information from any Web site on the mobile phone without needing to integrate with the backend systems of the enterprise’s individual Web sites. The key features of the Mobeix technology were that it was able to optimize content across different operating systems simultaneously, it could connect to any back-end system, it could render content on the mobile phone quickly and securely without the need for coding, and its Mobility Editor enabled rapid configuration of user interface screens via a drag-and-drop interface. Impressed by the potential offered by the technology, Tagit entered into a strategic partnership with MobileStruct to develop mobile applications using the Mobeix platform for Tagit customers. Using the Mobeix platform, the Tagit team, in partnership with the Indian telecommunications company Airtel, built the first-ever mobile box office (MBO) in India. The MBO concept offered customers the convenience of booking cinema tickets, selecting their seats, and making the payment using a mobile app. In 2006, almost two years after Tagit was set up, the company signed up its first client, India’s PVR Cinemas, and became the first to offer the MBO end-to-end solution in the country. Both Airtel and PVR Cinemas immediately gauged the value of the service and were keen to get the service

ChaPter 7 ó analyzing Business Markets

two-dimensional (2D) barcodes in the physical space (from newspapers, posters, television screens and others) with the mobile camera, connect to the Web site, and download content onto the mobile phone immediately. This would enable consumers and customers to get instant information on the mobile phone merely by capturing an image. Naffi recalled the excitement, “This was a eureka moment for us. We thought our idea could revolutionize the advertising business!” The value proposition was sound, yet Naffi and Narayanan faced an uphill task when it came to selling the idea to various stakeholders whose involvement was necessary to make the solution feasible. As Naffi described it,

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up and running as soon as possible. Tagit engineers got to work on the problem right away, together with teams from Airtel and PVR Cinemas. They set up a lease line from the Airtel data center to the PVR data center, and got the service back on its feet in a record time of just one week. Naffi recalled proudly, “Once we opened up the pipes and had greater bandwidth, then there was nothing stopping the business.” The business model worked well, albeit with low margins. PVR Cinemas charged its customers a service charge of INR 15 ($0.38) for every ticket sold, of which Tagit received INR 7 ($0.18). The Mobeix technology was cost-efficient, as it did not require building a new payments system. The Mobeix platform served as a proxy that mirrored PVR’s online payments gateway. In 2007, Tagit was contracted by Singapore Airlines to develop a mobile application for the airline’s passenger services. In line with their governance process, Singapore Airlines called for a tender, for which Tagit submitted their bid along with 15 other companies from around the world. Despite being a young company and small in size, Tagit won the contract because, in Naffi’s words, “We were the only ones who had the ready technology. It was a big win for us.” Tagit set up the airline’s first mobile ticketing platform and ran the service for four years.

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Technological advancements and increasing competition soon began to squeeze the profit margins on online ticketing contracts. In order to expand and scale up the transaction-based business, Tagit needed significant funding or enhanced profitability. The founders did go through several rounds of funding, albeit for small amounts. Healthy returns were possible only by adopting a high value-add business model, which was no longer possible in the online ticketing space. The co-founders started to consider other options to grow revenues and profits. To their advantage, the Mobeix transaction platform was flexible and could be applied to a range of sectors, including banks, retail, telecom companies and governments; that is, any organization that was looking to extend its e-services to the mobile space securely and seamlessly, and at low cost. At that time, many banks in Singapore had started or were looking to offer their services through mobile devices, and Naffi and Narayanan felt that the sector presented a good opportunity. They first targeted Citibank in India and broached the idea of “going mobile” to the chief technology officer of the bank. Winning the Citibank contract opened up a whole new opportunity space for Tagit. Furthermore, having a blue chip bank in their client portfolio went a long way in increasing the credibility of the company, one that was just beginning to make its mark in the market. Tagit’s licensebased model of operation worked well with banks that, due to privacy and security concerns, preferred bespoke

solutions and were willing to pay well for them. Naffi concluded, We had worked with Singapore Airlines in the early days of m-commerce. In those days, the value of each [ticketing] transaction was high, as was our commission. This gave the company its first life—the meat. The financial services space gave us the gravy. Banks paid well, and we needed the money. While the celebrations were on, the management team knew that more needed to be done; in order to strengthen the company, core technology intellectual property (IP) needed to be brought into the company. It so happened that the key to getting the Citibank contract was pegged to Tagit having full control of the IP. The BoD had also suggested that a full merger between Tagit and MobileStruct would be in the best interest of both companies. After some lengthy discussions, the management of Tagit presented the merger proposal to the board for formal approval. There were some challenges to overcome—such as agreeing on a fair valuation of MobileStruct, dilution of the stake of existing founders and agreeing on individual shares in the company. Despite these challenges, the management and the board saw obvious synergies that could be reaped for both companies through the merger. In 2008, Tagit and MobileStruct agreed to merge, and MobileStruct became a wholly owned subsidiary of Tagit. The companies agreed on a share swap based on their respective valuations, resulting in Paspulati and Neelima, together owning one-sixth of the merged entity. The intellectual property of the Mobeix technology effectively came under the control of Tagit, and the company now had full rights to use, market, and sell the technology offering. After the merger, Tagit went through yet another transformation, this one prompted by factors internal to the company. The cultures of the two companies—Tagit and MobileStruct—were considerably different. Some 25 software engineers from India joined the 40-strong Tagit team which primarily consisted of marketing and sales people. Despite these challenges, the management stayed committed. Naffi elaborated, There were times when we [the management] would not pay ourselves but staff salaries were never affected. We dipped into our personal savings to make sure that every employee got paid. That culture has trickled down through the ranks. Today we have employees that have been with us since the early days. The business expanded. Over the next four years, Tagit’s client portfolio grew to include leading banks in

based rather than the current one based on a one-time licensing fee and professional services. It was also looking to expand into new verticals such as government, healthcare, and logistics. In order to achieve these goals, the company would need to raise more capital and hire sector experts and professionals to run the company. Tagit was no longer a start-up—it needed money to grow and professionals at the helm. Naffi was reminded of the words of William Arthur Ward, “Only a person who risks is free. The pessimist complains about the wind; the optimist expects it to change; and the realist adjusts the sails.” It was time to adjust the sails. Note: Exchange rates between Singapore dollar and US dollar fluctuated from time to time during the case period.

Questions 1. What has Tagit done well to attract business customers such as Citibank? 2. Moving forward, what other partnerships can Tagit enter into besides mergers in order to expand its business?

ChaPter 7 ó analyzing Business Markets

Singapore and around the world, such as UOB, DBS, Standard Chartered Bank, Maybank, Commercial Bank of Dubai, Royal Bank of Canada and Commonwealth Bank of Australia (Indonesia). The business performed particularly well in 2010, with revenues reaching S$5.8 million ($4.8 million). While the founders were proud of the company’s achievements, they knew better than to rest on their laurels. Tagit had done well on profitability and capital efficiency and could boast of a cutting-edge-technology and a bluechip-client suite. However, some gaps remained. The enterprise model adopted for mobile banking was tedious and time-consuming, as each offering was customized to suit client requirements. Scaling the business required significant funding, for which Singapore was not the ideal location. Tagit was awaiting its next incarnation, which would involve a scalable business model that was user-

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Marketing Lesson ACCENTURE

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Accenture began in 1942 as Administrative Accounting Group, the consulting arm of accounting firm Arthur Andersen & Co. In 1989, it launched as a separate business unit focused on IT consulting and bearing the name Andersen Consulting. At that time, though it was earning nearly $1 billion annually, Andersen Consulting had low brand awareness among information technology consultancies and was commonly mistaken for its accounting corporate parent. To build its brand and separate itself from the accounting firm, Andersen Consulting launched the first large-scale advertising campaign in the professional services arena. By the end of the decade, it was one of the world’s largest management and technology consulting organizations. In 2000, following a successful arbitration against its former parent, Andersen Consulting was granted its full independence—but it had to relinquish its name. Andersen Consulting had 147 days to find a name that was able to be trademarked in 47 countries, effective and inoffensive in over 200 languages, and acceptable to employees and clients—and that corresponded with an available URL. The effort that followed was one of the largest—and most successful—rebranding campaigns in corporate history. Interestingly, the company’s new name came from a consultant at the company’s Oslo office, who submitted “Accenture” as part of an internal name generation initiative dubbed “Brandstorming.” The consultant coined the Accenture name because it connoted an “accent on the future.” At midnight, 31 December 2000, Andersen Consulting officially adopted the Accenture name and launched a global marketing campaign targeting senior executives at Accenture’s clients and prospects, all Accenture partners and employees, the media, leading industry analysts, potential recruits, and academia. The results of the advertising, marketing, and communications campaigns were quick and impressive. Overall, Accenture’s brand equity increased 11 percent and purchase consideration increased 350 percent. Awareness of Accenture’s breadth and depth of services achieved 96 percent of its previous level. Globally,

awareness of Accenture as a provider of management and technology consulting services was 76 percent of levels for the former Andersen Consulting name. Another key element to Accenture’s evolution was their successful completion of a $1.7 billion IPO in July 2001. In 2002, Accenture unveiled a new positioning summarized succinctly by the tagline “Innovation Delivered.” This tagline was supported by the statement, “From innovation to execution, Accenture helps accelerate your vision.” Accenture conducted extensive research with senior executives across industries and geographies and confirmed that they saw the inability to execute and deliver on ideas as the number one barrier to success. Accenture saw its differentiator as the ability both to provide innovative ideas—ideas grounded in business processes as well as IT—and to execute them. Competitors such as McKinsey were seen as highly specialized at developing strategy, whereas other competitors such as IBM were seen as highly skilled in technological implementation. Accenture wanted to be seen as excelling at both. As Ian Watmore, its U.K. chief, explained: “Unless you can provide both transformational consulting and outsourcing capability, you’re not going to win. Clients expect both.” In 2002, the business climate changed. After the dotcom crash and the economic downturn, innovation was no longer enough. Executives wanted bottom-line results. In late 2003, Accenture built upon the “Innovation Delivered” theme and announced its new tagline, “High performance. Delivered.” along with a campaign that featured golf superstar Tiger Woods as spokesperson. When Accenture sought Woods out, the athlete was at the top of his game—the world’s best golfer. What better symbol for high performance? Accenture’s message communicated that it could help client companies become high-performance businesses. Over the next six years, Accenture advertising featured Tiger Woods, alongside slogans such as “Go on. Be a Tiger.” and “We know what it takes to be a Tiger.” The campaign capitalized on Woods’s international appeal, ran all over the world, and became the central focus of Accenture-sponsored events such as the Accenture Match Play Championship. Things changed abruptly in late November 2009 when controversy surrounded Woods and his once wholesome image and he announced an indefinite departure from golf. After careful consideration and analysis, Accenture determined that Tiger Woods was no longer the right representative for its advertising, and announced it would not continue its sponsorship agreement with him. Accenture had contingency advertisements in place and was prepared to move ahead immediately. Accenture tested the new concepts successfully with its target audience, and the campaign came to life virtually

processes across more than 100 countries—resulting in €1 billion in savings for Unilever. Today, Accenture continues to excel as a global management consulting, technology services, and outsourcing company. It was ranked 36th among the World’s Most Admired Companies by Fortune in 2016. It was ranked 1st on innovation, people management, use of corporate assets, quality of management, financial soundness, long-term investment value, quality of services, and global competitiveness. In Asia, it has offices in China, India, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam. In Japan, it partnered with Panasonic and six other companies to build an environmentally minded smart town in Fujisawa. Accenture will use its prior experience with city and power grid projects to handle the creation, design, and promotion of services within the town. The company ended fiscal 2015 with revenues of $32.9 billion.

Questions 1. What has Accenture done well to target its B-to-B audience? 2. Has Accenture done the right thing by dropping Tiger Woods as its spokesperson? Discuss the pros and cons of its decision. Sources: “Annual Reports,” Accenture.com; “Lessons Learned from Top Firms’ Marketing Blunders,” Management Consultant International, December 2003, p. 1; Sean Callahan, “Tiger Tees Off in New Accenture Campaign,” BtoB Magazine, 13 October 2003, p. 3; “Inside Accenture’s Biggest UK Client,” Management Consultant International, October 2003, pp. 1–3; “Accenture’s Results Highlight Weakness of Consulting Market,” Management Consultant International, October 2003, pp. 8–10; “Accenture Re-Branding Wins UK Plaudits,” Management Consultant International, October 2002, p. 5; Mary Ellen Podmolik, “Accenture Turns to Tiger for Global Marketing Effort,” BtoB Magazine, 25 October 2004; Sean Callahan and Emily Steel, “After Ditching Tiger, Accenture Tries New Game,” Wall Street Journal, 14 January 2010; “Fact Sheet: Q3 Fiscal 2012,” www.newsroom.accenture.com, accessed on 26 August 2012.

ChaPter 7 ó analyzing Business Markets

overnight featuring animals and the same tagline, “High performance. Delivered.” In one ad, an elephant is pictured surfing alongside copy that reads, “Who says you can’t be big and nimble?” Another ad features a lizard trying to catch a butterfly by transforming its tongue into the design of a flower. The copy states, “If you innovate, they will come.” In November 2011, Accenture launched a new global brand campaign to take its “High performance. Delivered.” positioning to the next level by demonstrating the full depth and breadth of the company’s capabilities and focusing on the value Accenture creates for its clients. Among the key elements of the campaign is an ongoing series of result-focused case studies featuring clients, which are being leveraged across a variety of marketing channels, including advertising. For instance, an ad featuring Unilever focuses on how Accenture helped the global consumer goods company leverage technology to simplify, standardize and unify business

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C H A P T E R

Identifying Market Segments and Targets Companies cannot connect with all customers in large, broad, or diverse markets. They need to identify which market segments it can serve effectively. This decision requires a keen understanding of consumer behavior and careful strategic thinking. To develop the best marketing plans, managers need to understand what makes each segment unique and different. Identifying and satisfying the right market segments is often the key to marketing success.

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inkedIn was the first major social network to issue an IPO after establishing itself as one of the best entries into social networking in 2003. The company targeted a different audience than most other social networks, establishing itself as the premier professional networking site with a vision “to create economic opportunity for every professional in the world.” Having diverse revenue streams also separates LinkedIn from other social networks. It is driven by three distinct customer segments: job seekers who buy premium subscriptions with various special services, advertisers large and small who rely on its marketing solutions unit, and corporate recruiters who buy special search tools from its talent solutions unit. At the time of its IPO, LinkedIn had amassed 100 million registered users, adding a new one literally every second and a million every 10 days, half of them outside the United States. These users were attracted by the ability to manage their careers by networking with other professionals, seeking and sharing insights and searching

for jobs if the need arose. Now, LinkedIn has two new members every second, with a total of 433 million users. With social network penetration at only 24 percent of the Asia Pacific market, the growth potential for LinkedIn is promising. In 2016, LinkedIn crossed its 100-million member mark in Asia-Pacific. India had 37  million registered LinkedIn users, China had 23 million, followed by Indonesia at 6 million, Philippines at 4 million, Malaysia at 3 million, and Singapore at 1 million. Like most online services, LinkedIn strives to engage users on its site for as long as possible through continually improved content and new features. To enhance its content, the company acquired SlideShare, a presentation-hosting site, and Pulse, a news-reading application, and it also launched Talent Pipeline to help recruiters manage their leads. Although LinkedIn’s well-targeted and positioned brand has led to much initial success, competition looms from other online giants, notably Facebook.1

In this chapter, we will address the following questions: 1. What are the different levels of market segmentation? 2. In what ways can a company divide a market into segments? 3. What are the requirements for effective segmentation? 4. How should business markets be segmented? 5. How should a company choose the most attractive target markets?

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o compete more effectively, many companies are now embracing target marketing. Instead of scattering their marketing effort (a “shotgun” approach), they focus on those consumers they have the greatest chance of satisfying (a “rifle” approach). Effective target marketing requires that marketers: Identify and profile distinct groups of buyers who differ in their needs and preferences (market segmentation) Select one or more market segments to enter (market targeting) For each target segment, establish and communicate the distinctive benefit(s) of the company’s market offering (market positioning)

8.1 Bases for Segmenting Consumer Markets Market segmentation divides a market into well-defined groups. A market segment consists of a group of customers who share a similar set of needs and wants. A marketer’s task is to identify the appropriate number and nature of market segments and decide which one(s) to target. Two broad groups of variables are used to segment consumer markets. Some researchers try to form segments by looking at descriptive characteristics: geographic, demographic, psychographic, and behavioral. Then they examine whether these customer segments exhibit different needs or product responses. For example, they might examine the differing attitudes of “professionals,” “blue collars,” and other groups toward, say, “safety” as a car benefit.

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Other researchers define segments by looking at behavioral considerations, such as consumer responses to benefits, use occasions, or brands. Once the segments are formed, the researcher sees whether different characteristics are associated with each consumer-response segment. For example, the researcher might examine whether people who want “quality” rather than “low price” in buying an automobile differ in their geographic, demographic, and psychographic makeup. Regardless of which type of segmentation scheme is employed, the key is that the marketing program can be profitably adjusted to recognize customer differences. The major segmentation variables—geographic, demographic, psychographic, and behavioral segmentation—are summarized in Table 8.1.

Table 8.1 Major Segment Variables for Consumer Markets Geographic Region

Municipalities, Provinces, Special Administrative Regions, etc. (China)

City or metro size

Under 5,000; 5,000–19,000; 20,000–49,000; 50,000–99,000; 100,000–249,000; 250,000–499,000; 500,000–999,000; 1,000,000–3,999,000; 4,000,000 or over

Density

Urban, suburban, rural

Climate

Tropical; subtropical; temperate

Demographic Age

Under 6, 6–11, 12–19, 20–34, 35–49, 50–64, 65+

Family size

1–2, 3–4, 5+

Family life cycle

Nuclear; small extended; large extended

Gender

Male, female

Annual Income

Under $5,000, $5000–9,000; $10,000–$14,000; $15,000– $19,000; $20,000–$29,000; $30,000–$49,000; $50,000– $99,000; $100,000 and over

Occupation

Professionals, managers, executives, and businesspeople (PMEBs); craftspeople; forepersons; operatives; farmers; retired; students; homemakers; unemployed

None; elementary education; secondary education; diploma level; undergraduate; postgraduate

Religion

Buddhist; Catholic; Hindu; Muslim; Protestant; Taoist; other; none

Race

Mongolian, Manchu, Tartar, Zhuang, Hui, Tibetan, Miao, Yi, etc. (China)

Nationality

Chinese; Indian; Indonesian; Japanese; Malaysian; Filipino; Korean; Vietnamese; Singaporean; Thai; other

Social class

Lower lowers, upper lowers, working class, middle class, upper middles, lower uppers, upper uppers

Psychographic Lifestyle

Culture-oriented, sports-oriented, outdoor-oriented

Personality Behavioral

Compulsive, gregarious, authoritarian, ambitious

Occasions

Regular occasion, special occasion

Benefits

Quality, service, economy, speed

User status

Non-user, ex-user, potential user, first-time user, regular user

Usage rate

Light user, medium user, heavy user

Loyalty status

None, medium, strong, absolute

Readiness stage

Unaware, aware, informed, interested, desirous, intending to buy

Attitude toward product

Enthusiastic, positive, indifferent, negative, hostile

8.1.1 Geographic Segmentation Geographic segmentation calls for dividing the market into different geographical units such as nations, states, regions, counties, cities, or neighborhoods. The company can operate in one or a few areas, or operate in all but pay attention to local variations. In that way, it can tailor marketing programs to the needs and wants of local customer groups in trading areas, neighborhoods, and even individual stores. Here are two examples, one for a big country like China and another for a small country like Singapore: Procter & Gamble—In China, P&G’s customer research managers discovered that while low prices help sales in villages, it is also important to develop products that are consistent with cultural traditions. Thus, urban Chinese pay more than $1 for Crest toothpaste with exotic flavors such as Icy Mountain Spring and Morning Lotus Fragrance; while those in the villages prefer 50-cent Crest Salt White since many rural Chinese believe that salt whitens teeth. Such geographic segmentation is also practiced for its Olay moisturizing cream, Tide detergent, Rejoice shampoo, and Pampers diapers.2 In a growing trend called grassroots marketing, such activities concentrate on getting as close and personally relevant to individual customers as possible. Here’s what Hewlett-Packard did in India: 3 Hewlett-Packard—Hewlett-Packard positions itself as a company implementing “e-inclusion,”—the attempt to help bring the benefits of technology to the poor. Toward that end, HP began a three-year project designed to create jobs, improve education, and provide better access to government services in the Indian state of Kuppam. Working with the local government, as well as a branch of HP Labs based in India, the company, through grassroots marketing, provides the rural poor with access to government records, schools, health information, crop prices, and so on. Its hope is to stimulate small, tech-based businesses. Not only does this build goodwill and the HP brand in India, it also helps the company discover new, profitable lines of business.

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More and more, regional marketing means marketing right down to a specific district.4 Some companies use mapping software to show the geographic locations of their customers. The software may show a retailer that most of his customers are within only a 20-kilometer radius of his store, and further concentrated with certain areas. By mapping the densest areas, the retailer can resort to customer cloning, assuming that the best prospects live where most of his customers come from. Here is an example from Hong Kong:

Hong Kong convenience store chain, Circle K, uses data mining to find out the purchase profile of shoppers in different geographic area. Each outlet carries different items depending on the profile.

CR Asia—CR Asia runs the Circle K convenience shops in Hong Kong. Information technology helps it to stay abreast of the buying habits of the 350,000 consumers who purchase items from its shops daily. The company has an $8-million information hub with 20 servers at its headquarters. Traditional cash registers have been replaced with scanners, allowing for data mining. This technology helps sales staff to identify what customers want at different shops and stock their shelves accordingly. Circle K can profile its shops based on the demographics and nationalities of its customers. Hence, a store in Stanley, a sedate village on the south side of Hong Kong which attracts many expatriates and tourists, sells Heineken and Häagen-Dazs ice cream; while those in working-class housing estates are stocked with San Miguel beer, which costs half the price of Heineken, and a modestly priced, nonpremium Dreyer’s ice cream.5

Some approaches combine geographic data with demographic data to yield even richer descriptions of consumers and neighborhoods. Called geoclustering, it captures the increasing diversity of the population.

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8.1.2 Demographic Segmentation In demographic segmentation, the market is divided into groups on the basis of variables such as age, family size, family life cycle, gender, income, occupation, education, religion, race, generation, nationality, and social class. There are two reasons for the popularity of demographic variables to distinguish customer groups. First, consumer needs, wants, usage rates, and product and brand preferences are often associated with demographic variables. Second, demographic variables are easier to measure. Even when the target market is described in non-demographic terms (say, a personality type), the link back to demographic characteristics is needed to estimate the size of the market and the media that should be used to reach it efficiently. Here is how certain demographic variables have been used to segment markets.

Age and Life-Cycle Stage Consumer wants and abilities change with age. Toothpaste brands such as Crest and Colgate offer three main lines of products to target kids, adults, and older consumers. Age segmentation can be even more refined. Pampers divides its market into prenatal, newborn (0–1 month), infant (2–5 months), cruiser (6–12 months), toddler (13–18 months), explorer (19–23 months), and preschooler (24 months+).

Panasonic—To target seniors, Panasonic launched a series of household appliances specifically to meet their needs. It introduced what it called the “world’s lightest vacuum cleaner” to make housecleaning less tiresome for the elderly. Its refrigerator has its height and depth of shelves and drawers configured to match the physical characteristics of the typical Japanese housewife in her 50s, enabling her to reach what she wants without undue strain. Its air conditioner, besides warming the room rapidly, is able to direct a stream of air heated at 35 degrees Celsius at one’s feet to keep them toasty.

Age and life cycle can be tricky variables.6 The target market for some products may be the psychologically young. For example, Honda tried to target 21-year-olds with its boxy Element, which company officials described as a ‘dorm room on wheels.” So many baby boomers were attracted to the car’s ads depicting sexy college kids partying near the car at a beach that the average age of buyers turned out to be 42! With baby boomers seeking to stay young, Honda decided that the lines between age groups were getting blurred. When it was ready to launch a new subcompact called the Fit, Honda deliberately targeted Gen Y buyers as well as their empty-nest parents.7 Here’s a Singaporean example of a bank that had a dedicated campaign for the young:

Life Stage People in the same part of the life cycle may differ in their life stage. Life stage defines a person’s major concern, such as going through a divorce, going into a second marriage, taking care of an older parent, deciding to cohabit with another person, deciding to buy a new home, and so on. These life stages present opportunities for marketers who can help people cope with their major concerns.

Gender Men and women tend to have different attitudinal and behavioral orientations, based partly on genetic make-up and partly on socialization. For example, women tend to be more communalminded and men tend to be more self-expressive and goal-directed; women tend to take in more of the data in their immediate environment, while men tend to focus on the part of the environment that helps them achieve a goal. A research study examining how men and women shop found that men often need to be invited to touch a product, while women are likely to pick it up without prompting. Men often like to read product information; women may relate to a product on a more personal level.8 Gender differentiation has long been applied in clothing, hairstyling, cosmetics, and magazines. Shiseido has built a $6-billion business selling beauty products to women. Some products have been positioned as more masculine or feminine. Gillette’s Venus is the most successful female shaving line ever, and has appropriate product design, packaging, and advertising cues to reinforce a female image. However, men are increasingly an important segment to cosmetics companies.

The beauty industry in Japan—Japanese women continue to sustain the beauty business. Tokyo’s fashionable Marunouchi business district has seen beauty outlets sprouting. One such outlet, Café de Make-up, specifically targets office ladies. It offers them an orange seat, a cup of coffee, a choice of five colors of nail polish or lipstick, the services of a beauty advisor, and a chance to apply make-up at leisure at a vanity table for a low price of 500 yen. Men are also a fast-growing segment in the beauty market. Mandom, one of Japan’s leading makers of men’s cosmetics, says that sales of face care products like cleansing gels, toning lotions, and mud packs are strong and growing. One explanation for this is the slew of boyish, clean-cut actors and pop singers who have become the rage among young Japanese women. These celebrities have been engaged as endorsers of more and more beauty products.

Income Income segmentation is a long-standing practice in such product and service categories as automobiles, clothing, cosmetics, financial services, and travel.

ChaPter 8 ó Identifying Market Segments and targets

Kidults—Toy makers are targeting Asian “kidults,” especially in light of declining birthrates in Japan and South Korea. Defined more by attitude rather than age, “smart tech” toys target older players with a smartphone. Collectible toys, ranging from high-quality action figures to replica cars, also appeal to such consumers. Some companies, such as Mattel, are introducing two lines of the same product, one for kids and the other for adult collectors.

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Banyan Tree—Singapore’s Banyan Tree, famous for its upmarket pampering with a distinctive Asian touch, runs a multimillion dollar spa resort in Bahrain, where money is no object to guests. Set in a lush oasis, next to Bahrain’s Formula One motor-racing circuit and a wildlife reserve, the spa resort has been billed as the ultimate in exclusivity and luxury. Catering to the “blank check” segment, the spa resort has 78 villas with traditional Middle Eastern design, private open-air swimming pools, oversized infinity bathtubs, and sprawling master bedrooms. To deliver the ultimate level of privacy, guests, if they wish, can be kept away from view of other guests. Besides the high-end Banyan Tree resorts, it also has the Angsana Hotels and Resorts that are more affordable.9 Even in rural areas, income is rising. In Indonesia, for instance, such rising rural incomes have not gone unnoticed and Kraft has adapted its products to suit this segment.

Kraft—In Indonesia, consumer goods companies are adapting their marketing strategies to target this group of consumers. Although tastes are becoming more Westernized, rural consumers are still extremely price sensitive. Television ads are thus adapted to make the products more approachable and affordable. These ads are increasingly peppered with rural scenes and down-to-earth-looking characters peddling products in small-pack sizes. Kraft’s confectionery and cheese products are sold by 1 million outlets throughout Indonesia. Its Bisquat milk biscuits sells more than 200 million packets each month. The small packets costs 500 rupiah (6 cents) and are also available in a softcake version called bolu. Kraft has researched on the Indonesian rural consumers. A typical young Indonesian boy’s dietary and personal preferences meant he requires snacks four times a day, of which two may be served outside the home. Hence, Kraft offers products in biscuit and softcake forms, and in smaller packages to be sold at snack kiosks in towns and villages.10

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Increasingly, companies are finding that their markets are “hourglass-shaped” as some middle-market consumers migrate toward both discount and premium products.11 Companies that miss out on this new market risk being “trapped in the middle” and seeing their market share steadily decline. General Motors was caught in the middle, between highly engineered German imports in the luxury market and high-value Japanese and Korean models in the economy class, and has seen its market share continually slide.12

Generation Each generation or cohort is profoundly influenced by the times in which it grew up—the music, movies, politics, and defining events of that period. Members of a cohort share the same major cultural, political, and economic experiences. They have similar outlooks and values. Marketers often advertise to a cohort group by using the icons and images prominent in their experiences. Leo Burnett—In its Consumer Quest Survey, Leo Burnett found that in China, the “Open Generation” (those aged 18 to 34) strives for such qualities as having a sense of accomplishment, being committed to a loving relationship, and finding inner harmony. They are more willing to sacrifice pay for time off. Their parents, called the Elder Generation, emphasize values such as setting a good example for their children, working for the good of the country, and having national pride. While the Open Generation of China shares similar tastes in music and fashion with the Gen Xers in the United States critical differences remain. Whereas Xers and their Baby Boomer parents share many of the same values toward work, family, and society, their Chinese counterparts have a huge experiential gap between the two generations. While the Elder Generation had to endure the Communist Revolution and the Cultural Revolution, the Open Generation of China grew up in relative political stability since the late 1970s. They have also witnessed tremendous economic change and increasing social openness with the increased availability of Western ideas, products, and culture.13

Another generation group of interest to marketers is the Gen Y. Because Gen Y members are often turned off by overt branding practices and “hard sell,” marketers use different approaches to reach and persuade them. These include online buzz, student ambassadors, product placements in computer games, and sponsoring cool events. How about China’s Gen Y? Some of the interesting facts uncovered include the following:14 China’s Gen Y comprises approximately 200 million Chinese aged between 15 and 25.

2.

About 20 million Chinese attain teenage age annually.

3.

Each year, four times as many Chinese study engineering than Americans, jeopardizing the U.S.’s scientific and technological superiority.

4.

China’s Gen Y are significantly more entrepreneurial and capitalistic than their parents, and with market reform, can more easily become entrepreneurs.

5.

They are far more connected by the Internet and mobile phones than any other generation in China.

6.

Gen Yers consume 50 percent or more of family expenditure in some major Chinese cities.

7.

They generally know more about Westerners than Westerners know about them.

Sometimes, a combination of these variables is used for more refined segmentation that gives deeper insights into consumer differences.

China’s big spenders—China has identified three groups of consumers, based on age and urbanization, to boost domestic spending. As the anchor to China’s consumption revolution, the retirees, yuppies, and new urbanites are transforming China’s thrifty population into a spending juggernaut. These three disparate groups are the result of China’s demographic changes brought about by its three-decade-long one-child policy and rapid urbanization. The retirees are old but cash rich. Their spending power is expected to boost sectors such as tourism, insurance, and entertainment. The yuppies are young and confident. With more liberal values that depart from their parents’ generation, these young people are more likely to splurge a larger chunk of their income instead of saving. The new urbanites is a growing segment as more villagers abandon the farms to work in the cities.15

8.1.3 Psychographic Segmentation Psychographics is the science of using psychology and demographics to better understand consumers. In psychographic segmentation, buyers are divided into groups on the basis of psychological/personality traits, lifestyle, or values. People within the same demographic group can exhibit very different psychographic profiles. One of the most popular classification systems based on psychographic measurements is Strategic Business Insight’s VALSTM framework. VALS is based on psychological traits for people and classifies consumers into eight groups based on responses to a questionnaire containing four demographic and 35 attitudinal questions. The main dimensions of the VALS segmentation framework are consumer motivation and resources. Consumers are inspired by one of three primary motivations—ideals, achievement, and self-expression. Those primarily motivated by ideals are guided by knowledge and principles. Those motivated by achievement look for products and services that demonstrate success to their peers. Consumers whose motivation is self-expression desire social or physical activity, variety, and risk. Consumer resources are determined by personality traits such as energy, self-confidence, intellectualism, innovativeness, leadership, novelty seeking, impulsiveness, and vanity—in conjunction with key demographics. Different levels of resources enhance or constrain a person’s expression of his or her primary motivation.

China’s Gen Y are more entrepreneurial, more Internet connected, and know more about Westerners than Westerners know about them.

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1.

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Based on these dimensions, eight segments of consumers are identified. Here are the four segments with more resources: 1.

Innovators—These consumers are successful, sophisticated, and have high self-esteem. They have cultivated tastes with preferences for upscale, niche products and services.

2.

Thinkers—These consumers are motivated by ideals. They value order, knowledge, and responsibility. Being mature and reflective, they look for durability, functionality, and value in products.

3.

Achievers—Looking for consensus and stability, these consumers are successful and are work-oriented. They like established and prestige brands that demonstrate their success to their peers.

4.

Experiencers—These consumers are young, enthusiastic, and impulsive. They seek variety and excitement and spend much on fashion, entertainment, and socializing. Here are the four segments with fewer resources:

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1.

Believers—These consumers are conservative, conventional, and traditional. They prefer familiar, established brands and staying loyal to them.

2.

Strivers—These consumers are trendy and fun-loving. They seek the approval of others. However, because they have fewer resources, they emulate the purchases of those with more wealth by buying stylish products.

3.

Makers—Focusing on their work and home, these consumers are pragmatic, self-sufficient, traditional, and family-oriented. As such, they favor functional products.

4.

Strugglers—Loyal to their favorite brands, these elderly consumers are passive and display a sense of resignation. They are concerned about change.

Psychographic segmentation schemes are often customized by culture. The Japanese version of VALS (Japan-VALSTM) segments the market based on primary motivation—defined as what interests a person the most, such as tradition, achievement, and self-expression—and attitudes about social change. There are 10 segments: 1.

Integrators—These consumers are innovative. They are active, inquisitive, trend setting, informed, and affluent. As such, they travel frequently and are exposed to a wide range of media, including niche and foreign media.

2.

Self Innovators and Self Adaptors—Scoring high on self-expression, these consumers desire personal experience and social activities. They like daring ideas, exciting graphic entertainment, and fashionable displays.

3.

Ryoshiki Innovators and Ryoshiki Adaptors—Ryoshiki means “good values.” These consumers are focused on their occupation. While education, career achievement, and professional knowledge form their personal focus, they are also guided by their concern for their home, family, and social status.

4.

Traditional Innovators and Traditional Adaptors—These consumers focus on tradition. They follow traditional religions and customs and adopt conservative social opinion.

5.

High Pragmatics and Low Pragmatics—Not particularly motivated by any aspect, these consumers are not active or well-informed. They have few interests and appear to be uncommitted in their lifestyle choices, making them quite flexible.

6.

Sustainers—These consumers score lowest on innovation and self-expression. They lack money and education. They dislike innovation and tend to focus on sustaining the past.

Apple iPhone—In India, the iPhone is seen as a cool smartphone to have, a symbol of a “happening” lifestyle that many young Indians crave. However, its price is prohibitive. To reach out to price-sensitive but brand-conscious Indians, Apple used equated monthly installments to make the iPhone more affordable. Alongside promotional offers, Apple also widened its distribution channels, especially in second-tier Indian cities.

8.1.4 Behavioral Segmentation In behavioral segmentation, buyers are divided into groups on the basis of their knowledge of, attitude toward, use of, or response to a product.

Needs and Benefits

Decision Roles It is easy to identify the buyer for many products. Men normally choose their shaving equipment, and women choose their pantyhose. Even here marketers must be careful in making their targeting decisions, because buying roles change. When ICI, the giant British chemical company, discovered that women made 60 percent of the decisions on the brand of household paint, it decided to advertise its Dulux brand to attract women.

Procter & Gamble offers a range of shampoo brands that satisfies different hair care needs.

People play five roles in a buying decision: initiator, influencer, decider, buyer, and user. For example, assume a wife initiates a purchase by requesting a new treadmill for her birthday. The husband may then seek information from many sources, including his best friend who has a treadmill and is a key influencer in what models to consider. After presenting the alternative choices to his wife, he then purchases her preferred model which, as it turns out, ends up being used by the entire family. Different people are playing different roles, but all are crucial in the decision process and ultimate consumer satisfaction.

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User and Usage—Real User and Usage-Related Variables Many marketers believe that behavioral variables—occasions, benefits, user status, usage rate, loyalty status, buyer-readiness stage, and attitude—are the best starting points for constructing market segments.

Occasions Occasions mark a time of day, week, month, year or other well-defined temporal aspects of a consumer’s life. Buyers can be distinguished according to the occasions when they develop a need, purchase a product, or use a product. For example, air travel is triggered by occasions related to business, vacation, or family. Occasion segmentation can help firms expand product usage. Anniversaries in Japan—Anniversaries or kinenbi abound on the Japanese calendar. In November alone, there is Sushi Day, Dogs Day, Records Day, Handkerchief Day, Toilet Day, Elevator Day, Soccer Day, Jewelry Day, Peanut Day, Western Dress Day, Kimono Day, Kamaboko (fish cake) Day, Kelp Day, Japanese Chess Day, Fur Day, Married Couples Day, and Eating Out Day. These anniversaries are generally aimed at creating an occasion to promote a variety of products and institutions. For example, on Movies Day each 1 December, cinemas traditionally discount their tickets to promote attendance. Japanese retailers created White Day on 14 March for men to respond to the gifts they receive from their female friends on Valentine’s Day. Premiums are offered at bowling alleys every 22 June, Bowling Day. Indeed, the Japan Kinenbi Association publishes a newsletter highlighting forthcoming special occasions, compiles a register of kinenbi in the country, and provides consultation for organizations seeking a unique day of their own. As Japanese celebrate many other traditional festivals, they are receptive to new special occasions that give them an opportunity to think about the environment around them.16

ChaPter 8 ó Identifying Market Segments and targets

Not everyone who buys a product has the same needs or wants the same benefits from it. Needsbased or benefit-based segmentation is a widely used approach because it identifies distinct market segments with clear marketing implications. Procter & Gamble, for instance, has different shampoo brands according to the needs of each segment. Head & Shoulders is for those who need to control their dandruff problem; Pantene is for those who want to protect their hair from environmental damage from the sun; while Rejoice is for those who want a mild shampoo for everyday use.

Occasions are another way to segment the market. In Japan, marketers celebrate different occasions with appropriate promotions.

User Status Markets can be segmented into non-users, ex-users, potential users, first-time users, and regular users of a product. Blood banks cannot rely only on regular donors to supply blood; they must also recruit new first-time donors and contact ex-donors. Each will require a different marketing strategy. The key to attracting potential users, or even possibly non-users, is understanding the reasons as to why they are not using. Do they have deeply held attitudes, beliefs, or behaviors, or simply lack knowledge of the product or brand benefits and usage? Included in the potential user group are consumers who will become users in connection with some life stage or life event. Mothers-to-be are potential users who will turn into heavy users. Producers of infant products and services learn their names and shower them with products and ads to capture a share of their future purchases. Market-share leaders tend to focus on attracting potential users because they have the most to gain. Smaller firms focus on trying to attract current users away from the market leader.

Usage Rate Markets can be segmented into light, medium, and heavy product users. Heavy users are often a small percentage of the market but account for a high percentage of total consumption. For example, heavy beer drinkers account for 87 percent of the beer consumed—almost seven times as much as the light beer drinkers. Marketers would rather attract one heavy user than several light users. However, a potential problem is that heavy users are often either extremely loyal to one brand, or never stay loyal to a brand and are always looking for the lowest price. Here’s how the Chinese Internet market is segmented:

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256 The Digital Junkies are the most intensive Internet users among the Chinese. They spend more than 34 hours a week with digital media compared to the average of 15.8 hours.

Chinese Internet market—Consulting firm McKinsey found seven consumer segments among Internet users in China. The Traditionalists spend a large portion of their media time on traditional forms such as television and are less likely to own or want to own other digital devices. They are less educated than the rest of the Internet users and many live in smaller cities. The Digital Junkies are the most intensive Internet users. They spend more than 34 hours a week with digital media compared with an average of 15.8 hours for all users. They are young and are always on the lookout for the latest gadget. Another segment is the Gamers who spend most of their time on PC games and are heavy users of social networks. Mobile Mavens are heavy mobile-Internet users, preferring listening to music and reading. Info-centrics look for information to increase productivity at work. Basic Users spend the least amount of time online, and play games on mobile phones. Finally, the Traditionalists are light users of the Internet. They have little interest in high-tech devices and spend more time watching television.17

Buyer-Readiness Stage Some people are unaware of the product, some are aware, some are informed, some are interested, some desire the product, and some intend to buy. To help characterize how many people are at different stages and how well they have converted people from one stage to another, some marketers employ a marketing funnel. Figure 8.1 displays a funnel for two hypothetical brands, A and B. Brand B performs poorly compared to Brand A at converting one-time triers to more recent triers. The relative numbers of consumers at different stages make a big difference in designing the marketing program. Suppose a health agency wants to encourage women to have an annual Pap test to detect cervical cancer. At the beginning, most women may be unaware of the Pap test. The marketing effort should go into awareness-building advertising using a simple message. Later, the advertising should dramatize the benefits of the Pap test and the risks of not taking it. A special offer of a free health examination might motivate women to actually sign up for the test.

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Brand A

65%

Aware

29

Ever Tried

76%

Aware

74

Ever Tried

67%

62%

46%

Recent Trial

18

12

Occasional User

Regular User

71%

61%

50% 6 Most Often Used

62%

75%

45

32

24

15

Recent Trial

Occasional User

Regular User

Most Often Used

Figure 8.1 Brand Funnel

Loyalty Status Buyers can be divided into four groups according to brand loyalty status: 1.

Hard-core loyals—Consumers who buy only one brand all the time.

2.

Split loyals—Consumers who are loyal to two or three brands.

3.

Shifting loyals—Consumers who shift loyalty from one brand to another.

4.

Switchers—Consumers who show no loyalty to any brand.18

A company can learn a great deal by analyzing the degrees of brand loyalty: (1) By studying its hard-core loyals, the company can identify its products’ strengths; (2) By studying its split loyals, the company can pinpoint which brands are most competitive with its own; and (3) By looking at customers who are shifting away from its brand, the company can learn about its marketing weaknesses and attempt to correct them. Companies selling in a market dominated by switchers may have to rely more on pricecutting. If mistreated, switchers can also turn on the company. One caution: What appear to be brand-loyal purchase patterns may reflect habit, indifference, a low price, a high switching cost, or the non-availability of other brands.

Attitude Five attitude groups can be found in a market: enthusiastic, positive, indifferent, negative, and hostile. Door-to-door workers in a political campaign use voter attitude to determine how much time to spend with that voter. They thank enthusiastic voters and remind them to vote; they reinforce those who are positively disposed; they try to win the votes of indifferent voters; they spend no time trying to change the attitudes of negative and hostile voters.

Multiple Bases Combining different behavioral bases can help to provide a more comprehensive and cohesive view of a market and its segments. Figure 8.2 depicts one possible way to break down a target market by various behavioral segmentation bases.

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97

Brand B

63

257

Target Market

Unaware

Aware

Not tried

Negative opinion

Neutral

Favorable opinion

Rejector

Not yet repeated

Repeated

Loyal to other brand

Switcher

Loyal to brand

Light user

Regular user

Heavy user

Figure 8.2 Behavioral Segmentation Breakdown

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Tried

8.2 Bases for Segmenting Business Markets Business markets can be segmented with some of the same variables used in consumer market segmentation, such as geography, benefits sought, and usage rate, but business marketers also use other variables. Table 8.2 shows one set of these. The demographic variables are the most important, followed by the operating variables—down to the personal characteristics of the buyer. Table 8.2 Major Segmentation Variables for Business Markets Demographic Characteristics 1.

Industry: Which industries should we serve?

2.

Company size: What size companies should we serve?

3.

Location: What geographical areas should we serve?

Operating Variables 4.

Technology: What customer technologies should we focus on?

5.

User or non-user status: Should we serve heavy users, medium users, light users, or non-users?

6.

Customer capabilities: Should we serve customers needing many or few services?

Purchasing Approaches 7.

Purchasing-function organization: Should we serve companies with highly centralized or decentralized purchasing organizations?

8.

Power structure: Should we serve companies that are engineering dominated, financially dominated, and so on?

9.

Nature of existing relationships: Should we serve companies with which we have strong relationships or simply go after the most desirable companies?

10. General purchase policies: Should we serve companies that prefer leasing? Service contracts? Systems purchases? Sealed bidding? 11. Purchasing criteria: Should we serve companies that are seeking quality? Service? Price? Situational Factors 13. Specific application: Should we focus on certain applications of our product rather than all applications? 14. Size of order: Should we focus on large or small orders? Personal Characteristics 15. Buyer-seller similarity: Should we serve companies whose people and values are similar to ours? 16. Attitudes toward risk: Should we serve risk-taking or risk-avoiding customers? 17. Loyalty: Should we serve companies that show high loyalty to their suppliers? Source: Adapted from Thomas V. Bonoma and Benson P. Shapiro. Segmenting the Industrial Market, (Lexington, MA: Lexington Books, 1983).

The table lists major questions that business marketers should ask in determining which segments and customers to serve. A rubber-tire company should first decide which industries it wants to serve. It can sell tires to manufacturers of automobiles, trucks, farm tractors, forklift trucks, or aircraft. Within a chosen target industry, a company can further segment by company size. The company might set up separate operations for selling to large and small customers. A company can segment further by purchase criteria. For example, government laboratories need low prices and service contracts for scientific equipment; university laboratories need equipment that requires little service; and industrial laboratories need equipment that is highly reliable and accurate. Business marketers generally identify segments through a sequential process. Consider an aluminum company: The company first undertook macrosegmentation. It looked at which end-use market to serve: automobile, residential, or beverage containers. It chose the residential market, and it needed to determine the most attractive product application: semifinished material, building components, or aluminum mobile homes. Deciding to focus on building components, it considered the best customer size and chose large customers. The second stage consisted of microsegmentation. The company distinguished among customers buying on price, service, or quality. Because the aluminum company had a high-service profile, it decided to concentrate on the service-motivated segment of the market. James C. Anderson and James A. Narus have urged marketers to present flexible market offerings to all members of a segment.19 A flexible market offering consists of two parts: a naked solution containing the product and service elements that all service members value, and discretionary options that some segment members value. Each option might carry an additional charge. Siemens Electrical Apparatus Division sells metal-clad boxes to small manufacturers at prices that include free delivery and a warranty, but it also offers installation, tests, and communication peripherals as extra-cost options.

8.3 Market Targeting Once the firm has identified its market-segment opportunities, it has to decide how many and which ones to target. Marketers are increasingly combining several variables in an effort to identify smaller, better-defined target groups. Thus, a bank may not only identify a group of wealthy retired adults, but within that group distinguish several segments depending on current income, assets, savings, and risk preferences. This has led some market researchers to advocate a needs-based market segmentation approach. Roger Best proposed the seven-step approach shown in Table 8.3.

ChaPter 8 ó Identifying Market Segments and targets

12. Urgency: Should we serve companies that need quick and sudden delivery or service?

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Table 8.3 Steps in the Segmentation Process Description 1. Needs-Based Segmentation

Group customers into segments based on similar needs and benefits sought by customer in solving a particular consumption problem.

2. Segment Identification

For each needs-based segment, determine which demographics, lifestyles, and usage behaviors make the segment distinct and identifiable (actionable).

3. Segment Attractiveness

Using predetermined segment attractiveness criteria (such as market growth, competitive intensity, and market access), determine the overall attractiveness of each segment.

4. Segment Profitability

Determine segment profitability.

5. Segment Positioning

For each segment, create a value proposition and product-price positioning strategy based on that segment’s unique customer needs and characteristics.

6. Segment “Acid Test”

Create “segment storyboards” to test the attractiveness of each segment’s positioning strategy.

7. MarketingMix Strategy

Expand segment positioning strategy to include all aspects of the marketing mix: product, price, promotion, and place.

Source: Adapted from Robert J. Best, Market-Based Management, (Upper Saddle River NJ: Prentice Hall, 2000).

8.3.1 Effective Segmentation Criteria

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Not all segmentation schemes are useful. For example, table salt buyers could be divided into long-haired and short-haired customers, but hair length is irrelevant to the purchase of salt. Further, if all salt buyers buy the same amount of salt each month, believe all salt is the same, and would pay only one price for salt, this market would be minimally segmentable from a marketing point of view. To be useful, market segments must rate favorably on five key criteria: 1.

Measurable—The size, purchasing power, and characteristics of the segments can be measured.

2.

Substantial—The segments are large and profitable enough to serve. A segment should be the largest possible homogeneous group worth going after with a tailored marketing program. For example, it would not pay for an automobile manufacturer to develop cars for people who are less than 1 meter tall.

3.

Accessible—The segments can be effectively reached and served.

4.

Differentiable—The segments are conceptually distinguishable and respond differently to different marketing-mix elements and programs. If married and unmarried women respond similarly to a sale on perfume, they do not constitute separate segments.

5.

Actionable—Effective programs can be formulated for attracting and serving the segments.

Michael Porter has identified five forces that determine the intrinsic long-run attractiveness of a market or market segment: industry competitors, potential entrants, substitutes, buyers, and suppliers. The threats these forces pose are as follows: 1.

Threat of intense segment rivalry—A segment is unattractive if it already contains numerous, strong, or aggressive competitors. It’s even more unattractive if it’s stable or declining, if plant capacity must be added in large increments, if fixed costs or exit barriers are high, or if competitors have high stakes in staying in the segment. These conditions will lead to frequent price wars, advertising battles, and new-product introductions and will make it expensive to compete. The cellular phone market has seen fierce competition due to segment rivalry.

Threat of new entrants—The most attractive segment is one in which entry barriers are high and exit barriers are low.20 Few new firms can enter the industry, and poorly performing firms can easily exit.When both entry and exit barriers are high, profit potential is high, but firms face more risk because poorer-performing firms stay in and fight it out.When both entry and exit barriers are low, firms easily enter and leave the industry, and returns are stable but low. The worst case is when entry barriers are low and exit barriers are high: Here firms enter during good times but find it hard to leave during bad times. The result is chronic overcapacity and depressed earnings for all. The airline industry has low entry barriers but high exit barriers, leaving all carriers struggling during economic downturns.

3.

Threat of substitute products—A segment is unattractive when there are actual or potential substitutes for the product. Substitutes place a limit on prices and on profits. If technology advances or competition increases in these substitute industries, prices and profits are likely to fall. Air travel has severely challenged profitability for train travels .

4.

Threat of buyers’ growing bargaining power—A segment is unattractive if buyers possess strong or growing bargaining power. The rise of retail giants such as Wal-Mart has led some analysts to conclude that the potential profitability of packaged-goods companies will become curtailed. Buyers’ bargaining power grows when they become more concentrated or organized, when the product represents a significant fraction of their costs, when the product is undifferentiated, when buyers’ switching costs are low, when buyers are pricesensitive because of low profits, or when they can integrate upstream. To protect themselves, sellers might select buyers who have the least power to negotiate or switch suppliers. A better defense is developing superior offers that strong buyers cannot refuse.

5.

Threat of suppliers’ growing bargaining power—A segment is unattractive if the company’s suppliers are able to raise prices or reduce quantity supplied. Suppliers tend to be powerful when they are concentrated or organized, when they can integrate downstream, when there are few substitutes, when the supplied product is an important input, and when the costs of switching suppliers are high. The best defenses are to build win-win relationships with suppliers or use multiple supply sources.

8.3.2 Evaluating and Selecting the Market Segments In evaluating different market segments, the firm must look at two factors: the segment’s overall attractiveness and the company’s objectives and resources. How well does a potential segment score on the five criteria? Does a potential segment have characteristics that make it generally attractive, such as size, growth, profitability, scale economies, and low risk? Does investing in the segment make sense given the firm’s objectives, competencies, and resources? Some attractive segments may not mesh with the company’s long-run objectives, or the company may lack one or more necessary competencies to offer superior value. Marketers have a range or continuum of possible levels of segmentation that can guide their target market decisions. As Figure 8.3 shows, at one end is a mass market of essentially one segment; at the other are individuals or segments of one person. Between lie multiple segments and single segments. Each of the four approaches is described below. Full Market Coverage

Multiple Segments

Single Segments

Individuals as Segments

Customization Mass Market Figure 8.3 Possible Levels of Segmentation

Full Market Coverage With full market coverage, a firm attempts to serve all customer groups with all the products they might need. Only very large firms such as Samsung (mobile phone market), Toyota (vehicle market), and Coca-Cola (nonalcoholic beverage market) can undertake a full market strategy.

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2.

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Samsung identified six segments of mobile phone users based on their need for style, infotainment, business, multimedia, connection, and basic necessities. It has a slew of mobile phones for full market coverage.

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Samsung—Its climb to be the second largest mobile phone maker is grounded on understanding customer needs. Samsung realized that it needed to design more products for people in India, China, and other emerging markets that are providing most of the industry’s growth. Its research showed that there are six segments of users based on their needs: style, infotainment, business, multimedia, connected, and basic. The latter two are most relevant in emerging markets. The “connected” segment consists of people whose main concern is communicating with family, friends, and business associates; while people in the “basic” segment just want a low-cost device that allows them to talk and text message.21

Large firms can cover a whole market in two broad ways: through differentiated or undifferentiated marketing.

In undifferentiated marketing or mass marketing, the firm ignores segment differences and goes after the whole market with one offer. It designs a product and a marketing program that will appeal to the broadest number of buyers. It relies on mass distribution and advertising. It aims to endow the product with a superior image. Undifferentiated marketing is “the marketing counterpart to standardization and mass production in manufacturing.”22 The narrow product line keeps down costs of research and development, production, inventory, transportation, marketing research, advertising, and product management. The undifferentiated advertising program also reduces costs. Presumably, the company can turn its lower costs into lower prices to win the price-sensitive segment of the market. However, many critics point to increasing splintering of the market, and the proliferation of marketing channels and communication, which make it difficult and increasingly expensive to reach a mass audience. Marketing Insight: Segmentation Strategy for China shows how the diversity and dynamism of China defies the “one-size-fits-all” approach to segmentation and targeting. When different groups of consumers have different needs and wants, marketers can define multiple segments. The company can often better design, price, disclose, and deliver the product or service and also fine-tune the marketing program and activities to better reflect competitors’ marketing. In differentiated marketing, the firm operates in several market segments and designs different products for each segment. Cosmetics firm Estée Lauder markets brands that appeal to women (and men) of different tastes: The flagship brand, the original Estée Lauder, appeals to older consumers; Clinique caters to middle-aged women; M.A.C. to youthful hipsters; Aveda to aromatherapy enthusiasts; and Origins to eco-conscious consumers who want cosmetics made from natural ingredients.23

Lenovo practices differentiated marketing to reach out more effectively to consumer and business customers.

Lenovo—China’s IT service market is estimated to grow by leaps and bounds. To capitalize on this, Lenovo differentiated its retail channel to reach consumer and business customers. It doubled its chain of 1+1 Special Shops to more than 500 stores aimed at consumers. It also established a chain of about 400 commercial IT specialty shops, aimed at business customers. In so doing, Lenovo can sell bundled products like Internet services with hardware. It can also identify those customers, especially small- and mid-sized businesses, who might buy additional services. Lenovo has two departments working on its service business—one on bundling, the other offering after-sale services such as systems integration.24

Differentiated marketing typically creates more total sales than undifferentiated marketing. However, it also increases the costs of doing business. Because differentiated

MARKETING INSIGHT

SegMenTaTIon STraTegy For ChIna 3. Do not be fooled by generalities. While some generalizations may be fair, there are strong differences that go beyond economic differences. Guangzhou and Shenzhen, for example, are both tier-one cities, located in the same province. However, Guangzhou’s people mainly speak Cantonese, are mostly local born, and like to spend time at home with family and friends. In contrast, more than 80 percent of Shenzhen’s residents are young migrants from across the country. They speak mainly Mandarin and spend most of their time away from homes. Marketers will have to differentiate their campaigns and emphasize different channels when reaching out to the people in these two cities. Here are other examples of such differences: Every second consumer in Shandong believes that well-known brands are always of higher quality, and 30 percent are willing to pay a premium for the better product. In south Jiangsu, only a quarter of consumers prefer the well-known brands, and only 16 percent are willing to pay a premium for them. In the Shenzhen cluster, 38 percent of food and beverage shoppers find suggestions from in-store promoters to be a credible source of information, compared to only 12 percent in Nanjing. In Shanghai, 58 percent of residents shop for apparel in department stores, more than double that of Beijing residents. 4. Allow your clusters to be flexible. Some companies may want to merge or divide clusters for strategic management purposes. A company could, for instance, merge geographically nearby clusters such as Guangzhou and Shenzhen, or Chengdu and Chongqing, if its supply chain was well positioned to manage these clusters as one. Other companies may find it sensible to split the Shanghai cluster into subclusters because some markets are very different in, say, their media and shopping habits.

Source: “Is Your Emerging-Market Strategy Local Enough?” McKinsey Quarterly, April 2011.

marketing leads to both higher sales and higher costs, nothing general can be said about the profitability of this strategy.

Multiple-Segment Specialization With selective specialization, a firm selects a subset of all the possible segments, each objectively attractive and appropriate. There may be little or no synergy among the segments, but each promises to be a moneymaker. Keeping synergies in mind, companies can try to operate in supersegments rather than in isolated segments. A supersegment is a set of segments sharing some exploitable similarity. For example, many symphony orchestras target people who have broad cultural interests, rather than

ChaPter 8 ó Identifying Market Segments and targets

China’s economy is so dynamic that it is not enough for firms to develop a country-level strategy. Opportunities are rapidly moving beyond the larger cities. China has about 150 cities with at least 1 million inhabitants. Their population and income characteristics are very different and changing rapidly. Consulting firm McKinsey segmented the Chinese cities according to such factors as industry structure, demographics, scale, geographic proximity, and consumer characteristics. Some 22 city clusters were identified. One mega cluster has Beijing and Tianjin as the hubs; one large cluster has Xiamen and Fuzhou as the hubs; while a small cluster has Hohhot as the hub. McKinsey offers four important tips when designing a city cluster strategy in China: 1. Focus on cluster size, not city size. Although marketers may be attracted to the size of the bigger cities, trying to cover all of them may be less effective because they can be very far from one another. For instance, Chengdu, Xian, and Wuhan are among the 10 largest cities in China, but they are about 1,000 kilometers away from any of the others. In contrast, the biggest city in Shandong is Jinan, which is barely in the top 20. Its GDP is four times bigger than that of the cluster of cities around and including Xian, and three times bigger than the cluster of cities surrounding Chengdu. 2. Look beyond historical growth rates. Extrapolating future trends from historical patterns can be unreliable as consumer spending habits change rapidly as wealth rises. In some clusters, people are just starting to buy their first lowend domestic cars. In others, they are upgrading to imports or luxury brands. The Shenzhen cluster has 90 percent of middle-income households, while in the Nanchang and Harbin clusters, more than half of the households are still poor. As such, people in the Shenzhen cluster are already active consumers of many products, and the potential for growth is fairly limited. In the poorer clusters, many product categories are still emerging as larger numbers of people pass the threshold at which more goods become affordable.

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only those who regularly attend concerts. A firm can also attempt to achieve some synergy with product or market specialization. With product specialization, the firm sells a certain product to several different market segments. A microscope manufacturer, for instance, sells to university, government, and commercial laboratories, making different instruments for each, and building a strong reputation in the specific product area. The downside risk is that the product may be supplanted by an entirely new technology. With market specialization, the firm concentrates on serving many needs of a particular customer group, such as by selling an assortment of products only to university laboratories. The firm gains a strong reputation among this customer group and becomes a channel for additional products its members can use. The downside risk is that the customer group may suffer budget cuts or shrink in size.

Single-Segment Concentration With single-segment concentration, the firm markets to only one particular segment. Volkswagen concentrates on the small-car market, and Porsche on the sports car market. Through concentrated marketing, the firm gains a strong knowledge of the segment’s needs and achieves a strong market presence. Further, the firm enjoys operating economies through specializing its production, distribution, and promotion. If it captures segment leadership, the firm can earn a high return on its investment.

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Tiger motorcyles—Thai entrepreneur Piti Manomaiphibul’s Tiger motorcycles are giving Japanese giants Honda, Suzuki, and Yamaha a run for their money in Thailand’s lucrative motorcycle market. Tiger’s bikes are targeted at a segment that Japanese producers have overlooked—the thrifty, yet style-conscious, rural rider. When Piti went to Vietnam, he saw Chinese makers of cheap motorcycles seizing nearly 70 percent of the market from Japanese producers. He decided to make a mid-priced bike as good as the Japanese and much better than the Chinese models. Tiger is positioned against Japanese brands on two of the latter’s weak spots— cost and design. Tiger motorbikes are produced at 20 percent less than Japanese bikes without sacrificing quality. Among its models are Ozone 3, a basic model aimed at rural student riders, a high-performance bike for riders who crave powerful but affordable bikes, and Nano, a minimotorcyle for children.25

A niche is a more narrowly defined customer group seeking a distinctive mix of benefits within a segment. Marketers usually identify niches by dividing a segment into subsegments. Niche marketers aim to understand their customers’ needs so well that customers willingly pay a premium. What does an attractive niche look like? Consumers have a distinct set of needs; they will pay a premium to the firm that best satisfies them; the niche is fairly small but has size, profit, and growth potential and is unlikely to attract many competitors; and the niche gains certain economies through specialization. As marketing efficiency increases, niches that were seemingly too small may become more profitable.26 (See Marketing Insight: Chasing the Long Tail.)

Individual Marketing The ultimate level of segmentation leads to “segments of one,” “customized marketing,” or “oneto-one marketing.”27 As companies have grown more proficient at gathering information about individual customers and business partners (suppliers, distributors, retailers), and as their

MARKETING INSIGHT

ChaSIng The Long TaIL Anderson identifies two aspects of Internet shopping that contribute to this shift. First, greater choice is permitted by increased inventory and variety. Given a choice between 10 hit products, consumers are forced to select one of the 10. If, however, the choice set is expanded to 1,000, then the top 10 hits will be chosen less frequently. Second, the “search costs” of finding relevant new products are lowered due to the wealth of information sources available online, the filtering of product recommendations based on user preferences that vendors can provide, and the word-of-mouth network of Internet users. Some critics challenge the notion that old business paradigms have changed as much as Anderson suggests. Especially in entertainment, they say, the “head” where hits are concentrated is valuable also to consumers, not only to the content creators. One critic argued that “most hits are popular because they are of high quality,” and another noted that the majority of the products and services making up the long tail originate from a small concentration of online “long-tail aggregators.” Although some academic research supports the long tail theory, other research is more challenging, finding that poor recommendation systems render many very low-share products in the tail so obscure and hard to find that they disappear before they can be purchased frequently enough to justify their existence. For companies selling physical products, inventory, stocking, and handling costs can outweigh any financial benefits of such products.

Sources: Chris Anderson, The Long Tail, (New York: Hyperion); “Reading the Tail,” interview with Chris Anderson, Wired, 8 July 8 2006, p. 30; “Wag the Dog: What the Long Tail Will Do,” Economist, 8 July 8 2006, p. 77; Erik Brynjolfsson, Yu “Jeffrey” Hu, and Michael D. Smith, “From Niches to Riches: Anatomy of a Long Tail,” MIT Sloan Management Review, Summer 2006, p. 67; John Cassidy, “Going Long,” New Yorker, 10 July 2006, www.longtail.com; “Rethinking the Long Tail Theory: How to Define ‘Hits’ and ‘Niches’,” Knowledge@Wharton, 16 September 2009.

factories are being designed more flexibly, they have increased their ability to individualize market offerings, messages, and media. Mass customization is the ability of a company to meet each customer’s requirements—to prepare individually designed products, services, programs, and communications on a mass basis.28 Consumers increasingly value self-expression and the ability to capitalize on usergenerated products as well as user-generated content. Coke’s Freestyle vending machine allows users to choose from more than 100 Coke brands or custom flavors or to create their own.29 Services such as airlines and hotels routinely offer individualized experiences. One-to-one marketing takes the following steps: 1.

Identify your prospects and customers. Be selective. Build, maintain, and mine a rich customer database with extensive information, including customer touch points.

2.

Differentiate customers in terms of their needs and their value to your company. More valuable customers need more effort from marketers. Consider customer lifetime value and use activity-based costing.

3.

Interact with customers to improve your knowledge about their needs and build stronger relationships. Develop tailored offerings you can communicate in an individualized manner.

4.

Customize products, services, and messages to each customer. Customer interactions can be facilitated through the company contact center and Web site.

ChaPter 8 ó Identifying Market Segments and targets

The advent of online commerce, made possible by technology and epitomized by Amazon.com, iTunes, and Netflix, has led to a shift in consumer buying patterns, according to Chris Anderson, editor-in-chief of Wired magazine and author of The Long Tail. In most markets, the distribution of product sales conforms to a curve weighted heavily to one side—the “head”—where the bulk of sales are generated by a few products. The curve falls rapidly toward zero and hovers just above it far along the x-axis—the “long tail”—where the vast majority of products generate very little sales. The mass market traditionally focused on generating “hit” products that occupy the head, disdaining the low-revenue market niches comprising the tail. Anderson asserts that as a result of consumers’ embrace of the Internet as a shopping medium, the long tail harbors significantly more value than before. In fact, Anderson argues, the Internet has directly contributed to the shifting of demand “down the tail, from hits to niches” in a number of product categories, including music, books, clothing, and movies. Anderson’s long tail theory is based on three premises: (1) The lower the cost of distribution, the more you can economically offer without having to predict demand; (2) The more you can offer, the greater the chance that you will be able to tap latent demand for minority tastes that was unreachable through traditional retail; and (3) Aggregate enough minority taste, and you will often find a big new market.

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Customization is not for every company.30 It may be very difficult to implement for complex products such as automobiles. It can also raise the cost of goods by more than the customer is willing to pay. Some customers do not know what they want until they see actual products, but they also cannot cancel the order after the company has started to work on it. The product may be hard to repair and have little sales value. In spite of this, customizaion has worked well for some products.

Legal and Ethical Issue with Market Targets Market targeting sometimes generates public controversy.31 The public is concerned when marketers take unfair advantage of vulnerable groups (such as children) or disadvantaged groups (such as rural poor people), or promote potentially harmful products. The fast-food industry has been heavily criticized for marketing efforts directed toward children. Critics worry that high-powered appeals presented through the mouths of lovable animated characters will overwhelm children’s defenses and lead them to want such products. Toy marketers have been similarly criticized.

China’s pharmaceutical market—In China, practically all drugs are available over the counter, and can be bought without the need for prescriptions or medical advice. The Chinese, long used to the slow effects of traditional herbal medicines, are taking Western antibiotics and painkillers without being aware of their side effects. Differences in ethnicity and diet make many of these prescription medicines unsuitable for the Chinese. While authorities have cracked down on misleading advertisements by domestic manufacturers promoting miracle cures, there still exist numerous illegal medicine wholesalers.

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Cigarettes—In Indonesia, locally manufactured clove-scented kretek cigarettes have, for a long time, been promoted as “good for your cough” or “clears your voice” to the young. However, it was found that kretek cigarettes have higher percentage amounts of tar and nicotine compared to other brands such as Japan’s Mild Seven and Thailand’s Krongthip. Anti-smoking advocates have called for more responsible marketing. Sampoerna, one of the top kretek makers, has since published estimates of tar and nicotine levels for its own and competing brands, hoping to attract smokers to its mild brand.

Socially responsible marketing calls for targeting that serves not only the company’s interests, but also the interests of those targeted.

Summary 8.1 BASES FOR SEGMENTING CONSUMER MARKETS

How do marketers practice demographic segmentation? The market is divided into segments based on variables as follows: age, family size and life cycle, gender, income, job, education, religion, ethnicity, generation, nationality, and social class. Due to the measurability of demographic variables and their high correlation to consumer needs and wants, demographic segmentation is widely used by marketers. How can a market be segmented by age and life stage? Consumer wants and needs change along with age. The same product can be offered to various age segments with product modifications or a different marketing angle. A life stage is defined as a major concern in a person’s life at that point in time. This includes getting married, taking care of an elderly, and buying a new home. Marketers can create offerings to help people cope with their major concerns at different life stages. How can a market be segmented by gender? Men and women have different attitudes and behaviors when it comes to purchasing. Men are more passive, objective-driven, and technical; women are more hands-on and have greater communal tendencies.

How can a market be segmented by income and social class? Companies have long targeted varied income groups in the market. Higher income earners generally enjoy a higher standard of living and demand offerings with high quality. Consumers belonging to the same social group usually demand a set of products similar in quality and price. How can a market be segmented by generation? A cohort is a group of people influenced by the defining political, social, or economic events of a certain era. A cohort has similar outlooks on acceptable customs, behavior, and attitudes. Today’s Generation Y are turned off by overt brand practices and “hard sell.” What is psychographic segmentation? Psychographics is the science of using psychology and demographics to better understand consumers. Marketers segment consumers based on their lifestyle, personality, or values. A commonly used measuring stick is the Values and Lifestyle Segmentation (VALS) System. It classifies adults into eight groups based on personality and demographics. What is behavioral segmentation? Consumers are divided into segments based on their knowledge of, attitude toward, and use of a product. A market can be segmented based on needs and benefits. Roles that people can play in the decision to purchase a product range from the initiator, influencer, decider, buyer, and user. Marketers must keep track of decision roles because they may change over time. This is a visual summary of how a market is behaviorally segmented. See Figure A Behavioral Segmentation Breakdown.

ChaPter 8 ó Identifying Market Segments and targets

How do marketers practice geographic segmentation? It is done by dividing the market into separate geographical regions. A growing trend is grassroots marketing where firms reach out to its customers by engaging in activities that are personally relevant to them. With regional marketing, marketers discover the locations where their customer density is the highest, and practice customer cloning to cater to the needs of the local population. Via another method called geoclustering, marketers can merge geographic with demographic data to obtain more details of their consumers.

Products traditionally targeted at women have delved into marketing towards men (beauty products), and vice versa (automobiles).

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Target Market

Unaware

Aware

Not tried

Negative opinion

Neutral

Tried

Favorable opinion

Rejector

Not yet repeated

Repeated

Loyal to other brand

Switcher

Loyal to brand

Light user

Regular user

Heavy user

Figure A Behavioral Segmentation Breakdown

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What user and usage characteristics can be used for behavioral segmentation? Major events and important occasions create needs for certain products and services. Customers can be segmented by their demand for certain benefits to go along with the product or service. Consumers can be segmented by their user status for a product: ex-users, non-users, potential users, firsttime users, and regular users. The usage rate will influence marketers on the most profitable segment to target. Usually, heavy users are a small percentage of the market but greatly outperform medium and light users in profit ratings. Buyer-readiness stages tell marketers of their success in converting users from one end of the marketing funnel to another. Brand loyalty status tells marketers of the loyalty of their buyers to their brand, ranging from hardcore loyals and split loyals to shifting loyals and switchers. Buyers can be segmented according to their attitudes toward a company: enthusiastic, positive, indifferent, negative, and hostile.

Multiple bases can be used for a more comprehensive understanding of the market.

8.2 BASES FOR SEGMENTING BUSINESS MARKETS

What are the major segmentation variables for business markets? The most important variable is the demography of the segment. This includes type of industry, company size, and geographical location. The second variable is the operations aspect. The marketer has to consider the type of technology, target user status, and customer know-how. The purchasing approach of the target consumer can be considered as well. This consists of their purchasing function, power structure, nature of existing relationships, and purchasing criteria. Situational and personal characteristics are also bases by which marketers can segment their market.

What is flexible marketing offering? It consists of a naked solution which all segment members value, and discretionary options that a few segment members want.

8.3 MARKET TARGETING

What is full market coverage? Large companies attempt to provide for all customer segments with all the products they need. What is undifferentiated marketing? Undifferentiated marketing occurs when the company develops a generic product and offers it to the entire market. What is differentiated marketing? Differentiated marketing occurs when the company customizes its offering to suit the various market segments it targets. What is multiple-segment specialization? Multiple-segment specialization occurs when the company selects numerous segments that are attractive, but may not have commonalities among them. Alternatively, companies can expand their target to a super-segment—a collection of segments with an exploitable similarity.

What is market specialization? It is the concentration on a single customer group by the company, focusing the company’s efforts on establishing a strong presence in this segment. What is single-segment concentration? Marketers can decide to concentrate on a single segment to gain a strong knowledge and benefit from a strong market presence. Companies enjoy efficiencies derived from specialization. A niche is characterized by a small group of customers with a distinct set of needs and the ability to pay a premium for the product that best satisfies their needs. What is individual marketing? Customers are serviced on a one-to-one basis, and can choose and design many aspects of their product. Customized products are expensive, non-refundable, low on resale value, and generally difficult to repair. Why should marketers consider ethics when targeting segments? Unwelcome public scrutiny can harm the company’s market share. Social responsibility must be exercised especially when targeting vulnerable groups.

Applications Marketing Debate—Is Mass Marketing Dead? With marketers increasingly adopting more and more refined market segmentation schemes—fueled by the Internet and other customization efforts—some critics claim that mass marketing is dead. Others counter that there will always be room for large brands that employ marketing programs targeting the mass market. Take a position: Mass marketing is dead versus Mass marketing is still a viable way to build a profitable brand.

Marketing Discussion—Descriptive versus Behavioral Market Segmentation Schemes Think of various product categories. How would you classify yourself in terms of the various segmentation schemes? How would marketing be more or less effective for you depending on the segment involved? How would you contrast demographic versus behavioral segment schemes? Which ones do you think would be most effective for marketers trying to sell to you?

ChaPter 8 ó Identifying Market Segments and targets

How do marketers come up with effective segmentation criteria? When a market is segmented, there must be at least a segment that is measureable, substantial, accessible, differentiable, and actionable.

What is product specialization? It is the manufacturing of a certain product that the company offers to different market segments.

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Marketing Lesson PT HEINZ ABC

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In 1869, Henry John Heinz founded H.-J. Heinz Company to sell food sauces. Its flagship product, Heinz Ketchup, has since evolved into one of the world’s most valuable brands today, and its products also include Classico pasta sauce and Lea & Perrins cooking sauce. The company has expanded across 200 countries and has an extensive range that focuses on ketchup and sauces, frozen food, and infant nutrition. In 2015, Heinz merged with Kraft to become Kraft Heinz, making it the third-largest food-and-beverage company in North America. Prior to the merger, Heinz knew that growth in developed countries was slowing, and to expand, it needed to venture more actively outside Western countries. It saw the potential of Indonesia, an emerging market, and was eager to tap into it though the country was then just recovering from the Asian financial crisis. Indonesia has a population of over 250 million, and with a population growth rate of 1.49 percent, Indonesia’s population is expected to surpass that of the United States by 2043, making it the world’s most populous country after China and India. In 1999, Heinz announced it had made its first investment in Indonesia by acquiring a majority stake in a joint venture with the country’s largest producer of sauces and condiments, the ABC Group. The rest, as they say, is history. The success of Heinz in Indonesia owed in part to its recognition that it is not possible to have one global product, it needed to assimilate into Indonesia’s culture. To do this, Heinz had to thoroughly understand the likes and dislikes of Indonesian consumers. The strategy behind Heinz’s global expansion programs is simple; it does so by buying a local company that has done well. All Heinz needed was to continue with the local company’s practices rather than reinvent the wheel. And that’s how PT Heinz ABC was born. The acquired company, ABC Group, was a large but lowprofile company. It was Indonesia’s market leader in kecap manis (a thick, sweet soy sauce consumed with virtually every meal as a condiment or ingredient). It

also produced Indonesia’s top brand of sambal (a hot chili sauce), kecap asin (a salty soy sauce), ABC tomato ketchup, and fruit drink concentrates. Under PT Heinz ABC, the condiments and sauces are sold under their original name, ABC. Soy sauce, the main product line in the company, is commonplace in Indonesian cuisine and appears in most local dishes. In Indonesia, soy sauce is usually made with fermented soybeans and an assortment of various spices and sugar. More importantly, different Indonesian cities and towns have their own local recipes for soy sauce. Hence, one of the biggest challenges in the soy sauce industry is understanding local behavior. Here are the two key issues: 1. Culture—Different regions of Indonesia have different tastes and preferences with regard to their sauces, and local recipes for sauces have been passed down for centuries ever since soy sauce was introduced to Indonesia by the Chinese. Unlike Chinese soy sauce, which is thin and salty, Indonesian soy sauce is thick and can be salty, sweet, or a blend of the two. 2. Social—Indonesians tend to prefer sauces that originate in their own region. This may be a result of them having consumed local flavors for a prolonged period of time. This means that within one region, preferences will gravitate towards one predominant taste. For instance, Indonesians living closer to central Java prefer sweeter tastes than those living further away. PT Heinz ABC was successful in identifying the personal characteristics of Indonesians that played a key role in their food consumption. It studied their demographic and lifestyle characteristics. It understood that most Indonesians were not as well-to-do as Westerners and did not have refrigerators to store huge bottles of soy sauce. Adaptation was thus necessary. Instead of the typical huge glass bottle Heinz ketchup or ABC sauce is served in, it adapted and repackaged them into lower-priced plastic bottles and in small, single-use sachets to reach a wider market, including rural working-class Indonesians. PT Heinz ABC conducted studies with Indonesian housewives to improve the formula of their soy sauce. When studies showed that their sauces were too salty, the recipe was tweaked to reduce the salt levels and increase the levels of other spices. These studies help PT Heinz ABC to keep in touch with the tastes and preferences of their consumers and ensure that they were always able to satisfy consumer needs. PT Heinz ABC also took into account the geographic nature of Indonesia—spreading 5,120 kilometers from east to west and 1,760 kilometers from north to south,

since 1933. Hence, it is a popular and well-recognized company among Indonesians. To battle PT Heinz ABC in the sauce market, Unilever bought Bango, Indonesia’s number two soy-sauce maker, in 2001. This purchase started to make inroads into PT Heinz ABC’s strong hold on the sauce market. At one point, ABC’s sweet sauce market share shrank from 40 percent to 33 percent, while in that same period, Bango’s market share tripled to 32 percent. A reason for this was that Indonesian housewives found ABC’s sauce too salty compared with Bango’s. Indonesian taste had shifted towards sauces that are more blended and not too salty or sweet. In response to rising competition, PT Heinz ABC took on a more societal approach with its annual ABC Care Kitchen Program, which provides food to the needy. This helps with their brand image as a socially responsible company and at the same time helps to get their sauces out to a wider market through free samples. In 2014, PT Heinz ABC distributed over 100,000 meals. Together with its single-use sachets that cost a mere few cents, PT Heinz ABC was able to aptly demonstrate how its products can be easily used when cooking without having to pay a hefty price tag. Through these initiatives, PT Heinz ABC grew its market share to 22.44 percent by 2014—almost twice as much of its nearest competitor Masako, which has a 12.03 percent market share.

Questions 1. What market segmentation strategies do you think PT Heinz ABC should adopt in Indonesia? 2. What is PT Heinz ABC’s positioning in Indonesia? 3. Do you think it is likely that PT Heinz ABC would cannibalize the various versions of its soy sauce? Do you think it should have introduced these versions? 4. How do you think its social marketing helps in reinforcing its positioning? Sources: “How Heinz Is Spicing Up Sales,” Bloomberg Business, 27 August 2008; Richard Borsuk, “Heinz Will Enter Joint Venture With Indonesia’s ABC Group,” Wall Street Journal, 12 February 1999; “Indonesia: Unilever Becomes Sole Owner of Kecap Bango Ketchup,” FLEXNEWS, 16 August 2007; “The World’s Most Valuable Brands,” Forbes, October 2014; Kate Gillespie and H. David Hennessey, “Global Marketing,” Euromonitor International, September 2015, www.euromonitor.com/health-and-wellness-in-indonesia/report; Steven Gray, “Indonesia, a Fight for Soy-Sauce Crown,” Wall Street Journal, 20 April 2007; H. J. Heinz Company Annual Report 2007, www.heinz.com; Bill Johnson, “The CEO of Heinz on Powering Growth in Emerging Market,” Harvard Business Review, October 2011; John Kell, “Kraft Heinz Begins Trading as Merged Company,” Fortune, 15 June 2015; www.abcsauces.com; “Heinz ABC Culinary Challenge,” www.youtube.com/channel/UCXj4A3xZBZmh_nABjZppDZw/videos; “Sauces, Dressings and Condiments in Indonesia,” Euromonitor, www .portal.euromonitor.com, 19 March 2015; Deanna Ramsay, “A Sauce with History,” The Jakarta Post, 28 February, 2011; Heinz ABC Indonesia–ABC Dapur Ibu, www.heinzabc.co.id.

ChaPter 8 ó Identifying Market Segments and targets

mountainous in terrain with a string of volcanoes, and, with 6,000 of the 17,508 islands inhabitable. The distribution of food products across the country in a costeffective manner can be daunting. PT Heinz ABC took the initiative to use ABC’s existing motorbike distribution fleet. By keeping distribution costs low through such innovative distribution methods, PT Heinz ABC was able to meet the affordability needs of Indonesians. PT Heinz ABC has also been using social marketing. It hosts a variety of cooking and recipe competitions, each involving their sauces. These include the ABC Culinary Academy, where chefs come up with new recipes involving ABC’s products. ABC also has a video series on YouTube titled “Heinz ABC Culinary Challenge,” in which guest chefs from various hotels and restaurants are invited to showcase their recipes using ABC products. This helps them to set up a group of opinion leaders to promote their sauces, which in turn encourages the audience following these competitions and videos to use their sauces when cooking; by doing so, it helps them get used to the taste of their sauce. However, the road to success is not always smooth sailing. The Indonesian soy sauce market consists of 15 major producers, each with a market share of at least 1 percent. This means that competition is stiff within this market. PT Heinz ABC faces strong competition from Unilever. As an Anglo-Dutch food company in a former Dutch colony, Unilever Indonesia has been in the country

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Marketing Lesson FULLA DOLLS: THE ALTERNATIVE BARBIE

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Fulla is a 29-cm Barbie-like fashion doll marketed to children of Islamic and Middle-Eastern countries as an alternative to Barbie. The idea came about in 1999 when there was disquiet among the Muslim community regarding the values imparted by Barbie dolls. In 2003, Barbie was banned in Saudi Arabia because she did not promote values shared by the Islamic society. It was then that Fulla began hitting the stores. Fulla was created by a Syrian manufacturer called NewBoy Design Studio as an alternative consistent with the Muslim lifestyle. Named after a fragrant jasmine flower, Fulla shares almost the same size and proportions as Barbie, but that is about it. She is dark-eyed, oliveskinned with dark hair, and has Muslim values. Fulla has become a role model to some Muslims, displaying how many Muslims would prefer their daughters to dress and behave. Her personality has been described as “loving, caring, honest, and respects her mother and father. She’s good to her friends. She’s honest and doesn’t lie. She likes reading. She likes fashion.”

Fulla has a fairly extensive wardrobe with a modest outdoor fashion sense. She can be dressed in a black abaya with a matching headscarf. She also has a tiny pink prayer rug. Girls who want to dress like their dolls can buy a matching, girl-size prayer rug and cotton scarf set, also in pink. Her outdoor clothes do not include swimwear or anything revealing. Skirts are longer than knee-length and her shoulders are always covered. Besides clothes, Fulla also has jewelry, grooming materials, and furniture. Unlike Barbie, Fulla does not have a boyfriend because Muslims do not believe in romantic relationships out of wedlock. Instead, she has a brother and sister. She also has two friends, Yasmeen and Nada. How about her career choices? Teacher or doctor—occupations that are likely to meet with approval from Muslim parents. Fulla is not the first doll conforming to Islamic beliefs. Mattel marketed a group of collectors’ dolls that included a Moroccan Barbie and a doll called Leila intended to represent a Muslim slave girl in an Ottoman court. In Iran, a veiled doll called Sara is sold. There is also Razanne, selling primarily to Muslims in the United States and Britain. However, none comes close to the popularity enjoyed by Fulla. NewBoy attributes this to its keen understanding of the Arab market. Children’s satellite channels, popular in the Middle East, are swarmed with animated commercials showing Fulla saying her prayers as the sun rises, baking a cake to surprise her friend, or reading a book—values that resonate well with the Muslim community. Other commercials feature Middle Eastern actresses presenting Fulla silverware, Fulla stationery, and even Fulla luggage. So popular are Fulla dolls that in Damascus, where the average per capita is about $100 a month, Fulla dolls, priced at $16, are flying off the shelf.

Questions 1. What are the pros and cons of Fulla doll’s selective target marketing? 2. How can Fulla doll expand its sales? Is its segmentation strategy too selective? Why or why not? Sources: Ed O’Loughlin, “Fulla Has the Mid-East Doll Market Covered,” www.smh.com, 23 December 2005; Maria Zain, “Fulla Doll: An Alternative for Muslim Girls,” Dinar Standard, 3 November 2008; Katherine Zoepf, “Bestseller in Mideast: Barbie With a Prayer Mat,” The New York Times, 22 September 2005; www.wikipedia.com.

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PART 4 Building Strong Brands

9

C H A P T E R

T

Creating Brand Equity One of the most valuable intangible assets of a firm is its brands, and it is incumbent on marketing to properly manage their value. Building a strong brand is both an art and a science. It requires careful planning, a deep long-term commitment, and creatively designed and executed marketing. A strong brand commands intense consumer loyalty—at its heart is a great product or service.

he iconic Singapore Girl was created in 1972, when Singapore Airlines (SIA) burst onto the aviation scene. With no domestic routes to serve, SIA was forced to immediately start competing with international airlines for routes, getting access to airports, securing flight slots, and building a customer base. From Day 1, the top management decided that SIA should follow a fully branded differentiation strategy where excellent customer service, innovation, and technology were the key drivers of the brand. The airline does not only benchmark itself against qualities of the best airlines; it also compares itself to the best hotels, best resorts, and the best destinations. Understanding its customers is key. For its first-class passengers, SIA knows that they do not want to suspend the lives they lead on the ground because they are in a plane. SIA tries to replicate their ground lifestyle. To make them feel like they are at home, SIA offers a fully

flat bed and a down duvet that these passengers can snuggle in. It also offers an entertainment system, with many options to make the passenger feel even more at home. To top it all, SIA has consistently focused on its inflight experience through the Singapore Girl, the gentle flight attendant who is symbolic of Asian values and hospitality—caring, warm, gentle, and elegant. So powerful is this personification that the Singapore Girl remains the most recognized signature of the airline. To compete with the rising interest in low-cost and Middle Eastern carriers, SIA has a brand portfolio strategy, each with a distinct positioning. While SIA offers the full service, SilkAir is its regional, full-service carrier. TigerAir is its low-cost carrier competing with other low-cost carriers, while Scoot is its medium- to long-haul, low-cost airline. These airlines feed traffic among them to share a large number of connecting passengers with SIA. Some 60 percent of SilkAir’s passengers come from SIA.1

In this chapter, we will address the following questions: 1. What is a brand and how does branding work? What is brand equity? How is brand equity built, measured, and managed? What are the important brand architecture decisions in developing a branding strategy?

M

arketers of successful 21st century brands must excel at the strategic brand management process. Strategic brand management involves the design and implementation of marketing activities and programs to build, measure, and manage brands to maximize their value. The strategic brand management process involves four main steps: 1.

Identifying and establishing brand positioning

2.

Planning and implementing brand marketing

3.

Measuring and interpreting brand performance

4.

Growing and sustaining brand value deals with brand positioning

The latter three topics are discussed in this chapter. Chapter 10 reviews brand positioning strategies.

9.1 How Does Branding Work? Perhaps the most distinctive skill of professional marketers is their ability to create, maintain, enhance, and protect brands. Branding has become a marketing priority. Established brands such as Toyota, Samsung, and Apple command a price premium and elicit deep customer loyalty through the years. New brands such as UNIQLO and Instagram capture the imagination of consumers and the financial community alike.

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The American Marketing Association defines a brand as “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.” A brand is thus a product or service that adds dimensions that differentiate it in some way from other products or services designed to satisfy the same need. These differences may be functional, rational, or tangible—related to the product performance of the brand. They may also be more symbolic, emotional, or intangible— related to what the brand represents or means in a more abstract sense. Branding has been around for centuries as a means to distinguish the goods of one producer from those of another.2 In the fine arts, branding began with artists signing their works. Brands today play a number of important roles that improve consumers’ lives and enhance the financial value of firms.

9.1.1 The Role of Brands Brands identify the source or maker of a product and allow consumers—either individuals or organizations—to assign responsibility to a particular manufacturer or distributor. Brands perform a number of functions for both consumers and firms.

Brands’ Role for Consumers A brand is a promise between the firm and the consumer. It is a means to set consumers’ expectations and reduce their risk. In return for customer loyalty, the firm promises to reliably deliver a predictably positive experience and set of desirable benefits with its products and services. A brand may even be “predictably unpredictable” if that is what consumers expect, but the key is that it fulfills or exceeds customer expectations in satisfying their needs and wants. Consumers may evaluate the same product differently depending on how it is branded.3 They learn about brands through past experiences with the product and its marketing program, finding out which brands satisfy their needs and which do not. As consumers’ lives become more rushed and complicated, a brand’s ability to simplify decision-making and reduce risk becomes invaluable.4 Brands can also take on personal meanings to consumers and become an important part of their identity.5 They can express who consumers are or who they would like to be. For some consumers, brands can even take on human-like characteristics. 6 Brand relationships, like any relationship, are not cast in stone, and marketers must be sensitive to all the words and actions that might strengthen or weaken consumer ties.7

Brands’ Role for Firms Brands also perform valuable functions for firms.8 First, they simplify product handling or tracing, and help to organize inventory and accounting records. A brand also offers the firm legal protection for unique features or aspects of the product.9 The brand name can be protected through registered trademarks; manufacturing processes can be protected through patents; and packaging can be protected through copyrights and designs. These intellectual property rights ensure that the firm can safely invest in the brand and reap the benefits of a valuable asset.

Coca-Cola—Battered by a nationwide series of taste-test challenges from the sweetertasting Pepsi-Cola, Coca-Cola decided in 1985 to replace its old formula with a sweeter variation, dubbed New Coke. Coca-Cola spent $4 million on market research. Blind taste tests showed that Coke drinkers preferred the new, sweeter formula, but the launch of New Coke provoked a national uproar. Market researchers had measured the taste but failed to measure the emotional attachment consumers had to Coca-Cola. There were angry letters, formal protests, and even lawsuit threats to force the retention of “The Real Thing.” Ten weeks later, the company withdrew New Coke and reintroduced its centuryold formula as “Classic Coke,” a move that ironically might have given the old formula even stronger status in the marketplace. To firms, brands thus represent enormously valuable pieces of legal property that can influence consumer behavior, be bought and sold, and provide the security of sustained future revenues to their owner.13 Large earning multiples have been paid for brands in mergers or acquisitions. The price premium is often justified on the basis of assumptions of the extra profits that could be extracted and sustained from the brands, as well as the tremendous difficulty and expense of creating similar brands from scratch. Some believe that strong brands result in better earnings and profit performance for firms, which, in turn, creates greater value for shareholders.

Branding in Asia Branding, however, has not been a historical imperative for many Asian businesses. Asian businesses were more involved in performing the distribution function for the region’s imports and exports. Ideological reasons led countries such as China and Vietnam to discourage branding in the past. Many companies (e.g., those in Taiwan) have been successful in contract manufacturing under global brand names, even though brand-name manufacturers can replace them by shifting to even cheaper sources elsewhere (e.g., China). Still others benefited as franchisees or as regional joint-venture partners of Western franchises. Previously protected domestic industries and markets also meant there was less need to invest in brand building, although this is rapidly changing with increased liberalization and competition. China Airlines—When China Airlines (CAL) was a monopoly in Taiwan, it was conservatively run. Ever since it faced competition from rival EVA Airways, CAL has been given a thorough makeover. It spent $50 million in upgrading safety (following two accidents), and $12 million in new colors, livery, and signs, and redesigning airport lounges, ticketing offices, baggage tags, and stationery. Its old logo (the Taiwan flag) was replaced by the national flower (the plum blossom) to make CAL more international, less Taiwanoriented, and less government-linked. CAL’s new image thus signaled improvements in safety, service, training, and personality.14

A branding makeover for China Airlines included making the airline more international and less Taiwan or government associated.

ChaPter 9 ó Creating Brand equity

A credible brand signals a certain level of quality so that satisfied buyers can easily choose the product again.10 Brand loyalty provides predictability and security of demand for the firm and creates barriers to entry that make it difficult for other firms to enter the market. Loyalty can also translate into a willingness to pay a higher price—often 20 to 25 percent more.11 Although competitors may easily duplicate manufacturing processes and product designs, they cannot easily match lasting impressions in the minds of individuals and organizations from years of marketing activity and product experience. In this sense, branding can be seen as a powerful means to secure a competitive advantage.12 Sometimes, marketers do not see the real importance of brand loyalty until they change a crucial element of the brand, as the now-classic tale of New Coke illustrates.

277

Kwon Ping Ho, chairman of Banyan Tree Group, outlined five challenges for Asian brands with global ambitions:15

Banyan Tree’s brand cuts across cultural barriers. Its brand is distinctive, focusing on the exotic tropical beach lushness and graciousness of Southeast Asian hospitality; and yet, not culture-specific.

1.

Asian companies must overcome inherent parochialism. When a brand has a strong foothold in a large domestic market, it may find it challenging to escape the mindset constraints of the domestic market to think and act as a global player. Many strong domestic brands in India and Indonesia still remain largely domestic. In contrast, Japanese and Korean consumer brands were export-oriented from the beginning and did not have this inherent parochialism.

2.

Asian brands must adopt a corporate culture that reflects a global perspective.

3.

Asian brands must maintain their Asian brand identity as they go global. Brands must be distinctive but not culture-specific. Hence, while the resorts at Banyan Tree are often associated with the lushness of tropical beach locales and Southeast Asian hospitality, its resorts in Mexico and the Middle East have demonstrated to cross-cultural borders with facilities and services that are unique to those locales.

4.

Asian brands must rise above the cheap low-quality image. Many Asian brands use cost as a competitive advantage and price themselves low. This mindset is flawed as there will always be another brand that is cheaper.

5.

Asian companies must think like a global brand even if it is small. The digital age offers small brands the opportunity to achieve global reach.

9.1.2 The Scope of Branding How then do you “brand” a product? Although firms provide the impetus to brand creation through marketing programs and other activities, ultimately a brand is something that resides in the minds of consumers. A brand is a perceptual entity that is rooted in reality but reflects the perceptions and perhaps even the idiosyncrasies of consumers.

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Branding is endowing products and services with the power of a brand. Branding is all about creating differences. To brand a product, it is necessary to teach consumers “who” the product is—by giving it a name and using other brand elements to help identify it—as well as “what” the product does and “why” consumers should care. Branding involves creating mental structures and helping consumers organize their knowledge about products and services in a way that clarifies their decision making and, in the process, provides value to the firm. For branding strategies to be successful and brand value to be created, consumers must be convinced that there are meaningful differences among brands in the product or service category. The key to branding is that consumers must not think that all brands in the category are the same. Brand differences often are related to attributes or benefits of the product itself. Gillette, Sony, and 3M have been leaders in their product categories for decades due, in part, to continual innovation. Other brands create competitive advantages through nonproduct-related means. Coca-Cola, Oriental Hotel, and Hermès have become leaders in their product categories by understanding consumer motivations and desires, and creating relevant and appealing images around their products.

Even countries can be branded. Malaysia is branded as “Truly Asia.”

Branding can be applied virtually anywhere a consumer has a choice. It is possible to brand a physical good (Hyundai automobiles), a service (Singapore Airlines) a store (Takashimaya department store supermarket), a person (Jackie Chan) a place (the country of Malaysia), an organization (International Red Cross and Red Crescent Movement or Taiwan Stock Exchange), or an idea (family planning).

9.2 Defining Brand Equity Brand equity is the added value endowed to products and services. It may be reflected in how consumers think, feel, and act with respect to the brand, as well as the prices, market share, and profitability that the brand commands. Marketers and researchers use various perspectives to study brand equity.16 Customer-based approaches view brand equity from the perspective of the consumer—either an individual or an organization.17 The premise of customer-based brand equity models is that the power of a brand lies in what customers have seen, read, heard, learned, thought, and felt about the brand over time.18

Customer-based brand equity is thus defined as the differential effect that brand knowledge has on consumer response to the marketing of that brand.19 A brand is said to have positive customer-based brand equity when consumers react more favorably to a product and the way it is marketed when the brand is identified than when it is not identified. A brand has negative customer-based brand equity if consumers react less favorably to marketing activity for the brand under the same circumstances. There are three key ingredients to customer-based brand equity: Brand equity arises from differences in consumer response. If no differences occur, then the brand name product can essentially be classified as a commodity or generic version of the product. Competition would then probably be based on price.

2.

Differences in response are a result of consumer’s brand knowledge, the thoughts, feelings, images, experiences, and beliefs associated with the brand. Brands must create strong, favorable, and unique brand associations with customers, as have Volvo (safety), Hyundai (value), and Toyota (reliability).

3.

Brand equity is reflected in perceptions, preferences, and behavior related to all aspects of the marketing of a brand. Stronger brands lead to greater revenue. Table 9.1 summarizes some of these key benefits of brand equity.

ChaPter 9 ó Creating Brand equity

1.

Table 9.1 Marketing Advantages of Strong Brands Improved perceptions of product performance Greater loyalty Less vulnerability to competitive marketing actions Less vulnerability to marketing crises Larger margins More inelastic consumer response to price increases

279

More elastic consumer response to price decreases Greater trade cooperation and support Increased marketing communications effectiveness Possible licensing opportunities Additional brand extension opportunities Improved employee recruiting and retention Greater financial market returns The challenge for marketers is therefore ensuring that customers have the right type of experiences with products and services and their marketing programs to create the desired brand knowledge. In an abstract sense, brand equity can be seen as providing marketers with a vital strategic “bridge” from their past to their future.

Apple and Creative Technology—Apple Computer is a master at brand building. It has achieved strong brand loyalty by delivering on its mission as defined by former CEO Steve Jobs: “To create great things that change people’s lives.” One of its offerings was the iPod, which Apple built to iconic status using endorsements from rock stars like U2. Yet, some of Apple’s biggest buzz campaigns did not even originate with the company: In a trendy Manhattan club, two DJs host Tuesday night “Open iPod DJ Parties.” Apple also spent $293 million to create 73 retail stores to fuel excitement for its brand. The move to retail was to get more people to see and touch Apple products, and to experience what Apple can do for them. In contrast, its then rival in the MP3 player market, Singapore-based Creative Technology, has yet to attain Apple’s branding success. Creative has tried to match Apple feature for feature. When Apple launched its players in four colors, Creative

Customer experiences with Apple’s iPod and Creative Tech’s Zen were so vastly different that iPod has a much larger share despite Creative Tech having the first bite at the MP3 player market.

offered 10. Creative players are smaller and handier than the iPod mini, have more memory, longer-lasting batteries, and a radio. They are also priced lower than Apple’s iPod. Creative spent $100 million on advertising. However, tactical flaws marred Creative’s ad effectiveness. When Apple launched a special edition iPod bearing the signatures of U2, Creative retaliated by launching a special edition signed by its founder Sim Wong Hoo. Unfortunately, consumers did not desire an MP3 player with a CEO’s signature. Creative also ran such promotion campaigns as iBetter, which offered iPod owners the chance to trade in their iPods for free Creative players. However, instead of boosting the Creative brand, its products, dubbed “iPod killers,” have remained dowdy relative to Apple’s sexy urbanista. The result? Creative’s music players are outsold eight-to-one by iPods. It has since allied with Apple after receiving $100 million from the company to settle patent lawsuits and makes some accessories for the iPod.20 Marketers should also think of the marketing dollars spent on products and services as investments in consumer brand knowledge. The quality of the investment in brand building is the critical factor, not necessarily the quantity, beyond some minimal threshold amount. Brand knowledge dictates appropriate future directions for the brand. A brand promise is the marketer’s vision of what the brand must be and do for consumers. Consumers will decide— based on what they think and feel about the brand—where (and how) they believe the brand should go and grant permission (or not) to any marketing action or program. Some new products fail because consumers found them inappropriate.

Asian Brands and Brand Equity Unfortunately, Asian brands have traditionally had low brand equity, although this is gradually changing. In 2011, 10 Asian brands, all Japanese or Korean or Taiwan, featured among the world’s 100 most valuable brands, with Toyota the highest ranked at No. 11. Ian Batey, who developed the Singapore Girl icon for Singapore Airlines, argues that Asia should aim to have at least 20 brands among the world’s 50 most valuable names by 2020. He identified four types of East Asian assets that may serve as springboards to this end:21

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Asian brands such as Tiger Balm, Boh Tea, and Jim Thompson Silk can potentially be global brands.

1.

Golden assets—These refer to natural commodities such as rice, wheat, fruit, tea, fish, cotton, timber, rubber, and minerals, which are abundant in the region and usually exported. Yet, no Asian brand with a global standing exists in this category. Potential goldmines include Chinese tea and traditional medicines; Indonesian coffee, furniture, and batik textiles; Filipino wood products, marble, agricultural products, seafood, sugar, and tobacco; and Thai silk, celadon, and rice. Among the regional brands with potential in this category are traditional Chinese medicine names like the over-340-year-old Tong Ren Tang, Eu Yan Sang, Tiger Balm, Boh Tea, and Jim Thompson Silk. Interestingly, China’s State Internal Trade Bureau has awarded some 1,000 outfits like Tong Ren Tang with the status of Time-Honored Brands.

2.

Acquired assets—These refer to a branding opportunity on the back of an identity that enjoys strong credibility. Asia’s reputation for quality personal services and hospitality is an area where a global Asian hotel brand can emerge. Examples include the Oriental and Taj Hotels. Overseas Filipino contract workers comprise another promising branding avenue, given that 4.2 million of them are working abroad in some 146 countries, producing foreign exchange earnings of over $12 billion annually. India’s expertise in IT can also be branded globally. Its software companies—Wipro, Infosys, and Tata Consultancy Services—have the best potential in this regard. 3. Potential assets—These refer to the building of a global Asian brand from scratch. Mexico is not famous for its beer heritage but Corona, a Mexican brand, is now wellknown internationally. Many famous Japanese brands such as Sony were developed through this most difficult route. Korean songs and TV dramas have become very popular in Asia and some parts of America. Such mainland businesses as Haier (appliances), Lenovo (laptops), and Tsingtao (beer) have the potential to become China’s global brands.22

The K-Wave has seen Korean songs and dramas well received throughout Asia.

4. Combining acquired assets with potential assets—This hybrid approach may be achievable in the arts and entertainment industry by leveraging Asia’s extraordinary history. Thus, the Shanghai Theater Circus could be the next Cirque

du Soleil, and Bombay Universal Picture could be the biggest producer of Western-style dramas worldwide. Asian fabric design, Asian cuisine, and even Asian success in popular sports could yield a fruitful basket of global Asian brands. Batey encourages Asian businesses to ask themselves the following questions in their quest to become global brands:23 Is marketing the main driver in helping the brand attain global standing?

2.

Is the brand the most valuable financial asset?

3.

Is there a brand strategy that will elevate the brand into a global brand?

4.

Are the marketing personnel experienced and motivated to achieve the brand’s global ambition?

5.

Are there creative marketing communications talents and resources to bring the brand to the global stage?

6.

Are there plans to retain control of the global brand strategy and focus on international marketing programs?

7.

Is the business passionate about R&D and product enhancements?

8.

Are there financial resources to match the global ambition and compete seriously in the global brand game?

9.2.1 Brand Equity Models Although there is agreement about basic principles, a number of models of brand equity offer some different perspectives. Here we briefly highlight the more established ones.

Brand Asset Valuator Advertising agency Young and Rubicam (Y&R) developed a model of brand equity called Brand Asset Valuator (BAV). Based on research with almost 800,000 consumers in 51 countries, BAV provides comparative measures of the brand equity of thousands of brands across hundreds of different categories. There are four key components or pillars of brand equity according to BAV (see Figure 9.1):

ENERGIZED DIFFERENTIATION The brand’s point of difference Relates to margins and cultural currency

RELEVANCE How appropriate the brand is to you Relates to consideration and trial

BRAND STRENGTH Leading Indicator Future Growth Value

ESTEEM How you regard the brand Relates to perceptions of quality and loyalty

KNOWLEDGE An intimate understanding of the brand Relates to awareness and consumer experience

BRAND STATURE Current Indicator Current Operating Value Figure 9.1 Brand Asset Valuator Model

Source: Courtesy of BrandAsset® Consulting, a division of Young & Rubicam.

ChaPter 9 ó Creating Brand equity

1.

281

1.

Energized differentiation measures the degree to which a brand is seen as different from others.

2.

Relevance measures the appropriateness and breadth of a brand’s appeal.

3.

Esteem measures perceptions of quality and loyalty, or how well the brand is regarded and respected.

4.

Knowledge measures how aware and familiar consumers are with a brand.

Energized differentiation and relevance combine to determine brand strength. These two pillars point to the brand’s future value, rather than just reflecting its past. Esteem and knowledge together create brand stature, which is more of a “report card” on past performance. The relationships among these dimensions—a brand’s “pillar pattern”—reveal much about the brand’s current and future status. Energized brand strength and brand stature combine to form a power grid that depicts the stages in the cycle of brand development—each with its characteristic pillar patterns—in successive quadrants (see Figure 9.2). New brands, just after they are launched, By plotting a representative group of brands’ scores for both strength and stature, this matrix derived from the BrandAsset Valuator shows an accurate picture of a brand’s status and overall performance.

HIGH

These brands have low brand strength but high potential. They have built some energy and relevance, but are known to only a relatively small audience. Consumers are expressing curiosity and interest.

STRENGTH Energized Differentiation and Relevance

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These brands have become irresistible, combining high brand strength with high brand stature. They have high earnings, high margin power, and the greatest potential to create future value.

Microsoft Pixar Nike Dr. Pepper Target Nintendo Wii Apple LG Crocs GE Harley-Davidson AMD Toyota Amazon Mini Cooper iPhone Xerox TiVo Netflix Pom Adidas Tylenol BlackBerry Lindt SanDisk Tazo Verizon DirecTV Glacéau Palm Nikon Burger King Vitamin NICHE/MOMENTUM Lenovo Water Kodak Xbox Method Patagonia LEADERSHIP Advil NASCAR Grameen Bank Staples Silk Soymilk Facebook Blockbuster Nordstrom Zara Moet & Chandon Absolut Shiseido AOL Wikipedia

Red Bull

Flickr BitTorrent Second Life

Denny´s NBA

Lacoste

NEW/UNFOCUSED Kia Napster Vespa

ERODING/DECLINING

Diners Club

Efferdent

Gerber

H&R Block

Midas Century 21

Dristan

LOW

Bank of America American Airlines

Finesse Taster´s Choice

Joost Camper

Bausch & Lomb

Sprint

Michelob

Viacom

Vonage

Schlitz

Autotrader

Garnier

Kayak.com

IKEA

Greyhound

Prudential Alpo HIGH

STATURE Esteem and Knowledge These brands, with both low brand stature and low brand strength, are not well known among the general population. Many are new entrants; others are middling brands that have lost their way.

These brands show why high brand stature by itself is insufficient for maintaining a leading position. They struggle to overcome what consumers already know about and expect from them.

Figure 9.2 The Universe of Brand Performance Source: Young & Rubicam BrandAsset Valuator.

show low levels on all four pillars. Strong new brands tend to show higher levels of differentiation than relevance, while both esteem and knowledge are lower still. Leadership brands show high levels on all four pillars. Finally, declining brands show high knowledge—evidence of past performance—relative to a lower level of esteem, and even lower relevance and differentiation.

BRANDZ Marketing research consultants Millward Brown and WPP have developed the BRANDZ model of brand strength, at the heart of which is the BrandDynamicsTM model, a system of brand equity measurements that reveals a brand’s current equity and opportunities for growth (Figure 9.3). BrandDynamicsTM maintains that there are three brand associations crucial for building customer predisposition to buy a brand—meaningful, different, and salient brand associations. The success of a brand along those three dimensions is, in turn, reflected in three important outcome measures:

Premium: A brand’s ability to command a price premium relative to the category average Potential: The probability that a brand will grow value share How well a brand is activated in the marketplace and the competition that exists will determine how strongly brand predisposition ultimately translates into sales.

Meaningful

Power

Different

Premium

¥ £

€ $

Brand Associations

Brand Predisposition

Salient

Potential

In-Market

Figure 9.3 Brand DynamicsTM Model Source: BrandDynamics™ Model. Reprinted with permission of Millward Brown.

Brand Resonance Model The brand resonance model also views brand building as an ascending, sequential series of steps, from bottom to top: 1.

Ensuring customers identify the brand and associate it with a specific product class or customer need.

2.

Firmly establishing the brand meaning in consumers’ minds by strategically linking a host of tangible and intangible brand associations.

3.

Eliciting the proper customer responses in terms of brand-related judgment and feelings.

4.

Converting customers’ response to an intense, active brand loyalty.

According to this model, enacting the four steps involves establishing six “brand building blocks” with customers. These brand building blocks can be assembled in terms of a brand pyramid, as illustrated in Figure 9.4. The model emphasizes the duality of brands—the rational route to brand building is the left-hand side of the pyramid, whereas the emotional route is the right-hand side.24 MasterCard is an example of a brand with duality, as it emphasizes both the rational advantage to the credit card, through its acceptance at establishments worldwide, and the emotional advantage through its award-winning “priceless” advertising campaign, which shows people buying items to reach a certain goal. The goal itself—a feeling, an accomplishment or other intangible—is “priceless” (“There are some things money can’t buy, for everything else, there’s MasterCard.”).

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Power: A prediction of the brand’s volume share

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Stages of Brand Development

Brand

Brand Building Blocks

4. Relationships = What about you and me?

Branding Objective at Each Stage Intense, active loyalty

Resonance

3. Response = What about you?

2. Meaning = What are you?

1. Identity = Who are you?

Judgments

Feelings

Performance

Imagery

Salience

Positive, accessible reactions

Points-of-parity & difference

Deep, broad brand awareness

Figure 9.4 Brand Resonance Pyramid

Creating significant brand equity involves reaching the top or pinnacle of the brand pyramid, and will occur only if the right building blocks are put into place. Brand salience relates to how often and easily the brand is evoked under various purchase or consumption situations.

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Brand performance relates to how the product or service meets customers’ functional needs. Brand imagery deals with the extrinsic properties of the product or service, including how the brand attempts to meet customers’ psychological or social needs. Brand judgments focus on customers’ own personal opinions and evaluations. Brand feelings are customers’ emotional responses and reactions toward the brand. Brand resonance refers to the nature of the relationship that customers have with the brand and the extent to which customers feel that they are “in sync” with the brand. Resonance is characterized in terms of the intensity or depth of the psychological bond customers have with the brand, as well as the level of activity engendered by this loyalty. Examples of brands with high resonance include Harley-Davidson, Apple, and eBay.

9.3 Building Brand Equity Marketers build brand equity by creating the right brand knowledge structures with the right consumers. This process depends on all brand-related contacts—whether marketer-initiated or not. From a marketing management perspective, however, there are three main sets of brand equity drivers: 1.

The initial choices for the brand elements or identities making up the brand. (e.g., brand names, URLs, logos, symbols, characters, spokespeople, slogans, jingles, packages, and signage)—Korea’s Hanmi Whole Soymilk Company introduced Kong-Doo Soy Milk in attractive bottles that communicate what the product is. The bottle is clearly labeled and shaped gracefully like a soybean. Its message is clear, even to non-Koreans.

2.

The product and service and all accompanying marketing activities and supporting marketing program. One of Liz Claiborne’s faster-growing labels is Juicy Couture, whose

edgy, contemporary sportswear and accessories have a strong lifestyle appeal to women, men, and kids. Positioned as an affordable luxury, the brand creates its exclusive cachet via limited distribution and a somewhat risqué name and rebellious attitude.25 3.

Other associations indirectly transferred to the brand by linking it to some other entity (e.g., a person, place, or thing). China’s Li Ning Sports Goods used to rely on owner, Li Ning, who was an Olympic gymnastics champion as its endorser. However, its campaigns now feature other sports characters to appeal to younger, more affluent Chinese. It features NBA star Shaquille O’Neal as endorser. Additionally, Li Ning Sports Goods associates itself with the Olympics. It sponsored the Chinese table tennis, diving, gymnastics, and shooting teams. Such associations augur well for Li Ning.

9.3.1 Choosing Brand Elements ChaPter 9 ó Creating Brand equity

Brand elements are those trademarkable devices that serve to identify and differentiate the brand. Most strong brands employ multiple brand elements. Nike has the distinctive Swoosh logo, the empowering “Just Do It” slogan, and the mythological “Nike” name based on the winged goddess of victory.

Nintendo Wii—This home video game console was originally given the name Revolution. Later, it was referred to as Wii and not “Nintendo Wii,” making it the first home console Nintendo marketed outside of Japan without the company name featured in its trademark. Nintendo’s spelling of “Wii” with two lower-case “i” letters is meant to resemble two people standing side by side, representing players gathering together. Further, Wii (pronounced as “we”) emphasizes that the console is for everyone. It is short and simple to pronounce, making it universally memorable with little confusion or need for abbreviation. However, some people preferred “Revolution” over “Wii” because the latter sounded kiddish and may be a standing joke. However, Nintendo felt that “Revolution” is not an ideal name because it is long and in some cultures, difficult to pronounce.

Brand elements can be chosen to build as much brand equity as possible. The test of the brand-building ability of these elements is what consumers would think or feel about the product if they only knew about the brand element. A brand element that contributes positively to brand equity, for example, would be one where consumers assumed or inferred certain valued associations or responses. Based on its name alone, a consumer might expect ColorStay lipsticks to be long-lasting and Vitagen cultured milk drinks to be healthful.

Brand Element Choice Criteria There are six criteria in choosing brand elements (as well as more specific choice considerations in each case). The first three (memorable, meaningful, and likeable) can be characterized as “brand building” in terms of how brand equity can be built through the judicious choice of a brand element. The latter three (transferable, adaptable, and protectable) are more “defensive” and are concerned with how the brand equity contained in a brand element can be leveraged and preserved in the face of different opportunities and constraints. 1.

Memorable—How easily is the brand element recalled? How easily recognized? Is this true at both purchase and consumption? Short brand names such as Qoo and Kao can help, particularly in much of Asia where English is not the first language. Brand names that are multisyllabic and hard to pronounce (e.g., Häagen-Dazs) may require more time to learn and heavier promotion before they become part of the consumer’s lexicon. Moreover, while plosive consonants (e.g., b, c, d, g, k, and t) may add strength to the sound of brand names in the West (e.g., Tic Tac), they may not be suitable where Chinese dialects are concerned. Nasal sounds (e.g., nan, yin, and yang) are commonplace in Cantonese, while in Mandarin, the shoo and shur sounds dominate. Moreover, the brand name should also look distinctive to be memorable in Asia. Several Asian languages are not alphabet-based. Chinese, for example, uses about 50,000 ideographs composed of strokes. The Chinese also consider a name a work of art, and the

285 The Wii name is suggestive of two people playing, and its pronunciation implies that the video game console is for everyone.

art of writing (calligraphy) has a long tradition. Thus, the writing of a brand name is very important. It should be appealing and unique as it can function as a logo or trademark. 2.

Meaningful—To what extent is the brand element credible and suggestive of the corresponding category? Does it suggest something about a product ingredient or the type of person who might use the brand? Consider the inherent meaning in names such as Sharp and Walkman. Or the Chinese names of Reebok (Rui Bu Ke, 瑞捕克, meaning “quick steps”), Colgate (Gao Lu Jie, 高露洁, meaning “revealing superior cleanliness”), Nike (Nai Ke, 耐克, meaning “enduring and persevering”), BMW (Bao Ma, 宝马, meaning “precious horse”), or Tide (Tai Zi, 汰洁, meaning “gets rid of dirt”). These Chinese names sound like their original pronunciation and yet convey characteristics that are favorable to the product category.

The Chinese meaning of Nike, Nai Ke, 耐克, resonates with the fighting spirit in sports.

Some marketers believe that an Asian name is a liability when used in certain product categories as it is suggestive of poor quality or low class when compared with Western brands. For example, some Asian fashion businesses have adopted Western names (e.g., Bonia handbags of Malaysia) or Western-sounding names (e.g., Hong Kong’s Goldlion is pronounced gold-lyon), while others hide or downplay their national origins.

More generally, prudent marketers in the Asia Pacific should probe folklore, taboos, and superstitious and religious connotations conveyed by colors, numbers, or symbols where these form part of a brand name. One aspect of symbolism is the concept of a lucky name. Pepsi-Cola (百事可乐, meaning “hundred happy things”) is a lucky name in Chinese, while Volvo’s 164 and 264 models were less popular with the Chinese as the number four signifies death.

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The multitude of languages compounds the challenge of developing a brand name that has positive meaning across cultures. Barbie is a poor name for a doll in Malay-speaking countries as it sounds like the word for pork in Malay, a taboo meat for Muslims. Many Western companies in Asia have translated their names by sound (e.g., Ford), without considering the Asian name’s meaning; or by meaning (e.g., General Electric) without considering how the name sounds in different languages. Problems may occur for companies who localize their existing name via transliteration.

Unfortunate Chinese names—When Microsoft introduced its Bing search engine to China, it was careful in its Chinese name selection. In Chinese, the most common definitions of the character pronounced “bing” are “disease,” “defect,” and “virus.” The revised name, Bi Ying (必应), means “responds without fail.” Peugeot (Biao Zhi 标致) sounds enough like the Chinese slang for “prostitute” (biaozi 婊子) that the brand has inspired dirty jokes. Mr Muscle, the line of cleaning products, has been renamed as Mr Powerful (Weimeng Xiansheng 威猛先生), presumably because when it is spoken, the name Mr Muscle has a second, less appealing meaning of Mr Chicken Meat. Japanese cosmetic brand, Kanebo, when pronounced in a Chinese dialect by Hokkien speakers in Malaysia and Singapore literally means “having sex with your mother.”

Not only is each Chinese character inherently meaningful, each part of the character (called radicals) is also meaningful. Thus, marketers must analyze the connotations and meanings of their brand names at multiple levels. In addition, there are more homonyms in Asian than in Western languages. Given their tonal nature, the same phonetic pronunciation may have different meanings depending on how the word is pronounced. For example, the word “gong” has at least nine distinct characters with equally distinct meanings in Chinese (work, bow, public, meritorious service, attack, supply, palace, respectful, and a surname). Consumers may mistakenly ascribe the brand name with a character of a different tone. Marketers must ensure that such tonal confusions do not occur,; particularly in oral communications by radio or salespeople.

Hyatt—When Hyatt Hotel entered China, it realized that the name “Hyatt” does not translate easily and confers no meaning, as most Chinese are unfamiliar with American brands. To develop its Chinese brand equity, it used the name Yue (悦), which means “imperial,” a characteristic that many rich Chinese aspire to be. The organization then came up with courtly variations to match its subbrands: Kai Yue (凯悦), Jun Yue (君悦), and Bo Yue (柏悦) for the Regency, Grand, and Park Hyatt hotels, respectively.26

While some Asian countries have multiple dialects (e.g., China and India), others have multiple writing systems with different historical precedents and cultural implications. For example, Japan has four writing systems: the ChineseBiotherm highlights its European origin in its Chinese character based kanji, two phonemic systems (hiragana and katakana), and the name (碧欧泉) to compete more effectively in China. Western alphabet system, romaji. Brand names written in a particular system carry certain associations related to that system. Brands in the oldest system, kanji, are perceived to be traditional. Hence, kanji is suitable for traditional products like tea. The most modern system, katakana, may be more suited for high-tech products as it was introduced in Japan for foreign loan words. It is also appropriate for foreign products and products associated with foreign lifestyles. Hiragana, written by a courtesan, has a more feminine image suitable for beauty products, hair salons, and kimono stores.

Tamagotchi—Bandai, the makers of Tamagotchi, the virtual pet, selected the hiragana writing system to brand its product. The name means “cute egg watch” (from tamago, the everyday Japanese word for egg, and the suffix chi, for “small” and “cute”). Given that female teenagers were being targeted and the product’s emotional, high-touch rather than high-tech nature, hiragana was considered the appropriate system.

3.

Likeable—How aesthetically appealing do consumers find the brand element? Is it inherently likeable visually, verbally, and in other ways? Concrete brand names such as Sunkist, Bluebird, and Head & Shoulders evoke much imagery. The Chinese name for Fuji/Xerox Shagaku, a handheld copier, fits its image well. The name, written in Chinese characters, means “picture” and “fun,” and suggests that it possesses the qualities of an affectionate pet name. Similarly, Zaitun (a female Islamic name) was selected for a range of locally produced toiletries in Malaysia to give a cultural dimension and associative value (purity) to the products.

4.

Transferable—Can the brand element be used to introduce new products in the same or different categories? To what extent does the brand element add to brand equity across geographic boundaries and market segments? Often companies enter one Asian market after another. Such companies are likely to choose a name suited for one market but not for the next. For example, Johnson & Johnson wound up with two names in the same culture. In Hong Kong, Zhuang Sheng (莊臣 meaning “feudal lord”) was used. As this traditional upper-class association was considered inappropriate in socialist China, Qiang Sheng (强生 meaning “active life”) was employed there. Using an existing corporate or brand name may be considered more consistent on a regional basis. This works for original, alphabetic names that are short and catchy such as 3M, IBM, and M&M. However, consumers in many Asian markets (e.g., China) are still unfamiliar with Western names and spellings. Thus, judicious use of proper names is

ChaPter 9 ó Creating Brand equity

Biotherm—This French skincare brand goes by the Chinese name Bee Er Chuen in most Asian markets with the exception of China. China’s cosmetics market is dominated by foreign brands, and Biotherm wanted to highlight its international status with its name Bee Oh Chuen (碧欧泉), where the middle character Oh (欧) refers to Europe.27

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essential. For example, Britain’s Derwent Valley Foods selected the brand name “Phileas Fogg” for a line of fine foods. While educated Westerners might know of its origins and associations, many Asians would not. The experience of Robert Bosch, a German vehicle-parts and electrical appliance firm, in selecting an appropriate name for the China and Hong Kong markets is instructive of a pan-Asian approach to branding. It wanted a Chinese name that sounded like Bosch when pronounced in both Mandarin and Cantonese; that had positive meanings related to its core business or organizational image; that had no negative sound associations; and that was distinctive from other corporate names so as not to violate trademark infringement regulations. Eventually, it selected a name (Bo Shi in Mandarin and Bok Sai in Cantonese) which had favorable connotations as it could be interpreted as “winning all over the world.” 5.

Adaptable—How adaptable and updatable is the brand element? As many Asian brands modernize, their elements need to be adaptable and yet retain the traditional values of the brand.

6.

Protectable—How legally protectable is the brand element? How competitively protectable? Can it be easily copied? It is important that names that become synonymous with product categories—such as Kleenex, Scotch Tape, and Xerox—retain their trademark rights and not become generic. It is not uncommon for multinationals entering new Asian markets to discover that their brand name has already been registered in that country. For example, Marushin Foods, a Japanese food processing company, had registered the names of Mac and Burger prior to McDonald’s arrival in Japan. It took McDonald’s three years to finally register its trademark in Japan. Further, differences arise in international trademark laws between Asia and the West. In the United States and some European countries, trademark ownership is based on prior use. However, in some Asian countries, the trademark is deemed to be the property, and owned by, the registering party, and therefore can be sold. Astute Asian entrepreneurs have profited from locally registering established foreign brand names. Foreign companies seeking to invest in Asia should thus ensure their brand name and trademark are registered in the Asian country of interest. For example, Starbucks in China ran into intellectual property disputes because a local coffee shop in Shanghai, U-Like Coffee, had registered the pinyin spelling of the company’s name Xing Ba Ke before Starbucks got round to doing so.28 U-Like Coffee’s logo and store design are also similar to Starbucks’. Starbucks has since won the legal tussle. Other Asian companies have chosen names close to their Western competitors. Johnson & Johnson lost its lawsuit in China to protect its Carefree sanitary napkin trademark against a local company registered as Careful.29

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Many firms strive to build a unique brand name that eventually will become intimately identified with the product category. Examples are Kleenex, Scotch Tape, and Post-it notes. Given the rapid growth of the global marketplace, Asian companies should choose brand names that work outside the region. Just as foreign businesses must be cognizant of Asian aspects of brand naming, Asian companies should select names that are meaningful and pronounceable in other languages as they expand outside the region. Otherwise, they will find that they cannot use their names when they go abroad.

Lenovo’s parent company, Legend, decided to use Lenovo for its PC business because it starts with the letter “L,” which is the same as the company, and is easy to pronounce and spell.

Lenovo—The name of China’s largest technology company, Legend, was picked in 1984 by its founders who were then students and engineers at a Beijing technical institute. Since then, 40 other subbrands, including Happy Family for a software line, and 1+1 for a retail chain, emerged over the years. In 2001, it hired consulting firm Interpublic to find a new name and rationalize its subbrands. The result? The number of subbrands and product names was cut to 19 and a list of attributes was created that it hoped to impart to future customers. Because the company sells many products besides PCs, Legend’s old logo, which had a caricature of a floppy disk, needed an update. Interpublic presented Legend with about 250 new English names, including many that began with “L” to associate with the company’s existing names. Legend’s top 20 executives picked five finalists from a list of 25 candidates that had been vetted in many languages and trademark registries. From these five, Lenovo stood out because it could be trademarked in most countries and was easy to pronounce and spell. The company’s Chinese name, Lian Xiang, which means “imagination,” was not changed.30

Marketing Insight: Driving Deeper Brand Connection in China discusses brand naming practices in China for the automobile industry.

MARKETING INSIGHT

DrIvIng Deeper BrAnD COnneCTIOns In ChInA new premium automotive brand that is superior to Audi, the incumbent standard of premium vehicle in China. Mercedes Benz entered a year after. Despite its longer history in Taiwan and Hong Kong and its success with local language names (宾士 and 平治 respectively), to Mercedes’ credit, it took the opportunity to define a new name appropriate for the China market. It chose 奔驰 (Ben Ci, meaning “fast and famous”) as its Chinese name. 奔驰 translates well phonetically while establishing a set of positive meanings as the latest luxury brand in China. It is a name that highlights values relevant to the product category (“fast”) and resonates with the rapid growth in China. The rising class of business leaders was embracing speed, moving forward and sparing no effort in their pursuit of success. Additionally, Mercedes 奔驰 subtly connected at a deeper, subconscious level with a word that is tied to a wellknown Chinese proverb, 驰名天下 or 驰名当世 (meaning “world famous”). In contrast, there are auto brands that did not take the opportunity to redefine themselves when they entered China. Most Japanese automobiles stuck to their origin, maintaining consistency with their original Japanese company names. For example, Nissan (日产) and Honda (本田) stayed with the similar Japanese characters of the original company name but with pronunciation in Mandarin. Some brands made the traditional translation by sound. Ford chose 福特 (Fu Te), meaning “special prosperity,” partly because it was constrained by an established translation for the name Ford (for example, President Ford). While the Chinese meaning is favorable, it is already ‘Pre-owned’ as a common American surname and not something unique to cars. While General Motors had its name literally translated (通 用汽车, meaning “a car for general use”), it took the homonym approach in translating Chevrolet (雪弗莱 “Xue Fu Lai”), Buick (别 克 “Bie Ke”) and Cadillac (凯迪拉克 “Kai Di La Ke”), most of which lack a deeper meaning and a secondary set of associations for the Chinese consumers. Besides trademark due diligence, translating a Western brand for the Chinese market requires an understanding of the consumers. The above examples emphasize that a new brand entering China needs to get it right from the get go. While design, performance, and specifications are critical to a car’s success, having a winning Chinese name—relevant, distinctive, and favorable—allows a brand to go on to own an important position in consumers’ minds. After all, nobody wants to go down the disastrous route of choosing a name that sounds similar to a phrase with a poor meaning. Peugeot fared badly in part because its name 标致 (Biao Zhi) sounds similar to 婊子 (biao zi) which means “bitch” or “whore.”

Source: Adapted from a working paper by Chen Xueliang, “Driving Deeper Brand Connection in China.” Partially reproduced with permission from Think Business, NUS Business School, National University of Singapore (http://thinkbusiness.nus.edu). Copyright NUS Business School.

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International marketers have a love-hate relationship with the China market. On the one hand, China has become the largest market for almost every category and is still outgrowing many large, mature markets. At the same time, it is a complex place where well-known Western brands such as Best Buy and WalMart have floundered. Yet the Chinese market, with its 1.3 billion people whose first language is not English or an Anglicized form of it, gives foreign companies an opportunity to redefine their brand for the Chinese consumer or to reposition it. Creating an appropriate Chinese brand name then becomes strategic. The automotive industry is a classic case study. Volkswagen (VW) benefited as the first foreign automaker to enter the China market and went on to establish Audi as the dominant premium brand for government officials and business executives in the 1990s and early 2000s. From a branding perspective, VW took a traditional approach to its Chinese brand name. Its literal German meaning (“People’s Automobile”) was directly translated to 大众 (Da Zhong), meaning “the masses.” There is no congruity in how it sounds originally and in Chinese. Audi, VW’s premium brand, took the other approach of translating its name by sound. It became 奥迪 (Ao Di), which has no substantive meaning save for sounding like its original name—奥 (Ao) meaning “difficult to understand” and 迪 (Di) meaning “enlightened, guide.” Interestingly, cosmetic brand Dior reversed the characters for its Chinese name—迪奥 (Di Ao). As first movers, VW and Audi had an early advantage, and their Chinese brand naming was less critical in their success. The competitive landscape heated up in the early 2000s with the joint-venture production of BMW and Mercedes in China. These new premium entrants took the opportunity to redefine names that connected to their German origin and yet were aspirational to the rising number of senior executives and successful entrepreneurs, who were overtaking the number of Chinese government officials outfitted with Audi, the standard official car. Like its forerunner VW, Bayerische Motoren Werke could translate its company name literally, but we can expect more sophistication from a company that has simplified its pedigree and fame into three iconic letters for the world market. It could have insisted that its brand was famous and simple enough without further translation (the approach adopted by SAP and IBM). However, BMW chose the path of ‘transcendence’ in picking a name that deviated from the meaning as well as sound. Its Chinese name is 宝马 (Bao Ma) which means “treasured horse” or “precious ride.” That bold decision set a strong marketing foundation with a superior Chinese name that planted a vivid image in consumers’ mind. The name says it all—BMW is the

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Asian companies often face the problem that their domestic brand is not well known overseas, or their name may be associated with poor quality or image abroad. In addition to building their own names overseas, some Asian businesses overcome this problem by buying established foreign businesses and their brand names. Mulberry, Crabtree & Evelyn, and Escada—well-known European brands—are owned by Asian companies. Mulberry is owned by Christina Ong (Singapore), Crabtree & Evelyn by Sandra Lee (Malaysia), and Escada by Megha Mittal (India).

Developing Brand Elements Brand elements can play a number of brand-building roles. If consumers do not examine much information in making their product decisions, brand elements should be easily recognized and Asian companies overcome low brand name awareness or inferior recalled, and inherently descriptive and persuasive. Memorable or image by buying established foreign businesses. Mulberry, a famous meaningful brand elements can reduce the burden on marketing high-end European brand, is owned by a Singaporean business. communications to build awareness and link brand associations. The different associations that arise from the likeability and appeal of brand elements may also play a critical role in the equity of a brand. The tiger in Exxon reinforces the image of power for the company’s gas. Often, the less concrete brand benefits are, as is typical of service businesses, the more important it is that brand elements capture the brand’s intangible characteristics. One such element is the logo, which can visually represent the brand’s core benefits, and which can also transcend geographic boundaries more than verbal elements. For example, Cathay Pacific’s graceful brushwing logo conveys an image of personal, Asian service.

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Like brand names, slogans are an extremely efficient means to build brand equity. Slogans can function as useful “hooks” or “handles” to help consumers grasp what the brand is and what makes it special. They are an indispensable means of summarizing and translating the intent of a marketing program. Think of the inherent brand meaning in slogans such as “A Great Way to Fly” (Singapore Airlines).

9.3.2 Designing Holistic Marketing Activities Brands are not built by advertising alone. Customers come to know a brand through a range of contacts and touch points: personal observation and use, word of mouth, interactions with company personnel, online or telephone experiences, and payment transactions. A brand contact can be defined as any information-bearing experience a customer or prospect has with the brand, the product category, or the market that relates to the marketer’s product or service.31 Any of these experiences can be positive or negative. The company must put as much effort into managing these experiences as it does in producing its ads.32 Marketers are creating brand contacts and building brand equity through new avenues such as clubs and consumer communities, trade shows, even marketing, sponsorship, factory visits, public relations and press releases, and social cause marketing. Integrated marketing is about mixing and matching these marketing activities to maximize their individual and collective efforts.33 To achieve it, marketers need a variety of different marketing activities that consistently reinforce the brand promise. We can evaluate integrated marketing activities in terms of the effectiveness and efficiency with which they affect brand awareness and create, maintain, or strengthen brand associations and image. For instance, while Volvo may invest in R&D and engage in advertising, promotions, and other communications to reinforce its “safety” brand association, it also sponsors events so that it is seen as active, contemporary, and up-to-date. Volvo sponsorships include golf tournaments, the Volvo Ocean race, the Gothenburg horse show, and cultural events.

Internal Branding Marketers must now “walk the talk” to deliver the brand promise. They must adopt an internal perspective to consider what steps to take to be sure employees and marketing partners appreciate and understand basic branding notions, and how they can help or hurt brand equity.34 Internal

branding is activities and processes that help to inform and inspire employees.35 An up-to-date, deep understanding of the brand and its promise by all employees is critical for service companies and retailers. Brand bonding occurs when customers experience the company as delivering on its brand promise. All of the customers’ contacts with company employees and company communications must be positive. The brand promise will not be delivered unless everyone in the company lives the brand. One of the most potent influences on brand perception is the experience customers have with company personnel. For example, the in-flight service provided by the Singapore Girl is a critical ingredient of Singapore Airlines’ branding success. When employees care about and believe in the brand, they are motivated to work harder and feel greater loyalty to the firm. Some important principles for internal branding are:36

ChaPter 9 ó Creating Brand equity

Choose the right moment—Turning points are ideal opportunities to capture employees’ attention and imagination. BP found that after it ran an internal branding campaign to accompany its external repositioning, “Beyond petroleum,” most employees were positive about the new brand and thought the company was going in the right direction. Link internal and external marketing—Internal and external messages must match. IBM’s e-business campaign not only helped to change public perceptions of the company in the marketplace, it also sent a signal to employees that IBM was determined to be a leader in the use of Internet technology. Bring the brand alive for employees—A professional branding campaign should be based on marketing research and supervised by the marketing department. Internal communications should be informative and energizing.

9.3.3 Brand Communities Because of the Internet, companies are interested in collaborating with consumers to create value through communities built around brands. A brand community is a specialized community of consumers and employees whose identification and activities focus around the brand.37 Three characteristics identify brand communities:38 1.

A “consciousness of kind” or sense of felt connection to the brand, company, product, or other community members

2.

Shared rituals, stories, and traditions that help to convey the meaning of the community

3.

A shared moral responsibility or duty to both the community as a whole and individual community members

Brand communities come in many different forms.39 Some arise from brand users while others are company-sponsored and facilitated such as the Nike+ platform. A strong brand community results in a more loyal, committed customer base. Its activities and advocacy can substitute to some degree for activities the firm would otherwise have to engage in, creating greater marketing effectiveness and efficiency.40 A brand community can also be a constant source of inspiration and feedback for product improvement or innovations. Table 9.2 shows the activities that brand communities engage in that create value for the brand.

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Nike established a brand community with its Nike+ Web site that allows runners to record and track their performances and communicate with others around the world.

Table 9.2 Value Creation Practices SOCIAL NETWORKING Welcoming Empathizing

Governing

Greeting new members, beckoning them into the fold, and assisting in their brand learning and community socialization. Lending emotional and/or physical support to other members, including support for brand-related trials (e.g.,product failure, customizing) and/or for nonbrand-related life issues (e.g., illness, death, job). Articulating the behavioral expectations within the brand community.

IMPRESSION MANAGEMENT Evangelizing Justifying COMMUNITY ENGAGEMENT Staking Milestoning Badging Documenting BRAND USE Grooming Customizing Commoditizing

Sharing the brand “good news,”inspiring others to use, and preaching from the mountaintop. Deploying rationales generally for devoting time and effort to the brand and collectively to outsiders and marginal members in the boundary.

Recognizing variance with the brand community membership and marking intragroup distinction and similarity. Noting seminal events in brand ownership and consumption. Translating milestones into symbols and artifacts. Detailing the brand relationship journey in a narrative way, often anchored by and peppered with milestones. Cleaning, caring for, and maintaining the brand or systematizing optimal use patterns. Modifying the brand to suit group-level or individual needs. This includes all efforts to change the factory specs of the product to enhance performance. Distancing/approaching the marketplace in positive or negative ways. May be directed at other members (e.g., you should sell/should not sell that) or may be directed at the firm through explicit link or through presumed monitoring of the site (e.g., you should fix this/do this/change this).

Building a positive, productive brand community requires careful thought and implementation. Branding experts Susan Fournier and Lara Lee identified seven common myths about brand communities and suggest the reality in each case (see Table 9.3).

9.3.4 Leveraging Secondary Association

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The third and final way to build brand equity is, in effect, to “borrow” it. That is, brand associations may themselves be linked to other entities that have their own associations, creating “secondary” brand associations. In other words, brand equity may be created by linking the brand to other information in memory that conveys meaning to consumers (see Figure 9.5). The brand may be linked to certain source factors, such as the company (through branding strategies), countries or other geographical regions (through identification of product origin), and channels of distribution (through channel strategy); as well as to other brands

Table 9.3 The Myths and Realities of Brand Communities Myth

Reality

Brand community is a marketing strategy.

Brand community is a business strategy.The entire business model must support the community brand.

Brand communities exist to serve the business.

Brand communities exist to serve the people that comprise them.Brand communities are a means to an end,not the ends themselves. Cultivate the community and the brand will grow; engineer the community and the brand will be strong. Communities are inherently political and this reality must be confronted with honesty and authenticity head-on; smart companies embrace the conflicts that make communities thrive. Strong communities take care of all of their members; everyone in the community plays an important role. Social networks are one community tool,but the tool is not the strategy.

Build the brand,and the community will follow. Brand communities should be love fests for faithful brand advocates. Focus on opinion leaders to build a strong community. Online social networks are the best way to build community. Successful brand communities are tightly managed and controlled.

Control is an illusion; brand community success requires opening up and letting go; of and by the people,communities defy managerial control.

Ingredients

Company

Alliances

Extensions

Other Brands

Employees

People

BRAND

Country of origin

Places

Channels Things

Third-party endorsements

Events Causes

Figure 9.5 Secondary Sources of Brand Knowledge

ChaPter 9 ó Creating Brand equity

Endorsers

293 (through ingredient or co-branding), characters (through licensing), spokespeople (through endorsements), sporting or cultural events (through sponsorship), or some other third-party sources (through awards or reviews). For example, assume Evensun—a Taiwanese Original Equipment Manufacturer (OEM) of inline skates and protection gear—decided to introduce a new inline skate called “Topdog.” In creating the marketing program to support the new Topdog inline skate, the company could attempt to leverage secondary brand knowledge in several different ways: Leverage associations to the corporate brand by “subbranding” the product, calling it “Topdog by Evensun.” Consumers’ evaluations of the new product would be influenced by how they felt about Evensun and how they felt that such knowledge predicted the quality of an Evensun inline skate. Given its status as an OEM, this approach may not be advisable, as the Evensun name is not well recognized. Try to rely on its Taiwanese origins, but such a geographical location would seem to have little relevance to skating. Try to sell through popular skate shops in the hope that their credibility would “rub off” on the Topdog brand. Attempt to co-brand by identifying a strong ingredient brand for its fiberglass materials. Attempt to find one or more top professional inline skaters to endorse the inline skate or choose to sponsor a skating competition. Attempt to secure and publicize favorable ratings from third-party sources like leading inline skating magazines. Thus, independent of the associations created by the inline skate itself, its brand name, or any other aspects of the marketing program, Evensun can build equity by linking the brand to these other entities.

9.4 Measuring Brand Equity How do we measure brand equity? An indirect approach assesses potential sources of brand equity by identifying and tracking consumer brand knowledge structures. A direct approach assesses the actual impact of brand knowledge on consumer response to different aspects of the marketing. Marketing Insight: The Brand value Chain shows how the two measurement approaches can be linked. The two general approaches are complementary, and marketers can employ both. In other words, for brand equity to perform a useful strategic function and guide marketing decisions, it is important for marketers to (1) fully understand the sources of brand equity and how they affect outcomes of interest, as well as (2) how these sources and outcomes change, if at all, over time. Brand audits are important for the former; brand tracking is important for the latter. A brand audit is a consumer-focused series of procedures to assess the health of the brand, uncover its sources of brand equity, and suggest ways to improve and leverage its equity. Marketers should conduct a brand audit whenever they consider important shifts in strategic direction. Conducting brand audits on a regular basis (e.g., annually) allows marketers to keep their fingers on the pulse of their brands so that they can manage them more proactively and responsively. Audits are particularly useful background for managers as they set up their marketing plans. Brand-tracking studies collect quantitative data from consumers on a routine basis over time to provide marketers with consistent, baseline information about how their brands and marketing programs are performing on key dimensions. Tracking studies are a means of understanding where, how much, and in what ways brand value is being created, to facilitate day-to-day decision making.

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MARKETING INSIGHT

The BrAnD vAlue ChAIn

The brand value chain is a structured approach to assessing the sources and outcomes of brand equity and the manner in which marketing activities create brand value (see Figure 9.6). It is based on several basic premises. VALUE STAGES

Marketing Program Investment

Customer Mind-set

- Product - Communications - Trade - Employee - Other

MULTIPLIERS

Brand Performance

- Awareness - Associations - Attitudes - Attachment - Activity

Shareholder Value

- Price premiums - Price elasticities - Market share - Expansion success - Cost structure - Profitability

Program Multiplier

Customer Multiplier

- Clarity - Relevance - Distinctiveness - Consistency

- Competitive reactions - Channel support - Customer size & profile

Figure 9.6 The Brand Value Chain

- Stock price - P/E ratio - Market capitalization

Market Multiplier

- Market dynamics - Growth potential - Risk profile - Brand contribution

The program multiplier determines the marketing program’s ability to affect the customer mind-set and is a function of the quality of the program investment. The customer multiplier determines the extent to which value created in the minds and hearts of customers affects market performance. This result depends on competitive superiority (how effective the quantity and quality of the marketing investment of other competing brands are), channel and other intermediary support (how much brand reinforcement and selling effort various marketing partners are putting forth), and customer size and profile (how many

and what types of customers, profitable or not, are attracted to the brand). The market multiplier determines the extent to which the value shown by the market performance of a brand is manifested in shareholder value. It depends, in part, on the actions of financial analysts and investors. Researchers at Millward Brown adopt a very similar perspective. They maintain that a brand’s financial success depends on its ability to be meaningful, different, and salient. These three brand qualities (MD&S) predispose someone to positive purchase behavior (choose the brand over others, pay more for it, stick with or try it in the future), which in turn generates financial benefits to the company (increased volume share, higher price premium, increased likelihood to grow value share in the future). Millward Brown asserts that this brand predisposition is measured by three brand equity metrics: power, premium, and potential. People are predisposed to choose the brand over others. This will drive brand volume, so power predicts volume share based entirely on perceptions, absent of activation factors. People are predisposed to pay more for the brand. This will allow the brand to charge more, so premium predicts the price index your brand can command. Potential indicates the likelihood of value share growth for the brand in the next 12 months, based on people’s predisposition to stick to the brand or try it in the future.

Sources: Kevin Lane Keller and Don Lehmann, “How Do Brands Create Value,” Marketing Management, May–June 2003, pp. 27–31. See also Marc J. Epstein and Robert A. Westbrook, “Linking Actions to Profits in Strategic Decision Making,” MIT Sloan Management Review, Spring 2001, pp. 39–49; Rajendra K. Srivastava, Tasadduq A. Shervani, and Liam Fahey, “Market-Based Assets and Shareholder Value,” Journal of Marketing, January 1998, 62, pp. 2–18; Shuba Srinivasan, Marc Vanheule, and Koen Pauwels, “Mindset Metrics in Market Response Models: An Integrative Approach,” Journal of Marketing Research, August 2010, 47, pp. 672–84; Josh Samuel, “The Power of Being Meaningful, Different and Salient,” Point of View, www.millwardbrown.com; Jorge Alagon and Josh Samuel, “The Meaningfully Different Framework,” white paper, www.millwardbrown .com, April 2013.

Brand equity needs to be distinguished from brand valuation, which involves estimating the total financial value of the brand. Table 9.4 displays the world’s most valuable brands in 2015 according to one ranking. Marketing Insight: What is a Brand Worth? reviews one popular valuation approach, based in part on the price premium the brand commands multiplied by the extra volume it moves over an average brand.41 Table 9.4 The World’s 10 Most Valuable Brands

Rank

Brand

2016 Brand Value (Billions)

1 2 3 4 5 6

Apple Google Coca-Cola Microsoft Toyota IBM

$178.1 $133.3 $73.1 $72.8 $53.6 $52.5

7

Samsung

$51.8

ChaPter 9 ó Creating Brand equity

First, brand value creation begins when the firm targets actual or potential customers by investing in a marketing program to develop the brand, including marketing communications, trade or intermediary support, and product research, development, and design. This marketing activity will change customers’ mind-sets—what customers think and feel and everything that becomes linked to the brand. Next, these customers’ mind-sets will affect buying behavior and the way consumers respond to all subsequent marketing activity—pricing, channels, communications, and the product itself—and the resulting market share and profitability of the brand. Finally, the investment community will consider this market performance of the brand to assess shareholder value in general and the value of a brand in particular. The model also assumes that three multipliers increase or decrease the value that can flow from one stage to another.

295

8 9 10

Amazon Mercedes-Benz GE

$50.3 $43.5 $43.1

Source: Interbrand

MARKETING INSIGHT

WhAT Is A BrAnD WOrTh?

Top brand valuation firm Interbrand has developed a model to formally estimate the dollar value of a brand. Interbrand defines brand value as the net present value of the earnings a brand is expected to generate in the future and believes both marketing and financial analyses are equally important in determining the value of a brand. Its process follows the following five steps:

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1. Market segmentation—The first step in the Brand Valuation process is to divide the market(s) in which the brand is sold into mutually exclusive segments of customers that help to determine the variances in the brand’s economic value. 2. Financial analysis—Interbrand assesses purchase price, volume, and frequency to help calculate accurate forecasts of future brand sales and revenues. Specifically, Interbrand performs a detailed review of the brand’s equities, industry and customer trends, and historic financial performance across each segment. Once it has established Branded Revenues, it deducts all associated operating costs to derive earnings before interest and tax (EBIT). It also deducts the appropriate taxes and a charge for the capital employed to operate the underlying business, leaving intangible earnings, that is, the earnings attributed to the intangible assets of the business. 3. Role of branding—Interbrand next attributes a proportion of Economic Earnings to the brand in each market segment, by first identifying the various drivers of demand, then determining the degree to which the brand directly influences

each. The Role of Branding assessment is based on market research, client workshops, and interviews and represents the percentage of intangible earnings the brand generates. Multiplying the Role of Branding by Intangible Earnings yields brand earnings. 4. Brand strength—Interbrand then assesses the brand’s strength profile to determine the likelihood that the brand will realize forecast earnings. This step relies on competitive benchmarking and a structured evaluation of the brand’s market, stability, leadership position, growth trend, support, geographic footprint, and ability to be legally protected. For each segment, Interbrand applies industry and brand equity metrics to determine a risk premium for the brand. The company’s analysts derive the overall brand discount rate by adding a brand-risk premium to the risk-free rate, represented by the yield on government bonds. The brand discount rate, applied to the brand earnings forecast, yields the net present value of the brand earnings. The stronger the brand, the lower the discount rate, and vice versa. 5. Brand value calculation—Brand value is the net present value (NPV) of the forecast brand earnings, discounted by the brand discount rate. The NPV calculation comprises both the forecast period and the period beyond, reflecting the ability of brands to continue generating future earnings. Increasingly, Interbrand uses brand value assessments as a dynamic, strategic tool to identify and maximize return on brand investment across a whole host of areas.

Sources: Interbrand, the Interbrand Brand Glossary, and Interbrand’s Nik Stucky and Rita Clifton.

9.5 Managing Brand Equity Because consumer responses to marketing activity depend on what they know and remember about a brand, short-term marketing actions, by changing brand knowledge, necessarily increase or decrease the success of future marketing actions.

9.5.1 Brand Reinforcement As the company’s major enduring asset, a brand needs to be carefully managed so that its value does not depreciate. Many brand leaders of 70 years ago are still today’s brand leaders: CocaCola, and Campbell Soup, but only by constantly striving to improve their products, services, and marketing. Comparable long-lived Asian brands include Mikimoto pearls, Poh Chai pills, and San Miguel beer. Marketers can reinforce brand equity by consistently conveying the brand’s meaning in terms of (1) what products the brand represents, what core benefits it supplies, and what needs

it satisfies; as well as (2) how the brand makes those products superior, and which strong, favorable, and unique brand associations should exist in the minds of consumers. Nivea, one of Europe’s strongest brands, has expanded its scope from a skin cream brand to a skin care and personal care brand through carefully designed and implemented brand extensions reinforcing the Nivea brand promise of “mild,” “gentle,” and “caring” in a broader arena.

Sometimes, it is the heavy financial cost in investing in a brand that deters Asian companies from making a more concerted effort. China’s TCL Corp., one of the world’s largest television makers, tried to establish itself in the West but eventually gave up. Instead, TCL formed a joint venture with Thomson of France to produce TV sets under the Thomson and RCA labels for the European and U.S. markets. TCL’s chief financial officer said, “Unless you’re Samsung, and you make tons of money from other activities, you can go into a market and incur a huge loss with a brand. We are not in that position.”42 An important consideration in reinforcing brands is the consistency of the marketing support the brand receives, in terms of both amount and kind. Consistency does not mean uniformity and no changes: many tactical changes may be necessary to maintain the strategic thrust and direction of the brand. Unless there is some change in the marketing environment, however, there is little need to deviate from a successful positioning. In such cases, sources of brand equity should be vigorously preserved and defended. In managing brand equity, it is important to recognize the trade-offs between those marketing activities that fortify the brand and reinforce its meaning and those that attempt to leverage or borrow from existing brand equity to reap some financial benefit.43 At some point, failure to reinforce the brand will diminish brand awareness and weaken brand image.

9.5.2 Brand Revitalization Changes in consumer tastes and preferences, the emergence of new competitors or new technology, or any new development in the marketing environment could potentially affect the fortunes of a brand. In virtually every product category, there are examples of once prominent and admired brands that have fallen on hard times or, in some cases, disappeared.44 Nevertheless, a number of these brands have managed to make impressive comebacks in recent years, as marketers have breathed new life into their customer franchises. Asian brands such as Tiger Balm have seen their brand fortunes successfully turned around to varying degrees. Often, the first place to look in turning around the fortunes of a brand is to understand what its sources of brand equity were. Are positive associations losing their strength or uniqueness? Have negative associations become linked to the brand? Decisions must then be made on whether to retain the same positioning or to create a new positioning and, if so, which positioning to adopt. Consider the following “modern with a traditional twist” repositioning of Eu Yan Sang, a Chinese medicine business: Eu Yan Sang—Eu Yan Sang (EYS) was established in 1879. Its claim to fame was Bak Foong Yun, a pill said to enhance beauty and once a staple in Hong Kong. However, EYS saw a stagnation of its customer base during the 1980s. Market research found that EYS’s main customers were middle-aged housewives. To expand its market to include younger people, professionals, and men, EYS restyled its stores to look more modern, featuring better lighting and more customer-friendly products. It put up information panels

ChaPter 9 ó Creating Brand equity

Reinforcing brand equity requires innovation and relevance throughout the marketing program. Marketers must introduce new products and conduct new marketing activities that truly satisfy their target markets. The brand must always be moving forward in the right direction. Marketing must always find new and compelling offerings and ways to market them. Brands that fail to do so find that their market leadership dwindles or even disappears. Unfortunately, many Asian companies have mismanaged their brands for a variety of reasons. In the quest for ever-increasing profits, some Asian brands San Miguel Corporation, which produces the best-selling beer become distracted and lose focus. Their owners venture into unrelated around the world, was founded in 1890 in the Philippines. activities for short-term gains (e.g., property). Underinvestment and neglect have also caused many erstwhile popular Asian brands in such product categories as athletic shoes, patent medicines, underwear, and cosmetics to fade into oblivion.

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The Bak Foong pill still remains a major stalwart as part of Eu Yan Sang’s product line, especially after having undergone a packaging revamp to appeal to a more modern audience.

in shops and handed out brochures informing people about the uses and properties of its products. It expanded distribution by selling via major supermarket chains, pharmacies, and health food stores. EYS also repackaged its products to make them more convenient to use by offering ready-prepared products. Infusions such as ginseng were ground and packed into teabags that could be prepared in 10 minutes rather than the several hours traditionally needed. In all, EYS now makes more than 300 products and offers over 1,000 Chinese herbs. Recently, it expanded beyond the scope of traditional Chinese medicine (TCM) to include packaged health-food products such as bottled bird’s nest, soups, and other dietary supplements. It also markets over 20 spa products based on Chinese herbal formulations under the brand name ZING. EYS believes that the future of health care lies in integrative medicine combining the best of natural therapies and Western medical practices. Besides opening two integrative medicine centers in Hong Kong, it works with Western medical practitioners, homeopaths and other natural therapy practitioners for the best patient outcome. EYS now has more than 250 retail branches in Hong Kong, Malaysia, Singapore, and Australia. It also has an extensive network of wholesalers and distributors worldwide carrying its products. EYS has set up a cybershop which allows consumers worldwide to buy its products.

Sometimes the actual marketing program is the source of the problem because it fails to deliver on the brand promise. Then, a “back to basics” strategy may make sense. In other cases, however, the old positioning is just no longer viable and a reinvention strategy is necessary.

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A rebranding exercise of Malaysian-owned Crabtree & Evelyn saw its packaging and store concept changed, winning new customers and improving sales.

Crabtree & Evelyn—British beauty and lifestyle brand, Crabtree & Evelyn, has a Malaysian owner in Sandra Lee. In 2009, she started a rebranding exercise to make Crabtree & Evelyn “global and yet still relevant to the local cultures.” Extensive research showed that it was attracting young shoppers in Asia but an older crowd in the West. A brand makeover began. It had to modernize without losing its rich heritage inspired by the English stillroom—a place in old English homes where jams, balms, and fragrances are prepared using flowers, herbs, and fruits. The packaging for its food products draws on its rich archive of old designs but tweaks the colours. Its fragrances have romantic watercolor illustrations for an English aesthetism. To appeal to Asians, a promotion was held that sold limited edition Crabtree & Evelyn Hello Kitty tote bags. The revamp was a success and sales improved with new customers.45

There is obviously a continuum involved with revitalization strategies, with pure “back to basics” at one end and pure “reinvention” at the other end, and many combinations in between. The challenge is often to change enough to attract some new customers but not enough to alienate old customers. Brand revitalization of almost any kind starts with the product.46

9.6 Devising a Branding Strategy A firm’s branding strategy—often called the brand architecture—reflects the number and nature of common and distinctive brand elements applied. Deciding how to brand new products is especially critical. When a firm introduces a new product, it has three main choices: 1.

It can develop new brand elements for the new product.

2.

It can apply some of its existing brand elements.

3.

It can use a combination of new and existing brand elements.

When a firm uses an established brand to introduce a new product, it is called a brand extension. When a new brand is combined with an existing brand, the brand extension can also be called a sub-brand, as with Adobe Acrobat software, Toyota Camry automobiles, and American Express Blue cards. An existing brand that gives birth to a brand extension is referred to as the parent brand. If the parent brand is already associated with multiple products through brand extensions, then it may also be called a family brand.

In a category extension, the parent brand is used to enter a different product category from that currently served by the parent brand. Honda has used its company name to cover such different products as automobiles, motorcycles, snowblowers, lawnmowers, marine engines, and snowmobiles. This allows Honda to advertise that it can fit “six Hondas in a two-car garage.” Sharp, the leader in flat-panel TV, also lends its name to a variety of products such as cell phones, solar power, and white goods.

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A brand line consists of all products—original as well as line and category extensions—sold under a particular brand. A brand mix (or brand assortment) is the set of all brand lines that a particular seller makes available to buyers. Many companies are now introducing branded variants, which are specific brand lines supplied to specific retailers or distribution channels. They result from the pressure retailers put on manufacturers to provide distinctive offerings. A camera company may supply its low-end cameras to mass merchandisers while limiting its higher-priced items to specialty camera shops.49 A licensed product is one whose brand name has been licensed to other manufacturers who actually make the product. Corporations have seized on licensing to push the company name and image across a wide range of products. Sanrio’s Hello Kitty has been licensed to products ranging from credit cards to toasters.

9.6.1 Branding Decisions Alternative Branding Strategies Today, branding is such a strong force that hardly anything goes unbranded. Assuming a firm decides to brand its products or services, it must then choose which brand names to use. Three general strategies are often used: 1.

Individual or separate family brand names—This policy is followed by Procter & Gamble (Head & Shoulders, Pantene, Rejoice). A major advantage of an individual-names strategy is that the company does not tie its reputation to the products. If the product fails or appears to have low quality, the company’s name or image is not hurt. Companies often use different brand names for different quality lines within the same product class. Singapore Airlines named its regional air carrier SilkAir and its budget carrier Scoot in part to protect the equity of the Singapore Airlines brand.50 When Toyota introduced high-end luxury cars, it used Lexus.

ChaPter 9 ó Creating Brand equity

Brand extensions can be broadly classified into two general categories:47 In a line extension, the parent brand is used to brand a new product that targets a new market segment within a product category currently served by the parent brand, such as through new flavors, forms, colors, added ingredients, and package sizes. Many companies entering China have adapted to local tastes by introducing new flavors and new Frito-Lay extends its potato chip line by introducing flavors that adapt ingredients. Unilever in China has introduced jasmine iced tea, Colgate- to Asian tastes. Flavors include Peking duck, kimchi, and chili crab. Palmolive came up with jasmine soap, and Procter & Gamble even has jasmine Crest toothpaste. McDonald’s line of fast-food items includes red bean sundaes, while Pepsi’s Frito-Lay bags Peking duck-flavored potato chips. When Heinz found out that Chinese do not know much about oats but are familiar with whitebait, which is traditionally fed to Chinese babies, it extended its product line by adding a whitebait-flavored oatmeal baby food. One reason for such line extensions when entering new markets is to reduce the amount of education needed. For instance, in the hair care market, the average shampoo product is a big purchase for many Chinese consumers. Hence, marketers such as Procter & Gamble use ingredients that are intuitive to people. P&G launched a ginseng version of its Rejoice shampoo, which shoppers think could improve their hair shine over time just as ginseng supposedly heals the body with repeated use.48

Hello Kitty has been licensed to many products including credit cards, toasters, purses, confectionery, and UNO card games.

2.

Corporate umbrella or company brand name—This policy is followed by Hitachi. A blanket family name also has advantages. Development cost is less because there is no need for “name” research or heavy advertising expenditures to create brand-name recognition. Further, sales of the new product are likely to be strong if the manufacturer’s name is good. Moreover, the tendency that Asians like to know whom they buy from supports this approach (as well as the use of corporate names with individual product names). Hence, family and corporate brands are more evident in Asia than in the West. Kao markets everything from face-packs to detergents under its own name. Even Procter & Gamble, which uses individual names for its products, inserts its corporate logo and slogan (“Making your life better”) at the end of its Asian ads to raise awareness of the company in the region.

3.

Corporate name combined with individual product names—This subbranding or hybrid branding policy is followed by Sony (Sony Bravia, Sony Walkman, Sony Vaio, Sony PlayStation), Honda, and Hewlett-Packard. The company name legitimizes, and the individual name individualizes, the new product.

House of Brands versus a Branded House The use of individual or separate family brand names has been referred to as a “house of brands” strategy, whereas the use of an umbrella corporate or company brand name has been referred to as a “branded house” strategy. These two branding strategies represent two ends of a brand relationship continuum. A subbrand strategy falls somewhere between, depending on which component of the subbrand receives more emphasis. With a branded house strategy, it is often useful to have a well-defined flagship product. A flagship product is one that best represents or embodies the brand as a whole to consumers. It often is the first product by which the brand gained fame, a widely accepted best-seller, or a highly admired or award-winning product.

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Flagship products play a key role in the brand portfolio in that marketing them can have short-term benefits (increased sales) as well as long-term benefits (improved brand equity for a range of products). Certain models play important flagship roles for car manufacturers. Besides generating the most sales, family sedans Toyota Camry and Honda Accord represent brand values that all cars from these manufacturers share. Two key components of a branding strategy are brand portfolios and brand extensions.

9.6.2 Brand Portfolios A brand can only be stretched so far. Multiple brands are often necessary to pursue multiple market segments. Any one brand is not viewed equally favorably by all the different market segments that the firm would like to target. Some other reasons for introducing multiple brands in a category include:51 1.

Increasing shelf presence and retailer dependence in the store.

2.

Attracting consumers seeking variety who may otherwise have switched to another brand.

3.

Increasing internal competition within the firm.

4.

Yielding economies of scale in advertising, sales, merchandising, and physical distribution.

The brand portfolio is the set of all brands and brand lines a particular firm offers for sale to buyers in a particular category. Different brands may be designed and marketed to appeal to different market segments. Starwood Hotels & Resorts—One of the leading hotel and leisure companies in the world, Starwood Hotels & Resorts Worldwide, has 850 properties in more than 95 countries and 145,000 employees at its owned and managed properties. In its rebranding attempt to go “beyond beds,” Starwood has differentiated its hotels along emotional, experiential lines. Its hotel and call center operators convey different experiences for the firm’s different chains, as does the firm’s advertising. This strategy emerged from a major 18-month positioning project to find positions for the portfolio of brands that would establish an emotional connection with consumers. Consumer research suggested these positions for some of the brands:52

Sheraton. With the tagline “You don’t stay here, you belong,” Sheraton—the largest brand—is about warm, comforting, and casual. Its core value centers on “connections,” an image aided by the hotel’s alliance with Yahoo!, which cofounded the Yahoo! Link@Sheraton lobby kiosks and cyber cafés. Four Points by Sheraton. For the self-sufficient traveler, Four Points strives to be honest, uncomplicated, and comfortable. The brand is all about providing a high level of comfort and little indulgences like free high-speed Internet access and bottled water. Its ads feature apple pies and talk about providing guests with “the comforts of home.” W. With a brand personality defined as flirty, for the insider, and an escape, W offers guests unique experiences around the warmth of cool.

The hallmark of an optimal brand portfolio is the ability of each brand in it to maximize equity in combination with all the other brands in it. Marketers generally need to trade off market coverage with costs and profitability. If they can increase profits by dropping brands, a portfolio is too big; if they can increase profits by adding brands, it is not big enough. The basic principle in designing a brand portfolio is to maximize market coverage, so that no potential customers are being ignored, but to minimize brand overlap, so that brands are not competing for customer approval. Each brand should be clearly differentiated and appealing to a sizable enough marketing segment to justify its marketing and production costs.53 Marketers carefully monitor brand portfolios over time to identify weak brands and kill unprofitable ones.54 Brand lines with poorly differentiated brands are likely to be characterized by much cannibalization and require pruning.55 Investors can choose among thousands of financial plans. Students can choose among hundreds of business schools. For the seller, this spells hypercompetition. For the buyer, it may mean too much choice. Brands can also play a number of specific roles—flankers, cash cows, low-end entry level, and high-end prestige—as part of a portfolio.

Flankers Flanker or “fighter” brands are positioned with respect to competitors’ brands so that more important (and more profitable) flagship brands can retain their desired positioning. For example, Singapore Airlines launched Scoot to counter competition in the budget airline market. In designing these fighter brands, marketers must walk a fine line. Fighter brands must not be so attractive that they take sales away from their higher-priced comparison brands or referents. At the same time, if fighter brands are seen as connected to other brands in the portfolio in any way (e.g., by virtue of a common branding strategy), then fighter brands must not be designed so cheaply that they reflect poorly on these other brands.

Cash Cows

Scoot was launched as a fighter brand for Singapore Airlines to compete with the medium- to long-haul low-cost carriers.

Some brands may be kept around despite dwindling sales because they still manage to hold on to a sufficient number of customers and maintain their profitability with virtually no marketing support. These “cash cow” brands can be effectively “milked” by capitalizing on their reservoir of existing brand equity. For example, despite the fact that technological advances have moved much of its market to the newer Mach III brand of razors, Gillette still sells the older Trac II, Atra, and Sensor brands. Because withdrawing these brands may not necessarily result in customers switching to another Gillette brand, it may be more profitable for Gillette to keep them in its brand portfolio for razor blades.

ChaPter 9 ó Creating Brand equity

Westin. Westin’s emphasis on “personal, instinctive, and renewal” has led to a new sensory welcome featuring a white tea scent, signature music and lighting, and refreshing towels. Each room features Westin’s own “Heavenly Beds,” sold exclusively in the retail market through Nordstrom, further enhancing the brand’s upscale image.

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Low-End Entry-level The role of a relatively low-priced brand in the brand portfolio is often to attract customers to the brand franchise. Retailers like to feature these “traffic builders” because they are able to “trade up” customers to a higher-priced brand. Toyota’s Scion, with its quirky design and low prices, has a very specific target: people in their early 30s or under. Its specific marketing mission is to capture buyers who have not purchased anything from Toyota. As the youngest average customers in the industry, three-quarters of Scion drivers are first-time Toyota buyers.

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Toyota Scion plays an important role as an entry level offering for the entire Toyota product line.

High-End Prestige The role of a relatively high-priced brand in the brand family often is to add prestige and credibility to the entire portfolio. Thus, Lexus’ prestige contributes to Toyota’s positive image.

9.6.3 Brand Extensions Many firms have decided to leverage their most valuable asset by introducing a host of new products under their strongest brand names. Most new products are in fact line extensions—typically 80 to 90 percent in any one year. Moreover, many of the most successful new products, as rated by various sources, are extensions (e.g., Microsoft Xbox video game system and Apple iPad tablet). Nevertheless, many new products are introduced each year as new brands (e.g., Mini automobiles).

Advantages of Brand Extensions Two main advantages of brand extensions are that they can facilitate new product acceptance, as well as provide positive feedback to the parent brand and company.

Improved Odds of New-Product Success Consumers can make inferences and form expectations of the likely composition and performance of a new product based on what they already know about the parent brand itself and the extent to which they feel this information is relevant to the new product.56 For example, when Sony introduced a new personal computer tailored to multimedia applications, Vaio, consumers may have been more likely to feel comfortable with its anticipated performance because of their experience with and knowledge of other Sony products. By setting up positive expectations, extensions reduce risk.57 Because of the potentially increased consumer demand resulting from introducing a new product as an extension, it also

may be easier to convince retailers to stock and promote a brand extension. From a marketing communications perspective, an introductory campaign for an extension does not have to create awareness of both the brand and the new product but instead can concentrate on the new product itself.58 Extensions can thus result in reduced costs in the introductory launch campaign. They also can avoid the difficulty—and expense—of coming up with a new name. Extensions allow for packaging and labeling efficiencies. Similar or virtually identical packages and labels for extensions can result in lower production costs and, if coordinated properly, more prominence in the retail store by creating a “billboard” effect. By offering consumers a portfolio of brand variants within a product category, consumers who need a change—because of boredom, satiation, or any other reason—can switch to a different product type without having to leave the brand family.

Positive Feedback Effects

Line extensions can renew interest and liking for the brand and benefit the parent brand by expanding market coverage. Kimberly-Clark’s Kleenex unit has a goal of getting facial tissue in every room of the home. This philosophy has led to a wide variety of Kleenex facial tissues and packaging, including scented, ultrasoft, and lotion-impregnated tissues. Nikon has successfully extended its leadership in camera lenses to eyewear lenses. One benefit of a successful extension is that it may also serve as the basis for subsequent extensions. When Billabong established its brand credibility with the young surfing community as a designer and producer of quality surf apparel, its success permitted it to extend into other youth-oriented areas, such as snowboarding and skateboarding.

Disadvantages of Brand Extensions On the downside, line extensions may cause the brand name not to be as strongly identified with any one product.60 Al Ries and Jack Trout call this the “line-extension trap.”61 By linking its brand to mainstream food products such as mashed potatoes, powdered milk, soups, and beverages, Cadbury ran the risk of losing its more specific meaning as a chocolates and candy brand.62 Brand dilution occurs when consumers no longer associate a brand with a specific product or highly similar products and start thinking less of the brand. If a firm launches extensions consumers deem inappropriate, they may question the integrity and competence of the brand. Different varieties of line extensions may confuse and perhaps even frustrate consumers: which version of the product is the “right one” for them? As a result, they may reject new extensions for “tried and true” favorites or all-purpose versions. Retailers have to reject many new products and brands because they do not have the shelf or display space for them. The worst possible scenario with an extension is that it not only fails, but also harms the parent brand image in the process. Fortunately, such events are rare. “Marketing failures,” where insufficient consumers were attracted to a brand, are typically much less damaging than “product failures,” where the brand fundamentally fails to live up to its promise. Even then, product failures dilute brand equity only when the extension is seen as very similar to the parent brand. Even if sales of a brand extension are high and meet targets, it is possible that this revenue may have resulted from consumers switching to the extension from existing product offerings of the parent brand—in effect cannibalizing the parent brand. Intra-brand shifts in sales may not necessarily be so undesirable, as they can be thought of as a form of preemptive cannibalization. In other words, consumers might have switched to a competing brand instead of the line extension if it had not been introduced into the category. Tide laundry detergent maintains its same market share because of the sales contributions of the various line extensions (scented and unscented powder, tablet, liquid, and other forms). One easily overlooked disadvantage to brand extensions is that by introducing a new product as a brand extension, the firm forgoes the chance to create a new brand with its own unique image and equity. Consider the advantages to Disney of having introduced more adultoriented Touchstone films; and to Levi’s of having introduced casual Dockers pants.

ChaPter 9 ó Creating Brand equity

Besides facilitating the acceptance of new products, brand extensions can also provide feedback benefits.59 They can help clarify the meaning of a brand and its core brand values or improve consumer perceptions of the credibility of the company behind the extension.

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Success Characteristics A potential new product extension for a brand must be judged by how effectively it leverages existing brand equity from the parent brand to the new product, as well as how effectively the extension, in turn, contributes to the equity of the parent brand.63 Crest White Strips leveraged the strong reputation of Crest and dental care to provide reassurance in the teeth-whitening arena, while also reinforcing its dental authority image. Marketers should ask a number of questions in judging the potential success of an extension.64 Does the parent brand have strong equity? Is there a strong basis of fit? Will the extension have the optimal points-of-parity and points-of-difference? How can marketing programs enhance extension equity? What implications will the extension have for parent brand equity and profitability? How should feedback effects best be managed? To help answer these questions, Table 9.5 offers a sample scorecard with specific weights and dimensions that users can adjust for each application. Table 9.6 lists a number of academic research findings on brand extensions.65 One major mistake in evaluating extension opportunities is failing to take all of consumers’ brand knowledge structures into account, and focusing on one or two brand associations as a potential basis of fit.

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BIC—The French company Société Bic, by emphasizing inexpensive, disposable products, was able to create markets for nonrefillable ballpoint pens in the late 1950s, disposable cigarette lighters in the early 1970s, and disposable razors in the early 1980s. It unsuccessfully tried the same strategy in marketing Bic perfumes in the United States and Europe in 1989. The perfumes—two for women (“Nuit” and “Jour”) and two for men (“Bic for Men” and “Bic Sport for Men”)—were packaged in quarter-ounce glass spray bottles that looked like fat cigarette lighters and sold for $5 each. The products were displayed on racks at checkout counters throughout Bic’s extensive distribution channels. At the time, a Bic spokeswoman described the new products as extensions of the Bic heritage—“high quality at affordable prices, convenient to purchase, and convenient to use.” The brand extension was launched with a $20 million advertising and promotion campaign containing images of stylish people enjoying themselves with the perfume and using the tagline “Paris In Your Pocket.” Nevertheless, Bic was unable to overcome its lack of cachet and negative image associations, and the extension was a failure.66

Table 9.5 Brand Extendability Score Card Allocate points according to how well the new product concept rates on the specific dimensions in the following areas: Consumer Perspectives: Desirability 10 pts. _____Product category appeal (size,growth potential) 10 pts. _____Equity transfer (perceived brand fit) 5 pts. _____Perceived consumer target fit Company Perspectives: Deliverability 10 pts. _____Asset leverage (product technology,organizational skills,marketing effectiveness via channels and communications) 10 pts. _____Profit potential 5 pts. _____Launch feasibility

Competitive Perspectives: Differentiability 10 pts. _____Comparative appeal (many advantages; few disadvantages) 10 pts. _____Competitive response (likelihood; immunity or invulnerability from) 5 pts. _____Legal/regulatory/institutional barriers Brand Perspectives: Equity Feedback 10 pts. _____Strengthens parent brand equity 10 pts. _____Facilitates additional brand extension opportunities 5 pts. _____Improves asset base TOTAL _____ points

High-quality brands stretch farther than average-quality brands, although both types of brands have boundaries.

ChaPter 9 ó Creating Brand equity

Table 9.6 Research Insights on Brand Extensions

A brand that is seen as prototypical of a product category can be difficult to extend outside the category.

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Successful brand extensions occur when the parent brand is seen as having favorable associations and there is a perception of fit between the parent brand and the extension product. There are many bases of fit: product-related attributes and benefits, as well as nonproductrelated attributes and benefits related to common usage situations or user types. Depending on consumer knowledge of the categories, perceptions of fit may be based on technical or manufacturing commonalties or more surface considerations such as necessary or situational complementarity.

Concrete attribute associations tend to be more difficult to extend than abstract benefit associations. Consumers may transfer associations that are positive in the original product class but become negative in the extension context. Consumers may infer negative associations about an extension, perhaps even based on other inferred positive associations. It can be difficult to extend into a product class that is seen as easy to make. A successful extension can not only contribute to the parent brand image but also enable a brand to be extended even farther. An unsuccessful extension hurts the parent brand only when there is a strong basis of fit between the two. An unsuccessful extension does not prevent a firm from “backtracking”and introducing a more similar extension. Vertical extensions can be difficult and often require sub-branding strategies. The most effective advertising strategy for an extension emphasizes information about the extension (rather than reminders about the parent brand). Source: Kevin Lane Keller, Strategic Brand Management, 4th ed. (Upper Saddle River, NJ: Prentice Hall, 2013). Reproduced by permission of Pearson Education, Inc., Upper Saddle River, NJ.

9.7 Customer Equity Brand equity should be a top priority for any organization. Marketing Memo: Twenty-FirstCentury Branding offers some contemporary perspectives on enduring brand leadership. Finally, we can relate brand equity to one other important marketing concept, customer equity. The aim of customer relationship management (CRM) is to produce high customer

equity.67 Although we can calculate it in different ways, one definition of customer equity is “the sum of lifetime values of all customers.”68 As Chapter 5 reviewed, customer lifetime value is affected by revenue and cost considerations related to customer acquisition, retention, and cross-selling.69 Acquisition is affected by the number of prospects, the acquisition probability of a prospect, and acquisition spending per prospect. Retention is influenced by the retention rate and retention spending level. Add-on spending is a function of the efficiency of add-on selling, the number of add-on selling offers given to existing customers, and the response rate to new offers. The brand equity and customer equity perspectives certainly share many common themes.70 Both emphasize the importance of customer loyalty and the notion that value is created by having as many customers as possible pay as high a price as possible. In practice, however, the two perspectives emphasize different things. The customer equity perspective focuses on bottom-line financial value. Its clear benefit is its quantifiable measures of financial performance. But it offers limited guidance for go-to-market strategies. It largely ignores some of the important advantages of creating a strong brand, such as the ability to attract higherquality employees, elicit stronger support from channel and supply chain partners, and create growth opportunities through line and category extensions and licensing. The customer equity approach can overlook the “option value” of brands and their potential to affect future revenues and costs. It does not always fully account for competitive moves and countermoves, or for social network effects, word-of-mouth, and customer-to-customer recommendations.

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Brand equity, on the other hand, tends to emphasize strategic issues in managing brands and creating and leveraging brand awareness and image with customers. It provides much practical guidance for specific marketing activities. With a focus on brands, however, managers do not always develop detailed customer analyses in terms of the brand equity they achieve or the resulting long-term profitability they create.71 Brand equity approaches could benefit from sharper segmentation schemes afforded by customer-level analyses and more consideration of how to develop personalized, customized marketing programs for individual customers—whether individuals or organizations such as retailers. There are generally fewer financial considerations put into play with brand equity than with customer equity. Nevertheless, both brand equity and customer equity matter. There are no brands without customers and no customers without brands. Brands serve as the “bait” that retailers and other channel intermediaries use to attract customers from whom they extract value. Customers serve as the tangible profit engine for brands to monetize their brand value.

MARKETING MEMO

21st-CenTury BrAnDIng

An early pioneer in the study of branding, and still active as a brand strategist, David Aaker has much experience with what makes brands successful. Here are his top ten “to do tasks” for marketers—what you need to know to excel at brand building. 1. Treat brands as assets. Brand strategy needs to be developed in tandem with business strategy. 2. Show the strategic payoff of brand building. Show how the success of a business strategy depended on brand assets. 3. Recognize the richness of brands. Go beyond the three-word phrase. Although two to four associations often have the most import, understand the full range of associations that are cued by the brand. 4. Look beyond the functional benefits. Emotional and selfexpressive benefits and brand personality can provide a basis for sustainable differentiation and a deep customer relationship.

5. Consider organizational associations: people, programs, values, strategies, and a heritage that are unique to the company and meaningful to customers. 6. Look to role models. What other companies have been successful with similar branding efforts? Are there any people or programs internal to the firm that exemplify desired characteristics for the brand? 7. Understand the brand relationship spectrum and the right degree of separation for new offerings. 8. Look for branded differentiators. Even functional benefits, if copied, can remain distinctive if given a strong brand identify initially. 9. Use branded energizers; that is, a person or program you can associate with your brand. 10. Win the brand relevance battle; make your competitors seem irrelevant.

Sources: “David Aaker’s Top 10 Brand Precepts,” white paper, www.prophet.com. For more insights into branding best practices, see Allen Adamson, The Edge: 50 Tips from Brands That Lead (New York: Palgrave Macmillan, 2013).

Summary 9.1 HOW DOES BRANDING WORK?

How can Asian companies break into global markets? Asian companies have to overcome the parochialism, or narrow-mindedness, in their market outlook – they have to transcend the mind-set constraints of operating in their country. Asian brands have to rework their corporate culture to adopt a more global perspective. They have to maintain their distinctive Asian identity even in the global market. They must transcend the cut-price, mediocre image of their products. They must think like a global company despite being small.

What is the Brand Asset Valuator (BAV)? There are four key components to measure brand equity: Differentiation, relevance, esteem, and knowledge. Brand strength, an indicator of the future value of a brand, is determined by differentiation and relevance; brand stature, the past performance of a brand, is determined by esteem and knowledge. See Figure A Brand Asset Valuator Model.

ENERGIZED DIFFERENTIATION The brand’s point of difference Relates to margins and cultural currency

307 RELEVANCE How appropriate the brand is to you Relates to consideration and trial

ESTEEM How you regard the brand Relates to perceptions of quality and loyalty

What is branding? Branding is the backing of a product with the power of a brand. How do companies brand their products? Branding creates the impression of differences in a product compared to competitors’. Branding is mostly the creation of attributes and benefits to do with the actual product. Branding can also be non-product related, achieved by creating competitive advantages to appeal to customer motivations and desires.

9.2 DEFINING BRAND EQUITY

It is the added value attributed to products and services.

ChaPter 9 ó Creating Brand equity

What is the role of brands? Brands assign responsibility to a company for its products; consumers can link a product and its manufacturer together. Brands simplify decision making and reduce the risk of dissatisfaction for consumers. Brands imply a level of quality so consumers know what to expect when buying from that brand in the future – this is a form of comparative advantage. A brand acts as legal protection for its company for the distinctive features of its products.

What is customer-based brand equity? It is the effect on brand marketing that possessing knowledge based on customer responses. It can be both positive and negative. It arises from differences in consumer responses as a result of consumer knowledge about a brand. Customers manifest their impressions of a brand through perceptions, preferences and behavior toward the marketing of the brand.

BRAND STRENGTH Leading Indicator Future Growth Value

KNOWLEDGE An intimate understanding of the brand Relates to awareness and consumer experience

BRAND STATURE Current Indicator Current Operating Value

Figure A Brand Asset Valuator Model

What is the BRANDZ model? Central to this model is the BrandDynamics pyramid, where five levels of brand building are used to gauge the strength of a brand. In descending order of importance, the levels are Presence, Relevance, Performance, Advantage, and Bonding.

See Figure B Brand Dynamics Pyramid. Strong relationship/ High share of category expenditure

Bonding

Nothing else beats it Does it offer something better than the others?

Advantage

Performance

Can it deliver? Does it offer me something?

Relevance

Do I know about it?

Presence

Weak relationship/ Low share of category expenditure

Figure B Brand Dynamics Pyramid

What is the Brand Resonance Model? This model also uses the pyramid concept, but it emphasizes the codependence of the rational and the emotional route to branding as well. See Figure C Brand Resonance Pyramid. Stages of Brand Development

Brand

Brand Building Blocks

Branding Objective at Each Stage

4. Relationships = What about you and me?

Intense, active loyalty Resonance

3. Response = What about you?

2. Meaning = What are you?

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1. Identity = Who are you?

Judgments

Feelings

Performance

Imagery

Salience

Positive, accessible reactions

Points-of-parity & difference

Deep, broad brand awareness

Figure C Brand Resonance Pyramid

Part 4 ó Building Strong Brands

Memorability can be enhanced by using cultural references in the advertisements or design of the name or logo.

9.3 BUILDING BRAND EQUITY

What are brand elements? They are trademarkable qualities that consumers use to identify and differentiate the brand. What are the six criteria that marketers use to select a brand element? Three criteria fall under brand building: the brand element must be memorable, meaningful, and likeable. Three criteria are concerned with how the element can be preserved and leveraged upon: the brand element must be transferable, adaptable, and protectable. How can marketers make a brand element memorable? In Asia, choosing a brand name that is easily pronounceable will help, especially in non-English speaking regions.

How can marketers make a brand element meaningful? Consumers will find qualities in a product that mirror their values and lifestyles. Company should avoid translations of their names that have lewd, vulgar, or unlucky connotations to them. Regions with multiple dialects have different associations related to each dialect, ranging from traditional to modern, and even to more feminine distinctions. How can marketers make a brand element protectable? Companies should secure the legal rights to their names or their translations before other companies trademark them. Some companies have developed products that have become synonymous with the entire product category, for example Scotch Tape and Kleenex. To overcome poor consumer awareness and associations with low quality, Asian companies have bought over other brands that are already popular abroad. How do marketers develop brand elements? Brand elements that are memorable and meaningful reduce the need for comprehensive marketing to establish link associations and product awareness. Logos and slogans can also be used to communicate the brand’s values and business nature. How are holistic marketing activities designed? Customers know a brand through a range of contacts and touch points. A brand contact is any information-bearing experience a customer has with the brand. What is internal branding? It comprises activities that educate and align employees to the brand’s philosophy. Brand bonding occurs when consumers feel that the company is delivering on its brand promise.

Companies follow these principles to practice internal branding: choosing the right moment for internal campaigns, aligning internal and external marketing, and generating pride and morale among their employees. What is a brand community? It is a group of consumers and employees whose actions and identification focus around the brand. A strong brand community will lead to a more loyal customer base. Their activities can somewhat replace publicity and marketing programs that the firm would otherwise have to engage in.

9.4 MEASURING BRAND EQUITY

What is a brand audit? It is a consumer-oriented series of procedures to assess the status of the brand as well as discover means to leverage it and improve on it. It is done when marketers contemplate strategic shifts in marketing plans. What are brand tracking studies? They are quantitative data that provide marketers with a constant flow of information regarding their brand equity and marketing programs. What is brand valuation? It is the total financial value of a brand. See Figure D Brand Value Chain. VALUE STAGES

Marketing Program Investment

Customer Mind-set

- Product - Communications - Trade - Employee - Other

MULTIPLIERS

Brand Performance

- Awareness - Associations - Attitudes - Attachment - Activity

Shareholder Value

- Price premiums - Price elasticities - Market share - Expansion success - Cost structure - Profitability

Program Multiplier

Customer Multiplier

- Clarity - Relevance - Distinctiveness - Consistency

- Competitive reactions - Channel support - Customer size & profile

Figure D Brand Value Chain

- Stock price - P/E ratio - Market capitalization

Market Multiplier

- Market dynamics - Growth potential - Risk profile - Brand contribution

What is brand reinforcement? It is the strengthening of brand equity through marketing actions that promote the brand’s core benefits, needs satisfied, and why the brand is superior to competitors. It involves continuously developing new products and marketing strategies. What is brand revitalization? It involves the brand returning to its roots or developing a new source of brand equity. A brand’s flagging sales can be a result of poor marketing programs or unfulfilled promises.

9.6 DEVISING A BRANDING STRATEGY

What are some terms regarding branding strategy? A brand extension is a spinoff of a brand from an established one. A subbrand is a brand within an existing one. A parent brand is the brand that the subbrand or brand extension derives itself from. A master or family brand is a parent brand associated with multiple products. What are the two categories of brand extensions? In a line extension, the parent brand introduces a new product within an existing category. In a category extension, the parent brand branches out into a new product category. What are three general branding strategies? A firm could consider branding its different products under individual or separate family brand names. A firm could also use a corporate umbrella or company brand name for all products across the board. A firm could combine any two of its brand names to form a subbrand—corporate name combined with individual product names. What is a brand portfolio? It is a set of all brand and brand lines offered by a certain firm in a particular market segment.

ChaPter 9 ó Creating Brand equity

What is the purpose of leveraging secondary associations? Brand equity can be created by linking the brand to other information that holds certain meaning for consumers. Source factors that can be linked are places, people, intangible events or causes, and other brands.

9.5 MANAGING BRAND EQUITY

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It achieves the goals of increasing shelf presence, attracting variety-seeking consumers, increasing internal competition, and reaping economies of scale.

Brand extensions can refine the corporate meaning of the parent brand, and rejuvenate interest and loyalty in the parent brand.

What are some roles brands can play in a brand portfolio? A flanker protects the market share of its more prestigious or profitable sister brands. A cash cow is able to maintain its profitability due to high brand equity, thus not requiring much marketing and could potentially damage profits if removed from the shelves. A low-end entry-level brand aims to attract new customers to the franchise in the hopes of them upgrading to more profitable products in the future. A high-end prestige brand lends credibility to the entire portfolio.

What are the disadvantages of brand extensions? Brand dilution could occur, where consumers no longer link the brand to a set of products. Unsuccessful, or worse, harmful, products will damage brand equity. Brand extensions may effectively “cannibalize” profits from the parent brand.

What are the advantages of brand extensions? New products have a better chance of success riding on the brand equity of the parent brand; advertising can omit promoting the brand but instead merely focus on the product.

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9.7 CUSTOMER EQUITY

What is customer equity? It is the sum of all customers’ lifetime values. Customer lifetime value depends on revenue, the costs of customer acquisition, retention, and add-on spending. It is the quantitative measure of a firm’s financial performance, ignoring qualitative aspects that brand equity considers.

Applications Marketing Debate—Are Line Extensions Good or Bad? Some critics vigorously denounce the practice of brand extensions, as they feel that too often companies lose focus and consumers become confused. Other experts maintain that brand extensions are a critical growth strategy and source of revenue for the firm. Take a position: Brand extensions can endanger brands versus Brand extensions are an important brand growth strategy.

Marketing Discussion How can you relate the different models of brand equity presented in the chapter? How are they similar? How are they different? Can you construct a brand equity model that incorporates the best aspects of each model?

Marketing Lesson MALAYSIAN AIRLINES

Table 1 Financial Performance and Traffic Load Indicators 31 Dec 2013

31 Dec 2012

31 Dec 2011

Financials Total Revenue

RM’000

15,121,204

13,756,411

13,901,421

Total Expenditure

RM’000

(16,314,775)

(14,162,738)

(16,485,693)

Taxation

RM’000

(16,051)

(5,937)

(8,441)

(Loss)/Profit after Tax

RM’000

(1,168,839)

(430,738)

(2,521,325)

20,733

16,651

17,046

48,323,213

38,144,029

41,645,340

Traffic Passenger Carried

‘000

Passenger Carried

‘000 Pax KM

Passenger Load Factor

74.5

74.5

Cargo Carried

‘000 TKM

1,936,066

1,889,058

2,063,255

Mail Carried

‘000 TKM

69,305

8,739

8,908

Overall Load Carried

‘000 TKM

6,299,988

5,312,774

5,945,441

72.9

75.5

Overall Load Factor

%

%

80.6

76.7

Source: Malaysian Airline System Berhad Annual Report 2013, performance highlights, pp. 127.

ChaPter 9 ó Creating Brand equity

Christoph Mueller, the newly appointed CEO of Malaysian Airlines (MAS), heaved a sigh as he looked through the copious amount of data concerning the airline’s financial and traffic information as well as reports on the two aviation events that led to a disastrous 2014 for the airline and the industry. known for having turned around the struggling Irish national carrier Aer Lingus after taking the helm as CEO in 2009, Mueller was the man of choice to rebrand and rebuild the carrier for Khazana Nasional Berhad, the parent company of MAS. MAS took off in 1937 as Malayan Airways Limited. It was founded as a joint initiative by the Ocean Steamship Company of Liverpool, the Straits Steamship of Singapore and Imperial Airways to fly between Penang and Singapore. It became a bi-national airline in 1965, following Singapore’s separation from Malaysia, and was renamed Malaysia-Singapore Airlines. However, it went

through yet another name change when the airline was split into two for the respective nations in 1972, giving birth to the Malaysian Airlines System Co. The corporate vision for MAS is to be the “Preferred Premium Carrier.” Indeed, this vision guided the national airlines to its prime, clinching it a spot in the list of 5-star airlines compiled by Skytrax five times since 2005. However, with the rise of budget carriers providing nofrills services in the region over the last decade, MAS faced much competition and has struggled to stay afloat financially in recent years. In 2015, the airline was reported to have been losing close to $1 million per day for the past three years. Table 1 shows the airline having made losses in billions of ringgit in recent years. Southeast Asia has become one of the fastest-growing aviation markets in the past decade with the influx of budget carriers such as AirAsia, Scoot, and Tigerair. Many of these entrants introduced new and competitive short-haul routes, resulting in overcapacity, drying up any profit margins that existing carriers had within the short haul market. As reported by the Center for Aviation in October 2014, MAS had only a 7 percent Southeast Asia capacity share, as opposed to the Lion group (Malindo Air, Thai Lion Air, Wings Air), which had 15 percent, and the AirAsia group, which also held a 15 percent share. At that time, Southeast Asia was also the only region that had as many airlines on order as its current fleet. According to Airlineleader, a strategy journal for airline CEOs by the Center for Aviation, only 4 out of the 17 airlines in Southeast Asia reported operating profits in the first half of 2014. It was no surprise that MAS’s profit

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margins had been squeezed over the years, as seen in Table 1, against the tide of regional and Gulf-state airlines. In 2014, the airline was in dire financial straits when the tragedies of two of its flights, MH370 and MH17, struck with a short span of four months. In March of that year, MH370, an international passenger flight carrying 227 passengers and 12 crew members from Kuala Lumpur to Beijing, lost contact with air traffic control two hours after takeoff. The passengers represented 15 nationalities. Although there have been aviation crashes before, it was almost unheard of for a Boeing 777 to have disappeared without any trace. After a week-long search operation in the Gulf of Thailand that expanded to the South China Sea and the Andaman Sea, it was concluded that the plane had diverted from its original route plan. Despite the extensive search, costing as high as $100 million, no debris was found, fueling wild speculations of terrorism. The MH370 saga was made worse by what appeared to be either poor communication or lack of it between the management of the airline and the relatives of those who were on board the missing plane. Though the airline set up an immediate press conference within 7 hours to acknowledge the loss of contact with the flight, its communications over the following weeks appeared to be fragmented and conflicted with external sources. When the White House, released information that an additional search area was possibly being opened in the Indian Ocean on the basis of a new lead, indicating that the plane may have continued flying after communications was cut off, MAS responded by dismissing the report or declining to comment, only to agree with it a day or two later. Such communication blunders were seen again when British newspaper Daily Telegraph published a transcript of the final 54 minutes of communications between the cockpit of MH370 and Malaysian air control. The airline responded by claiming that it was inaccurate and that it was unable to release the transcript, as it was part of ongoing investigations. These conflicting pieces of information only exacerbated the carrier’s predicament by eroding consumer trust and its brand image in the eyes of the public. Currently, the Boeing 777 is believed to have crashed somewhere in the far ends of the Indian Ocean and has yet to be found. Other regional airlines such as Garuda Indonesia and Korean Air have been plagued by aviation disasters in the past but recovered from them; however, lightning struck twice for MAS with the MH17 crisis, a mere four months after the MH370 incident. MH17, carrying 298 passengers and crew, was flying over the war-torn fields of Ukraine when Pro-Russian separatist insurgents shot it out of the sky. Almost 70 percent of the passengers were citizens of the Netherlands. When Ukrainian authorities announced that the plane was shot

down, MAS responded that it was unable to verify the cause of the tragedy and that it would do its best to bring any perpetrator to justice. Such messages cast doubt over the airline’s capability to handle the crisis, leading to erosion in consumer trust. Even if the carrier had withheld information to not jeopardize the integrity of its investigations, it often came across as being not in control of those investigations. Although MAS was the victim of a disaster that was beyond their control, the ghost of the MH370 saga a few months earlier and consumers’ shaken trust resulted in plummeting confidence in the brand. According to Mohsin Aziz, an aviation analyst at Maybank, “There’s no historical precedent for an airline company to have suffered two such major disasters within such a short span of time.” The immediate effects of the two disasters were seen as the passenger numbers of the airline dropped significantly in the following months. The airline flagged a 3.1 percent drop in passengers in June 2014 from June 2013. Customers took to social media and posted photos of flights with many empty rows. MAS stock prices plunged by 13 percent after the MH17 tragedy. The stock prices of other airlines also declined. Overall, MAS was said to have lost $148 million in the first quarter of 2014. The loss included cancellations and delays of more than 30,000 bookings after the first disaster. MAS had a previous record of safety issues, with major incidents such as the crash of a Boeing 737-200 into a swamp on approach to Subang Airport in 1977; a crash resulting from one of its fleet overshooting the runway at Tawau Airport in 1995; and the instrumentation failure that caused the pilot of a Boeing 777-2H6ER to manually take control and make an emergency landing in 2005. The MH370 and MH17 disasters not only served as a final blow to the airline’s safety record and consumer confidence, but it also appeared to have resulted in a loss of confidence among its staff. Soon after the incident, 186 Malaysian Airlines flight crew members quit their positions between January and July. On the brink of financial bankruptcy and feeling from two tragedies over a short span, the quasi-state-owned airline appeared to be heading for a government bailout. With its reputation severely damaged, MAS had to address many hard-hitting questions from its stakeholders. Some felt that the airline needed to transform its entire business model to compete with the budget carriers, including a new discounted pricing structure to build volume. Others believed that rebranding was necessary. Branding makeovers such as name or logo changes had been done before. This can be seen in the outcome of the 1983 tragedy that involved Korean Air Lines, which subsequently renamed itself Korean Air and repainted its fleet from white to light blue. However, significant

and liabilities to the new company, only two-thirds of the original workforce was offered jobs with new conditions. This resulted in the biggest layoff in the corporate history of the nation as an estimated 6,000 employees were dismissed by the government-linked company. Through this “refreshing exercise,” Malaysian Airlines hoped to recruit “fresh blood” to rebuild the struggling airline. Despite the trying times and the turmoil the airline was in, Mueller remained optimistic about the airline’s future. Shortly after his appointment, he told the press, “We remain committed to serving you with our world-class Malaysian hospitality and look forward to welcoming you on board Malaysia Airlines.” He also set a 2017/2018 deadline to turn the company around and achieve breakeven. Looking forward, aggressive rebranding is needed to restore consumers’ confidence and faith in the carrier. It still faces tough competition from low-cost carriers such as AirAsia, AirAsia X, and Malindo, which operate only within Asia Pacific, and the presence of other international carriers such as Singapore Airlines, Air New Zealand, and Virgin Australia. Gulf carriers are also making their presence known in Southeast Asia via partnerships like Emirates with Qantas and Etihad with Virgin Australia, which only make the challenge harder for MAS. As Mueller went through the reports, he wondered whether rebranding by itself was sufficient for the airline.

ChaPter 9 ó Creating Brand equity

management or operational changes were probably needed in the case of MAS if it were to ever regain consumer trust and correct its service and safety records. With the need for immediate intervention, Khazana Nasiona Berhad set in motion a complete overhaul of the airline that consisted of shutting down MAS and transferring all its assets and liabilities to a brand new company, Malaysian Airlines Berhad (MAB). The overhaul also came with a much-needed change in leadership to restore public confidence. Christoph Mueller was the man of choice as he had a reputation for turning airlines around. When he was appointed, Mueller wasted no time getting down to business. He highlighted the need for “better accountability” within the company and outlined a ‘reset’ plan for the carrier, calling for major fleet downsizing and realignment of routes coupled with a sharper business model. He highlighted modifications to the existing fleet of MAS, such as its two A380 jumbo jets, which were chalking up costs due to insufficient demand. He also laid out key product quality improvements that MAS customers could expect in the future to raise the status quo of the carrier. These included refurbishing the business class seats, improving inflight entertainment, and updating the online booking systems and mobile applications. However, the privatization of MAS did not leave its 20,000 employees unscathed. In the transfer of assets

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Questions 1. Identify key areas in MAS’s marketing mix that led to its bankruptcy, and explain how they could have been better managed. 2. Given the stiff competition Malaysia Airlines faces from low-cost carriers and other international airlines, how should it position itself going forward? 3. Do you think rebranding is sufficient? Do you think consumers will have confidence in the new airline? 4. What are the possible avenues of growth for Malaysia Airlines in the upcoming years given the constraints it faces? Sources: Tony Dawber, “Missing Malaysia Airlines Flight: Safety Record of MAS Marred by a Series of Major Incidents,” Daily Mirror, www.mirror.co.uk, 12 March 2014; Malcolm Moore and Nick Allen, “Malaysia Airlines Flight MH370 Could Have Crashed in Indian Ocean, U.S. Says,” Daily Telegraph, www.telegraph. co.uk, 13 March 2014; “Missing Malaysia Airlines Plane: Timeline of Events on Flight MH370,” The Straits Times, 14 March 2014; “Malaysia Airlines MH17 Crash: What Happened to the Plane--A Timeline,” The Straits Times, 18 July 2014; Karl West, “Is There a Future for Malaysia Airlines after Flights MH370 and MH17,” The Guardian, 29 July 2014; “Malaysia: Twin Tragedies in Malaysian Airlines Pushed to the Edge,” Mena Report, 30 July 2014; Christian Edwards, “Rebranding Won’t Wash Malaysia Airline’s Woes away,” Philippines News Agency, 4 August 2014; Iris Dorbian, “Malaysian Airlines to Delist after $429 Million Buyout,” www.CFO.com, 9 August 2014; Joe Coscarelli, “No One Wants to Fly Malaysia Airlines Anymore, for Some Reason,” New York, www .nymag.com, 26 August 2014; Jessica Best, “Malaysia Airlines Flights Left with Rows of Empty Seats as Company Struggles after Disaster,” Daily Mirror, www.mirror.co.uk, 27 August 2014; “Malaysian Airlines Gets Overhaul,” Herald-Sun, 30 August 2014; “Southeast Asia: Turbulence in One of the World’s Hottest Emerging Markets,” Airline Leader, Issue 25, November 2014; Shaun Sim, “Is it Safe to Fly in Asia? After Air Asia Crash, Not Deterred from Traveling across Region by Plane,” International Business Times, 30 December 2014; “How Malaysia Airlines Can Salvage Its Brand,” Macau Daily Times, 24 April 2015; Mala Bhargav, “Blundering into Disaster,” www.BusinessWorld.in, 26 April 2015; “MAS to Lay Off Entire Workforce,” The Straits Times, 26 May 2015; Anita Gabriel, “MAS to Spring Biggest Layoff in Malaysia’s Corporate History,” The Business Times, 28 May 2015; Sumisha Naidu, “Malaysia Airlines Sends Out Termination Letters to 20,000 Staff,” ChannelNewsAsia, www.channelnewsasia.com, 1 June 2015; Sumisha Naidu, “Malaysia Airlines CEO Reveals Plan to Bring Carrier Back to Profitability,” ChannelNewsAsia, www.channelnewsasia.com, 1 June 2015; Pauline Ng, “Malaysia Airlines Is Technically Bankrupt,” The Business Times, 2 June 2015; www.malaysianairlines.com; Jon Ostrowo, Rory Jones, and Jason Ng, “Ukraine Crash Deals New Blow to Malaysian Airlines,” Wall Street Journal, 17 July 2014; Malaysian Airlines Annual Report, 2013.

Marketing Lesson McDONALD’S

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McDonald’s is the world’s leading hamburger fast-food chain, with over 32,000 restaurants in 118 countries. More than 75 percent of McDonald’s restaurants are owned and operated by franchisees, which decreases the risk associated with expansion and ensures long-term tenants for the company. McDonald’s serves 58 million people each day and promises a simple, easy, and enjoyable food experience for its customers. The history of the McDonald’s Corporation dates back to 1955 when Ray Kroc, a multimixer salesman, franchised a hamburger restaurant from the McDonald brothers, named it McDonald’s, and offered simple foods such as the famous 15-cent hamburger. Kroc helped design the building, which featured red and white sides and a single golden arch to attract local attention. Ten years later, 700 McDonald’s restaurants existed around the country, and the brand was on its way to becoming a household name. During the 1960s and 1970s, Kroc led McDonald’s growth domestically and internationally while pushing the importance of quality, service, cleanliness, and value (QSCV). The menu expanded to include the Big Mac, Quarter Pounder, Happy Meal, Filet-O-Fish, and breakfast items like the Egg McMuffin. Kroc also understood early on that his core audience consisted of children and families. Therefore, he focused McDonald’s advertising efforts at these groups and introduced Ronald McDonald in 1965 during a 60-second commercial. It was also during this time that McDonald’s created the Ronald McDonald House, which opened in 1974 to help children with leukemia. Since then, it has expanded into a global charity effort called Ronald McDonald House Charities that strives to improve children’s lives, health, and well-being through three major programs: Ronald McDonald House, Ronald McDonald Family Room, and Ronald McDonald Care Mobile. McDonald’s aggressively expanded overseas throughout the 1980s by adding locations throughout Europe, Asia, the Philippines, and Malaysia. This rapid expansion, however, led to many struggles during the 1990s and early 2000s. The company lost focus

and direction, expanding by as many as 2,000 new restaurants a year. New employees were not trained fast or well enough, all of which led to poor customer service and dirtier restaurants. New competitors popped up. Consumer tastes changed, and new products like pizza, the Arch Deluxe, and deli sandwiches failed to connect with consumers. Jim Skinner, McDonald’s chief executive explained, “We got distracted from the most important thing: hot, high-quality food at a great value at the speed and convenience of McDonald’s.” In 2003, McDonald’s implemented a strategic effort called the “Plan to Win.” The framework, which still exists today, helped McDonald’s restaurants refocus on offering a better, higher-quality consumer experience rather than a quick and cheap fast-food option. The Plan to Win “playbook” provided strategic insight on how to improve on the company’s 5 Ps—people, products, promotions, price, and place—yet allowed local restaurants to adapt to different environments and cultures. For example, McDonald’s introduced an egg, tomato, and pepper McPuff in China; an ebi Filet-O (shrimp burger), koroke burger (mashed potato and cabbage), and green-tea flavored milkshake in Japan; McAloo Tikki, a vegetarian burger, in India; McSpaghetti in the Philippines; bulgogi burger (pork in an onion sake marinade) in Korea; bubor ayam (chicken congee) in Malaysia; and kao fan (fried rice patties) in Taiwan. Some food changes that helped turn the company around included offering more chicken options as beef consumption started to decline. It responded to health trends and began offering premium salads as well as all-white-meat McNuggets. While many of the healthier options targeted moms and held a premium price, McDonald’s introduced the $1 menu at the same time, which targeted the lower-income bracket and teenagers. McDonald’s also launched a worldwide repackaging effort as a result of intense consumer research. The new packaging aimed to accomplish several tasks, including teaching consumers about McDonald’s health consciousness and building awareness of its use of locally grown produce. It included bold text and full-color photographs of real ingredients like potatoes on French fry packaging and vegetables, cheese, and cooking utensils on hamburger packaging. With competition intense in the mature markets, McDonald’s is looking at the emerging Asia region for its next phase of growth. Trailing behind KFC in China, where Chinese prefer chicken to beef, McDonald’s is adapting to consumer tastes by enhancing its chicken menu items. It also revamped its existing yellow-and-red décor stores into a more relaxed and stylish bistro design to target at the younger customers. Its focus on the youths is not lost in its communications. A recent campaign addressed Chinese’ concerns about food safety with a parody on WikiLeaks.

Its communications emphasized its ethical and healthy treatment of chickens. The campaign, which plays on the Chinese term for WikiLeaks to create “Chickileaks,” is rolled out on television, a microsite, and online videos in partnership with popular video-sharing site Tudou. McDonald’s also launched a 150 million-yuan Hamburger University in China, its first in the country, to educate local employees not only on QSCV but also on developing better tasting and locally inspired menu items.

In India, McDonald’s has even gone beyond adapting its menu to the largely vegetarian-based market. Its managing director has even gone undercover to assess the performance of its stores. Vikram Bakshi visits each store incognito and observes the crowd and the service. He also checks the toilets for cleanliness, one of McDonald’s core values.

Questions

Sources: Andrew Martin, “At McDonald’s, the Happiest Meal Is Hot Profits,” New York Times, 10 January 2009; Janet Adamy, “McDonald’s Seeks Way to Keep Sizzling,” Wall Street Journal, 10 March 2009; Matt Vella, “McDonald’s Thinks About the Box,” BusinessWeek, 8 December 2008; Jessica Wohl, “McDonald’s CEO: Tough Economy, but Some ‘Thawing,’” Reuters, 17 April 2009; “McDonald’s Rolls Out New Generation of Global Packaging,” McDonald’s press release; “The Hotlist: 10 Unusual Items on McDonald’s Menus Around the World,” www.dailymail.co.uk, 23 January 2009; Jerry Clode, “McDonald’s Exposes ‘Chickileaks’ in China,” Advertising Age, 3 April 2011; Gao Changxin, “Golden Arches Cooks Up Long-term Strategy,” China Daily, 28 April 2011; Malini Goyal, “McDonald’s MD Vikram Bakshi Goes Incognito to Find Out Performance of Outlets,” The Economic Times, 27 March 2011.

ChaPter 9 ó Creating Brand equity

1. What are McDonald’s core brand values? Have these changed over the years? 2. McDonald’s did very well during the recession in the late 2000s. With the world economy turning around for the better and then tottering, should McDonald’s change its strategy? Why or why not? 3. What risks do you feel McDonald’s will face going forward?

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PART 4 Building Strong Brands

10 C H A P T E R

Crafting the Brand Positioning No company can win if its products and offerings resemble every other product and offering. As part of the strategic brand management process, each company and offering must represent a distinctive big idea in the mind of the target market.

I

KEA, the Swedish furniture retailer, is ranked among Forbes’s Top 50 World’s Most Valuable Brands. Its philosophy “to create a better everyday life for the many people” resonates with consumers worldwide. This philosophy is translated in different ways in the 26 countries IKEA is in. In Japan, for instance, IKEA did not fare well when it first entered because its do-ityourself concept was not one that the Japanese would consider important for a better everyday life. It learned its lesson. Its second foray translated its positioning more effectively by showing how IKEA furniture can fit into tiny Japanese homes with compact kitchens, advertising the space-saving options that Japanese homemakers look for. In China, IKEA’s positioning of creating a better life whetted the growing Chinese appetite to be homeproud. While IKEA offers the same product range, it

adapts its store layout, merchandise presentation, home solutions, and prices. The Chinese tend to spend most on their living rooms as this is the part of the home where they can “show off” and entertain. Chinese living rooms also usually have a dining table. As such, living room merchandise and dining table items feature prominently in Chinese IKEA stores. In Europe, IKEA is positioned as offering good quality and stylish furniture at prices low enough that almost everyone can afford them, but the lower income and availability of cheap local furniture in China makes IKEA prices unaffordable for many. To reduce prices, IKEA has to increase local sourcing of materials. The value proposition of IKEA in China has thus been changed to a good quality, Western-styled aspirational brand for the middle-class population.1

In this chapter, we will address the following questions: 1. How can a firm develop and establish an effective positioning in the market? 2. How do marketers identify and analyze competition? 3. How are brands successfully differentiated? 4. What are the differences in positioning and branding with a small business?

10.1 Developing and Communicating a Positioning Strategy Marketing strategy is built on segmentation, targeting, and positioning (STP). A company discovers different needs and groups in the marketplace, targets those needs and groups that it can satisfy in a superior way, and then positions its offering so that the target market recognizes the company’s distinctive offering and image.

10.1.1 Understanding Positioning and Value Propositions Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the mind of the target market. The goal is to locate the brand in the minds of consumers to maximize the potential benefit to the firm. A good brand positioning helps guide marketing strategy by clarifying the brand’s essence, what goals it helps the consumer achieve, and how it does so in a unique way. A useful measure of the effectiveness of a firm’s positioning is the brand substitution test. If, in some marketing activity—an ad campaign, a viral video, a new product introduction—the brand were replaced by a competitive brand, then that marketing activity should not work as well in the marketplace. A well-positioned brand should be distinctive in its meaning and execution. If a sport or music sponsorship, for example, would work as well for a leading competitor, then either the positioning is not sharply defined or the sponsorship as executed does not tie closely enough to the brand positioning. A good positioning has a “foot in the present” and a “foot in the future.” It needs to be somewhat aspirational so the brand has room to grow and improve. Positioning on the basis of the current state of the market is not forward-looking enough, but at the same time, the positioning cannot be so removed from reality that is essentially unobtainable. The real trick in positioning is to strike just the right balance between what the brand is and what it should be.

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Sulwhasoo is positioned as Korea’s premium herbal medicinal cosmetic brand.

Sulwhasoo—Amorepacific is a leading Korean cosmetic company. Since 1967, it has researched on Korean medicinal skincare methods, focusing on extracting skincare ingredients from ginseng, a plant known for its nourishing qualities. One of its brands, Sulwhasoo, a high-end line, enjoys the market leader position as Korea’s No. 1 premium herbal medicinal cosmetics brand. Over the years, Sulwhasoo’s pursuit of harmony of tradition and science founded its philosophy of sangseng (相生), which refers to the ultimate harmony of opposite energies. According to Sulwhasoo, the sangseng of nature and people is to utilize natural ingredients to refine human beauty, while the sangseng of tradition and science is to synergize traditional wisdom and modern science. The philosophy of sangseng is what drives Sulwhasoo to realize the wisdom of nature and tradition. With its focus on traditional medicinal concepts and the careful selection of high-quality herbal essences, Sulwhasoo is positioned as a high-end cosmetic brand offering natural herbal ingredients founded on modern science.2

The result of positioning is the successful creation of a customer-focused value proposition, a cogent reason why the target market should buy the product. Table 10.1 shows how two companies— Volvo and Top detergent—defined their value proposition given their target customers, benefits, and prices. Positioning requires that marketers define and communicate similarities and differences between their brand and its competitors. Specifically, deciding on a positioning requires: 1.

Determining a frame of reference by identifying the target market and relevant competition

2.

Identifying the optimal points of parity and points of differences brand associations given that frame of reference

3.

Creating a brand mantra to summarize the positioning and essence of the brand

Table 10.1 Examples of Value Propositions Demand States and Marketing Tasks Company and Product

Target Customers

Benefits

Value Proposition

Volvo (station wagon)

Safety-conscious “upscale”

Durability and safety

The safest, most durable wagon in which your family can ride

Eco-friendly and high performance cleaning

A plant-based detergent that is eco-friendly and keeps your clothes clean

Environmentally Top (laundry detergent) protective to consumers

The competitive frame of reference defines which other brands a brand competes with, and therefore, which brands should be the focus of competitive analysis. Decisions about the competitive frame of reference are closely linked to target market decisions. Deciding to target a certain type of consumer can define the nature of competition, because certain firms have decided to target that segment in the past (or plan to do so in the future), or because consumers in that segment may already look to certain products or brands in their purchase decisions.

10.2.1 Identifying Competitors A good starting point in defining a competitive frame of reference for brand positioning is to determine category membership—the products or sets of products with which a brand competes and which function as close substitutes. It would seem a simple task for a company to identify its competitors. Apple knows Samsung is its major competitor in the mobile phone and tablet markets; Nintendo knows Sony PlayStation is the competitor to its Wii; and Singapore Airlines sees Cathay Pacific as its competitor. The range of a company’s actual and potential competitors, however, can be much broader than the obvious. For a brand with explicit growth intentions to enter new markets, a broader or maybe even more aspirational competitive frame may be necessary to reflect possible future competitors. And a company is more likely to be hurt by emerging competitors or new technologies than by current competitors. For instance, telecommunication companies are facing competition not only from other carriers but also from Skype and Wi-Fi hotspots.

ChaPter 10 ó Crafting the Brand Positioning

10.2 Determining a Competitive Frame of Reference

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Some brands use its competitive frame of reference to develop its positioning.

We can examine competition from both an industry and a market point of view.3 An industry is a group of firms offering a product or class of products that are close substitutes for one another. Marketers classify industries according to number of sellers; degree of product differentiation; presence or absence of entry, mobility, and exit barriers; cost structure; degree of vertical integration; and degree of globalization. Using the market approach, we define competitors as companies that satisfy the same customer need. For example, a customer who buys a word-processing package really wants “writing ability”—a need that can also be satisfied by pencils or pens. Marketers must overcome “marketing myopia” and stop defining competition in traditional category and industry terms.4 Coca-Cola, focused on its soft drink business, missed seeing the market for coffee bars and freshfruit-juice bars, which eventually impinged on its soft-drink business. The market concept of competition reveals a broader set of actual and potential competitors than competition defined in just product category terms. Jeffrey F. Rayport and Bernard J. Jaworski suggest profiling a company’s direct and indirect competitors by mapping the buyer’s steps in obtaining and using the product. This type of analysis highlights both the opportunities and the challenges a company faces.5

10.2.2 Analyzing Competitors A company needs to gather information about each of its competitor’s real and perceived strengths and weaknesses. Table 10.2 shows the results of a company survey that asked customers to rate its three competitors, A, B, and C, on five attributes. Competitor A turns out to be well known and respected for producing high-quality products sold by a good sales force, but poor at providing product availability and technical assistance. Competitor B is good across the board and excellent in product availability and sales force. Competitor C rates poor to fair on most attributes. This result suggests that in its positioning, the company could attack Competitor A on product availability and technical assistance and Competitor C on almost anything, but it should not attack B, which has no glaring weaknesses. As part of this competitive analysis for positioning, the firm should also ascertain the strategies and objectives of its primary competitors.6 Once a company has identified its main competitors and their strategies, it must ask: What is each competitor seeking in the marketplace? What drives each competitor’s behavior? Many factors shape a competitor’s objectives, including size, history, current management, and financial situation. If the competitor is a division of a larger company, it’s important to know whether the parent company is running it for growth or for profits, or milking it.7 Finally, based on all this analysis, marketers must formally define the competitive frame of reference to guide positioning. In stable markets with little short-term change likely, it may be fairly easy to define one, two, or perhaps three key competitors. In dynamic categories where competition may exist or arise in a variety of different forms, multiple frames of reference may arise, as we discuss next. Table 10.2 Customers’ Ratings of Competitors on Key Success Factors

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Customers

Product

Product

Technical

Awareness

Quality

Availability

Assistance

Selling Staff

Competitor A

E

E

P

P

G

Competitor B

G

G

E

G

E

Competitor C

F

P

G

F

F

Note E = excellent, G = good, F = fair, P = poor.

10.2.3 Identifying Optimal Points-of-Parity and Points-ofDifference Once the competitive frame of reference for positioning has been fixed by defining the customer target market and nature of competition, marketers can define the appropriate PODs and POPs associations.8

Points-of-Difference Points-of-difference (PODs) are attributes or benefits consumers strongly associate with a brand, positively evaluate, and believe that they could not find to the same extent with a competitive brand. Strong, favorable, and unique brand associations that make up PODs may be based on virtually any type of attribute or benefit. Examples are Apple (design, ease of use, and irreverent attitude), Nike (performance, innovative technology, and winning), and Lexus (quality, reliability, and efficiency). Creating strong, favorable, and unique associations as PODs is a real challenge, but essential in terms of competitive brand positioning. Google+—Google introduced a social networking service called Google+. The service looks very much like Facebook. It allows people to share and discuss status updates, photos, and links like they do on Facebook. However, Google+ is different in a significant way—it is meant for sharing with groups such as colleagues, roommates, or football friends, unlike Facebook, which allows all of one’s friends or the entire Web. Google+ makes the point that in real life, people have walls and windows, and when they talk to someone, only those in the room can overhear the conversation. Google+ users can categorize friends into different groups with titles such as “book club” or “jogging friends.” They will then be able to share with these groups or with all of their friends. Unlike Facebook, people on Google+ do not have to agree to be friends with one another.9

Three criteria determine whether a brand association can truly function as a point-ofdifference—desirability, deliverability, and differentiability. Some key considerations follow:

Deliverable by the company—The company must have the internal resources and commitment to feasibly and profitably create and maintain the brand association in the minds of consumers. The product design and marketing offering must support the desired association. Does communicating the desired association require real changes to the product itself, or just perceptual shifts in the way the consumer thinks of the product or brand? Creating the latter is typically easier. Hyundai has had to work to overcome public perceptions that its automobiles are not as reliable as Japanese brands and has done so through warranties and contemporary images. The ideal brand association is preemptive, defensible, and difficult to attack. It is generally easier for market leaders such as Visa, and SAP to sustain their positioning, based as it is on demonstrable product or service performance, than it is for market leaders such as Fendi, Prada, and Hermès, whose positioning is based on fashion and is thus subject to the whims of a more fickle market. Differentiating from competitors—Finally, consumers must see the brand association as distinctive and superior to relevant competitors. Splenda sugar substitute overtook Equal and Sweet’N Low to become the leader in its category by differentiating itself on its authenticity as a product derived from sugar, without any of the associated drawbacks.10 Any attribute or benefit associated with a product or service can function as a point-ofdifference for a brand as long as it is sufficiently desirable, deliverable, and differentiating. The brand must demonstrate clear superiority on an attribute or benefit, however, for it to function as a true point-of-difference. Consumers must be convinced, for example, that Louis Vuitton has the most stylish handbags and Energizer is the longest-lasting battery.

Onida—Onida is a household name in India. Besides television, the company also sells household appliances such as air-conditioners, washing machines, DVD players, and home theater systems. However, over time, its sales was flagging. Several reasons account for the decline: Onida had internal management problems; its customers had grown older and the brand had failed to connect itself meaningfully to the current generation. Onida tried to create a radically new identity when it replaced its original tagline, “Neighbor’s Envy, Owner’s Pride” with a new one, “Nothing but the Truth,” which was changed again to “It Can Change Your Life,” and yet again to “Experience the Desire.” Its mascot, the green-horned devil with a long pointed tail also changed several times. The results were disastrous, as with the constant changes in positioning and mascot, customers could not identify what Onida’s POD was. Onida lost its market share to Videocon, Sony, Samsung, LG, and Philips, which were better positioned as “international” brands.11

Points-of-Parity Points-of-parity (POPs), in contrast, are attribute or benefit associations that are not necessarily unique to the brand but may in fact be shared with other brands. These types of associations come in two basic forms: category and competitive. Category POPs are attributes or benefits that consumers view as essential to be a legitimate and credible offering within a certain product or service category. In other words, they represent necessary—but not necessarily sufficient—conditions for brand choice. Consumers might not consider a travel agency truly a travel agency unless it is able to make air and hotel reservations,

ChaPter 10 ó Crafting the Brand Positioning

Desirable to consumer—Consumers must see the brand association as personally relevant to them. The Westin Stamford hotel in Singapore advertised that it was the world’s tallest hotel, but a hotel’s height is not important to many tourists. Consumers must also be given a compelling reason to believe and an understandable rationale for why the brand can deliver the desired benefit. Mountain Dew may argue that it is more energizing than other soft drinks and support this claim by noting that it has a higher level of caffeine. Chanel No. 5 perfume may claim to be the quintessentially elegant French perfume and support this claim by noting the long association between Chanel and haute couture. Substantiators can also come in the form of patented, branded ingredients, such as NIVEA Wrinkle Control Crème with Q10 co-enzyme.

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provide advice about leisure packages, and offer various ticket payment and delivery options. Category POPs may change over time due to technological advances, legal developments, or consumer trends. Competitive POPs are associations designed to overcome perceived weaknesses of the brand. A competitive POP may be required to either (1) negate competitors’ perceived PODs or (2) negate a perceived vulnerability of the brand as a result of its own PODs. The latter consideration arises when consumers feel that if a brand is good at one thing (easy to use), it must not be good at something else (have advanced features). One good way to uncover key competitive POPs is to role-play competitors’ positioning and infer their intended PODs. Competitor’s PODs will, in turn, suggest the brand’s POPs. Consumer research into the trade-offs consumers make in their purchasing decisions can also be informative. Regardless of the source of perceived weaknesses, if, in the eyes of consumers, a brand can “break even” in those areas where it appears to be at a disadvantage and achieve advantages in other areas, the brand should be in a strong—and perhaps unbeatable—competitive position.

Points-of-Parity versus Points-of-Difference For an offering to achieve a POP on a particular attribute or benefit, a sufficient number of consumers must believe that the brand is “good enough” on that dimension. There is a “zone” or “range of tolerance or acceptance” with POPs. The brand does not literally have to be seen as equal to competitors, but consumers must feel that the brand does well enough on that particular attribute or benefit. If consumers feel that way, they may be willing to base their evaluations and decisions on other factors potentially more favorable to the brand. A light beer presumably would never taste as good as a full-strength beer, but it would have to taste close enough to be able to effectively compete. For Asian brands, achieving POPs may be no mean feat, given rapid changes in the competitive landscape. For example, with the opening of China’s retail market to foreign players, local stores are faced with declining store loyalty and sales. The pressure to be at least on par on some attributes is greatest in coastal cities like Shanghai, where consumers are more sophisticated and have greater store choice.12

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With PODs, the brand must demonstrate clear superiority. Consumers must be convinced that Louis Vuitton has the most stylish handbags, Energizer is the longest-lasting battery, Toyota offers the most reliable car, and Tiger Beer is the best tasting beer. Often, the key to positioning is not so much in achieving a POD as in achieving POPs! Visa versus American Express—Visa’s POD in the credit card category is that it is the most widely available card, which underscores the category’s main benefit of convenience. In contrast, American Express has built its equity by highlighting the prestige associated with the use of its card. Having established their PODs, Visa and American Express now compete by attempting to blunt each other’s advantage to create POPs. Visa offers gold and platinum cards to enhance the prestige of its brand and advertises “It’s Everywhere You Want to Be” in settings that reinforce exclusivity and acceptability. American Express has substantially increased the number of vendors that accept its cards and created other value enhancements through its “Make Life Rewarding” program.

Multiple Frames of Reference It is not uncommon for a brand to identify more than one actual or potential competitive frame of reference, if competition widens or the firm plans to expand into new categories. For example, Starbucks could define very distinct sets of competitors, suggesting different possible POPs and PODs as a result: 1.

Quick-serve restaurants and convenience shops (McDonald’s and 7-11)—Intended PODs might be quality, image, experience, and variety; intended POPs might be convenience and value.

2.

Supermarket brands for home consumption (Nescafé and Kao)—Intended PODs might be quality, image, experience, variety, and freshness; intended POPs might be convenience and value.

3.

Local cafés—Intended PODs might be convenience and service quality; Intended POPs might be quality, variety, price, and community.

Note that some potential POPs and PODs for Starbucks are shared across competitors; others are unique to a particular competitor.

Finally, if there are many competitors in different categories or subcategories, it may be useful to either develop the positioning at the categorical level for all relevant categories (“quickserve restaurants” or “supermarket take-home coffee” for Starbucks) or with an exemplar from each category (McDonald’s or Nescafé for Starbucks).

Straddle Positioning Occasionally, a company will be able to straddle two frames of reference with one set of PODs and POPs. In these cases, the PODs for one category become POPs for the other and vice versa. Subway restaurants are positioned as offering healthy, good-tasting sandwiches. This positioning allows the brand to create a POP on taste and a POD on health with respect to quick-serve restaurants such as McDonald’s and Burger King and, at the same time, a POP on health and a POD on taste with respect to health food restaurants and cafés. Straddle positions allow brands to expand their market coverage and potential customer base. Another example of straddle positioning is BMW. BMW—When BMW first made a strong competitive push into the U.S. market in the early 1980s, it positioned the brand as being the only automobile that offered both luxury and performance. At that time, American luxury cars were seen by many as lacking performance, and American performance cars were seen as lacking luxury. By relying on the design of its cars, its German heritage, and other aspects of a well-conceived marketing program, BMW simultaneously achieved: (1) a POD on luxury and a POP on performance relative to performance cars: and (2) a POD on performance and a POP on luxury relative to luxury cars. The clever slogan “The Ultimate Driving Machine” effectively captured the newly created umbrella category—luxury performance cars.

By combining the seemingly incompatible benefits of luxury and performance, BMW has found great success in the American automotive market.

ChaPter 10 ó Crafting the Brand Positioning

Under such circumstances, marketers have to decide what to do. There are two main options with multiple frames of reference. One is to first develop the best possible positioning for each type or class of competitors and then see whether there is a way to create one combined positioning robust enough to effectively address them all. If competition is too diverse, however, it may be necessary to prioritize competitors and then choose the most important set of competitors to serve as the competitive frame. One crucial consideration is not to try to be all things to all people—that leads to lowest-common-denominator positioning, which is typically ineffective.

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While a straddle positioning often is attractive as a means of reconciling potentially conflicting consumer goals, it also carries an extra burden. If the POP and POD with respect to both categories are not credible, the brand may not be viewed as a legitimate player in either category. Many early PDAs that unsuccessfully tried to straddle categories ranging from pagers to laptop computers provide a vivid illustration of this risk.

10.2.4 Choosing Specific POPs and PODs To build a strong brand and avoid the commodity trap, marketers must start with the belief that you can differentiate anything. Michael Porter urged companies to build a sustainable competitive advantage.13 Competitive advantage is a company’s ability to perform in one or more ways that competitors cannot or will not match. But few competitive advantages are inherently sustainable. At best, they may be leverageable. A leverageable advantage is one that a company can use as a springboard to new advantages, much as Microsoft leveraged its operating system to Microsoft Office and then to networking applications. In general, a company that hopes to endure must be in the business of continuously inventing new advantages that can serve as the basis of points-of-difference.14 Marketers typically focus on brand benefits in choosing the points-of-parity and points-ofdifference that make up their brand positioning. Brand attributes generally play more of a supporting role by providing “reasons to believe” or “proof points” as to why a brand can credibly claim it offers certain benefits. Marketers of Dove soap, for example, will talk about how its attribute of one-quarter cleansing cream uniquely creates the benefit of softer skin. Consumers are usually more interested in benefits and what exactly they will get from a product. Multiple attributes may support a certain benefit, and they may change over time.

Means of Differentiation

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Any product or service benefit that is sufficiently desirable, deliverable, and differentiating can serve as a point-of-difference for a brand. The obvious and often the most compelling means of differentiation for consumers are benefits related to performance. Swatch offers colorful, fashionable watches; IKEA offers contemporary furniture at value-for-money prices for a better life. Often a brand’s positioning transcends its performance considerations. Companies can fashion compelling images that appeal to consumers’ social and psychological needs. Companies work hard to develop distinctive images for their brands. The Got Milk ad campaign makes milk a likeable beverage. Absolut Vodka’s ads creates a distinctive image for the shape of its bottle. Even a seller’s physical space can be a powerful image generator. Shangri-la Hotels developed a distinctive image with its atrium lobbies. To identify possible means of differentiation, marketers have to match the consumer’s desire for a benefit with their company’s ability to deliver it. For example, they can design their distribution channels to make buying the product easier and more rewarding. Many companies have gone into online selling to make buying and distribution easier.

Perceptual Maps For choosing specific benefits as POPs and PODs to position a brand, perceptual maps may be useful. Perceptual maps are visual representations of consumer perceptions and preferences. They provide quantitative portrayals of market situations and the way consumers view different products, services, and brands along various dimensions. By overlaying consumer preferences with brand perceptions, marketers can reveal “holes” or “openings” that suggest unmet consumer needs and marketing opportunities. For example, Figure 10.1(a) shows a hypothetical perceptual map for a beverage category. The four brands—A, B, C, and D—vary in terms of how consumers view their taste profile (light versus strong) and personality and imagery (contemporary versus modern). Also displayed on the map are ideal point “configurations” for three market segments (1, 2, and 3). The ideal points represent each segment’s most preferred (“ideal”) combination of taste and imagery.

Strong Flavor D 3

Strong Flavor

Brands: A, B, C, & D Customer Segments Ideal Points: 1, 2, & 3

Traditional Image

A

1 Contemporary Image

Customer Segments Ideal Points: 1, 2, & 3

D

B

3

B

1 Traditional Image

2 C

A''

Light Flavor

Light Flavor

Figure 10.1(a) Hypothetical Beverage Perceptual Map: Current Perceptions

A’

Contemporary Image

Figure 10.1(b) Hypothetical Beverage Perceptual Map: Possible Repositioning for Brand A

Consumers in Segment 3 prefer beverages with a strong taste and traditional imagery. Brand D is well-positioned for this segment as it is strongly associated in the marketplace with both these benefits. Given that none of the competitors is seen as anywhere close, we would expect Brand D to attract many of the Segment 3 customers. Brand A, on the other hand, is seen as more balanced in terms of both taste and imagery. Unfortunately, no market segment seems to really desire this balance. Brands B and C are better positioned with respect to Segments 2 and 3, respectively. By making its image more contemporary, Brand A could move to A’ to target consumers in Segment 1 and achieve a point-of-parity on imagery and maintain its point-of-difference on taste profile with respect to Brand B. By changing its taste profile to make it lighter, Brand A could move to A’’ to target consumers in Segment 2 and achieve a point-of-parity on taste profile and maintain its point-of-difference on imagery with respect to Brand C. Deciding which repositioning is most promising, A’ or A’’, would require detailed consumer and competitive analysis on a host of factors—including the resources, capabilities, and likely intentions of competing firms—to choose the markets where consumers can profitably be served.

Emotional Branding Many marketing experts believe that brand positioning should have both rational and emotional components. In other words, it should contain POD and POP that appeal to both the head and the heart. Strong brands often seek to build on their performance advantages to strike an emotional chord with customers. Kate Spade is a brand that blends functional and emotional elements in its positioning.

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A

2 C

Brands: A, B, C, & D

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Kate Spade—Although only a little more than 20 years old, Kate Spade has evolved from a bags-only brand to a much more diversified fashion brand. Launched by husband-and-wife team Kate and Andy Spade, who have since sold their stake, the brand was initially known for a tiny, minimalist-looking black bag. Later, a stronger style helped to give Kate Spade its sweet spot of making the customer “the most interesting person in the room.” With greater emphasis on marrying form and function, the brand expanded into apparel and jewelry and has become the centerpiece of a revamped Liz Clairborne (now known as Fifth & Pacific). Accessories are updated constantly, and there are frequent new merchandise introductions. Kate Spade made a strong e-commerce push to complement its offline stores; 20 percent of sales come from online channels. The company also made a well-integrated social media foray, using Facebook, Twitter, Instagram, Tumblr, Pinterest, YouTube, and Spotify to reinforce its core brand values of “patterns, colors, fun food, and classic New York moments.” It has made a move into Europe and Asia and has especially set its sights on China.

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Kate Spade found a consumer sweet spot by skillfully blending form and function in its products.

A person’s emotional response to a brand and its marketing will depend on many factors. An increasingly important consideration is the brand’s authenticity.15 Brands such as Johnson & Johnson, Samsung, and UNIQLO, which are seen as authentic and genuine, can evoke trust, affection, and strong loyalty. By successfully differentiating themselves, emotional brands can provide financial payoffs.

10.3 Brand Mantras To further focus the intent of the brand positioning and the way firms would like consumers to think about the brand, it is often useful to define a brand mantra.16 A brand mantra is an articulation of the heart and soul of the brand and is closely related to other branding concepts like “brand essence” and “core brand promise.” Brand mantras are short, three- to five-word phrases that capture the irrefutable essence or spirit of the brand positioning. Their purpose is to ensure that all employees within the organization and all external marketing partners understand what the brand has most fundamentally to represent with consumers so they can adjust their actions accordingly.

10.3.1 Role of Brand Mantras Brand mantras are powerful devices. They can provide guidance about what products to introduce under the brand, what ad campaigns to run, and where and how to sell the brand. Their

influence, however, can extend beyond these tactical concerns. Brand mantras may even guide the most seemingly unrelated or mundane decisions, such as the look of a reception area and the way phones are answered. In effect, they create a mental filter to screen out brand-inappropriate marketing activities or actions of any type that may have a negative bearing on customers’ impressions of a brand. Brand mantras must economically communicate what the brand is and what it is not. What makes for a good brand mantra? McDonald’s brand philosophy of “Food, Folks, and Fun” captures its brand essence and core brand promise. Two high-profile and successful examples—Nike and Disney—show the power and utility of a well-designed brand mantra.

Disney—Disney developed its brand mantra in response to its incredible growth through licensing and product development during the mid-1980s. In the late 1980s, Disney became concerned that some of its characters, such as Mickey Mouse and Donald Duck, were being used inappropriately and becoming overexposed. The characters were on so many products and marketed in so many ways that in some cases it was difficult to discern what could have been the rationale behind the deal to start with. Moreover, because of the broad exposure of the characters in the marketplace, many consumers had begun to feel Disney was exploiting its name. Disney moved quickly to ensure that a consistent image—reinforcing its key brand associations—was conveyed by all third-party products and services. To facilitate this supervision, Disney adopted an internal brand mantra of “fun family entertainment” to serve as a screen for proposed ventures. Opportunities that were not consistent with the brand mantra—no matter how appealing—were rejected.

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Nike—Nike has a rich set of associations with consumers, based on its innovative product designs, its sponsorships of top athletes, its award-winning advertising, its competitive drive, and its irreverent attitude. Internally, Nike marketers adopted the three-word brand mantra, “authentic athletic performance,” to guide their marketing efforts. Thus, in Nike’s eyes, its entire marketing program—its products and how they are sold—must reflect those key brand values. Over the years, Nike has expanded its brand meaning from “running shoes” to athletic shoes” to “athletic shoes and apparel” to “all things associated with athletics (including equipment).” Each step of the way, however, it has been guided by its “authentic athletic performance” brand mantra. For example, as Nike rolled out its successful apparel line, one important hurdle for the products was that they could be made innovative enough through material, cut, or design to truly benefit top athletes. At the same time, the company has been careful to avoid using the Nike name to brand products that do not fit with the brand mantra (like casual “brown” shoes).

Nike’s brand mantra of “authentic athletic performance” guides the types of products it makes and the athletes it hires as endorsers.

Disney’s brand mantra of “fun family entertainment” provides guardrails so its marketing stays on track.

10.3.2 Designing a Brand Mantra Unlike brand slogans designed to engage consumers, brand mantras are designed with internal purposes in mind. Although Nike’s internal mantra was “authentic athletic performance,” its external slogan was “Just Do It.”Here are the three key criteria for a brand mantra.

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1.

Communicate. A good brand mantra should define the category (or categories) of business for the brand and set the brand boundaries. It should also clarify what is unique about the brand.

2.

Simplify. An effective brand mantra should be memorable. For that, it should be short, crisp, and vivid in meaning.

3.

Inspire. Ideally, the brand mantra should also stake out ground that is personally meaningful and relevant to as many employees as possible.

For brands facing rapid growth, it is helpful to define the product or benefit space in which the brand would like to compete, as Nike did with “athletic performance” and Disney with “family entertainment.”Words that describe the nature of the product or service, or the type of experiences or benefits the brand provides, can be critical to identifying appropriate categories into which to extend. For brands in more stable categories where extensions into more distinct categories are less likely to occur, the brand mantra may focus more exclusively on points-of-difference. Other brands may be strong on one, or perhaps even a few, of the brand associations making up the brand mantra. But for the brand mantra to be effective, no other brand should singularly excel on all dimensions. Part of the key to both Nike’s and Disney’s success is that for years no competitor could really deliver on the combined promise suggested by their brand mantras.

10.4 Establishing Brand Positioning Once they have determined the brand positioning strategy, marketers should communicate it to everyone in the organization so that it guides their words and actions. One helpful schematic to do so is a brand-positioning bull’s-eye. Constructing a bull’s-eye for the brand ensures that no steps are skipped in its development. Marketing Memo: Constructing a Brand Positioning Bull’s-eye outlines one way marketers can formally express brand positioning.

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Establishing the brand positioning in the marketplace requires that consumers understand what the brand offers and what makes it a superior competitive choice. To do so, consumers need to understand in which category or categories it competes and its POPs and PODs with respect to those competitors.

When Li Ning repositioned itself from a mid-tier to an upscale brand, it hiked prices and focused less on smaller cities. This move not only did not attract brand-conscious youths away from Nike and adidas, but it also left an opening for local competitor, Anta, to capture its valueconscious customers.

Li Ning—Chinese sporting-goods manufacturer, Li Ning, founded by the famous Olympic gymnast of the same name, was well entrenched as the No. 2 sports footwear in China, behind Nike but ahead of adidas. Then a series of missteps occurred. Li Ning decided to reposition itself as an upscale brand. It revamped its logo and launched a new campaign titled “Make the Change.” The company raised prices and started to shift its distribution focus from lowertiered markets to Tier 1 cities such as Shanghai and Beijing. These steps to reposition itself as a higher-end brand did not attract brand-conscious youths who were more than happy to spend a bit more to buy Nike or adidas. Additionally, these price increases gave its Chinese competitor, Anta, an opening to attract the value-conscious customers away from Li Ning.17

10.4.1 Communicating Category Membership Category membership may be obvious in some cases. Target customers are aware that Shiseido is a leading brand of cosmetics, Samsung is a leading mobile phone manufacturer, and Singapore Airlines is a leading airline, and so on. Often, however, marketers for many other brands must inform consumers of a brand’s category membership. Perhaps the most obvious situation is the introduction of new products, especially when category identification itself is not apparent.

There are also situations in which consumers know a brand’s category membership but may not be convinced the brand is a valid member of the category. They may be aware that HewlettPackard produces digital cameras, but they may not be certain whether HP cameras are in the same class as Sony, Olympus, Canon, and Nikon. In this instance, HP might find it useful to reinforce category membership.

ConsTruCTing a Brand PosiTioning Bull’s-eye

MARKETING MEMO

A brand bull’s-eye provides content and context to improve everyone’s understanding of the positioning of a brand in the organization. Here we describe the components of a brand bull’s-eye, illustrating with a hypothetical Starbucks example. In the inner two circles is the heart of the bull’s-eye— key points-of-parity and points-of-difference, as well as the brand mantra. In the next circle out are the substantiators or reasons-to-believe (RTB)—attributes or benefits that provide factual or demonstrable support for the points-of-parity and points-of-difference. Finally, the outer circle contains two other useful branding concepts: (1) the brand values, personality, or character—intangible associations that help to establish the tone for the words and actions for the brand; and (2) executional Consumer Target

e Valu

Discerning coffee drinker Consumer Insight Coffee and the drinking experience is often unsatisfying

properties and visual identity—more tangible components of the brand that affect how it is seen. Three boxes outside the bull’s-eye provide useful context and interpretation. To the left, two boxes highlight some of the input to the positioning analysis: One includes the consumer target and a key insight about consumer attitudes or behaviors that significantly influenced the actual positioning; the other box provides competitive information about the key consumer need the brand is attempting to satisfy and some competitive products or brands that need suggests. To the right of the bull’seye, one box offers a “big picture” view of the output—the ideal consumer takeaway that would result if the brand positioning efforts were successful.

s/Personality/Charact Contemporary

er

Substantiators (RTB) Thoughtful

Caring 24-hour training of baristas

nts-of-parity Poi Fairly Priced

Responsible, locally involved

Stock options/ health benefits for baristas

Starbucks gives me the richest possible sensory experience drinking coffee

Brand Mantra Consumer Need State Desire for better coffee and a better consumption experience

Relaxing, Rich, Rewarding Fresh highrewarding Coffee Experience quality coffee moments Triple Totally Varied, exotic Rich sensory filtrated coffee drinks integrated consumption Convenient, water system friendly experience service e P oi Green & n t s - o f - D if f e r e n c Earth colors

Competitive Product Set Local cafés, fast-food restaurants, & convenience shops

Exe cuti o

tity d en I l a nal Properties/Visu

A Hypothetical Example of a Starbucks Brand Positioning Bull’s Eye

Consumer Takeaway

Siren logo

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Brands are sometimes affiliated with categories in which they do not hold membership. This approach is one way to highlight a brand’s POD, providing consumers know the brand’s actual membership. With this approach, however, it is important not to be trapped between categories. Consumers should understand what the brand stands for, and not just what it is not. The Konica e-mini M digital camera and MP3 player was marketed as the “four-in-one entertainment solution,” but it suffered from functional deficiencies in each of its product application and languished in the marketplace as a result.18

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There are three main ways to convey a brand’s category membership:

To communicate category membership, some brands such as Tommy Hilfiger, in its early days, associated itself with Calvin Klein to suggest it has great American designs.

1.

Announcing category benefits—To reassure consumers that a brand will deliver on the fundamental reason for using a category, benefits are frequently used to announce category membership. A chicken stock cube might attain membership in the seasoning category by claiming the benefit of great taste and support this benefit claim by possessing high-quality ingredients (performance) or by showing users delighting in its consumption (imagery).

2.

Comparing to exemplars—Well-known, noteworthy brands in a category can also be used to specify category membership. When Tommy Hilfiger was an unknown, advertising announced his membership as a great American designer by associating him with Calvin Klein and Perry Ellis, who were recognized members of that category.

3.

Relying on the product descriptor—The product descriptor that follows the brand name is often a concise means of conveying category origin. In India’s TV set market, international brands such as Sony, Samsung, Philips, and LG command a high market share. To capitalize on the advantage that an MNC brings to the perception of quality, local brand Videocon positioned itself as an “Indian MNC” in its tagline.

10.4.2 Communicating POPs and PODs One common difficulty in creating a strong, competitive brand positioning is that many of the attributes or benefits that make up the POPs and PODs are negatively correlated. For example, it might be difficult to position a brand as “inexpensive” and at the same time assert that it is “of the highest quality.” Consider these examples of negatively correlated attributes and benefits:

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Low price vs High quality

Powerful vs Safe

Taste vs Low calories

Strong vs Refined

Nutritious vs Good tasting

Ubiquitous vs Exclusive

Efficacious vs Mild

Varied vs Simple

Moreover, individual attributes and benefits often have positive and negative aspects. For example, consider a long-lived Asian brand such as Tiger Balm, Brands Essence of Chicken, or Milkmaid condensed milk. The brand’s heritage could suggest experience, wisdom, and expertise. On the other hand, it could also imply being old-fashioned and not up-to-date. Unfortunately, consumers typically want to maximize both of the negatively correlated attributes or benefits. Much of the art and science of marketing is dealing with trade-offs, and positioning is no different. The best approach clearly is to develop a product or service that performs well on both dimensions. Geox shoes, for instance, is able to overcome the seemingly conflicting product images of “breathable” and “waterproof” for its soles through technological advances. Some marketers have adopted other approaches to address attribute or benefit trade-offs: launching two different marketing campaigns, each one devoted to a different brand attribute or benefit; linking themselves to any kind of entity (person, place, or thing) that possesses the right kind of equity as a means to establish an attribute or benefit as a POP or POD; and even attempting to convince consumers that the negative relationship between attributes and benefits, if they consider it differently, is in fact positive.

10.4.3 Monitoring Competition Positioning requires organizational commitment. It is not constantly overhauled or changed. At the same time, it is important to regularly research the desirability, deliverability, and differentiability of the brand’s POPs and PODs in the marketplace to understand how the brand positioning might need to evolve or, in rare cases, be replaced.

In assessing potential threats from competitors, three high-level variables are useful: 1.

Share of market—the competitor’s share of the target market

2.

Share of mind—the percentage of customers who named the competitor in responding to the statement “Name the first company that comes to mind in this industry.”

3.

Share of heart—the percentage of customers who named the competitor in responding to the statement “Name the company from which you would prefer to buy the product.”

We could generalize as follows: Companies that make steady gains in mind share and heart share will inevitably make gains in market share and profitability. Firms such as Apple, Toyota, and Samsung are reaping the benefits of providing emotional, experiential, social, and financial value to satisfy customers. Table 10.3 Market Share, Mind Share, and Heart Share Market Share

Mind Share

Heart Share

2016

2017

2018

2016

2017

2018

2016

2017

2018

Competitor A

50%

47%

44%

60%

58%

54%

45%

42%

39%

Competitor B

30

34

37

30

31

35

44

47

53

Competitor C

20

19

19

10

11

11

11

11

8

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There’s an interesting relationship among these three measures. Table 10.3 shows them as recorded for three hypothetical competitors. Competitor A enjoys the highest market share but is slipping. Its mind share and heart share are also slipping, probably because it’s not providing good product availability and technical assistance. Competitor B is steadily gaining market share, probably due to strategies that are increasing its mind share and heart share. Competitor C seems to be stuck at a low level of market, mind, and heart share, probably because of its poor product and marketing attributes.

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10.5 Alternative Approaches to Positioning The competitive brand positioning model that we have reviewed in this chapter is a structured way to approach positioning based on in-depth consumer, company, and competitive analysis. Some marketers have proposed other, less-structured approached that offer provocative ideas on how to position a brand. We highlight a few here.

10.5.1 Brand Narratives and Storytelling Rather than outlining specific attributes or benefits, some marketing experts describe positioning a brand as telling a narrative or story.19 Randall Ringer and Michael Thibodeau see narrative branding as based on deep metaphors that connect people’s memories, associations, and stories.20 They identify five elements of narrative branding: (1) the brand story in terms of words and metaphors, (2) the consumer journey in terms of how consumers engage with the brand over time and touch points where they come into contact with it, (3) the visual language or expression for the brand, (4) the manner in which the narrative is expressed experientially in terms of how the brand engages the senses, and (5) the role/relationship the brand plays in the lives of consumers. Based on literary convention and brand experience, they also offer the following framework for a brand story: Setting—The time, place, and context Cast—The brand as a character, including its role in the life of the audience, its relationships and responsibilities, and its history or creation myth Narrative arc—The way the narrative logic unfolds over time, including actions, desired experiences, defining events, and the moment of epiphany Language—The authenticating voice, metaphors, symbols, themes, and leitmotifs

The mysterious disappearance of Jim Thompson provides an excellent brand narrative for this Thai silk accessories chain.

Jim Thompson Thai Silk—A brand narrative for Jim Thompson Thai Silk (JTTS) will be Thailand, set in the 1950s, when a former U.S. soldier returned to the country he fell in love with. He decided to make Thailand his second home and help the Thais by upgrading its handwoven Thai silk industry. JTTS products are renowned for their quality and designs. One day, Jim Thompson disappeared mysteriously while hiking in Malaysia. But his legend lives on as JTTS products are one of the few products endorsed by the Thai royalty, and are used in many leading European and Asian hotels.21

Patrick Hanlon developed the related concept of “primal branding” that views brands as complex belief systems. Diverse brands such as Google, Starbucks, and Apple have a “primal code” or DNA that resonates with their customers and generates their passion and fervor. He outlines seven assets that make up this belief system or primal code: a creation story, creed, icon, rituals, sacred words, a way of dealing with nonbelievers, and a good leader.22

10.5.2 Cultural Branding Douglas Holt believes for companies to build iconic, leadership brands, they must assemble cultural knowledge, strategize according to cultural branding principles, and hire and train cultural experts.23 Even Procter & Gamble, a company that has long orchestrated how shoppers perceive its products, has started on what is called “a learning journey” with the consumer. It is learning to let go and allow consumers to participate in its brand creation. Experts who see consumers actively co-creating brand meaning and positioning refer to this as “Brand Wikification,” given that wikis are written by contributors from all walks of life and all points of view.24

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Building brands for a small business is a challenge because these firms have limited resources and budgets. Nevertheless, numerous success stories exist of entrepreneurs who have built their brands up essentially from scratch to become powerhouse brands.

By being inclusive and focusing on how its products can fit into consumers’ everyday lives, UNIQLO has experienced remarkable growth.

UNIQLO—Founded by Tadashi Yanai, UNIQLO (short for Unique Clothing Warehouse) has followed its mission statement and credo of “Made for All” to become a brand with a goal of reaching $50 billion in sales in 2020 and becoming the number-one retailer in the world. UNIQLO stands out . . . by not standing out! Heavily inspired in its early days by Gap and its one-time president Mickey Drexler, the company expressly states that it does not want to be in the fashion game of chasing ever-changing trends. With a strong technology emphasis, the company focuses on continual process improvement and the creation of new, innovative products. Its signature mix of fleece, synthetic thermal underwear, down jackets, jeans, and other basics is designed to capture the essence of each type of product. UNIQLO feels it provides the perfect components for its customers’ everyday lives, products they can combine in different ways to create their own unique expressions. The company’s marketing strategy combines active social media campaigns with aggressive in-store activities to connect with customers and pull them into the stores.

In general, with limited resources behind the brand, both focus and consistency in marketing programs are critically important. Creativity is also paramount—finding new ways to market new ideas about products to consumers. Some specific branding guidelines for small businesses are as follows:

Creatively conduct low-cost marketing research. There are a variety of low-cost marketing research methods that help small businesses connect with customers and study competitors. One way is to set up course projects at local universities to access the expertise of students and professors. Focus on building one or two strong brands based on one or two key associations. Small businesses often must on only one or two brands and key associations as points of difference for those brands. These associations must be consistently reinforced across the marketing program over time.

Create buzz and a loyal brand community. Because small businesses often must rely on word of mouth to establish their positioning, public relations, social networking, and lowcost promotions and sponsorship can be inexpensive alternatives. Creating a vibrant brand community among current and prospective customers can also be a cost-effective way to reinforce loyalty and help spread the word to new prospects. Web browser Mozilla Firefox is able to compete with Microsoft’s Internet Explorer in part because of its dedicated volunteer group of 10,000 programmers who work on its open source coding. leverage as many secondary associations as possible. Secondary associations—any persons, places, or things with potentially relevant associations—are often a cost-effective, shortcut means to build brand equity, especially those that help to signal quality or credibility. Unlike major brands that often have more resources at their disposal, small businesses usually do not have the luxury to make mistakes and must design and implement marketing programs much more carefully.

Home-Fix The DIY Store—This Singapore-based family-run business mushroomed from a mom-and-pop hardware and paint store to almost 30 stores in Singapore, Malaysia, and Indonesia. It entered the home hardware business because it realized that it is recession proof: when times are bad, people stay at home and undertake home improvement projects. Home-Fix expanded on home ground first. When it reached saturation point with 21 stores, a two-pronged approach was adopted. It expanded to Malaysia and Indonesia, markets that are geographically close to Singapore, so that management could monitor and control the quality of goods and services. The second strategy was to think of new ways to engage consumers by selling “solutions” to them. One of Home-Fix’s new targets was women because they have more decision-making power on household matters. Hence, Home-Fix organized a Ladies Nite at its flagship store. Besides offering special product demonstrations and promotions to women, it also conducted a survey. HomeFix received 108 completed survey forms during the event that helped it understand the female market better. It also has a database of 80,000 customers that it wants to conduct data mining on for more targeted marketing efforts. To learn more from industry leaders, Home-Fix management goes on government-led trips to the United States to learn from Nike, Starbucks, and Nordstrom.25

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employ a well-integrated set of brand elements. It is important for small businesses to maximize the contribution of each of the three main sets of brand equity drivers. First, they should develop a distinctive, well-integrated set of brand elements that enhances both brand awareness and brand image. Brand elements should be memorable and meaningful, with as much creative potential as possible. Innovative packaging can substitute for ad campaigns by capturing attention at the point of purchase. Proper names or family names, which often characterize small businesses, may provide some distinctiveness but can suffer in terms of pronounceability, meaningfulness, memorability, or other branding considerations. If these deficiencies are too great, explore alternative brand elements.

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Summary 10.1 DEVELOPING AND ESTABLISHING A BRAND POSITIONING

What is positioning? It is the crafting of an image and offering that the target market would pay attention to among the plethora of competitive choices. It has to offer a balance between present goals and future aspirations.

10.2 DETERMINING A COMPETITIVE FRAME OF REFERENCE

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How does a brand determine its competitive frame of reference? A brand first has to determine its category membership, defined as the set of products that a brand competes with and which function as close substitutes. The brand then identifies competitors manufacturing similar or competitive products. However, future competitors and technological leaps could be unaccounted for and subsequently hurt the company’s share of the market or relevancy. The brand then has to analyze its competitors’ strengths and weaknesses by conducting an attribute-based competitive analysis. What is the difference between competition from an industry and market point of view? Industry competitors are firms offering products that are close substitutes for one another. Market competitors are firms manufacturing products that satisfy the same consumer need. How do you analyze competition? You need to gather information about competitors’ strengths and weaknesses. You need to discern what competitors are trying to achieve. Then, you need to define your competitive frame of reference to develop for your positioning. What are points-of-difference (PODs)? They are brand associations that consumers believe are unique to a certain brand and competitors are unable to match up to.

Three components of a successful point-of-difference are desirability, deliverability and differentiability. What are points-of-parity (POPs)? They are brand associations possessed by a firm that may not necessarily be unique to the firm but shared with other competitors. Category points-of-parity are associations necessary but not sufficient to be a market leader in the industry. Competitive points-of-parity are associations designed to overcome perceived weaknesses. A competitive POP may be used to negate competitors’ PODs or combat a derived vulnerability as a result of a personal POD. Why do brands occasionally use multiple competitive frames of reference? This occurs when new competitors enter or the firm plans to diversify into new markets. Marketers can then develop one combined positioning comprising favorable positions for each class of competitors. Alternatively, they can prioritize and choose the most important set of competitors to serve as its competitive frame. What is straddle positioning? It is the act of addressing two frames of reference with one set of POD and POP. How do firms choose their POPs and PODs? Marketers usually create POPs and PODs around the perceived benefits of the brand rather than the brand’s attributes. Some of the benefits offer a competitive advantage, while others offer a leverageable advantage that serves as a springboard to new advantages. Perceptual maps, visual representations of consumers’ preferences, can be used to aid a marketer in choosing its POPs and PODs. What are the means of differentiation? Any benefit that is sufficiently desirable by consumers can be a means to differentiate, provided that the company is able to deliver it. Usually, companies differentiate on performance. Other means include image.

What is a perceptual map? It is a visual, quantitative representation of consumer perceptions and preferences of different brands along various dimensions. What is emotional branding? It is the appeal of a brand to the emotional, in addition to the rational, side of consumers.

What is a brand mantra? It is a short slogan that epitomizes what the firm stands for, and provides direction for the firm’s employees such that they can monitor and change their actions accordingly. A brand mantra is designed to capture the firm’s points-of-difference. How should a brand mantra be designed? The mantra has to be communicative, memorable, and inspiring.

10.4 ESTABLISHING BRAND POSITIONING

What are the possible problems firms face with category membership? Incumbent firms in a particular category may not enjoy sufficient consumer interest. Consumers may be unconvinced of the firm’s legitimacy in a certain category. Firms may be placed in a category that they find undesirable. How do firms overcome these category membership problems? Firms can espouse their product benefits to claim allegiance to a particular category. Firms can associate their products with well-known exemplars in that category. Firms can use the product descriptor to explicitly highlight the category of its product. What are the difficulties of communicating POPs and PODs? Certain attributes and benefits may conflict with each other (e.g., low price and high quality).

What are the three variables that a firm should monitor when analyzing potential threats? The competitor’s share of market. The competitor’s share of mind—the percentage of customers who relate this firm to the industry. The competitor’s share of heart—the percentage of customers who would most prefer to buy products from this firm.

10.5 ALTERNATIVE APPROACHES TO POSITIONING

What are brand narratives? It is positioning the brand like telling a story. Some elements of narrative branding are the brand story in words and metaphors, the consumer journey in terms of engagement and touch points, the level of sensory engagement of the brand, and the role of the brand in consumers’ lives. What is cultural branding? It is using cultural knowledge to strategize on how to build a brand in line with cultural branding principles. Consumers create brand meaning much as the firms themselves do.

10.6 POSITIONING AND BRANDING A SMALL BUSINESS

What are some branding guidelines for small businesses? Firms can use unconventional means to conduct market research (e.g., hire college students). Firms can rely on one or two key associations to create a single strong brand. Firms should focus on creating a loyal consumer base. Firms should leverage as many positive brand associations as possible. Firms should use a balanced and appealing set of brand elements.

ChaPter 10 ó Crafting the Brand Positioning

10.3 BRAND MANTRAS

Individual attributes may have good and bad aspects (e.g., experienced versus old-fashioned). Firms can adopt two separate marketing programs to market each attribute (to solve problem #1) or use technological improvements to overcome conflicting product images (to solve problem #2).

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Applications Marketing Debate—What Is the Best Way to Position? Marketers have different views on how to position a brand. Some value structured approaches such as the competitive positioning model described in the chapter, which focuses on specific points-of-parity and points-of-difference. Others prefer unstructured approaches that rely more on stories, narratives, and other flowing depictions. Take a position: The best way to position a brand is through a structured approach versus The best way to position a brand is through an unstructured approach.

Marketing Discussion Identify other negatively correlated attributes and benefits not shown on page 356. What strategies do firms use to try to position themselves on the basis of pairs of attributes and benefits?

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Marketing Lesson Under Armour was founded in 1996 by Kevin Plank and became a $5 million company within 5 years. By 2013, it became the 39th largest apparel and footwear company in the world. Despite being a newcomer in the sportswear market, Under Armour has built a remarkable brand equity in a short span. It has a strong foothold as an athlete-oriented and technologically accomplished producer of apparel and footwear. The Baltimore-based company boasts an impressive list of sportsmen endorsements, featuring U.S. Olympic swimmer Michael Phelps, National Football League star quarterback Tom Brady of the New England Patriots, Major League Baseball’s Ryan Zimmerman of the Washington Nationals, and National Basketball Association star guards Stephen Curry of the Golden State Warriors and Brandon Jennings of the Detroit Pistons. Apart from the strong endorsement of U.S. athletes, Under Armour has also started gaining much traction across the globe. Under Armour launched its first-ever retail theater specialty store at the Jing An Kerry Center in Shanghai in October 2013, aimed at providing the “Under Armour Experience.” The first-of-its-kind retail environment aims to use storytelling to form a narrative that would reel consumers in, selling them the ‘experience’ before getting them to try their footwear or apparel that go along with this experience. Captured with 360-degree camera technology and displayed on a 270-degree screen, a short film relaying stories on what it feels like to train as an athlete is shown to customers at the specialty store, following which they would be guided by performance trainers to the store section, where they can check out the latest apparel and footwear. This has been part of the latest revamp of the company’s marketing strategy in China to expand in that market, where exercise is still a somewhat foreign concept. Michael Phelps, who hosts this short film, remarked, “it’s exciting to be part of this experience designed to empower Chinese athletes.”

ChaPter 10 ó Crafting the Brand Positioning

UNDER ARMOUR

Under Armour’s expansion into Asia has not just included mainland China but also potential markets such as that of the Association of South East Asia Nations (ASEAN). It has stores in Malaysia, the Philippines, Singapore, and Taiwan and opened in Thailand in August 2015. It opened a store in Manila, the heart of the Philippines, in 2014, and Charlie Maurath, President of Under Armour International, then commented that they were “leveraging their domestic momentum to build a long-term and impactful global presence.” Under Armour also made a spectacular entry into the Malaysian market for performance apparel, footwear, and equipment. Within 12 days of the opening of its flagship store in Suria KLCC on 17 January 2015, it became one of the brand’s top three stores in terms of productivity. According to Michael Binger, CEO of Triple Pte. Ltd., a Singapore-based company that holds the exclusive distribution rights for the Under Armour brand throughout Southeast Asia, sales for the KLCC outlet, which is the biggest Under Armour store in Southeast Asia, exceeded internal targets by 80 percent. Binger credited the effectiveness of word-of-mouth and brand ambassadors like radio deejay Linora Low and other local celebrities such as fitness model Nana Al Haleq, TV host Kit Mah, and actor Hansen Lee, who were seen demonstrating their skills in various sports before the official steel chain was cut during the opening of the 2,400-square-feet outlet. Even during its rapid expansion, unlike conventional firms, Under Armour has not just focused on having retail stores in different geographical locations but on ensuring that the Under Armour experience is provided to all its customers. The Manila outlet, for instance, features interior decoration with wood accents, cement floors, and bolts that convey an industrial and gym-like atmosphere that embodies the brand’s signature ethos of gritty determination, passion, and will. Besides expanding physically, Under Armour has also expanded its brand outreach in the fitness markets through applications such as MapMyFitness, a whollyowned subsidiary it acquired in 2013. MapMyFitness brought an impressive 20 million registered and 9 million regular users under the brand outreach of Under Armour at a time when fitness wearables were becoming trendy in many global fitness markets. Further, Under Armour acquired fitness apps MyFitnessPal and Endomondo for $475 million and $85 million respectively in 2015. MyFitnessPal allows its users to log calories, record exercise timings, and compete with their Facebook friends to lose weight. Endomondo lets users track their workouts and analyze their performances, acting as a personal trainer right from one’s smartphone.

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Through these mobile application ventures, Under Armour has positioned itself in mobile health and driven technology advances in fitness, health, and wellness for consumers who are conscious about a healthy lifestyle. Under Armour also constantly looks out for new athletes who fit its brand personality and tries to stay connected with young athletes. The latest addition to its list of celebrity endorsers includes tennis player Andy Murray, winner of two Wimbledon Championships and one U.S. Open, ranked No. 2 in September 2016. Ryan Kuehl, Under Armour Senior Category Director, stated, “Andy’s remarkable character, competitive spirit and unmatched ability make him the perfect fit for our family.” Associations like this helps the brand to remain in tune with the young athletes and active youth who look up to these stellar sports celebrities for inspiration.

Menswear makes up a significant 65 to 70 percent of its business in the United States, and so it has been trying to grow womenswear, a market that is largely untapped in many Asian countries. In 2014, Under Armour signed Gisele Bundchen as the face of its “I Will What I Want” womenswear campaign, which has reportedly been viewed more than 13 million times online. However, despite having a women’s line since 2003, Under Armour has yet to generate enough traction to compete with the likes of other sportswear giants like Nike and Adidas who have specific campaigns for women. It also lacks the scale and equity of Nike and Adidas, though it strives to compete with them in the long run. Under Armour had reached the 1 billion milestone in just over four years, and in 2016 it tripled its revenues since then by clocking a staggering $4.8 billion in net revenue.

Questions

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1. Review Under Armour’s brand portfolio. What role has target marketing, smart acquisitions, and R&D played in growing its brand? 2. What factors does Under Armour consider when selecting new overseas markets to enter? 3. What communication strategies have been instrumental in making successful entries into the Asian apparel and footwear markets? 4. What is next for Under Armour on a global level? If you were the CEO, how would you sustain or expand the company’s global leadership? Sources: Sarah Meehan, “Under Armour Looks to Grow in China through New ‘Experience’ Store,” Baltimore Business Journal Online, 25 September 2013; “Under Armour Launches First Retail Theater Specialty Stores in Shanghai’s Jing An Kerry Centre,” Dow Jones Institutional News, 18 October 2013; “Under Armour Goes to Shanghai,” www.mediapost.com, 21 October 2013; “Under Armour Opens Local Stores,” Business World, 5 June 2014; “Sprint Teams with Samsung, Under Armour and MapMyFitness to Drive Advances in Growing Health and Fitness Technology Market,” Dow Jones Institutional News, 24 June 2014; “Reaching to Tap Market for Sportswear,” Business Times Singapore, 23 September 2014; Stacey Chia, “Under Dog No More,” The Straits Times, 31 October 2014; Michael Angelo S. Murillo, “Getting Close to the Athletes,” Business World, 3 November 2014; May Yip, “Engaging Higher Performance Gear,” Business Times Singapore, 3 January 2015; “Health Finds,” Business Mirror, 21 January 2015; Taylor Lorenz, “Under Armour Has Acquired Fitness Apps MyFitnessPal and Endomondo for a combined $560 million,” www.businessinsider.sg, 5 February 2015; Hunter Hackney, “Under Armour to Acquire Two Fitness Apps,” Stock Watch, 5 February 2015; “Under Armour off to Great Start,” Business Times, 21 February 2015; Christina Low, “American Sports Brand Opens 2,400 sq ft Store in Suria KLCC,” www.thestar.com.my, 27 February 2015; Under Armour Inc in Apparel and Footwear (World) Report, Euromonitor International; Under Armour Annual Report, www.investor.underarmour.com.

Marketing Lesson The Oregon-based sports giant is the world’s largest sportswear and footwear company, with an estimated brand value of $19 billion in 2014 according to Forbes. It has an extensive distribution network around the world for its wide array of footwear and apparel products, catering to significant core sports categories such as running, basketball, and soccer. Nike’s sales in the Greater China region, inclusive of Hong Kong, Taiwan, and Macau, have been a significant contributor to the company’s revenues, accounting for

Table 1 Retail Value of Footwear Brands in China (US$ million) Brand

Company name

2009

2010

2011

2012

2013

2014

Nike

Nike Inc

1,215.10

1,312.50

1,589.60

1,739.40

1,701.10

1,834.10

Adidas

adidas Group

756.00

857.10

1,044.70

1,297.70

1,431.10

1,577.20

Li Ning

Li Ning Co Ltd

865.50

943.80

826.10

629.10

564.60

599.30

New Balance

New Balance Athletic Shoe Inc

92.90

102.60

115.20

196.90

317.60

462.10

Asics

Asics Corp

295.80

303.00

312.10

319.30

-

-

Bata

Bata Ltd

66.00

88.10

128.80

158.20

183.40

210.40

Converse

Nike Inc

112.60

122.80

137.50

159.50

179.60

200.30

Clarks

C&J Clark International Ltd

56.30

87.90

123.80

151.00

166.10

180.80

Skechers

Skechers USA Inc

27.00

45.90

68.90

96.40

108.00

119.30

Reebok

adidas Group

89.40

74.70

89.40

100.00

104.10

107.30

Hush Puppies

Wolverine World Wide Inc

33.10

36.80

47.80

66.90

83.70

98.70

Puma

Kering SA

95.60

96.10

Burberry

Burberry Group Plc

30.20

36.50

52.10

69.60

76.70

88.10

Zara

Inditex, Industria de Diseño Textil SA

16.20

25.00

40.80

52.90

58.50

64.20

The North Face

VF Corp

7.70

12.70

21.70

33.90

44.60

60.10

Lacoste

Maus Frères SA

-

49.00

54.40

60.00

-

-

-

-

-

-

ChaPter 10 ó Crafting the Brand Positioning

NIKE CHINA

up to $2.60 billion of Nike Inc.’s $27.8 billion revenue worldwide for 2014, or almost 10 percent of its total revenue in that year. Nike in mainland China reported retail sales of $1.834 billion for 2014. A key factor for the increasing importance of the Chinese market is the change in the modern Chinese consumer’s taste. This has led to an increased demand for apparel and footwear with brand prestige, as seen in the rise of Western brands in China such as Zara, Hennes & Mauritz AB (H&M), adidas, and Nike. A booming middle class along with increasing disposable incomes among the Chinese has led to consumers spending more on their appearance. Euromonitor forecasts an expected growth in the sales of apparel and footwear from 2014 to 2019 at a sizeable 21.5 percent. Nike estimated that its annual sales revenue from China would reach $4 billion in sales by 2016. However, Nike’s sales in Greater China, inclusive of Taiwan, Hong Kong, and Macau, plunged for five consecutive quarters throughout 2013 into 2014 before climbing up 4 percent in the second quarter of 2014. As seen in Table 1, Nike’s retail sales in footwear in China dropped by a staggering $38.3 million in 2013.

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H&M

H&M Hennes & Mauritz AB

10.10

16.30

25.40

37.00

44.50

57.70

Hugo Boss

Hugo Boss AG

32.70

40.70

55.70

57.20

56.60

53.80

Kappa

BasicNet SpA

160.00

185.40

120.70

69.00

43.80

35.70

Puma

PPR SA

70.90

85.10

102.10

100.50

Lacoste

Lacoste SA

34.20

38.40

43.70

Puma

Puma AG

-

-

Reebok

Reebok International Ltd

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Source: EuroMonitor International

Despite an encouraging entry, Nike has a challenging road ahead in sustaining growth in the region, and more so in China. For starters, Nike faces a tough challenge from its direct competitor adidas. While Euromonitor highlights Nike’s share in the Chinese sportswear market in 2013 at 12.1 percent and adidas’s at 11.2 percent, adidas

is steadily catching up on Nike’s leader position. Adidas reported 6 percent growth in Greater China in the first quarter of 2013. Further, as shown in Table 2, Nike’s brand share in China dropped from 1.1 percent in 2010 to 1 percent in 2014, while adidas’s brand share rose from 0.8 percent in 2010 to 1 percent in 2014.

Table 2 Brand Shares of Companies by Apparel and Footwear in China (%) Companies

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2010

2011

2012

2013

2014

Prime Success International Group Ltd

-

-

-

-

-

Senda Group

-

-

-

-

-

-

-

PPR SA

0.20

0.20

0.20

Others

80.20

78.60

79.10

80.20

80.30

1.40

1.50

1.60

1.60

1.70

Bestseller A/S Belle International Holdings Ltd

1.20

1.20

1.30

1.30

1.30

Nike Inc

1.10

1.10

1.10

1.00

1.00

adidas Group

0.80

0.90

1.00

1.00

1.00

Heilan Home Co Ltd

0.20

0.30

0.40

0.60

0.90

Anta (China) Co Ltd

0.80

0.90

0.80

0.60

0.70

Semir Group Co Ltd

0.70

0.80

0.70

0.60

0.60

Fast Retailing Co Ltd

0.20

0.20

0.30

0.40

0.60

E Land Group

0.50

0.50

0.50

0.50

0.50

Inditex, Industria de Diseño Textil SA

0.20

0.40

0.50

0.50

0.50

Shanghai La Chapelle Fashion Co Ltd

0.10

0.10

0.30

0.40

0.50

Metersbonwe Group

0.80

0.90

0.70

0.60

0.40

Bosideng International Holdings Co Ltd

0.70

0.70

0.70

0.60

0.40

Daphne International Holdings Ltd

0.40

0.50

0.50

0.50

0.40

Li Ning Co Ltd

0.90

0.70

0.50

0.40

0.40

H&M Hennes & Mauritz AB

0.20

0.20

0.30

0.30

0.40

Xtep International Holdings Ltd

0.50

0.60

0.50

0.40

0.30

361 Degrees International Ltd

0.60

0.60

0.50

0.30

0.30

Ningbo Romon Group Co Ltd

0.30

0.30

0.30

0.30

0.30

Trendy Group International Holdings Ltd

0.30

0.30

0.30

0.30

0.30

Youngor Group Co Ltd

0.30

0.30

0.30

0.30

0.30

Ningbo Peacebird Group Co Ltd

0.10

0.20

0.30

0.30

0.30

VF Corp

0.20

0.20

0.30

0.30

0.30

0.10

0.20

0.20

0.20

0.30

0.20

0.30

0.30

0.30

0.20

Texwinca Holdings Ltd

0.40

0.40

0.30

0.20

0.20

Aokang Group Co Ltd

0.30

0.30

0.30

0.20

0.20

Glorious Sun Enterprises Ltd

0.30

0.30

0.30

0.20

0.20

Hongqingting Group Co Ltd

0.20

0.30

0.30

0.20

0.20

Peak Sport Products Co Ltd

0.40

0.40

0.20

0.20

0.20

China Lilang Ltd

0.20

0.30

0.20

0.20

0.20

Etam Développement SCA

0.30

0.30

0.20

0.20

0.20

0.20

0.20

0.20

0.20

Asics Corp

-

Beijing Aimer Lingerie Co Ltd

0.20

0.20

0.20

0.20

0.20

Hugo Boss AG

0.20

0.20

0.20

0.20

0.20

Kangnai Group Co Ltd

0.20

0.20

0.20

0.20

0.20

LVMH Moët Hennessy Louis Vuitton SA

0.20

0.20

0.20

0.20

0.20

Mark Fairwhale (Shanghai) Commercial Co Ltd

0.20

0.20

0.20

0.20

0.20

Ningbo GXG Fashion Co Ltd

0.20

0.20

0.20

0.20

0.20

Beijing Toread Outdoor Products Co Ltd

0.10

0.10

0.10

0.10

0.20

New Balance Athletic Shoe Inc

0.10

0.10

0.10

0.10

0.20

0.20

0.10

Kering SA

-

-

-

Fujian Septwolves Industry Co Ltd

0.20

0.30

0.30

0.20

0.10

Hongxing Erke Group

0.30

0.30

0.20

0.20

0.10

Exceed Co Ltd

0.30

0.30

0.20

0.10

0.10

Zhejiang Baoxiniao Group Co Ltd

0.10

0.20

0.20

0.10

0.10

Esprit Holdings Ltd

0.20

0.20

0.10

0.10

0.10

Burberry Group Plc

0.10

0.10

0.10

0.10

0.10

Ecco Sko A/S

0.10

0.10

0.10

0.10

0.10

Embry Holdings Ltd

0.10

0.10

0.10

0.10

0.10

Fapai Group Co Ltd

0.10

0.10

0.10

0.10

0.10

Foshan Saturday Shoes Co Ltd

0.10

0.10

0.10

0.10

0.10

Fuxin Telent (Fujian) Outdoor Products Co Ltd

0.10

0.10

0.10

0.10

0.10

Giordano International Ltd

0.10

0.10

0.10

0.10

0.10

Girdear Fashion Co Ltd

0.10

0.10

0.10

0.10

0.10

Guangzhou Gefeng Fashion Co Ltd

0.10

0.10

0.10

0.10

0.10

Hongguo International Co Ltd

0.10

0.10

0.10

0.10

0.10

Levi Strauss & Co

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

Ports Design Ltd

PVH Corp

0.10

-

0.10

0.10

0.10

0.10

Seven Brand Co Ltd

0.10

0.10

0.10

0.10

0.10

Shanghai Dragon Corp

0.10

0.10

0.10

0.10

0.10

ChaPter 10 ó Crafting the Brand Positioning

Cosmo Lady China Holdings Co Ltd Dongguan Dongyue Caparison Co Ltd

341

Tingmei Group Health-care Science & Technology Co Ltd

0.10

0.10

0.10

0.10

0.10

Gap Inc

0.00

0.00

0.10

0.10

0.10

BasicNet SpA

0.40

0.20

0.10

0.10

0.00

Boshiwa International Holding Ltd

0.10

0.10

0.10

0.00

0.00

China Sports International Ltd

0.10

0.10

0.10

0.00

0.00

MecoxLane Inc

0.20

0.10

0.10

0.00

0.00

Hongkong Congcong Globegarment Co Ltd

0.10

0.10

0.00

0.00

0.00

Source: EuroMonitor International

Several factors have contributed to adidas’s rise in China. The launch of high-heeled sneakers from its sub-brands such as Originals, NEO, and Y-3 has been met with much success. Collin Currie, Managing Director of adidas Group Greater China, states, “NEO is competitively priced. The price gap between NEO and Chinese local brands is within 100 yuan [$16 or €12]. We think Chinese consumers in lower-tier cities with [relatively] higher disposable income will prefer to buy international brands with high quality.”

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Adidas has also taken the lead in addressing an influential gap in the Chinese market: women. As Jens Meyer, VP-Marketing of Sports Performance for adidas China, said, “There’s no Lululemon in China.” The Adidas China team localized the global “All in for My Girls” marketing platform by choosing Taiwanese pop star Hebe, whom the local market can associate with. The visuals showed “cute” and smiling women rock climb, dance, and hang out in the gym—a deliberate showcase of Asian ideals of beauty. This is in contrast to its many Western commercials, such as its original 2014 “Winner Stays” or 2002 “Move” commercials, which show sweat and athletic prowess while engaging in sports. Understanding the behavior of this target group played a key role in adidas’s marketing strategy. Meyer said that these women “were doing sport with a desire to do it together with their girlfriends . . . they wanted to laugh and have fun” and that “sport was as much about going to the gym as the coffee afterward.” Adidas also advertised TV commercials of Chinese people running, dancing, and performing parkour. By showing non-traditional activities like dance, which could be carried out in small groups, the commercials helped to connect with Chinese women who were less sporty and were intimidated by the gym. The success of the “All in for My Girls” campaign was soon evident: adidas registered a 40 percent growth in its women’s business after the launch of the campaign. Other competitors such as H&M have also been slowly gaining traction, eating into Nike’s market share. In Hong Kong, H&M’s retail sales increased from $42.5 million in 2010 to $127.7 million in 2014.

Another huge challenge for Nike’s operations is its accumulation of inventory as a result of the sales slowdown despite its projected increase in sales after the 2008 Beijing Olympics. The higher-than-usual markdown on products on the shelves of its retails and outlets is not only accompanied by competition from adidas, which was first to offer discounts to clear its inventory, but also by the possibility of jeopardizing it brand image in the long run. Nike’s challenge in China could also be seen partly as a cultural one. In the West, Nike uses wealthy superstars’ brand endorsements to boost its sales. An example is Air Jordan, Michael Jordan’s self-titled basketball shoe line. Air Jordan had become an entirely separate division within Nike, having contributed largely to the growth of Nike’s annual revenues from $8.78 billion in 1998 to $19.18 billion in 2009. However, in China, sporting achievements are seen more in collective and national terms. Further, athletes in China do not appear to have the same degree of glamor or influence compared to those in the West. Instead, academic performance is held in higher regard. Nike’s approach in China should therefore be different to that in the West and instead build on national programs through partnerships with schools and universities to play on the Chinese people’s collective and nationalistic sentiments. Further, Nike’s position as a premium provider of sportswear for popular sports such as soccer may not be appreciated to the same degree in China, where soccer is not as popular as it is in Europe. As such, Nike China needs to craft a new story in the country if it is to capture the upcoming young generation, which cares about societal status and fashion as they climb out of rural poverty and head to the cities. Despite their aspirations to appear trendy, this “fashionista” generation is also price-sensitive, as they go for value-for-money and affordability along with brand prestige. Hence, when faced with two brands that are positioned on the same tier in terms of prestige, the average consumer will go for the one that offers more affordable products.

Anta, another major sportswear brand, is also on the rise. Having designed the “Champion Dragon Outfit” for the Chinese sports delegation to the 2012 London Olympics, the Chinese sportswear giant has slowly inched its way into the global consciousness. The Fujian-based sportswear giant has seized a significant portion of the mass market for leisure wear. It saw its sales hit a high of $1.42 billion in 2014—the highest since its initial public offering in Hong Kong in 2007. Further, to compete with the likes of Nike and adidas in the high-end consumer market, Anta acquired Italian brand Fila in 2009. Through Fila, it has reached out to many consumers who are conscious of brand prestige. Anta also constantly innovates with its series of differentiated products. Besides tailor-making the Challenge100, a specialized functional running shoe for the Chinese ultra-marathon runner Chen Penbin, it also launched the A-Loop running shoe featuring the all-new A-Web 3.0 technology in the second quarter of 2015. The company emphasizes product differentiation and integrating sports resources with its sponsorship to deliver a consistent store image. In addition to the local competition, the weak protection of intellectual property in China has also led to easy counterfeits being accessible at very cheap prices and in large quantities. Even though Nike is positioned to target the aspiring brand-conscious young generation who are willing to spend money on their appearance, there is a portion of this group who are choosing to purchase counterfeits at lower prices compared to the Nike originals. This has resulted in a dent in not only the profits of Nike but also its close competitors, such as adidas.

Questions 1. What are Nike’s points-of-parity (POP) and points-of-differentiation (POD) in China? 2. Discuss why you think Nike could not expand as its competitors did. 3. Going forward, what should Nike do to thwart competition and regain its strong foothold in China? Sources: Walter Bottlick, “Celebrity Endorsement: When It’s Worth the Effort,” Magnificat, April 2010; “ANTA Sports Launches Olympics Strategy and Marketing Campaign Hand-In-Hand with COC Unveils ‘Champion Dragon Outfit’,” www.anta.com, 17 May 2012; Yang Yang, “Adidas Ready to Surf the China Wave,” www.businessinsider.com, 25 May 2012; “Li-Ning Lost Out to Foreign Rivals in China,” www.ft.com, 17 June 2013; “Nike Just Doesn’t Do It with lost Sales Year in China,” Bloomberg Business, 18 July 2013; “Adidas Gains on Nike in China by Balancing Performance with Fashion,” Advertising Age, 14 August 2013; “How Is Nike Conquering the Challenging China Market,” www.fashionbi.com, 25 August 2014; Phalguni Soni, “The Growth Factors Spiking NIKE Revenues and Earnings,” Market Realist, 29 December 2014; Aaron Taube, “25 Nike Ads That Shaped The Brand’s History,” www.usa .chinadaily.com.cn, 1 September 2013; “Nike’s China Problem,” Forbes, 21 March 2014; Tiffany Ap, “Anta First to Break Away from Loss-Making Chinese Sportswear Pack,” South China Morning Post, 8 August 2014; Donny Kwok, “China’s Li Ning Stumbles from Gold Medal Position to No Man’s Land,” Reuters, 1 September2014; Tiffany Ap, “Anta Aims to Rival Global Sports Brands,” South China Morning Post, 29 February 2015; Jens Hansard, “H&M sees Profits Rise Despite Pressure from Strong Dollar,” Wall Street Journal, 24 March 2015; “ANTA Retains Leading Market Share in Travel and Sports Shoes in China for 14th Consecutive Year—Wings to Awards for Outstanding Investor Relations Performance,” Dow Jones Newswires, 13 April 2015; Nike Inc, Annual Report on Form 10-K, accessed on 15 July 2015; Nike (China) Inc. Report, Euromonitor International, accessed on 15 July 2015; “Nike’s Chinese Wall,” www.iamthestrategist.com.

ChaPter 10 ó Crafting the Brand Positioning

Both adidas and Nike have jumped on this wave with the launch of trendy and affordable product lines such as NEO, which offers everyday essentials such as fitted jeans, and Converse, acquired by Nike in 2003, which offers lasting shoes at a competitive price. Further, the market for sportswear is not without strong competition from local brands such as Li Ning and Anta. Li Ning has created a serious dent in Nike’s revenues as well. Named after Chinese gymnast Li Ning, who is hailed as a national hero for his six medal victories in the 1984 Los Angeles Olympics, the nation’s first appearance at a summer game in 32 years, the Chinese company grew from 3,373 outlets in 2005 to 6,245 outlets in 2008. It is hard to forget the image of founder Li Ning, decked out in his company’s clothes, rising to light the Olympic flame in the Bird Nest’s stadium during the 2008 Beijing Olympics. In addition, Li Ning’s biggest ambassadors consist not only of the celebrity founder athlete himself but also other celebrity athletes such as the National Basketball Team of Finland, NBA Superstar Dwyane Wade, and Olympic Triple Jump Champion Christian Taylor. While Nike takes the market lead in Beijing and Shanghai, Li Ning leads in the second- and third-tier cities in the Chinese market. Its stronghold in mass-market leisure wear is also a serious barrier for Nike if it plans to venture beyond its professional standard athletic wear into other markets. The Chinese company has also tried to rebrand itself as a premium sportswear provider by raising its prices in 2010, launching an assault on Nike’s position in that target segment. Li Ning also sponsors traditionally Chinese dominated sports such as diving, gymnastics, and badminton compared with Nike, which heavily sponsors football.

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PART 4

Building Strong Brands

11 C H A P T E R

I

Competitive Dynamics Growth is essential for the success of any firm. To be a long-term market leader is the goal of any marketer. Today’s challenging marketing circumstances, however, often dictate that companies reformulate their marketing strategies and offerings several times. Economic conditions change, competitors launch new assaults, and buyer interest and requirements evolve. Different market positions can suggest different market strategies.

n a case of David versus Goliath, homegrown Jollibee took on McDonald’s in the Philippines and succeeded hands down. It braced itself for McDonald’s entry with an aggressive marketing campaign and a change in menu and service. While McDonald’s remained largely faithful to its core menu, Jollibee was open to steering away from typical fast-food fare. Unlike Americans, Filipinos do not like pure beef patties as they are considered bland. Instead, Jollibee makes its patties stronger flavored with garlic, onion, and celery. Its two most popular items are Yumburger and Chickenjoy. Yumburger has a rich dose of French dressing in the middle, while its ChickenJoy comes with chili powder. Filipinos prefer French fries

to be dry on the inside and taste like they have been fried several times, unlike McDonald’s moist French fries. Filipinos, especially children, also like sweet spaghetti. Jollibee obliged by offering Filipino fare such as palabok, vermicelli noodles topped with sauce and fish flakes, and arroz caldo, rice porridge with chicken bits. For dessert, Jollibee has its signature deep-fried mango pie. Its marketing campaigns are also very in tuned with the Filipino culture. Filipino values such as respect for elders, patriotism, and loyalty to the family are frequently promoted in Jollibee’s campaigns. Also, instead of running its ads in English, as McDonald’s did, Jollibee ran ads in Tagalog, the Filipino language.1

In this chapter, we will address the following questions: 1. How can market leaders expand the total market and defend market share? 2. How should market challengers attack market leaders? 3. How can market followers or nichers compete effectively? 4. What marketing strategies are appropriate at each stage of the product life cycle? 5. How should marketers adjust their strategies for an economic downturn?

T

his chapter examines the role competition plays and how marketers can best manage their brands depending on their market position and stage of the product life cycle. Competition grows more intense every year— from global competitors eager to grow sales in new markets and online competitors seeking cost-efficient ways to expand distribution to private-label and store brands providing low-price alternatives, and brand extensions by mega-brands moving into new categories.2 For these reasons and more, product and brand fortunes change over time, and marketers must respond accordingly.

11.1 Competitive Strategies for Market Leaders Suppose a market is occupied by the firms shown in Figure 11.1. Forty percent of the market is in the hands of a market leader; another 30 percent is in the hands of a market challenger; another 20 percent is in the hands of a market follower, a firm that is willing to maintain its market share and not rock the boat. Market nichers, serving small market segments larger firms do not reach, hold the remaining 10 percent. A market leader has the largest market share and usually leads the other firms in price changes, new-product introductions, distribution coverage, and promotional intensity. Some well-known market leaders are Microsoft (computer software), Zara (fast-fashion store), Amazon (online store), Apple (smartphones), and Visa (credit cards).

Figure 11.1 Hypothetical Market Structure

Although marketers assume well-known brands are distinctive in consumers’ minds, unless a dominant firm enjoys a legal monopoly, it must maintain constant vigilance. A product innovation may come along and hurt the leader; a competitor might unexpectedly find a fresh new marketing angle or commit to a major marketing investment; or the leader might find its cost structure spiraling upward. Marketing Insight: Pokémon Go: A Game-Changer for Nintendo? discusses the ups and downs of Nintendo and the worldwide craze of Pokémon Go, which may bring Nintendo to its next phase of growth.

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MARKETING INSIGHT

Pokémon Go: A GAMe-ChANGer For NINteNdo?

As comebacks go, the excitement surrounding the return of Pokémon could literally be a game changer. Pokémon Go, the latest incarnation of the franchise, has become an overnight blockbuster in the app world. Since its launch on July 6, 2016, the mobile game has racked up tens of millions of downloads and millions of active players around the world, breaking records even in markets where it has yet to officially launch. In mid-July, less than a week after its debut in the United States, Pokémon Go became the most active mobile game ever—even more popular than Candy Crush, which was once a viral gaming sensation. One research firm reported that average daily usage of Pokémon Go exceeded time spent on WhatsApp, Snapchat, Tinder, Instagram, and Twitter. The game’s huge popularity has rekindled interest in Nintendo, the Kyoto-based games maker that launched the Pokémon phenomenon 20 years ago. A week after Pokémon Go’s release, Nintendo’s shares spiked on the Tokyo exchange, more than doubling the firm’s market value to $42.1 billion. However, Nintendo did not itself produce Pokémon Go. Niantic Labs, a Google spin-off, developed the app in partnership

with the Pokémon Company, which itself has three partners— Nintendo, Game Freak, and Creatures. Even though it remains unclear how much profit Nintendo will actually receive from the game, investors are clearly anticipating big outcomes. The big question is, will this heady speculation actually deliver any solid financial substance? Once a giant of the gaming world, until recently Nintendo had been written off by many analysts as a faded start that had failed to keep pace with a changing market. The last few years have seen its console sales languishing in a poor third place behind PlayStation and Xbox, and at the same time it stubbornly resisted entering the mobile games business. It was very different 20 years ago. Nintendo was then in an enviable position, commanding around 90 percent of the gaming market. A series of innovations had made the former playing-card manufacturer an industry leader in home and handheld electronic gaming. But dominant positions like that rarely endure, especially not in an industry so fundamentally tied to technology. Nintendo’s rise began in the mid-1980s with the release of the ground-breaking Nintendo Entertainment System (NES)

Consumers are too disloyal, fickle, and unwilling to shell out cash to pay for them. And competitors are very creative. Against this landscape, blockbuster games of today are quickly forgotten. Remember Angry Birds? Nintendo needs alternative vehicles to unlock the value of its unique set of characters. If we truly want to see value created in Nintendo, we need to see Nintendo collaborate with or be acquired by a company with complementary resources needed to keep its characters as busy as Mickey, Donald, Elsa, Mulan, and Cinderella have been for Disney. Until then, any value created by Nintendo is as much of an illusion as those poor Pokémons being chased by millions on the screens of their smartphones.

Sources: Adapted from Andrew Delios, “Pokémon Go: A Game-Changer for Nintendo?” Think Business, 3 August 2016. Partially reproduced with permission from Think Business, NUS Business School, National University of Singapore (http://thinkbusiness.nus.edu). Copyright NUS Business School.

11.1.1 Expanding Total Market Demand The dominant firm normally gains the most when the total market expands. If Indonesians increase their consumption of sweet chili sauce, ABC stands to gain the most because it is the market leader in such sauces. If ABC can convince more Indonesians to add more sweet chili sauce to their dishes and for all meals, ABC will benefit considerably.

ChaPter 11 ó Competitive Dynamics

home gaming console. The launch of the NES was the precursor to a string of legendary gaming titles and characters from the Nintendo stable, such as Excitebike, Super Mario Brothers, Donkey Kong, and Legend of Zelda. A decade later, the company hit another winner with the launch of the handheld Gameboy, a console that became the platform for the first Pokémon game. In the world of gaming, it seemed, Nintendo had the golden touch, its name held up as the undisputed champion of the gaming industry. Nintendo’s success came from innovation, but in the world of technology it is easy to be out-innovated by well-resourced competitors like Sony and Microsoft. This competition steadily eroded Nintendo’s grip on the gaming industry. Nintendo may have long since been knocked from its perch, but a key legacy of its former dominance gives it a formidable competitive resource: a list of characters imprinted on the minds of gamers. From Mario to the many faces of Pokémon, no other company has such a potentially valuable catalog of intellectual property. With innovation no longer driving success for Nintendo, it needs to put its characters to work. Much as Disney seduces us into buying its clothes, books, music, or vacations in its hotels, theme parks, and cruises, Nintendo built unbreakable connections to its characters through its iconic games. Pokémon Go marks an interesting first step in realising the potential value Nintendo has on its books. Reviewers and players have praised the app’s innovative approach of using augmented reality and immersive, physically active game play. But remember that it was not Nintendo who developed the game. For Nintendo itself, Pokémon Go is still only a first step, and a small one at that. The new game reincarnates a dormant set of characters that still has widespread appeal. However, there is no evidence yet that it yields significant long-term sustainable advantage to Nintendo. It certainly is not enough value to justify an addition of $21 billion to the company’s value. What matters most is where it goes next. For years, Nintendo ignored the smartphone revolution and resisted venturing into mobile gaming, focusing instead on incremental innovation in its own platforms and internal development of games. Now, it seems, it may have seen the light. The company has said it plans to release four mobile games by March 2017. The success of Pokémon Go offers a promising sign that Nintendo still commands the brand recognition and intellectual property to produce games of huge appeal. But we cannot forget that competition in the mobile gaming space is intense.

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Similarly, when the Chinese energy drink market expanded, Coca-Cola stood to gain a lot because its Powerade’s market share increased considerably.3 In general, the market leader should look for new customers or more usage from existing customers.

New Customers A company can search for new users among three groups: those who might use it but do not (market-penetration strategy), those who have never used it (new-market segment strategy), or those who live elsewhere (geographical-expansion strategy). Here is how the video-gaming industry in Japan has changed with a new market in female gamers:

As the market leader in Indonesian food sauces, ABC stands to gain the most by expanding the total market demand.

Japan’s video-game industry—The traditionally male-dominated video-game market in Japan is seeing increased patronage from female gamers who are interested in otome –romance games. These women are attracted to play out their romantic escapades in richly storied social games. They get to fantasize the men they want. Experts expect such female-oriented games to contribute more to the overall gaming industry. Opportunities include turning manga, graphic novels, into interactive games because female-oriented comics account for a large majority of Japan’s e-book market. Social networks like Gree stands to benefit. Gree develops and runs games for its Facebook-like service in Japan.4

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Romance games are gaining popularity, making female gamers an increasingly important market for video-game companies.

More Usage Usage can be increased by increasing the amount, level, or frequency of consumption. Increasing the amount of consumption can sometimes be done through packaging or product design. Larger package sizes have been shown to increase the amount of product that consumers use at one time.5 “Impulse” consumption products such as soft drinks and snacks find that usage increases when the product is made more available. Some firms have developed smaller packaging sizes that have increased sales volume through more frequent usage. Increasing frequency of use involves either (1) identifying additional opportunities to use the brand in the same basic way, or (2) identifying completely new and different ways to use the brand.

Additional Opportunities to Use the Brand To generate additional usage opportunities, a marketing program can communicate the appropriateness and advantages of using the brand. Another opportunity arises when consumers’ perceptions of their usage differs from reality. For many products with relatively short lifespans, consumers may fail to replace the product in a timely manner because of a tendency to overestimate

the length of productive usage.6 One strategy to is to tie the act of replacing the product to a certain holiday, event, or time of year. Another strategy might be to provide consumers with better information on either (1) when the product was first used or would need to be replaced, or (2) the current level of product performance. Each Gillette cartridge features a blue stripe that slowly fades with repeated use. After about a dozen shaves, it fades away, signaling the user to move on to the next cartridge. Gillette also promotes its Fusion razor with an app, uArt, downloadable from iTunes. It allows users to add hair to a photo, use their fingers to guide the virtual Fusion to remove the follicles, and see what facial hair they like.7

New Ways to Use the Brand

11.1.2 Protecting Market Share While trying to expand total market size, the dominant firm must continuously defend its current business. Sony must constantly guard against Panasonic, Apple against Samsung mobile phones, and Singapore Airlines against Cathay Pacific. What can the market leader do to defend its terrain? The most constructive response is continuous innovation. The leader leads the industry in developing new product and customer services, distribution effectiveness, and cost cutting. Comprehensive solutions increase its competitive strength and value to customers so that they feel appreciative or even privileged to be a customer as opposed to feeling trapped or taken advantage of.

Proactive Marketing In satisfying customer needs, a distinction can be drawn between responsive marketing, anticipative marketing, and creative marketing. A responsive marketer finds a stated need and fills it. An anticipative marketer looks ahead into what needs customers may have in the near future. A creative marketer discovers and produces solutions customers did not ask for but to which they enthusiastically respond. Creative marketers are proactive market-driving firms, not just market-driven ones.8 Many companies assume their job is just to adapt to customer needs. They are reactive mostly because they are overly faithful to the customer-orientation paradigm and fall victim to the “tyranny of the served market.” Successful companies instead proactively shape the market to their own interests. Instead of trying to be the best player, they change the rules of the game.9 A company needs two proactive skills: (1) response anticipation to see the writing on the wall, as when IBM changed from a hardware producer to a service business, and (2) creative anticipation to devise innovative solutions, as when PepsiCo introduced H2OH! (a soft drinkbottled water hybrid). Note that responsive anticipation is performed before a given change, while reactive response happens after the change takes place. Proactive companies create new offers to serve unmet—and maybe even unknown— consumer needs. At one time, Sony engaged in such proactive marketing. Sony—Sony has introduced many successful new products that customers never asked for or even thought were possible: Walkmans, VCRs, video cameras, and CDs. At that time, Sony was a market-driving firm, not just a market-driven firm. Akio Morita, its founder, once proclaimed that Sony does not serve markets; Sony creates markets. The Walkman is a classic example: In the late 1970s, Akio Morita was working on a pet project that would revolutionize the way people listened to music: a portable cassette player he called the Walkman. Engineers at the company insisted there was little demand for such a product, but Morita refused to part with his vision.10

ChaPter 11 ó Competitive Dynamics

The second approach is to identify completely new and different applications. For example, food product companies have long advertised new recipes that use their branded products in entirely different ways. Lee Kum Kee, a Hong Kong-based manufacturer of Chinese sauces, provides recipes on what dishes to cook using its sauces.

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Proactive companies may redesign relationships within an industry, like Toyota and its relationship to its suppliers. Or they may educate consumers, as Body Shop does in stimulating the choice of environmentally friendly products. Companies need to practice “uncertainty management.” Companies that are too risk-averse will not be winners. Proactive firms: Are ready to take risks and make mistakes Have a vision of the future and of investing in it Have the capabilities to innovate Are flexible and non bureaucratic Have many managers who think proactively In Asia, 20 centuries ago, in a treatise called The Art of War, the famed Chinese military strategist, Sun Tzu, told his warriors: “One does not rely on the enemy not attacking, but on the fact that he himself is unassailable” (see Marketing Insight: Sun Tzu Bing Fa: Modern Strategy Insights from Ancient China). His military strategies have been applied to marketing. The leader of continuous innovation applies the military principle of the offensive: the commander exercises initiative, sets the pace, and exploits enemy weaknesses.

MARKETING INSIGHT

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Sun Tzu BinG Fa: ModerN StrAteGy INSIGhtS FroM ANCIeNt ChINA

In Chinese, the phrase “military strategy” comprises Bing (兵; soldier) and Fa (法; doctrine), which can be translated to mean “the art of war.” This is the title of Sun Tzu’s classic treatise, written in the 4th century B.C. The Chinese expression Shang Chang Ru Zhan Chang (商场 如战场) is translated to mean: “The marketplace is a battlefield.” This is how some Asians view success or failure in business. From an Asian perspective, the outcome of a family business directly influences the family’s survival and well-being. As the family is the key unit of a nation, its performance affects the nation’s survival and well-being. Thus, many Asians treat business competition as life-and-death warfare. A key principle articulated by Sun Tzu concerns the need for careful strategic planning. He wrote, “With careful and detailed planning, one can win; with careless and less detailed planning, one cannot win. How much less chance of victory has one who does not plan at all! From the way planning is done beforehand, one can predict victory or defeat.” Relatedly, Sun Tzu emphasized the importance of avoiding bloody conflicts as much as possible: “To subdue the enemy without fighting is the supreme excellence.” This is possible through a meticulous assessment of the strengths and weaknesses of one’s company and one’s competitors, as well as the market environment: “If you know your enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained, you will also suffer a defeat. If you know neither your enemy nor yourself, you will succumb in every battle . . . . Know the terrain, know the weather, and your victory will be complete.”

Sun Tzu further described the necessity of appraising seven elements: Moral influence—This refers to how people who support their ruler are willing to fight through the pitfalls of war. Thus, managers must formulate a common corporate goal to be shared by all employees, so that everyone will perceive themselves as members of the same group. A successful manager should be able to mobilize subordinates to work as a team. The company will then be able to “fight as one man” (同心; tongxin) in competition with others. Ability of generals—A good general should possess five qualities: wisdom (智; zhi), sincerity (诚; cheng), benevolence (仁; ren), courage (勇; yong), and strictness (严; yan). Thus, corporate leaders should have the following qualities: broad knowledge with ability to identify business trends and opportunities; the ability to establish mutual trust between management and employees; the ability to delegate power, while knowing how to tolerate employees’ unavoidable mistakes; the ability to understand the problems of subordinates and care for their welfare; the ability to avoid harassment from trifles; boldness to make risky decisions, while not making hasty or reckless ones; and the ability to mete out punishment decisively and fairly. Sun Tzu stressed the importance of a broadly defined generalship for leaders as opposed to merely their technical backgrounds. In many Asian companies, a manager’s general qualities are often viewed as more important than technical qualifications. Climate and terrain—Climate refers to conditions which represent an uncontrollable aspect of military situations.

act accordingly. Companies with well-trained employees can thus operate with greater organizational efficiency and effectiveness. Investment in a variety of training programs is a hallmark of successful business enterprises worldwide. Discipline—A good army always has stringent discipline, which it can achieve with an efficient reward-andpunishment system. Soldiers must be treated with humanity but kept under close control. Orders should be consistently carried out under strict supervision. Thus, a company with an effective disciplinary system will be geared toward higher performance. When employees are well aware of what they will receive, they will perform accordingly. Operational Guidelines At the operational level, Sun Tzu advocates some principles and rules for offence and defence which businesses may find useful: Short war—“Let your great object be victory, not lengthy campaigns. Rapidity is the essence of war.” Thus, planning should be well-conceived, but implementation of plans should be swift and decisive. Concentration—“Keep your forces concentrated, while the enemy must be divided.” Clearly, this is an endorsement of target marketing. Deception and surprise—“All warfare is based on deception; take advantage of the enemy’s unreadiness, make your way by unguarded routes, and attack unguarded spots.” This advocates the identification and targeting of new markets with potential ignored by one’s competitors. Initiative—“The clever combatant imposes his will on the enemy, but does not allow the enemy’s will to be imposed on him.” This advocates engaging competitors on one’s terms, rather than those of the competitor. Attack weakness—“In war, the way is to avoid what is strong and to strike what is weak.” This supports the flank and bypass attack strategies by market challengers against market leaders. Flexibility—“Just as water retains no shape, so in warfare there are no constant conditions. The soldier works out his victory in relation to the foe whom he is facing, and does not repeat the tactics which have gained him one victory, but lets his methods be regulated by the infinite variety of circumstances.” Marketers must thus cope with change and adapt quickly. This principle also favors the use of adaptive selling to canned presentations. Limitations Despite these insights, not all of Sun Tzu’s ideas can be applied in a business context. For example, he tended to exaggerate the role of the leader while downgrading that of the soldiers: “Although soldiers are not very smart, they are most easily moved.” Moreover, business is an act of construction, while war is one of destruction.

Sources: Sun Tzu and Samuel B. Griffith, The Illustrated Art of War (Oxford: Oxford University Press, 2005), pp. 17, 141–143; Gerald Michaelson, Sun Tzu–The Art of War for Managers: 50 Strategic Rules (Avon, MA: Adams Media, 2001); Victor H. Mair, The Art of War: Sun Zi’s Military Methods (New York: Columbia University Press, 2007).

ChaPter 11 ó Competitive Dynamics

However, a good general knows how to use these components advantageously, choosing the right time to fight, and turning bad weather to the disadvantage of the enemy. Likewise, marketers have to grapple with the “business climate.” These include political situations, economic cycles, investment climate, and other related social and cultural factors such as changes in demographics and consumer attitudes. To be competitive, a company must capitalize on environmental changes and formulate its strategies accordingly. Managers must be able to adapt strategies for environmental constraints, select the best time, and turn these conditions into advantages. An import substitution policy, for example, may hamper market entry, but at the same time may provide opportunities for investment, which can result in access to a closed market. Terrain refers to the area for military operations. While the geographical features of the battlefield are largely uncontrollable variables, the chosen ground for fighting is. In business, therefore, a company must decide in which place to manufacture and which market to target. The location should be selected according to a company’s needs. For example, if a company needs to tap cheap labor, it should move its operations to a developing country. Strength—Strength is relative: “In war, numbers alone confer no advantage. If one does not advance by force recklessly, is able to concentrate his military power through a correct assessment of the enemy situation, and enjoys the full support of his men, that would suffice.” Thus, there is no absolute superiority or inferiority in competition. What matters is knowing where one’s competitive edge lies, and when, where, and how to engage in competition. Organization size may seem to provide an advantage for major enterprises, but it can also lead to bureaucracy and low efficiency. Indeed, many recent corporate restructuring exercises have aimed to downsize operations to pursue niche strategies and to be more nimble in seizing market opportunities. A small enterprise must be able to concentrate its resources, deceive its competitors by hiding its real strengths, and use market intelligence to obtain information on its competitors. Thus, smaller Asian firms, having benefited from technologies through all possible channels, have become tough competitors within a short time. Doctrine—This element stresses the importance of rules and regulations, designation of ranks, allocation of responsibilities, and organizational structure. There is a need to delegate the necessary power to one’s subordinates and to maintain a good balance between an authoritarian leader and unorganized decentralization. Thus, managers should have sufficient power to coordinate their strategies. Adequate empowerment to carry out various assignments is also preferred. Training—Training is essential for ensuring success. If soldiers do not know how to follow signals, they cannot

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Defensive Marketing Even when it does not launch offensives, the market leader must not leave any major flanks exposed. The aim of defensive strategy is to reduce the probability of attack, divert attacks to less threatening areas, and lessen their intensity. The defender’s speed of response can make an important difference in the profit consequences. A dominant firm can use the six defense strategies summarized in Figure 11.2.11 (2) Flank (3) Preemptive ATTACKER

(1) Position

(4) Counteroffensive

(6) Contraction

DEFENDER

(5) Mobile

Figure 11.2 Six Types of Defense Strategies

Position Defense Position defense involves occupying the most desirable market space in the minds of the consumer, making the brand almost impregnable. Procter & Gamble “owns” the key functional benefit in many product categories, with Tide detergent for cleaning, Crest toothpaste for cavity prevention, and Pampers diapers for drybess.

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Flank Defense Although position defense is important, the market leader should also erect outposts to protect a weak front or possibly serve as an invasion base for counterattack. Shiseido—Its main focus in China is to make over its upmarket Auprés brand specifically for the Chinese market. To cater to rising purchasing power among Chinese consumers, it repackaged the Auprés line by adding a deluxe version and a men’s skincare line called JS. It also emphasized its attention to service by offering a special counter in department stores where customers can freely sample cosmetics something that is still quite uncommon in China. Additionally, Shiseido is pushing its lower end nonprestige cosmetic brands such as Za and Pure Mild in China to flank its cosmetic line.12

Pre-emptive Defense A more aggressive maneuver is to attack before the enemy starts its offense. A former senior executive at Jardine Matheson summed it well when he said, “If you own $8 billion worth of real estate in Hong Kong, two of the territory’s major hotels, and Asia’s leading merchant bank, if you are number one like we are, you’ve got to keep investing to stay number one.” Similarly, when Toyota’s Hiroshi Okuda took over the helm as the first president to come from outside the Toyoda family, he said, “What should a company do when everyone else thinks it is best in the business? Try harder.” A company can launch a preemptive defense in several ways. It can wage guerrilla action across the market—hitting one competitor here, another there—and keep everyone off balance; or it can try to achieve a grand market envelopment. It can introduce a stream of new products, making sure to precede them with preannouncements—deliberate communications regarding future actions.13 Preannouncements can signal to competitors that they will have to fight to gain market share.14 If Microsoft announces a new product development plan, smaller firms may choose to concentrate their development efforts in other directions to avoid head-to-head competition.

Some high-tech firms have even been accused of engaging in “vaporware”—preannouncing products that miss delivery dates or are not ever introduced.15

Counteroffensive Defense When attacked, most market leaders will respond with a counterattack. Counterattacks can take many forms. In a counteroffensive, the leader can meet the attacker frontally or hit its flank or launch a pincer movement. An effective counterattack is to invade the attacker’s main territory so that it will have to pull back to defend the territory. Another common form of counteroffensive is the exercise of economic or political clout. The leader may try to crush a competitor by subsidizing lower prices for the vulnerable product with revenue from its more profitable products; or may prematurely announce that a product upgrade will be available, to prevent customers from buying the competitor’s product; or may lobby legislators to take political action to inhibit or cripple the competition. Tech leaders like Apple, Intel, and Microsoft have aggressively defended their brands in court. Unilever China—In streamlining its Chinese operations into a single holding company based in Shanghai, Dutch company Unilever faced problems when seven of its Chinese partners did not want to swap their stakes in various joint ventures for minority shares in the resulting entity. A Dutch minister lobbied Shanghai officials to support Unilever’s consolidation plans. Unilever also approached the then Chinese premier and Shanghai’s ex-mayor, arguing that only one foreign personal products company could have a strong position in China; it would be either Unilever, based in Shanghai, or another company based in Guangzhou (Procter & Gamble). The plan was endorsed. Unilever was thus successful and later announced the formation of its holding company.16

Mobile Defense In mobile defense, the leader stretches its domain over new territories that can serve as future centers for defense and offense through market broadening and market diversification. Market broadening involves shifting focus from the current product to the underlying generic need. The company gets involved in R&D across the whole range of technology associated with that need. Thus, “petroleum” companies sought to recast themselves into “energy” companies. Implicitly, this change demanded that they dip their research fingers into the oil, coal, nuclear, hydroelectric, and chemical industries.

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Shiseido protects the weak front of its Auprés brand by offering sampling services, and flanking it with a lower end brands such as Za and Pure Mild.

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Goodbaby—This Chinese company makes baby strollers, children’s bicycles, as well as car seats, playpens, bassinets, and other kids’ products marketed under such names as Geoby, Cosco, Safety 1st, Huffy, and Schwinn. In China, Goodbaby’s products have more than 80 percent market share. However, despite growth opportunities both at home and abroad, it faces the threat of market liberalization with China’s entry into the World Trade Organization. Hence, Goodbaby plans to enter the retail business by expanding its product lines to include disposable diapers and infant/children’s clothing. It has over 1,100 Chinese patents in about 30 countries. In the diaper market, it faces stiff competition from market leaders Pampers and Huggies. As Goodbaby is not able to leverage its stroller distribution network to market its diapers, it has to establish new distributor relationships. Therefore, its diapers are priced 15 percent below that of the two leading brands. The clothing market has its own set of challenges. Goodbaby has licensing agreements with Disney and manufacturing relationships with Wal-Mart, Sears, and other U.S. companies. It plans to open up more stores in Chinese middle-class suburbs and city centers, selling infant and toddler clothes, diapers, strollers, sippy cups and other products. This broadening is aimed at increasing Goodbaby’s domestic profit margins, since the stores will eliminate middlemen costs. However, the move is risky as Goodbaby has no retailing experience and may alienate its existing retailers. The market may also not be ready for so many shops dedicated to selling such products.17 Market diversification involves shifting into unrelated industries. When tobacco companies like Reynolds and Philip Morris acknowledged the growing curbs on cigarette smoking, they were not content with position defense or even with looking for cigarette substitutes. Instead they moved quickly into new industries, such as beer, liquor, soft drinks, and frozen foods. Below is a Japanese example.

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Ajinomoto—This Japanese company, best known for commercializing a seasoning based on monosodium glutamate, specializes in amino acid-derived products. It is now trying to build a global franchise by extending its expertise to other products. In the animal feed market, Ajinomoto produces amino acid-based feedstock additives for cattle and poultry; as well as lysine, a feed additive to fatten livestock, to meet the increasing demand for meat from the emerging middle-class in China. In the consumer market, it sells an array of instant soups, pasta dishes, edible oils, and frozen foods. It has also introduced Amino Vital, a health supplement drink in the United States. This drink has become the rage among professional athletes, and Ajinomoto is working on penetrating the market of amateur athletes as well.18

Contraction Defense Large companies sometimes recognize that they can no longer defend all of their territory. The best course of action then appears to be planned contraction (also called strategic withdrawal): giving up weaker territories and reassigning resources to stronger territories. P&G sold Pringles to Kellogg for almost $2.7 billion when it decided it wanted to get out of the foods business to focus on its core household and consumer products.

11.1.3 Increasing Market Share Market leaders can improve their profitability by increasing their market share. In some markets, one share point is worth tens of millions of dollars. No wonder normal competition has turned into marketing warfare, as the following Chinese example illustrates. However, gaining increased share in the served market does not automatically produce higher profits—especially for labor-intensive service companies that may not experience many economies of scale. Much depends on the company’s strategy.

Because the cost of buying higher market share may far exceed its revenue value, a company should consider four factors before pursuing increased market share: The possibility of provoking antitrust action in some countries—Jealous competitors are likely to cry “monopoly” if a dominant firm makes further inroads. This rise in risk would diminish the attractiveness of pushing market share gains too far.

2.

Economic cost—Figure 11.3 shows that profitability might fall with further market-share gains after some level. In the illustration, the firm’s optimal market share is 50 percent. The cost of gaining further market share might exceed the value. The “holdout” customers may dislike the company, be loyal to competitive suppliers, have unique needs, or prefer dealing with smaller suppliers. The cost of legal work, public relations, and lobbying rises with market share. Pushing for higher market share is less justified when there are few scale or experience economies, unattractive market segments exist, buyers want multiple sources of supply, and exit barriers are high. Some market leaders have even increased profitability by selectively decreasing market share in weaker areas.20

3.

4.

The danger of pursuing the wrong marketing activities—Companies successfully gaining share typically outperform competitors in three areas: new-product activity, relative product quality, and marketing expenditures.21 Companies that cut prices more deeply than competitors typically do not achieve significant gains, as enough rivals meet the price cuts and others offer other values so that buyers do not switch. The effect of increased market share on actual and perceived quality 22—Too many customers can put a strain on the firm’s resources, hurting product value and service delivery. Some online companies experienced growing pains when their customer base expanded, resulting in system outages and access problems. Consumers may also infer that “bigger is not better” and assume that growth will lead to a deterioration of quality. If “exclusivity” is a key brand benefit, existing customers may resent additional new customers.

11.2 Other Competitive Strategies Firms that occupy second, third, and lower ranks in an industry are often called runner-up, or trailing firms. Some, such as Colgate, Nissan, Sharp, Avis, and PepsiCo, are quite large in their own right. These firms can adopt one of two postures. They can attack the leader and other competitors in an aggressive bid for further market share as market challengers, or they can play ball and not “rock the boat” as market followers.

Optimal Market Share P rofitability

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0

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Harbin beer became an acquisition target for foreign beers eyeing to expand their market share in China.

Chinese breweries—China is the world’s biggest beer market. Its four largest breweries are Snow, Tsingtao, Harbin, and Yanjing. Harbin Brewery was caught in a beer brawl between Anheuser-Busch and SABMiller. The former bought a 29 percent stake in Harbin Beer and the reaction from SABMiller was swift. It launched a hostile takeover bid to protect its existing 29 percent stake in Harbin Beer. Eventually, SABMiller dropped its $550 million bid after Anheuser-Busch launched a $720 million counteroffer. Both global beer makers are interested in Harbin Beer because they want to expand their market share and have a bigger bite of the China market. Other international breweries followed. Belgium’s Interbrew bought several breweries near Shanghai to capture a prominent position in China’s two richest provinces, Guangdong and Zhejiang, while Scottish and Newcastle have a stake in Chongqing Breweries. Over the past decade, there have been more than 80 acquisitions. Tsingtao took over Xin Immense, West Lake, and Taiyuan Jiahe breweries.19

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25

50

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Mar ket S hare (% ) Figure 11.3 The Concept of Optimal Market Share

11.2.1 Market-Challenger Strategies Many market challengers have gained ground or even overtaken the leader. Toyota today produces more cars than General Motors. Challengers set high aspirations, leveraging their resources while the market leader often runs the business as usual. Challengers can also tap into public perceptions that they are the underdog. Consider Tupperware in India. Tupperware—The traditional kitchenware for storing leftover food in India are metal containers. When Tupperware entered India as a challenger to these metal containers, it had to convince Indian homemakers to turn their backs on this long-held kitchen tradition. Tupperware began to develop its vacuum-sealed kitchenware to adapt to local food habits. While Tupperware sells rectangular containers for bread elsewhere; in India, it offers round containers to accommodate the shape of roti, traditional Indian bread. It also has masala boxes. Further, it is cognizant of the low prices charged by local competition, and thus produces its kitchenware locally.23 Now let us examine the competitive attack strategies available to market challengers.

Defining the Strategic Objective and Opponent(s) A market challenger must first define its strategic objective. Most aim to increase market share. The challenger must decide whom to attack: It can attack the market leader. This is a high-risk but potentially high-payoff strategy and makes good sense if the leader is not serving the market well. The alternative strategy is to out-innovate the leader across the whole segment.

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It can attack firms of its own size that are not doing the job and are underfinanced. These firms have aging products, are charging excessive prices, or are not satisfying customers in other ways. It can attack small local and regional firms. Several major banks grew to their present size by gobbling up smaller rivals. It can attack the status quo. The entire industry, not just specific firms, may not be addressing customer needs adequately. Netflix has succeeded by contrasting their services with those of competitors.

Choosing a General Attack Strategy Given clear opponents and objectives, what attack options are available? We can distinguish among five attack strategies: frontal, flank, encirclement, bypass, and guerilla attacks.

Frontal Attack In a pure frontal attack, the attacker matches its opponent’s product, advertising, price, and distribution. The principle of force says that the side with the greater manpower (resources) will win. A modified frontal attack, such as cutting price vis-à-vis the opponent’s, can work if the market leader does not retaliate and if the competitor convinces the market that its product is equal to the leader’s.

Chinese sports brands such as Li Ning use American basketball stars as endorsers.

Chinese sports brands—After tasting some success in Tier 1 cities, Nike and adidas are muscling their way into China’s smaller cities by lowering prices to compete with local brands. However, local sportswear companies such as Li Ning and Peak are not taking it lying down. They have taken the offensive by stepping up their overseas presence, especially in the U.S. basketball turf. Li Ning signed up several NBA Basketball stars including former superstar Shaquille O’Neal as its endorsers. It also engages in extensive TV commercials using famous American comedians to generate brand awareness. Peak has signed NBA players, Jason Kidd and Ron Artest.24

Flank Attack A flank attack can be directed along two strategic dimensions—segmental and geographic. The segmental attack involves serving uncovered market needs, as Japanese automakers did when they developed more fuel-efficient cars. In a geographic attack, the challenger spots areas where the opponent is underperforming. Below are two examples of market leaders who were attacked by flanking because they were unwilling to improve on areas beyond their expertise:

Kodak—Eastman Kodak led the development of film-based photography. It also invented digital photography. However, because of its near-monopoly status in the photographic film industry, it rested on its laurels and the power of its brand. It was not too keen in developing the digital photography business that it had invented. It seemed that it wanted digital photography to fail so that its film photography business, in which it was the leader, could thrive. In 2012, Kodak filed for bankruptcy. Challengers such as Fujifilm, innovated across a larger array of technologies and embraced digital photography more wholeheartedly.

A flanking strategy is another name for identifying shifts in market segments that are causing gaps to develop, then rushing in to fill the gaps and develop them into strong segments. Flanking is in the best tradition of modern marketing, which holds that the purpose of marketing is to discover needs and satisfy them. Flank attacks are particularly attractive to a challenger with fewer resources than its opponent and are much more likely to be successful than frontal attacks.

Encirclement Attack The encirclement maneuver is an attempt to capture a wide slice of the enemy’s territory by launching a grand offensive on several fronts. It makes sense when the challenger commands superior resources and believes a swift encirclement will break the opponent’s will. In making a stand against archrival Microsoft, Sun Microsystems licensed its Java software to hundreds of companies and millions of software developers for all sorts of consumer devices. As consumer electronics products began to go digital, Java started appearing in a wide range of gadgets.

Bypass Attack The most indirect assault strategy is the bypass. It means bypassing the enemy and attacking easier markets to broaden one’s resource base. This strategy offers three lines of approach: diversifying into unrelated products, diversifying into new geographical markets, and leapfrogging into new technologies to supplant existing products.

Haier—When Haier, China’s home appliance company, entered the United States, it knew it could not compete head on with General Electric and Whirlpool for the large-sized white goods market. Instead, Haier entered the U.S. market through the backdoor by catering to college students with small-sized refrigerators that can be fitted into crammed college dorm rooms. This bypass strategy worked as it allowed Haier to leverage its market leadership in the small- and medium-sized refrigerators market to slowly establish a foothold in the large refrigerator market.26

Holding on to its laurels in the photographic film market, and not pressing on in the digital photography business, led to Kodak’s bankruptcy.

ChaPter 11 ó Competitive Dynamics

BlackBerry—Once a technological innovator with market dominance, BlackBerry created valuable proprietary technologies that allow devices to work securely. However, it got too concerned about defending the technologies it had created that it ignored giving users the best possible experience when using its devices. The best possible experience may well mean surrendering its technological advantage, and BlackBerry tried holding on to its technological superiority. But Apple attacked BlackBerry through flanking. The next powerful innovation was not technological but the amazing ease of use and range of applications offered.25

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In technological leapfrogging, a challenger patiently researches and develops the next technology and launches an attack, shifting the battleground to its territory, where it has an advantage. Google used technological leapfrogging to overtake Yahoo! and become the market leader in search engines.

Guerrilla Attacks Guerrilla attacks consist of small, intermittent attacks to harass and demoralize the opponent and eventually secure permanent footholds. The guerrilla challenger uses both conventional and unconventional means of attack. These include selective price cuts, intense promotional blitzes, and occasional legal action, to harass the opponent and eventually secure permanent footholds. A guerrilla campaign can be expensive, although admittedly less expensive than a frontal, encirclement, or flank attack, but it typically must be backed by a stronger attack if the challenger hopes to beat the opponent. Hyundai—Hyundai Motors is known for taking advantage of the hardships of other automakers. Toyota’s automobile recall woes created an opportunity for Hyundai to increase its presence in the United States. The blow to Toyota’s quality reputation magnified the impact of Hyundai’s marketing campaign that focused on its improved quality. The campaign pitched Hyundai’s reengineered Sonata in the family sedan segment that is largely associated with Toyota’s Camry. It ruled out price discounts and cash incentives. Instead, its marketing blitz included advertising during the Super Bowl and the Academy Awards, and focused on quality and building its brand power.27

Choosing a Specific Attack Strategy

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Any aspect of the marketing program can serve as the basis for attack, such as lower-priced or disconnected products, new or improved products and services, a wider variety of offerings, and innovative distribution strategies. A challenger’s success depends on combining several strategies to improve its position over time. Here is what Samsung did. Samsung—Samsung has used many challenger strategies to take on Japanese manufacturers and outsell them across a wide range of products. Like many other Asian companies, Samsung used to stress volume and market domination rather than profitability. Yet during the Asian financial crisis of the late 1990s, when other Korean chaebol collapsed beneath a mountain of debt, Samsung took a different tack. It cut costs and placed new emphasis on manufacturing flexibility, which allowed its consumer electronics goods to go from project phase to store shelves within six months. It also began a serious focus on innovation, using technological leapfrogging to produce stateof-the-art mobile phone handsets that are big sellers not only across Asia but also in Europe and the United States.28

11.2.2 Market-Follower Strategies Theodore Levitt argues that a strategy of product imitation might be as profitable as a strategy of product innovation.29 The innovator bears the expense of developing the new product, getting it into distribution, and informing and educating the market. The reward for all this work and risk is normally market leadership. However, another firm can come along and copy or improve on the new product. Although it probably will not overtake the leader, the follower can achieve high profits because it did not bear any of the innovation expense. Many companies prefer to follow rather than challenge the market leader. Patterns of “conscious parallelism” are common in capital-intensive, homogeneous-product industries, such as steel, fertilizers, and chemicals. The opportunities for product differentiation and image differentiation are low; service quality is often comparable; and price sensitivity runs high. The mood in these industries is against short-run grabs for market share because that strategy only provokes retaliation. Most firms decide against stealing one another’s customers. Instead, they present similar offers to buyers, usually by copying the leader. Market shares show high stability.

This is not to say that market followers lack strategies. A market follower must know how to hold current customers and win a fair share of new customers. Each follower tries to bring distinctive advantages to its target market—location, services, financing. Because the follower is often a major target of attack by challengers, it must keep its manufacturing costs low and its product quality and services high. It must also enter new markets as they open up. The follower has to define a growth path, but one that does not invite competitive retaliation. Four broad strategies can be distinguished: 1.

Counterfeits are common in Asia.

Cloner—The cloner emulates the leader’s products, name, and packaging, with slight variations. For example, Glico Pocky chocolate stick snacks has a look-alike in Giant Chocky, Oreo chocolate sandwich cookies in Rodeo, and Tsingtao (青岛) beer in Tsingitao (青一岛) and Tsingsuntao (青山岛). In the computer business, clones are a fact of life.

Goojje—Goojje (谷姐) was a working search engine site that copied Google China. It was created after Google executives publicly threatened to shut down the Chinese site following the cyber attack on Google China and the necessity of filtering search results. Goojje allowed searches to be run, but apparently used Google and Baidu to do the actual searches. Google demanded that Goojje stop using its logo, but Goojje refused. Google in Chinese (谷歌) is a transcription without regard to its meaning of “valley song.” The Chinese name of Goojje can be interpreted as “the sister of Google.” The jje is from the word for sister, “jie jie” (姐姐), which mirrors how Google’s last syllable (歌) sounds like ge ge (哥哥) which means “brother.”

MARKETING INSIGHT

CouNterACtING CouNterFeItING

The combined price of a genuine Hermès wallet, a Louis Vuitton leather handbag, and a watch, belt, pair of glasses, pair of pants, and pair of sandals from Gucci would amount to $5,109 in Hong Kong boutiques. In Shenzhen, the fake editions of these items would cost a total of $150. Counterfeiting is among the world’s fastest-growing and most lucrative businesses. While many have heard of fake versions of luxury leather accessories, pharmaceutical products, and household brands, there are also theme parks that counterfeit popular brands. In Hunan province of China, a theme park, inspired by the mobile game Angry Birds, operates without license from the latter. Visitors take turns with giant slingshots of balloons, fashioned in the like of Angry Birds, to knock down structures protecting a bunch of pigs. A third of Japanese companies said imitations of their products were China-made, followed by South Korea with 18.1 percent, and Taiwan with 17.6 percent. Two technological trends have emerged in counterfeiting: the use of the Internet to sell pirated products and the proliferation of cheap high-tech equipment that facilitates better-quality reproduction of original material. With its ease of access, large audience, and potential for anonymity, the Internet

provides an ideal platform for counterfeiters. For example, there are at least 160 Web sites offering “genuine” Chanel products even though Chanel does not sell any of its products on the Internet. Textile piracy has grown in sophistication as the Internet has made it easier to copy branded goods. Digital technology has also facilitated the production of imitation CDs of the same quality as the original. It costs only five cents to produce a pirated version of a hit CD which is then sold in Asia for 40 to 50 times that amount. Improved technology has also helped counterfeiters design large-scale integration chips for calculators and LCDs. The fight against piracy is hampered by public perception that counterfeiting is a low-grade, victimless crime. Thus, a Hong Kong government billboard campaign tried to appeal to consumers’ conscience by declaring, “You are what you wear. Get real.” Yet, counterfeit aircraft and auto parts, medical equipment, birth control pills, and even vodka have been known to threaten lives. Moreover, with the increase in the quality of counterfeit products, some consumers who once rejected fakes are now clamoring for them and boasting about the source and cost of their purchases.

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Counterfeiter—The counterfeiter duplicates the leader’s product and package and sells it on the black market or through disreputable dealers. Music record firms, Louis Vuitton, and Rolex have been plagued with the counterfeiter problem, especially in Asia (see Marketing Insight: Counteracting Counterfeiting for details).

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What can marketers do to combat counterfeiters? Here are some strategies:

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Do nothing—Sometimes taking action may offend an otherwise congenial Asian partner, or local markets may view the Western firm as being heavy-handed. Team up with other brands to fund the cost of working with local governments to raid producers and sellers of fakes— Examples: Comite Colberg, an association of 75 French luxury brands; the Business Software Alliance; and the Beijingbased Quality Brands Protection Committee, which includes Compaq, Anheuser Busch, J&J, Philip Morris, and Prada. Lobby home governments—The U.S. government has placed Indonesia on its “priority watch list” for intellectual property rights violations which may impact Jakarta’s ability to attract investments, particularly in high-tech sectors. Other Asian nations similarly affected include the Philippines and Taiwan. This may motivate more consistent enforcement of intellectual property laws in the region. Governments of eight nations including the United States and Japan have signed an agreement to cut costly copyright and trademark theft. Develop in-house antifraud squads—Reebok and Nike send teams of undercover agents on training courses that teach them to recognize their company’s goods from fakes and to identify culprits. Engage investigative agencies—Firms in the consumer electronics and entertainment industry have engaged such agencies to identify counterfeiters, their distribution channels, and their manufacturing sites for authorities to take action. Casio hired private investigators to monitor counterfeits at major export promotion fairs and nip large-lot transactions in the bud.

Accelerate R&D efforts—Continually improving product performance and bettering the price/value offering creates a moving target for pirates. Canon is developing calculators with more functions and higher quality more quickly. Use high-tech labeling like special inks and dyes, holograms, and electronic signatures—Australia had a leading athlete donate DNA which was then incorporated into special ink used in official products sold during the Sydney Olympic Games. Advertise to end-users—A pull strategy may be employed to persuade consumers that the real product is superior to pirated brands, thus devaluing the latter’s status. Form partnerships—“If you can’t beat ‘em, join ‘em.” While Yamaha failed to combat imitation motorbikes by complaining to the Chinese authorities and placing newspaper ads condemning the practice, Honda decided to partner a Hainan company that prospered by making fake Honda bikes. The Sundrio Honda Motorcycle Company now produces lowpriced bikes for the Chinese market. Yamaha’s plight highlights the serious challenges that remain in the fight against counterfeiting in Asia. For example, in China, local branches of such regulatory bodies as the Administration for Industry and Commerce and the Quality and Technical Supervisory Bureaus are willing to get tough. However, counterfeiters are seldom handed over for criminal prosecution partly because officials may then be unable to extract bribes from the pirates. Some pirates are as organized and large as MNCs. Given their size, they can not only produce more and better quality fakes, but are also harder to dismantle. Ironically, things may improve when counterfeiters start to target local Chinese brands.

Sources: “The Spread of Counterfeiting: Knock-offs Catch On,” The Economist, 4 March 2010; Charles Cooper, “China Steals ‘Angry Birds’ for Theme Park,” www.cbsnews.com/stories/2011/09/16/scitech/main20107294.shtml, 16 September 2011; Kirsty Barnes, “New Counterfeit Reports Highlight Worrying Trends,” www.outsourcing-pharma.com/Contract-Manufacturing/New-counterfeit-report-highlights-worrying-trends, 2 November 2007; “Anti-counterfeiting Agreement Signed in Tokyo,” www.uk.reuters.com, 1 October 2011.

3.

imitator—The imitator copies some things from the leader but maintains differentiation in terms of packaging, advertising, pricing, or location. The leader does not mind the imitator as long as the imitator does not attack the leader aggressively.

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adapter—The adapter takes the leader’s products and adapts or improves them. The adapter may choose to sell to different markets, but often the adapter grows into the future challenger, as many Japanese firms have done after adapting and improving products developed elsewhere.

What does a follower earn? Normally, less than the leader. For example, a study of food processing companies showed the largest firm averaging a 16 percent return on investment; the number 2 firm, 6 percent; the number 3 firm, –1 percent, and the number 4 firm, –6 percent. In this case, only the top two firms have profits. No wonder Jack Welch, former CEO of GE, told his business units that each must reach the number 1 or number 2 position in its market or else! Followership is often not a rewarding path.

11.2.3 Market-Nicher Strategies An alternative to being a follower in a large market is to be a leader in a small market, or niche. Smaller firms normally avoid competing with larger firms by targeting small markets of little or no interest to the larger firms.

Firms with low shares of the total market can be highly profitable through smart niching. Such companies tend to offer high value, charge a premium price, achieve lower manufacturing costs, and shape a strong corporate culture and vision. The nicher achieves high margin, whereas the mass-marketer achieves high volume. Nichers have three tasks: creating niches, expanding niches, and protecting niches. Niching carries a major risk in that the market niche might dry up or be attacked. The company is then stuck with highly specialized resources that may not have high-value alternative uses. Because niches can weaken, the firm must continually create new ones. Marketing Memo: Niche Specialist roles outlines some options. The firm should “stick to its niching” but not necessarily to its niche. That is why multiple niching is preferable to single niching. By developing strength in two or more niches, the company increases its chances for survival. Firms entering a market should aim at a niche initially rather than the whole market.

NIChe SPeCIALISt roLeS

The key idea in successful nichemanship is specialization. Here are some possible niche roles: End-user specialist—The firm specializes in serving one type of end-use customer. For example, a value-added reseller (VAR) customizes the computer hardware and software for specific customer segments and earns a price premium in the process. Vertical-level specialist—The firm specializes at some vertical level of the production-distribution value chain. A copper firm may concentrate on producing raw copper, copper components, or finished copper products. Customer-size specialist—The firm concentrates on selling to either small, medium-sized, or large customers. Many nichers specialize in serving small customers who are neglected by the majors. Specific-customer specialist—The firm limits its selling to one or a few customers. Keiretsu suppliers may sell their entire output to a single company, such as Matsushita. Geographic specialist—The firm sells only in a certain locality, region, or area of the world. Product or product-line specialist—The firm carries or produces only one product line or product. Hanjaya Mandala Sampoerna produces kretek, a clove-scented cigarette favored

by most Indonesian smokers. Its main brand, Dji Sam Soe (a Chinese dialect for “Two, Three, Four”), is hand-rolled by thousands of employees in East Java. The company also offers machine-rolled and low-tar brands such as A Mild. Sampoerna was subsequently acquired by Philip Morris International, the international operating company of the Altria Group. Product-feature specialist—The firm specializes in producing a certain type of product or product feature. Job-shop specialist—The firm customizes its products for individual customers. Quality-price specialist—The firm operates at the lowor high-quality ends of the market. Hewlett-Packard specializes in the high-quality, high-price end of the hand-calculator market. Service specialist—The firm off ers one or more services not available from other firms. An example would be a bank that takes loan requests over the phone and handdelivers the money to the customer. Channel specialist—The firm specializes in serving only one channel of distribution. For example, a soft-drink company decides to make a very large-sized soft drink available only at gas stations.

11.3 Product Life-Cycle Marketing Strategies A company’s positioning and differentiation strategy must change as the product, market, and competitors change over the Product Life Cycle (PLC). To say that a product has a life cycle is to assert four things: 1.

Products have a limited life.

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Product sales pass through distinct stages, each posing different challenges, opportunities, and problems to the seller.

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Profits rise and fall at different stages of the PLC.

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Products require different marketing, financial, manufacturing, purchasing, and human resource strategies in each life-cycle stage.

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11.3.1 Product Life Cycles (PLC) Sales and Profits ($)

Sales

Most PLC curves are portrayed as bell-shaped (see Figure 11.4). This curve is typically divided into four stages: introduction, growth, maturity, and decline.30 1. introduction—A period of slow sales growth as the product is introduced in the market. Profits are nonexistent because of the heavy expenses of product introduction.

Profit

2. Growth—A period of rapid market acceptance and substantial profit improvement. Introduction

Growth

Maturity

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Time Figure 11.4 Sales and Profit Life Cycles

3. maturity—A slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits stabilize or decline because of increased competition. 4. Decline—Sales show a downward drift and profits erode.

The PLC concept can be used to analyze a product category (television), a product form (flat screen), a product (LED), or a brand (LG). Not all products exhibit a bell-shaped PLC.31 Three common alternate patterns are shown in Figure 11.5. Figure 11.5(a) shows a growth-slump-maturity pattern, often characteristic of small kitchen appliances such as hand-held mixers and bread makers. Sales grow rapidly when the product is first introduced and then fall to a “petrified” level that is sustained by late adopters buying the product for the first time and early adopters replacing the product. The cycle-recycle pattern in Figure 11.5(b) often describes the sales of new drugs. The pharmaceutical company aggressively promotes its new drug, and this produces the first cycle. Later, sales start declining and the company gives the drug another promotion push, which produces a second cycle (usually of smaller magnitude and duration).32 Another common pattern is the scalloped pattern in Figure 11.5(c). Here sales pass through a succession of life cycles based on the discovery of new product characteristics, uses, or users. For example, the sales of nylon show a scalloped pattern because of the many new uses—parachutes, hosiery, shirts, carpeting, boat sails, automobile tires—that continue to be discovered over time.33

Time

Primary cycle

Recycle

(c) Scalloped Pattern

Sales Volume

(b) Cycle-Recycle Pattern

Sales Volume

(a) Growth-Slump-Maturity Pattern

Sales Volume

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Time

Time

Figure 11.5 Common Product Life-cycle Patterns

11.3.2 Style, Fashion, and Fad Life Cycles We need to distinguish three special categories of PLCs—styles, fashions, and fads (Figure 11.6). A style is a basic and distinctive mode of expression appearing in a field of human endeavor. Styles appear in homes (colonial, ranch, Tudor); clothing (formal, casual, funky); and art (realistic, surrealistic, abstract). A style can last for generations, and go in and out of vogue. A fashion is a currently accepted or popular style in a given field. Fashions pass through four stages: distinctiveness, emulation, mass-fashion, and decline.34 The length of a fashion cycle is hard to predict. One viewpoint is that fashions end because they represent a purchase compromise, and consumers start looking for missing attributes.35 For example, as automobiles become smaller, they become less comfortable, and then a growing number of buyers start

Time

Fad

Sales

Fas hion

Sales

Sales

Style

Time

Time

Figure 11.6 Style, Fashion, and Fad Life Cycles

Fads are fashions that come quickly into public view, are adopted with great zeal, peak early, and decline very fast. Their acceptance cycle is short, and they tend to attract only a limited following of those who are searching for excitement or want to distinguish themselves from others. Fads do not survive because they do not normally satisfy a strong need. The marketing winners are those who recognize fads early and leverage them into products with staying power.

Angry Birds—Chinese gamers were crazy over the mobile game Angry Birds. With intense competition from mobile game developers and the short-lived nature of the gaming industry, its developer, Rovio Entertainment, went all out to cash in on its popularity. It customized a Chinese version called “Mooncake Festival” to coincide with the Chinese Mid-Autumn Festival. It also sold Angry Birds mooncakes and opened outlets to sell official merchandise. The craze for fen nu de xiao niao (愤怒的小鸟), a literal Chinese translation of Angry Birds, took a whole new level. Angry Birds reportedly turned up in a Shanghai university Math paper testing students on angles and velocity.37

ChaPter 11 ó Competitive Dynamics

wanting larger cars. Further, too many consumers adopt the fashion, thus turning others away. Another observation is that the length of a particular fashion cycle depends on the extent to which the fashion meets a genuine need, is consistent with other trends in the society, satisfies societal norms and values, and does not exceed technological limits as it develops.36

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Is the mobile games the mobile game Angry Birds a fad? People were crazy over it and both official and pirated merchandise sold and are still selling like hotcakes.

11.3.3 Marketing Strategies: Introduction Stage and the Pioneer Advantage Because it takes time to roll out a new product, work out the technical problems, fill dealer pipelines, and gain consumer acceptance, sales growth tends to be slow at this stage.38 Sales of expensive new products such as high-definition TV are slowed by additional factors such as product complexity and fewer potential buyers. Profits are negative or low in the introduction stage. Promotional expenditures are at their highest ratio to sales because of the need to (1) inform potential consumers, (2) induce product trial, and (3) secure distribution in retail outlets.39 Firms focus on those buyers who are the most ready to buy, usually higher-income groups. Prices tend to be high because costs are high. Companies that plan to introduce a new product must decide when to enter the market. To be the first can be rewarding, but risky and expensive. To come in later makes sense if the firm can bring superior technology, quality, or brand strength.

Pioneering Advantages Most studies indicate that the market pioneer gains the most advantage. Companies like Campbell, Coca-Cola, and Amazon.com developed sustained market dominance.40 What are the sources of the pioneer’s advantage?41 Marketing Insight: understanding double Jeopardy describes one

MARKETING INSIGHT

uNderStANdING doubLe JeoPArdy

Double jeopardy is an empirical generalization that has roots in many areas but was popularized in marketing by the British academic Andrew Ehrenberg. It boils down to the fact that a small-share brand is penalized twice—it has fewer buyers than a large-share brand, and they buy less frequently. As a consequence, most of a brand’s market share is explained by its market penetration and the size of its customer base rather than by customers’ repeat purchases. Implicit in the principle of double jeopardy is the assumption that brands are substitutable and have target segments in common. It is, in fact, most often observed with weakly differentiated brands targeting the same group of people. Exceptions are highly differentiated niche brands that thrive

on small shares and high loyalty and seasonal brands that offer unique value and tally cluster purchases in short periods of time. One implication drawn by double jeopardy proponents is that marketers seeking growth should focus on increasing the size of the customer base rather than on deepening the loyalty of existing customers. They see PR efforts, distribution plans, and any means to increase brand exposure, familiarity, and availability as more important than persuasive advertising to target switchers or CRM efforts to reward loyal customers. Critics of double jeopardy question how inevitable it is and see other implications for marketers. For example, they view new or established brands with a new positioning or message as differentiated enough to avoid double jeopardy’s predicted results.

Source: John Scriven and Gerald Goodhardt, “The Ehrenberg Legacy,” Journal of Advertising Research, June 2012, pp. 198–202; Byron Sharp, How Brands Grow: What Marketers Don’t Know (Melbourne, Australia: Oxford University Press, 2010); Nigel Hollis, “The Jeopardy in Double Jeopardy,” www.millwardbrown.com, 2 September 2009; Andrew Ehrenberg and Gerald Goodhardt, “Double Jeopardy Revisited, Again,” Marketing Research, 2002. See also Andrew Ehrenberg: A Tribute (1926–2010), Special Section, Journal of Advertising Research, June 2012, 52.

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way market leaders can benefit from loyalty due to their size. Early users will recall the pioneer’s brand name if the product satisfies them. The pioneer’s brand also establishes the attributes the product class should possess. The pioneer’s brand normally aims at the middle of the market and so captures more users. Customer inertia also plays a role; and there are producer advantages: economies of scale, technological leadership, patents, ownership of scarce assets, and other barriers to entry. Pioneers can have more effective marketing spending and enjoy higher rates of consumer repeat purchases. An alert pioneer can maintain its leadership indefinitely.42 Pioneering appears to be advantageous in Asia. Studies in China suggest that early entrants had superior sales growth and higher asset turnover but faced greater operational risks and achieved lower returns on their investments than later entrants. These findings imply that pioneers in emerging Asian markets should exploit first-mover advantages (market expansion and asset efficiency) while mitigating its disadvantages (risk and cost effects). They can adopt preemptive strategies such as patents, fill positioning gaps in the marketplace, minimize technological leakage to rivals by retaining employees, track the evolution of customer needs while being willing to cannibalize, and maintain operational flexibility. Market followers may enter through a niche to avoid confronting pioneers, acquire a pioneer that has yet to achieve its potential, and reduce risks by learning from how pioneers deal with governments, suppliers, customers, and other stakeholders in the value chain.43

Pioneering Drawbacks However, the pioneer advantage is not inevitable.44 Look at the fate of Netscape (Web browser), Reynolds (ballpoint pens) and General Motors and Volkswagen in China. These were market pioneers who were overtaken by later entrants. Steven Schnaars studied 28 industries where the imitators surpassed the innovators.45 He found several weaknesses among the failing pioneers, including new products that were too crude, were improperly positioned, or appeared before there was strong demand; product-development costs that exhausted the innovator’s resources; a lack of resources to compete against larger firms entering; and managerial incompetence or unhealthy complacency. Successful imitators thrived by offering lower prices, improving the product more continuously, or using brute market power to overtake the pioneer. None of the companies that now dominate in the manufacture of personal computers—including Dell and Gateway—were first movers.46 Peter Golder and Gerard Tellis raise further doubts about the pioneer advantage.47 They distinguish between an inventor (first to develop patents in a new-product category), a product

Chinese automaker Chery has seen its QQ model challenging General Motors and Volkswagen in China.

pioneer (first to develop a working model), and a market pioneer (first to sell in the new-product category). They also include non surviving pioneers in their sample. They conclude that although pioneers may still have an advantage, a larger number of market pioneers fail than has been reported and a larger number of early market leaders (though not pioneers) succeed. Examples of later entrants overtaking market pioneers are IBM over Sperry in mainframe computers, and GE over EMI in CAT scan equipment. Follow-up research by Golder and colleagues provides further insights:49 Leading brands are more likely to persist during economic slowdown and when inflation is high, and less likely to persist during economic expansion and when inflation is low. Half the leading brands in the sample lost their leadership after being a leader over periods ranging from 12 to 39 years. The rate of brand leadership persistence has been substantially lower in recent times than in earlier times. Once brand leadership has been lost, it is rarely regained. Categories with above-average brand leadership persistence are food and household supplies; those with below-average rates are durables and clothing.

Gaining a Pioneering Advantage Golder and Tellis also identified five factors as underpinning long-term market leadership: vision of a mass market, persistence, relentless innovation, financial commitment, and asset leverage.50 Other research has highlighted the importance of the novelty of the product innovation.51 When a pioneer starts a market with a really new product, survival can be very challenging. In contrast, when the market is started by an incremental innovation, as was the case with MP3 players with video capabilities, pioneers’ survival rates are much higher. Speeding up innovation is essential in an age of shortening product life cycles. Being early has been shown to pay. One study found that products debuting six months late but on budget earned an average of 33 percent less profit in their first five years; products that came out on time but 50 percent over budget sacrificed only 4 percent of potential profits. Companies should not try to move too fast; they must carefully design and execute their product-launch marketing. In the United States, General Motors rushed out its newly designed Malibu to get a leg up over its midsize Honda, Nissan, and Ford competitors. When all the different versions were not ready for production at launch, the brand’s momentum stalled.

ChaPter 11 ó Competitive Dynamics

General Motors and Volkswagen—General Motors (GM) and Volkswagen (VW) were one of the earliest entrants in the China auto market. GM formed its Shanghai joint venture in 1997, while VW arrived in 1984. They quickly dominated the market. However, they are now trounced by latecomers such as Hyundai and Honda. Hyundai’s Elantra was popular with the Chinese, while Honda saw great response to its Fit model. Local automaker, Chery, saw its sales climb with the success of its QQ model. Meanwhile, GM’s and VW’s market shares tumbled. The latecomers were more attuned to making affordable, smaller cars, with comparable quality that Chinese consumers wanted. Before Hyundai launched Elantra, it sent 20 engineers and marketing experts to find out what buyers were looking for. Chery, one of China’s largest automakers, saw its sales increase more than eightfold over the past five years. However, as first movers, GM and VW benefited from high tariffs that kept out imports and allowed them to milk the market for immense profits. But this also meant that they avoided necessary cost cutting. Moreover, most of GM and VW sales were then to state-owned companies that did not worry too much about prices. Today, most buyers are individuals who want the best deal. GM responded by introducing no-interest loans to gain advantage over the competition. VW stemmed its drop in market share by adding new models and cutting prices.48

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M1

M2

P1

1

2

P2

4

P3

5

M3

3

Figure 11.7 Long-Range Product Market Expansion

One study found that Internet companies which realized benefits from moving fast (1) were first movers in large markets, (2) erected barriers of entry against competitors, and (3) directly controlled critical elements necessary for starting a company.52 The pioneer should visualize the various product markets it could initially enter, knowing that it cannot enter all of them at once. Suppose market-segmentation analysis reveals the product market segments shown in Figure 11.7. The pioneer should analyze the profit potential of each product market singly and in combination and decide on a market expansion path. Thus, the pioneer in Figure 11.7 plans first to enter product market P1M1, then move the product into a second market (P1m2), then surprise the competition by developing a second product for the second market (P2m2), then take the second product back into the first market (P2m1), and then launch a third product for the first market (P3m1). If this game plan works, the pioneer firm will own a good part of the first two segments and serve them with two or three products.

11.3.4 Marketing Strategies: Growth Stage The growth stage is marked by a rapid climb in sales. Early adopters like the product, and additional consumers start buying it. New competitors enter, attracted by the opportunities. They introduce new product features and expand distribution.

Fast-food chains in China—Since China opened its doors, fast-food chains such as KFC, McDonald’s, and Starbucks have set up numerous shops. The expanding purchasing income of China’s middle class has seen doughnut shops, including Krispy Kreme and Dunkin’ Donuts, proliferating. Dunkin’ opened its first store in China in 2008. Krispy Kreme entered one year later and is located in a prime pedestrian restaurant street off Nanjing Road in Shanghai.53

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366 With a growing middle-class Chinese economy, different types of fast-food chains such as Krispy Kreme are seizing this opportunity by establishing a presence there.

Prices remain where they are or fall slightly, depending on how fast demand increases. Companies maintain their promotional expenditures at the same or at a slightly increased level to meet competition and to continue to educate the market. Sales rise much faster than promotional expenditures, causing a welcome decline in the promotion-sales ratio. Profits increase during this stage as promotion costs are spread over a larger volume and unit manufacturing costs fall faster than price declines owing to the producer learning effect. Firms have to watch for a change from an accelerating to a decelerating rate of growth to prepare new strategies. During this stage, the firm uses several strategies to sustain rapid market growth: It improves product quality and adds new product features and improved styling. It adds new models and flanker products (i.e., products of different sizes, flavors, and so on, that protect the main product). It enters new market segments. It increases its distribution coverage and enters new distribution channels. It shifts from product-awareness advertising to product-preference advertising. It lowers prices to attract the next layer of price-sensitive buyers. By spending money on product improvement, promotion, and distribution, it can capture a dominant position. It forgoes maximum current profit hoping to make even greater profits in the next stage.

11.3.5 Marketing Strategies: Maturity Stage At some point, the rate of sales growth will slow, and the product will enter a stage of relative maturity. This stage normally lasts longer than the previous stages and poses big challenges to marketing management. Many products are in the maturity stage of the life cycle, and most marketing managers cope with the problem of marketing the mature product. The maturity stage divides into three phases: growth, stable, and decaying maturity. In the first phase, the sales growth rate starts to decline. There are no new distribution channels to fill. New competitive forces emerge. In the second phase, sales flatten on a per capita basis because of market saturation. Most potential consumers have tried the product, and future sales are governed by population growth and replacement demand. In the third phase, decaying maturity, the absolute level of sales starts to decline, and customers begin switching to other products.

The third phase poses the most challenges. The sales slowdown creates overcapacity in the industry, which leads to intensified competition. Weaker competitors withdraw. A few giants dominate—perhaps a quality leader, a service leader, and a cost leader—and profit mainly through high volume and lower costs. Surrounding these dominant firms is a multitude of market nichers, including market specialists, product specialists, and customizing firms. Korean TV shopping—With the popularity of online shopping in wired Korea, one would think that traditional TV shopping is on the decline. Instead, South Koreans are going big on television home shopping. Koreans can buy tour packages, insurance, and even rent apartments from TV shopping channels. Despite more online competition, TV shopping has retained its popularity because retailers give discounts and customers can get a tempting preview of their purchases. The use of charismatic show hosts also helps to lure purchasers.55

The question is whether to struggle to become one of the big three and achieve profits through high volume and low cost, or to pursue a niching strategy and achieve profits through low volume and a high margin. Sometimes, the market will divide into low- and high-end segments, and the firms in the middle see their market share steadily erode. Here is how Swedish appliance manufacturer, Electrolux, has coped with this situation.

Electrolux AB—At one time, Electrolux was facing an intensively competitive appliance market that had both low- and high-end competitors squeezing out mid-priced brands. Low-cost Asian competitors such as Haier, LG, and Samsung were pressing prices down while premium companies including Bosch were growing at the expense of middleof-the-road brands. To beat the competition, Electrolux’s then CEO Hans Stråberg embarked on a strategy that started with rethinking what mid-range customers’ needs and wants are when it comes to appliances. He segmented the market into 20 types of consumers according to their lifestyle and purchasing patterns. This turned out to be a successful strategy, as Electrolux successfully marketed its steam ovens to healthoriented consumers while its compact dishwashers, originally developed for smaller kitchens, targeted a broader consumer segment interested in washing dishes more often. Electrolux’s success is a lesson for companies stuck in the middle of a mature market—start by understanding your consumers and identifying what their needs are

ChaPter 11 ó Competitive Dynamics

Trek 2000—Everyone seems to have a USB thumb drive. Each year, over 200 million of these devices are sold. Some of such thumb drives have even been used as corporate gifts. After inventing the thumb drive, Singapore-based company Trek filed for international patents to protect its intellectual property. However, despite this, many companies copied the invention. With the market into its maturity phase and competition more intense, Trek took on four companies for violating the firm’s patent, and was awarded damages. Companies like Imation, Verbatim, Lenovo, and Toshiba have since been paying Trek royalties for producing and selling Thumb Drives.54

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and what problems they experience. Thereafter, consider what is it they really want to have even if they do not articulate it. Having been successful in the middle-range market,  Electrolux is concentrating on the top end of the appliance market, selling professional-grade ranges to the ultra-luxury consumer segment. With distribution and local market presence in more than 150 countries, Electrolux is eyeing global growth, especially in emerging markets.56

Some companies abandon weaker products to concentrate on more profitable and new products. Yet many mature markets and old products may still have potential. Industries widely thought to be mature—autos, motorcycles, television, watches, cameras—were proved otherwise by the Japanese, who found ways to offer new value to customers. Seemingly moribund brands like Ovaltine have achieved sales revivals through the exercise of marketing imagination. The popularity of Tiger Balm in the reemerging traditional Chinese medicine market is an example.

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In its maturity stage, Tiger Balm rebounded when there was renewed interest in traditional Chinese medicine.

Tiger Balm—This external medication for pain relief is based on a formula that originated and was used in the imperial courts of China. The founder’s two sons, Boon Haw (meaning gentle tiger) and Boon Par (meaning gentle leopard) refined the formula, employing their knowledge of Chinese and Western medicines, and marketed it under the Tiger Balm name. Early marketing efforts included driving a “tiger car” painted with gold and black stripes and topped with a mock tiger’s head on the hood to generate awareness. Tiger Balm’s unique logo (a springing tiger), and distinct packaging (a hexagonal glass jar containing an official-looking imitation paper seal) made it stand out from its competitors. However, the brand lost momentum in the 1970s due to a tussle for corporate control. In the early 1990s, Tiger Balm was revived by new management at Haw Par Corporation. Haw Par aggressively advertised Tiger Balm in Asia by leveraging on its heritage. It also introduced Tiger Medical Plaster, Tiger Muscle Rub, and Tiger Liniment to expand its product line. A new variant, Tiger Balm Soft, was launched to target active young consumers. This topical analgesic contains a light herbal fragrance and a soft texture. Tiger Balm is now distributed in over 100 countries in Africa, the United States, Asia, Australasia, Europe, and the Middle East. It is also available online from such sites as Costco in the United States, Wellcome in Hong Kong, and Wellbeing in the United Kingdom.57

Market Modification A company might try to expand the market for its mature brand by working with the two factors that make up sales volume: Volume = number of brand users x usage rate per user, as in table 11.1. Table 11.1 Alternate Ways to Increase Sales Volume Expand the Numbers of Users

Increase the Usage Rates Among Users

Convert nonusers. The key to the growth of air freight service was the constant search for new users to whom air carriers can demonstrate the benefits of using air freight rather than ground transportation.

Have consumers use the product on more occasions. Serve Campbell’s soup for a snack. Use Heinz vinegar to clean windows.

Enter new market segments. When Goodyear decided to sell its tires via Wal-Mart, Sears, and Discount Tire, it immediately boosted its market share.

Have consumers use more of the product on each occasion. Drink a larger glass of orange juice.

Attract competitors’ customers. Marketers of Puffs facial tissues are always wooing Kleenex customers.

Have consumers use the product in new ways. Use Tums antacid as a calcium supplement.

Product Modification Managers also try to stimulate sales by modifying the product’s characteristics through quality, features, or style. Quality improvement increases functional performance by launching a “new and improved” product. Feature improvement adds size, weight, materials, and accessories that expand the product’s performance, versatility, safety, or convenience. Style improvement increases the product’s aesthetic appeal. Any of these can attract consumer attention. One of Dunkin’ Donuts best sellers in China are dried pork and seaweed doughnut and the doughnut made with dried bonito fish.

Marketing Program Modification

11.3.6 Marketing Strategies: Decline Stage Sales decline for several reasons, including technological advances, shifts in consumer tastes, and increased competition. All lead to overcapacity, increased price-cutting, and profit erosion. The decline might be slow, as in the case of sewing machines; or rapid, as in the case of the 5.25-inch floppy disks. Sales may plunge to zero, or they may petrify at a low level. These structural changes are different from a short-term decline resulting from a marketing crisis of some sort. Here is a Chinese example regarding bicycles. Flying Pigeon—In the early 1980s, Flying Pigeon was China’s biggest bike builder. Its 20-kilogram one-speed models were the pride of workers nationwide. There was a multi year waiting list to get one, and even then, good guanxi or connections were needed. At the peak of its life cycle, Flying Pigeon sold three million bikes, all of them black. Times have changed. There are more cars on the road that make bikes a poor cousin. There were less than six bike makers in the 1980s, but this has grown. Flying Pigeon knows that the era of basic black is gone for good. Its bikes now comes in varied models and many colors. They are advertised and sold in more outlets, including supermarkets.58 As sales and profits decline, some firms withdraw from the market. Those remaining may reduce the number of products they offer. They may withdraw from smaller market segments and weaker trade channels, and they may cut their promotion budgets and reduce prices further. Unfortunately, most companies have not developed a policy for handling aging products. A product’s lifespan may be prolonged because the task of putting it to death is unpleasant. In Asia, Chinese managers may be reluctant to acknowledge the poor performance of a product line, especially if it is one they had endorsed. These products are likely to persist in Chineserun companies as a matter of mianzi or face. Logic may also play a role. Management believes that product sales will improve when the economy improves, or when the marketing strategy is revised, or when the product is improved; or the weak product may be retained because of its alleged contribution to the sales of the company’s other products; or its revenue may cover out-of-pocket costs, even if it is not turning a profit.

Eliminating Weak Products Weak products often consume a disproportionate amount of management’s time; require frequent price and inventory adjustments; generally involve short production runs despite expensive setup times; require both advertising and sales force attention that might be better used to make the healthy products more profitable; and can dilute the company’s image. The biggest cost might well lie in the future. Failing to eliminate weak products delays the

ChaPter 11 ó Competitive Dynamics

Product managers might also try to stimulate sales by modifying other marketing program elements—price, distribution, and communications in particular. They should assess the likely success of any changes in terms of effects on new and existing customers. The average Chinese in China find doughnuts too sweet. While sales of coffee and tea are more popular than doughnuts, Krispy Kreme modified its shops to attract more patronage by providing easy chairs and a quiet surrounding to relax, surf the Web, and enjoy food at a more leisurely pace.

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aggressive search for replacement products. The weak products create a lopsided product mix, long on yesterday’s breadwinners and short on tomorrow’s. Some firms abandon declining markets earlier than others. Much depends on the presence and height of exit barriers in the industry.59 The lower the exit barriers, the easier it is for firms to leave the industry, and the more tempting it is for the remaining firms to stay and attract the withdrawing firms’ customers. For example, Procter & Gamble stayed in the declining liquid-soap business and improved its profits as others withdrew. The appropriate strategy also depends on the industry’s relative attractiveness and the company’s competitive strength in that industry. A company that is in an unattractive industry but possesses competitive strength should consider shrinking selectively. A company that is in an attractive industry and has competitive strength should consider strengthening its investment.

Harvesting and Divesting Strategies for harvesting and for divesting are quite different. Harvesting calls for gradually reducing a product or business’s costs while trying to maintain sales. The first step is to cut R&D costs, and plant and equipment investment. The company might also reduce product quality, sales force size, marginal services, and advertising expenditures. It would try to cut these costs without letting customers, competitors, and employees know what is happening. Harvesting is an ethically ambivalent strategy, and it is also difficult to execute. Yet many mature products warrant this strategy. Harvesting can substantially increase the company’s current cash flow.60 Companies that successfully restage or rejuvenate a mature product often do so by adding value to the original product. Consider the experience of Yamaha, the dominant producer of pianos.

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Yamaha invested in technology so that people can play pieces like professional pianists. The digital piano rejuvenated the piano industry.

Yamaha—When Yamaha controlled 40 percent of the global brand piano market, total demand was sliding by 10 percent a year. Rather than giving up on selling pianos, Yamaha closely examined the market and found that the majority of pianos purchased sit around idle and neglected, without being tuned regularly. It seemed that many people owned pianos, but few were playing them. People did not want to invest the time that it takes to master the instrument. Yamaha then decided to develop a sophisticated combination of digital and optical technology that can play performance pieces just like the way professional pianists do. The advent of the digital piano has revived the piano industry and increased the market for piano maintenance as well.

When a company decides to divest a product with strong distribution and residual goodwill, it can probably sell it to another firm. If the company cannot find any buyers, it must decide whether to liquidate the brand quickly or slowly. It must also decide on how much inventory and service to maintain for past customers.

11.3.7 Evidence for the Product Life-Cycle Concept Based on the above discussion, table 11.2 summarizes the characteristics, marketing objectives, and marketing strategies of the four stages of the PLC. The PLC concept helps marketers interpret product and market dynamics, conduct planning and control, and do forecasting. One research study of 30 product categories unearthed a number of interesting findings concerning the PLC:61 new consumer durables show a distinct takeoff, after which sales increase by roughly 45 percent a year, but also show a distinct slowdown, when sales decline by roughly 15 percent a year. Slowdown occurs at 34 percent penetration on average, well before the majority of households own a new product.

The growth stage lasts a little over eight years and does not seem to shorten over time. informational cascades exist, meaning that people are more likely to adopt over time if others already have, instead of by making careful product evaluations. One implication, however, is that product categories with large sales increases at takeoff tend to have larger sales decline at slowdown. Table 11.2 Summary of Product Life-Cycle Characteristics, Objectives, and Strategies Introduction

Growth

Maturity

Decline

Sales

Low sales

Rapidly rising sales

Peak sales

Declining sales

Costs

High cost per customer

Average cost per customer

Low cost per customer

Low cost per customer

Profits

Negative

Rising profits

High profits

Declining profits

Customers

Innovators

Early adopters

Middle majority

Laggards

Competitors

Few

Growing number

Stable number beginning Declining number

Characteristics

Marketing Objectives Create product

Maximize market share

Maximize profit while defending market share

Reduce expenditure

Diversify brands and items models

Phase out weak products

Price to penetrate market

Price to match or best

Cut price

awareness and trial

and milk the brand

Strategies Product

Offer a basic product

Offer product extensions, service, warranty

Price

Charge cost-plus

ChaPter 11 ó Competitive Dynamics

to decline

371 competitors’

Distribution

Build selective distribution

Build intensive distribution

Build more intensive distribution

Go selective: phase out

Communications

Build product awareness

Build awareness and

Reduce to minimal level

and trial among early

interest in the mass

adopters and dealers

market

Stress brand differences and benefits and encourage brand switching

loyals

unprofitable outlets needed to retain hard-core

Sources: Chester R.Wasson, Dynamic Competitive Strategy and Product Life Cycles (Austin, TX: Austin Press, 1978); John A.Weber, “Planning Corporate Growth with Inverted Product Life Cycles,” Long Range Planning (October 1976), pp. 12–29; Peter Doyle, “The Realities of the Product Life Cycle,” Quarterly Review of Marketing (Summer 1976).

11.3.8 Critique of the Product Life-Cycle Concept PLC theory has its share of critics. They claim that life-cycle patterns are too variable in shape and duration to be generalized, and that marketers can seldom tell what stage their product is in. A product may appear to be mature when actually it has reached a plateau prior to another upsurge. Critics also charge that, rather than an inevitable course that sales must follow, the PLC pattern is the self-fulfilling result of marketing strategies and that skillful marketing can in fact lead to continued growth.62

11.3.9 Market Evolution Because the PLC focuses on what is happening to a particular product or brand rather than on what is happening to the overall market, it yields a product-oriented rather than a marketoriented picture. Firms need to visualize a market’s evolutionary path as it is affected by new

needs, competitors, technology, channels, and other developments and change product and brand positioning to keep pace.63 Like products, markets evolve through four stages: emergence, growth, maturity, and decline. Consider the case of Lego. LEGO Group—LEGO Group, the Danish toy company, enjoyed a 72 percent global market share of the construction toy market; but children were spending more of their spare time with video games, computers, and television and less time with traditional toys. Lego recognized the need to change or expand its market space. It redefined its market space as “family edutainment,” which included toys, education, interactive technology, software, computers, and consumer electronics. All involved exercising the mind and having fun. Part of LEGO Group’s plan is to capture an increasing share of customer spending as children become young adults and then parents. The Lego Movie rekindled such interest and went on to be successful with its Lego Batman movie.

11.4 Marketing in a Slow-Growth Economy Given economic cycles, there will always be tough times, such as 2008–2010 in many parts of the world, and the continued sluggish global economy. Despite reduced funding for marketing programs and intense pressure to justify them as cost effective, some marketers survived—or even thrived—in a slowdown. Here are five guidelines to improve the odds for success during an economic downturn.

11.4.1 Explore the Upside of Increasing Investment Does it pay to invest during a recession? Although the severity of the recent downturn took firms into uncharted territory, 40 years of evidence suggests those willing to invest during a recession have, on average, improved their fortunes when compared with those that cut back.64

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The amount of investment isn’t all that matters. Firms that received the most benefit from increasing marketing investments during a recession were often those best able to exploit a marketplace advantage such as an appealing new product, a weakened rival, or development of a neglected target market. With such strong evidence, marketers should consider the potential upside and positive payback of an increased investment that seizes market opportunities.

11.4.2 Get Closer to Customers In tough times, consumers may change what they want and can afford, where and how they shop, even what they want to see and hear from a firm. A downturn is an opportunity for marketers to learn even more about what consumers are thinking, feeling, and doing, especially the loyal customer base that yields so much of a brand’s profitability.65 Firms should characterize any changes as temporary adjustments versus permanent shifts.66 In explaining why it is important to look forward during a recession, Eaton CEO Alex Cutler noted,“It is a time when businesses shouldn’t be assuming that the future will be like the past. And I mean that in virtually every dimension whether it is economic growth, value propositions, or the level of government regulation and involvement.”67 A Booz & Company survey of 1,000 U.S. households found 43 percent were eating at home more and 25 percent were cutting spending on hobbies and sports activities. In both cases, respondents said they would likely do so even when the economy improved.68 With consumer confidence at its lowest in decades, spending shifted in many ways. As one retail analyst commented, “Moms who used to buy every member of the family their own brand of shampoo are buying one big cheap one.”69

11.4.3 Review Budget Allocations Slowed growth provides an opportunity for marketers to review their spending, opens promising new options, and eliminates those that don’t yield results. Marketing communications allow much experimentation. In London, T-Mobile created spontaneous, large-scale, interactive “happenings” to convey its brand positioning that “Life’s for Sharing” and generate massive publicity. Its “Dance” video, featuring 400 dancers getting the whole Liverpool tube station to dance, was viewed millions of times on YouTube.70

11.4.4 Put Forth the Most Compelling Value Proposition One mistake in a recession is to be overly focused on price reductions and discounts, which can harm long-term brand equity and price integrity. Marketers should increase—and clearly communicate—the value their brands offer, making sure consumers appreciate all the financial, logistical, and psychological benefits compared with the competition.71 The more expensive the item,the more important this value framing becomes. In the recent recession, GE changed its ad messages for the $3,500 Profile washer-and-dryer set to emphasize its practicality—it optimizes the use of soap and water per load to reduce waste and saves customers money by being gentle on clothes, extending their life.72

Discounting successful brands is not a good option because it tells the market two things: Your prices were too high before, and your products won’t be worth the price once the discounts are gone. Appealing to frugal customers with a new brand at lower prices avoids alienating those still willing to pay for higher-priced brands.

11.4.5 Fine-tune Brand and Product Offerings Marketers can review product portfolios and brand architecture to confirm that brands and subbrands are clearly differentiated, targeted, and supported based on their prospects. Luxury brands can benefit from lower-priced brands or subbrands in their portfolios. Take Armani as an example.

Armani—Armani differentiates its product line into three tiers distinct in style, luxury, customization, and price. In the most expensive, Tier I, it sells Giorgio Armani and Giorgio Armani Privé, custom-made couture products that sell for thousands of dollars. In Tier II, it offers Emporio Armani—young, modern, more affordable styles—and Armani jeans that convey technology and ecology. In lower-priced Tier III are more youthful and street-savvy translations of Armani style, A|X Armani Exchange, sold at retail locations in cities and suburban malls. The brand architecture has been carefully devised so each extension lives up to the core promise of the Armani brand without diluting the parent’s image. But clear differentiation also exists, minimizing consumer confusion and brand cannibalization. In tough economic times, the lower end picks up the selling slack and helps maintain profitability.

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Marketers should also review pricing to ensure it has not crept up over time and no longer reflects good value. Procter & Gamble adopted a “surgical” approach to reducing prices in specific categories in which its brands were perceived as costing too much compared with competitive products. At the same time, it launched communications about the innovativeness and value of its many other brands to help ensure consumers would continue to pay their premium prices. Ads for Bounty claimed it was more absorbent than a “bargain brand” of paper towels; headlines in print ads for Olay Professional Pro-X’s Intensive Wrinkle Protocol proclaimed, “As Effective at Wrinkle Reduction as What the Doctor Prescribed. At Half the Price.”73

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Armani’s three price tiers within its product lines helps the company survive and prosper in good and bad times.

Because different brands or subbrands appeal to different economic segments, those that target the lower end of the socioeconomic spectrum may be particularly important during a recession. Value-driven companies such as McDonald’s, Wal-Mart, Dell, and IKEA are likely to benefit most. Bad times also are an opportunity to prune brands or products with diminished prospects. During the recession, Procter & Gamble divested many stagnant brands such as Comet cleanser, Folgers coffee, Jif peanut butter, and Crisco oil and shortening, to concentrate on highergrowth opportunities with much success.

Summary 11.1 COMPETITIVE STRATEGIES FOR MARKET LEADERS

What are some strategies firms can use to stay ahead of the competition? Firms must find ways to expand total market demand, use defensive and offensive maneuvers to protect existing market share, and find ways to increase their market share. How do firms expand total market demand? Firms can attract new customers via marketpenetration strategy, new-market segment strategy, and the geographical-expansion strategy. Firms can increase the amount of consumption by larger packaging or product revamps. Firms can increase the frequency of consumption by designing innovative ways to use the product, or coming up with additional opportunities to use the product.

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How can firms protect their market share? Firms can adopt proactive marketing or defensive marketing techniques. What are the three facets of proactive marketing? Responsive marketing entails addressing an existing need in the market. Anticipative marketing involves predicting consumers’ needs in the future. Creative marketing discovers solutions consumers do not ask for but readily embrace. Proactive firms invest in the future, and are prepared to take risks and make mistakes. What are the six defensive marketing strategies? Position defense involves occupying the most desirable market space in consumers’ minds. Flank defense is the creation of products to protect weaker markets and prevent attacks. Preemptive defense entails broad market envelopment to indicate to competitors to stay out of competition, and guerilla maneuvers to keep competitors wary.

Counteroffensive defense involves meeting the aggressor in a direct face-off, or by targeting the aggressor’s niche area while it attacks yours. Mobile defense broadens the size (shifts focus from the product to the intrinsic need) and diversity (expands into new unrelated industries) of the market. Contraction defense is the deliberate downsizing of firms to focus on fewer niche areas. Is a greater market share always desirable? It is desirable because more share points equate to more sales. It is not desirable because increased share may not translate into higher profits. What are some factors a firm should consider before trying to get a higher market share? With larger market share, the firm may provoke antitrust action. There are economic considerations such as whether profitability will fall with market share gains. Gaining market share through price cuts may see competitors meeting these price cuts, resulting in no buyers switching. Higher market share means having to serve more customers, thus putting pressure on the firm’s resources. This may result in less favorable actual and perceived quality.

11.2 OTHER COMPETITIVE STRATEGIES

What are some strategies a market challenger may use to oust the dominant firm? The market challenger must first choose its opponent— the market leader, firms that are about the same size but operating less efficiently, or smaller firms. The market challenger then chooses a general attack strategy. Finally, the market challenger chooses a specific attack strategy, which can comprise any aspect of the firm’s marketing program.

11.3 PRODUCT LIFE-CYCLE MARKETING STRATEGIES

What are product life cycles (PLC)? The PLC is usually divided into four stages: introduction, growth, maturity, and decline. See Figure A Sales and Profit Life Cycles

Sales and Profits ($)

Sales

Profit

Introduction

Sales Volume

Sales Volume

Recycle

Time (c) Scalloped Pattern

Sales Volume

Recycle

R

Time Figure B Common Product Life-Cycle Patterns

(c) Scalloped Patter

Sales Volume

Sales Volume

Sales Volume

Primary cycle

Primary cycle Time

(b) Cycle-Recycle Pattern

Time Pattern Why(a) Growth-Slump-Maturity is multiple niching preferred (b)toCycle-Recycle single Pattern niching? This is because niches can see dwindling interest, and having a stake in multiple niches hedges the firm against downtrends in a particular niche. Sales Volume

375

(b) Cycle-Recycle Pat

Time

What are the benefits of market-niching? Firms with a small share of the market can still enjoy high profitability via higher margins. Market nichers usually offer high value, high-priced products while operating at low manufacturing costs, guided by a strong corporate culture.

Sales Volume

Decline

(a) Growth-Slump-Maturity Pattern

(a) Growth-Slump-Maturity Pattern

Time

Maturity

Other common PLC patterns are the growth-slumpmaturity pattern, the cycle-ecycle pattern, and the scalloped pattern. See Figure B Common Product Life-Cycle Patterns

What are the four market-follower strategies? The counterfeiter mimics the market leader’s products and sells them through illicit means. The cloner copies the leader’s products, name, and packaging with slight variations. The imitator copies certain aspects of the leader’s product, but differentiates on packaging, advertising, pricing, or location. The adapter improves on the leader’s products, often becoming a future challenger of the market leader.

Time

Growth

Time Figure A Sales and Profit Life Cycles

What is product imitation? It is the adoption of existing products and making improvements on them. This particular marketfollower firm does not have to bear innovation cost and risk.

Primary cycle

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What are the general attack strategies available to market challengers? In a frontal attack, the challenger matches its competitor in product, perceived quality, price, distribution, and advertising. In a flank attack, the challenger pinpoints markets where the dominant firm is underperforming or neglecting, and rushes in to fill up the gap. In an encirclement attack, the challenger launches into an offensive on many fronts to gain a large slice of the dominant firm’s territory. In a bypass attack, the challenger can diversify into unrelated markets, into extended geographical regions, or practice technological leapfrogging. In a guerilla attack, the challenger adopts occasional and unpredictable price cuts, value propositions, and legal action, hoping to secure a permanent long-term foothold.

Time

How do the PLCs for style, fashion, and fads look? A style is a basic means of expression, and can last for generations. A fashion is a currently desired style in a given field. A fad is a passing trend with high take-up and putdown rates. See Figure C Style, Fashion, and Fad Life Cycles

Sales

Fas hion

Fad

Sales

Time

Sales

Time

Time

Fas hion

Fad

Time

Sales

Time

Time

Fad

What are the three types of pioneers? The inventor is the first to develop patents in a new product category. The product pioneer is the first to develop a working model. The market pioneer is the first to sell in a new product category.

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Sales

Sales

Style

Fas hion

Sales

Sales

Style

Why do some market pioneers not succeed? Their products are not well-constructed, are improperly positioned, or appear before there was a strong demand for them. The innovation and development costs exceed the breadth of the pioneer’s resources. Successful imitators offer lower prices, continually develop their product, or use brute market power to overtake the market leader.

Time Figure C Style, Fashion, and Fad Life Cycles

What are the advantages of a market pioneer? Early users will remember the brand name if the product satisfies them. Pioneers dictate the necessary attributes the product class should possess. Pioneers create barriers to entry that discourages competitors from entering the industry.

Time What occurs in the introduction life-cycle stage? Sales are slow as dealer and consumer acceptance is low. Profits are negative. Promotional expenditures are high relative to sales. Prices tend to be high.

What occurs in the growth life-cycle stage? Sales of existing firms soar and new competitors attracted by the profits enter. Promotional expenditure rises to match up to the competition and to educate the public. Profits increase as promotional costs are spread over larger sales volume. What occurs in the maturity life-cycle stage? In this stage, the first phase, growth, sees slower growth rates due to a lack of new distribution channels. In the second phase, stable, sales per capita plateau off due to market saturation. In the third, decaying, total sales start to decline because customers stop using the product in favor of other ones. Firms can combat the decline in sales by the following means: market modification, product modification, and marketing program modification. What occurs in the decline life-cycle stage? Certain firms withdraw from the market, while others reduce the number of offered products.

Many firms do not have programs to identify weaker products. The number of firms leaving the market will hinge on the height of exit barriers. What are harvesting and divesting? Harvesting is the reducing of variable costs while maintaining sales volume. Divesting is the sale of a brand with good reputation and customer awareness to a larger firm who can ride on this brand awareness.

What can marketers do to succeed in an economic downturn? Firms can invest during an economic slowdown and be able to exploit a marketplace advantage such as a new product, a weakened competitor, or a neglected target market. Firms should learn more about their customers, especially the loyal ones; and understand how the recession has affected their shopping habits. Firms should also characterize whether changes in consumer behavior are temporary adjustments or permanent shifts. Firms can take the slowdown as an opportunity to review budget allocations. Marketers should increase and clearly communicate their most compelling value proposition. Firms can review product portfolios to ensure that brands are clearly differentiated, targeted, and supported based on their prospects.

Applications Marketing Debate—Do Brands Have Finite Lives? Often, after a brand begins to slip in the marketplace or disappears altogether, commentators observe, “All brands have their day.” Their rationale is that all brands, in some sense, have a finite life and cannot be expected to be leaders forever. Other experts contend, however, that brands can live forever, and their long-term success depends on the skill and insight of the marketers involved. Take a position: Brands cannot be expected to last forever versus There is no reason for a brand to ever become obsolete.

Marketing Discussion Pick an industry. Classify firms according to the four different roles they might play: leader, challenger, follower, and nicher. How would you characterize the nature of competition? Do the firms follow the principles described in the chapter?

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What are the critiques of the product life-cycle concept? It is difficult to ascertain the stage which a product is in. The pattern is a self-fulfilling prophecy rather than a depiction of the life-cycle course. Firms have to follow the evolution of the market in addition to focusing on the product-oriented lifecycle stages.

11.4 MARKETING IN A SLOW-GROWTH ECONOMY

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Marketing Lesson TATA SALT (A) Written by Dr. Philip Zerrillo, Havovi Joshi, and S. N. Venkat at the Singapore Management University

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It was the beginning of 2011, and Parag Gadre, the assistant vice president of marketing and strategy at Tata Chemicals Limited (TCL) had just reviewed the latest data from his marketing unit. He noted that the “I-Shakti” brand of salt was continuing to grow and perform exceedingly well. In the five years since it had been launched, it had become the second-biggest salt brand in India, with a market share of 14 percent after the flagship brand, Tata Salt from Tata Chemicals. Gadre realized that he faced an unusual dilemma, and the time had come to make some hard decisions about I-Shakti. The product had first been conceived as a place-holder brand to satisfy the demand that the unit’s original flagship product, Tata Salt, could not satisfy, but I-Shakti had now become a “real” brand that could potentially evolve to be a serious threat to Tata Salt, the market leader. I-Shakti had been launched in 2006 as a refined iodized salt targeted at the lower-end, regional markets. The brand name features “I” for Iodine and “Shakti” for power. The brand was intended to be an intermediary between the bulk salt sold in many grocery stores, local brands, and the branded packaged salt. Unlike Tata Salt, it was not manufactured in-house but sourced from third-party manufacturers and then packaged and marketed under the I-Shakti brand name. In contrast, Tata Salt was a well-established and comparatively high-value-added (vacuum evaporated) product, aimed at meeting the needs of the educated consumer in the cities. While the customer segments, markets, attributes, and pricing for the two brands were envisaged to be quite distinct, I-Shakti’s exceptional success was now beginning to pose a distinct challenge to Tata Salt. Further, one of the principal factors that had motivated TCL to launch I-Shakti was the production capacity constraint at the Tata Salt factory, an issue which would soon be mitigated as the capacity expansion project at the plant was well on track to be completed by January 2012. The new capacity for producing vacuum evaporated salt would increase production through-put by 33 percent to 0.8 million tons per annum.

Gadre was wondering what would be his best option. Should I-Shakti be left to continue growing in the salt market and perhaps compete directly with Tata Salt? Or should the I-Shakti brand de-emphasize salt and move into other product categories? Salt holds a special place in the hearts of most Indians. Historically, even if a trader was going bankrupt, he would ensure that he repaid the debts owed to the salt seller. Salt also played a crucial role in the nation’s struggle for independence from British rule. In 1882, in a measure to increase revenue, the British increased the tax on salt to almost 2,400 percent the price of salt. They also imposed the Salt Act in India, which stated that any person convicted of dealing with the illegal production of salt would be imprisoned, and the contraband salt and conveyance used to carry it would be confiscated. While salt was universally recognized as an important food seasoning, for Indians, particularly the poorer laborers, it was an invaluable commodity and vital for surviving in an environment where they perspired profusely. As the father of India’s independence Mahatma Gandhi had aptly commented, “Next to air and water, salt is perhaps the greatest necessity of life. It is the only condiment of the poor.” In March 1930, Gandhi set out on foot for the coastal village of Dandi in western India—a march which lasted 23 days and was observed by millions of people along the way. On April 6, he picked up a lump of mud and salt, boiled it to make salt, and proclaimed, “With this, I am shaking the foundations of the British Empire.” This single act of non-violent, civil disobedience spread like wildfire through the nation. Although the Salt Tax was repealed only many years later in 1946, many historians see the Dandi salt march and the civil disobedience movement it symbolized as a key turning point in India’s struggle for freedom. In 1953, India became self-sufficient in salt production and thereafter did not have any need to resort to imports. However, given the political and cultural significance of salt, despite having an adequate supply to meet the domestic demand, through the Salt Commissioners Organization, the Central Government continued to oversee several aspects of the salt industry in the country, including the maintenance of standards and monitoring of the quality and price of salt. Salt was also one of the few products that did not incur a sales tax. By 2010, India was ranked the third-largest saltproducing country in the world (after the United States and China). While salt could be produced from several sources, in India, sea salt made up about 70 percent of the total salt production. India’s annual requirement of salt in 2009–2010 was approximately 17.4 million tons, and was expected to grow to about 19.4 tons by 2014–2015. In particular, the domestic demand for edible salt was forecasted to

cause of iodization in India through its vacuum-evaporated salt manufacturing process. It soon grew to become a market leader in the national branded salt segment and was consistently rated as one of the most trusted brands since 2001 by The Economic Times, one of India’s largest financial newspapers. For almost a decade, Tata Salt had no competition in the national, branded salt segment. It was only in 1996 that other brands such as Annapurna and Nirma jumped into the fray. However, Tata Salt continued to retain its competitive supremacy. It positioned itself as a product targeted towards the national good of the people, launching an emotional “desh ka namak” (“salt of the nation”) campaign. It was in 2006 that TCL recognized that there was a significant demand for iodized salt in the lower end, regional markets. According to India’s National Family Health Survey (2005–2006), 49 percent of Indian households consumed inadequately iodized or non-iodized salt. This was a very different and readily available target group from that of Tata Salt. These were buyers with increasing purchasing power residing in B- and C-class cities, which had populations of less than 1 million. Though management believed that Tata Salt could capture this demand, the production site in Mithapur, Gujarat, did not have the capacity to meet this demand; its annual production is about 553,500 tons. The company considered alternative means to satisfy this segment rather than cede it to competitors and potential upstarts who were gaining in strength. While Tata Salt was growing at 2–3 percent, these other brands were growing twice as fast, and competitors could soon threaten Tata Salt’s market leadership. I-Shakti was designed and launched to protect Tata Salts’ market share, and provide an opportunity for users of loose, coarse, and unbranded or locally branded salts to upgrade. In addition to being a place-holder brand, I-Shakti was also envisaged to play a role in increasing the market potential of Tata Salt. This was a two-step process; by being a price-warrior and making the initial entry into a new market, the volume provided a logistical scale that the Tata Salt brand could later piggy back on. The addition of iodine to the salt at an affordable price was to be the brand’s main value proposition. I-Shakti, a solar salt, was introduced without any capital expenditure. In contrast, vacuum salt such as Tata Salt needs investment of about 10 times more than solar salt. This had to do with TCL’s new business model, whereby the salt was not manufactured in-house but sourced from third-party manufacturers. To ensure that it effectively managed the risk of sourcing externally, thereby protecting its reputation and the Tata brand name, TCL laid down stringent quality specifications for I-Shakti. Each packet of I-Shakti was endorsed by the International

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grow by 1.5 percent over a five-year period ending 2014–2015. On an average, the per capita consumption of salt in India was about 12 grams per day (the U.S. equivalent being 0.15 grams a day), with the average expenditure of a household on salt being approximately $0.23 per month. In 2011, the private sector continued to play a dominant role, contributing over 88 percent of salt production, while the public sector contributed approximately 2 percent, and the cooperative sector added another 10 percent. The industry was largely dominated by the unbranded, loose salt segment, which made up almost 49 percent of the market in 2008–2009, but this was expected to change significantly over the next five years, with the national and regional brands expected to be the prime gainers. The TCL salt brands, namely Tata Salt and I-Shakti, were clearly the market leaders in the iodized branded salt market in India. By the financial year ending 2011, these two brands had together achieved a market share of over 62 percent among the national, packaged branded salt brands, up from 59 percent the previous year. Tata Salt and I-Shakti had a market share of 46 percent and 16 percent respectively, while the other major competitors Nirma Salt and Annapurna had approximately 13 percent market share each. Each of these players was pushing their brand of salt through strong marketing networks and distinctive sales strategies. For instance, while Tata Salt emphasized the purity factor, Annapurna stressed the health benefit of the iodine content in its iodized salt and its low sodium salt. TCL, which belonged to the $83 billion Tata group, was a pioneer in India’s branded iodized salt market. It was established in 1939 at Mithapur in the western Indian state of Gujarat. By the financial year ending March 31, 2011, TCL had recorded sales of $2133.3 million and a net profit of $127.9 million. Through some large acquisitions, TCL had become the world’s second-largest producer of soda ash. It was also the leading player for crop nutrients, manufacturing urea and phosphatic fertilizers. In addition to Tata Salt and I-Shakti, TCL also had two other salt brands—Tata Salt Lite and Topp Salt. Tata Salt Lite was introduced in 2007 and was the market leader in the super premium low-sodium salt segment. Tata Salt Lite contained 15 percent lower sodium than ordinary salt and was enriched with iodine and potassium. Hence, it was specifically targeted at the health-conscious consumer; Topp Salt was a vacuum evaporated, super-refined and iodine-enriched salt meant solely for export. It was sold in the Middle East and was expected to cover the entire United Arab Emirates. Prior to 1982, non-iodized, unrefined crystal salt was widely available in India. Then Tata Salt was launched as the first national brand of packaged salt, and pioneered the

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Council for the Control of Iodine Deficiency Disorders, certifying that it contained an adequate quantity of iodine. I-Shakti performed remarkably well and was rolled out nationally in 2007–2008. By 2009, it had reached 20 million households, and by the financial year ending 31 March 2011, it had gone on to become the secondlargest packaged salt brand after Tata Salt. As brands, Tata Salt and I-Shakti had very different attributes. Tata Salt was clearly the superior product in terms of traits such as consistent saltiness, complete solubility, whiteness, lack of visible impurity, and lack of moisture. In 2009, Tata Salt was “Hazard Analysis and Critical Control Points” (HACCP) certified, which was the most globally respected food grade certification. Although this certification was not a requirement for salt, TCL believed it was simply important to do. The pricing and margins of these products, as seen in Table 1, were a reflection of the strength of the Tata brand and its noticeable performance features. Table 1 Pricing Comparison between Tata Salt and I-Shakti

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Tata Salt

I-Shakti Salt

(in INR per kg)

(in INR per kg)

Price to Distributor

11.6

7.0

Price to Stockist

11.8

8.2

Price to Retailer

12.6

9.0

13–14

10.0

14.0

12.0

End Consumer Price Maximum Retail Price (MRP)

Tata Salt was an extremely well-known brand, with high consumer loyalty. The product thrived on a powerful demand pull. I-Shakti, carrying only a minor Tata brand insignia on the back of the package, was a new brand in the market. To gain market share, there was a need for a strong dealer push through the supply chain. As an incentive for trade support, I-Shakti distributors gained higher margins though they were not holding any stock and were only responsible for handling orders. Overall, for TCL, if the net margin of Tata Salt was at 100 index points, it was higher than that of I-Shakti, which stood at about 50 index points. Moreover, as compared to Tata Salt, far smaller quantities of I-Shakti were distributed. For instance, for the financial year 2011, 568,000 tons of Tata Salt were dispatched from the Mithapur factory, while just 191,000 tons of I-Shakti salt were dispatched from its two major centers—Tuticorin in southern India and Gandhidham in western India.

Some 70 percent of Tata Salt sales came from the metropolises (approximately 50 Indian cities, with populations exceeding 4 million), and cities with over 1 million people. Tata Salt alone reached nearly 65 million of an estimated 220 million households through approximately 1.46 million retail outlets. As expected, ensuring that a product manufactured in a single location in western India was distributed through India—a country that covered 3.28 million square kilometers—was a huge logistical exercise. Almost 98 percent of Tata Salt was transported by rail, with just about 2 percent being sent by road. The salt was sent in 50-kilogram bulk bags and re-packaged into half- and 1-kilogram packs at third-party packaging centers. As salt was considered an essential commodity, it enjoyed the lowest freight rate bracket on the Indian railways, at $0.02 (INR 1) per ton per kilometer. However, given the complexity, weight, and distances that the salt traveled, it was not surprising that over 30 percent of the cost of goods sold was on account of handling costs. In a clear contrast to Tata Salt, 70 percent of I-Shakti’s sales were from towns with a population below 1 million people, typically located in the more remote areas. Having a lower income and purchasing power, the rural Indian consumer was far more price-sensitive. As I-Shakti was sourced as a finished product from manufacturers in different locations, distance played an important role in deciding where the salt should be shipped. From 1983 to 2000, TCL had appointed a third party, Vardhaman Chemicals Ltd., as its sole sales agent for Tata Salt. However, by 2003, the sole-agent status relationship ceased completely, and TCL adopted in-house marketing. When I-Shakti was launched, it was decided that the same sales force be used for both salts, gaining synergy from common sales and distribution efforts. While I-Shakti was primarily developed to provide an offering to smaller cities and towns, it was also used as a clubbing item to help Tata Salt migrate to regional and rural areas, regardless of the supply constraints in the Mithapur facility. By combining small amounts of Tata Salt with the I-Shakti brand, Tata Salt was able to gain a presence in these emerging regions and achieve reasonable economies of scale. The salt market in India was becoming intensely competitive and was ultimately a low-margin product. As Ashvini Hiran, Head of Consumer Products Business at TCL, had said, “Most salt brands in the market are solar salts and compete with I-Shakti. Tata Salt is on a different platform. Tata Salt will remain the umbrella brand and in the coming years we hope to bring more variants, each with a story of its own.” TCL had undertaken a capacity expansion project to increase the production capacity at

Gadre was aware that his unit was at an inflection point, where the amazing growth trajectory displayed by I-Shakti was proving to be a mixed blessing. Though originally envisaged as a place-holder product, it was now a brand in its own right. The markets that Tata Salt and I-Shakti were targeted at were quite different, but he was conscious that I-Shakti’s rapidly growing market share could be at the cost of the Tata Salt brand that it had been set up to protect. The I-Shakti brand name was clearly gaining great popularity. It had also developed an extensive distribution network of small traditional shops and large format malls in the edibles market. Gadre was left wondering whether I-Shakti, which clearly resonated in the market place, should simply be allowed to continue growing independently as a salt brand and thereafter face the risk that it may cannibalize the existing Tata Salt markets. Or should it de-emphasize salt, maybe even discontinue it altogether, and diversify into other products such as rice, wheat, and pulses, which were key components of the Indian diet and should enjoy a thriving market?

Questions 1. How can TCL ensure that I-Shakti continues to grow? 2. How can TCL ensure that I-Shakti does not cannibalize the sales of Tata Salt? Sources: Shamni Pande, “Now, Salt with the Double Edge,” Business Today, 21 March 2010; Rajmohan Gandhi, Gandhi: The Man, His People, and the Empire (Oakland: University of California Press, 2009), p. 303; “Dandi March,” www.mkgandhi.org; “Government Concern,” http://salttradeindia.com; “Salt Industry, India Salt Industry”, www.economywatch.com, 30 June 2010; Shubha Madhukar, “Flavour of India,” 2009, www.tata.com/pdf/tata_review_oct_09 /business_flavour_of_india.pdf; www.tata.com.

ChaPter 11 ó Competitive Dynamics

the factory by 33 percent from 600,000 tons per annum to 800,000 million tons per annum. Measures were also in place to enhance the products’ value proposition to improve margins, with a view to adding modern imagery to the Tata Salt brand, as well as extending the brand equity through high visibility and premium variants aimed at the more discerning customer. The company had recently introduced flavored salts, such as garlic onion and lemon coriander and was planning to produce “double fortified salt” (enriched with both iron and iodine) to fight malnutrition and related diseases such as iron deficiency anemia caused by low immunity levels. This micro-nutritional platform was to support the eradication of iodine and iron deficiency by providing this salt to mass consumers, migrating both the Tata Salt users and non-users to this brand. This process was also viewed as an integral part of the company’s corporate and social responsibility. Due to I-Shakti’s growing demand, steps were taken to set up additional sourcing capabilities for solar refined salt.

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Marketing Lesson TATA SALT (B)

Written by Dr. Philip Zerrillo, Havovi Joshi, and S.N. Venkat at the Singapore Management University It was early 2012, and a little over a year since the I-Shakti brand had been extended to the packaging and marketing of pulses, also known as dal or lentils, in December 2010. The results so far had been very pleasing.

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Pulses are the cheapest and the richest source of protein for the vegetarian Indian. I-Shakti Dals was launched with the mission of not only increasing the production of pulses in India to help bridge the existing gap between the demand and supply of pulses in the country, but to also provide better/ reliable quality, hygienic pulses to Indian households. Leveraging upon the synergies in the farm and consumer space, we are happy to have managed to influence a sizeable section of the Indian farmers’ community to undertake pulses’ cultivation and see the fruition of our efforts in this direction. What we are offering is a reasonably priced product bundle to the consumers for the convenience and better health of their families. R. Mukundan, Managing Director, Tata Chemicals Limited A Tata Strategic Analysis report had forecasted that India would require about 38 million tons of pulses per year by 2018. This calculation was based on the nation’s expected population growth and the World Health Organization’s recommendation that Indians (a large number being vegetarians) should consume 80 grams of pulses per person each day. Already, in 2007–2008, the domestic demand for pulses in India of 18 million tons exceeded the estimated annual supply of

15 million tons, and the difference was made up by costly imports. TCL thus recognized the need and potential for introducing branded pulses to the market, and in March 2010, the company stretched the I-Shakti brand to pulses. This was done in collaboration with TCL’s sister Tata group company, Rallis India Limited. Rallis was one of India’s leading agrochemicals companies, with a comprehensive portfolio of pesticides, herbicides, and plant nutrients for Indian farmers. It had an extensive distribution network of 1,500 distributors that reached over 40,000 retail counters and serviced rural markets. TCL’s “farm to fork” initiative aimed at leveraging Rallis’s close relationship with farmers and its salt brands’ wide distribution network to market the pulses. The pulses were sourced through a unique model whereby TCL organized finance for farmers as well as offered to buy back their produce in a transparent manner. A pilot project, “Grow More Pulses,” was launched in a public–private partnership at several locations to encourage farmers to cultivate more pulses, which would be procured and marketed as I-Shakti Dals. Rallis also offered assistance to the farmers to teach them about the best cultivation practices. As a result of this process, not only did the farmer gain in terms of higher productivity and market access, but TCL too achieved cost effectiveness by reducing the intermediaries involved in the supply chain. To maintain the Tata reputation, the raw produce purchased was processed under stringent quality standards by TCL and thereafter sent to the packing centers before being distributed. We have a target to sell 15,000 tons (of I-Shakti pulses) this year, around 35,000 tons next year, and the year after we will take it up to 100,000 lakh tons. R. Mukundan, Managing Director, Tata Chemicals Limited About a year after the launch, I-Shakti pulses were being sold in 10 states of India, using its own and Rallis India’s extensive distribution channels. The company planned to extend deeper into these regions over the next five years, and only then venture into new markets. Within two years of its launch, TCL was hopeful that it would sell about $200 million in I-Shakti pulses. Priced at about $1.87 (INR 95) per kilogram, I-Shakti pulses offered far higher margins when compared to I-Shakti salt.

Table 1 Pricing Comparison between Tata Salt, I-Shakti Salt, and I-Shakti Pulses Tata Salt

I-Shakti Salt

I-Shakti Pulses

(in INR per kg)

(in INR per kg)

(in INR per kg)

Price to Distributor

11.6

7.0

62

Price to Stockist

11.8

8.2

63

Price to Retailer

12.6

9.0

67

End Consumer Price

13-14

10.0

83

Maximum Retail Price (MRP)

14.0

12.0

95 channel. It not only used the existing infrastructure of systems, teams, and channel partners that distributed the salt but also had access to the retail units of the Tata Salt-I-Shakti distribution chain, which spanned almost 1.5 million urban and rural outlets. Further, by attempting to integrate the supply chain, TCL was also in a position to cut out the middlemen, giving it a further advantage with the pulses retailers. In addition, as the supply chain partners could receive clubbed orders of pulses along with salt, they could service the retail outlets for both. Given the success that I-Shakti pulses was enjoying, it was perhaps not surprising that TCL planned to further venture into this brand of edibles. As Ashvini Hiran, TCL’s Chief Operating Officer of the consumer products division, commented, “We will invest more in I-Shakti, which will serve as our umbrella food brand.”

Questions 1. How does I-Shakti’s venture into pulses give it an advantage over its competition? 2. How does integrating its supply chain give I-Shakti a competitive advantage? Sources: Amit Sridharan, “I-Shakti: The Journey So Far in Branded Pulses,” Commodity Online, 12 September 2011; Tata Chemicals, www.tata.com/company/profile .aspx; Promit Mukherjee, “Tata Chemicals Sees Pulses Raking in Rs. 1000 Crores,” Daily News & Analysis, 12 November 2011; Parag Gadre, Assistant Vice President, Marketing & Strategy, TCL, in an interview with Philip Zerrillo and S.N. Venkat, 4 July 2011; Sayantani Kar, “Chemistry of Pulses,” Business Standard, 3 January 2011.

ChaPter 11 ó Competitive Dynamics

Thus, financially, the venture into pulses made a lot of sense. As an analyst with a leading international brokerage commented, “At INR 9,000–10,000 million revenue, the company can clock net margins of 6 percent, which would translate into INR 2–2.5 higher earnings per share.” There was also an opportunity for TCL to improve its procurement of pulses from farmers. One of the principal causes of the shortfall in India was the low yield rate compared to other countries. With TCL and Rallis combining forces to disseminate best practices, it was hoped that the current yield of about 622 kilograms per hectare would improve. The yield is about 965 kilograms in Sri Lanka, 807 kilograms in Bangladesh, and Egypt has the highest yield in the world at 3,058 kilograms per hectare. TCL planned to bring in 600,000 hectares involving 230,000 farmers in the coming five years. The I-Shakti brand of pulses had clearly benefited from the synergies available from TCL’s existing salt distribution

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PART 5

Shaping the Market Offerings

12 C H A P T E R

S

Setting Product Strategy At the heart of a great brand is a great product. Product is a key element in the market offering. To achieve market leadership, firms must offer products and services of superior quality that provide unsurpassed customer value.

ince its inception in 1989, Lexus has emphasized top-notch product quality and customer care, as reflected by its long-time slogan, “The Relentless Pursuit of Perfection.” At one point, in response to customer complaints over minor problems with its LS 400, the company sent technicians to each owner’s home to fix the vehicles for free. As part of its “Lexus Covenant,” it has vowed to “have the finest dealer network in the industry, and treat each customer as we would a guest in our own home.” To this end, Lexus built its dealership framework from the ground up, hand-picking dealers committed to its promise to provide an exceptional experience to customers, a system competitors acknowledge is the industry ideal. The company offers a full product line anchored by its flagship LS sedan, as

well as its GS sports coupe, RX SUVs, and ES midsize car. It is consistently highly rated in the Luxury Institute’s annual Luxury Consumer Experience surveys, bolstered by strong dealership experience. In addition, J. D. Power and Associates has ranked Lexus the “most dependable” automotive brand 16 times since 1995, and the company consistently ranks above the industry average in customer retention. With its average buyer in his or her mid-50s, Lexus has set its sights on attracting younger buyers by emphasizing more aggressive styling, handling dynamics, and driver engagement. A new marketing initiative uses television advertising to link the brand and the LS sedan to a lavish, cool lifestyle. Social media and other promotions and events also create novel customer experiences around food, fashion, entertainment, and travel.

In this chapter, we will address the following questions: 1. What are the characteristics of products, and how do marketers classify products? 2. How can companies differentiate products? 3. Why is product design important and what factors affect a good design? 4. How can a company build and manage its product mix and product lines? 5. How can companies combine products to create strong co-brands or ingredient brands? 6. How can companies use packaging, labeling, warranties, and guarantees as marketing tools?

Value-based prices

Attractiveness of the market offering Product features and quality

Services mix and quality

Figure 12.1 Components of the Market Offering

M

arketing planning begins with formulating an offering to meet target customers’ needs or wants. The customer will judge the offering by three basic elements: product features and quality, services mix and quality, and price (see Figure 12.1). In this chapter, we examine product; in Chapter 13, services; and in Chapter 14, prices. All three elements—products, services, and pricing—must be meshed into a competitively attractive offering.

12.1 Product Characteristics and Classifications Many people think that a product is a tangible offering, but a product can be more than that. A product is anything that can be offered to a market to satisfy a want or need. Products that are marketed include physical goods, services, experiences, events, persons, places, properties, organizations, information, and ideas.

12.1.1 Product Levels: The Customer-Value Hierarchy In planning its market offering, the marketer needs to address five product levels (see Figure 12.2).1 Each level adds more customer value, and the five constitute a customervalue hierarchy.

ct

al produc tenti t Po nted prod e u m ug ted prod ct c p e pr o u du sic

Part 5 ó Shaping the Market Offerings

Core benefit

ct

386

Ba

Ex

A

The fundamental level is the core benefit: the service or benefit the customer is really buying. A hotel guest is buying “rest and sleep.” A woman buying cosmetics is buying “hope.” Marketers must see themselves as benefit providers.

Figure 12.2 Five Product Levels

At the second level, the marketer has to turn the core benefit into a basic product. Thus, a hotel room includes a bed, bathroom, towels, desk, dresser, and closet. At the third level, the marketer prepares an expected product, a set of attributes and conditions buyers normally expect when they purchase this product. Hotel guests expect a clean bed, fresh towels, working lamps, and a relative degree of quiet. At the fourth level, the marketer prepares an augmented product that exceeds customer expectations. In developed countries, brand positioning and competition take place at this level. In developing and emerging markets such as India and Vietnam, however, competition takes place mostly at the expected product level. At the fifth level stands the potential product, which encompasses all the possible augmentations and transformations the product or offering might undergo in the future. Here is where companies search for new ways to satisfy customers and distinguish their offering.

What is the core benefit of Web sites such as Alibaba? A place for businesses to source and showcase their supplies.

Alibaba—This Hangzhou-based business-to-business Web site offers as its core benefit, a site for manufacturers to find buyers worldwide. A vast variety of products from red onions to red dump trucks can be sourced. Businesses can search by product or country, view pictures and specifics of various products, find company contact information, and in some cases, even take a virtual company tour. The site is easy to navigate and offers sellers the opportunity to showcase their products to the world. Suppliers who pay an additional fee can showcase an unlimited number of products, get earlier access to potential buyers, are offered Web templates for storefronts, and have access to performance tools to evaluate customer activity. Alibaba is now the world’s largest online business-to-business trading platform for small businesses.

Differentiation arises and competition increasingly occurs on the basis of product augmentation, which also leads the marketer to look at the user’s total consumption system: the way the user performs the tasks of getting and using products and related services.2 Each augmentation adds cost, however and augmented benefits soon become expected benefits and necessary points-of-parity. Today’s hotel guests expect cable or satellite television with a remote control and high-speed Internet access or two phone lines. This means competitors will have to search for still other features and benefits to differentiate themselves. As some companies raise the price of their augmented product, some competitors offer a “stripped-down” version at a much lower price. Thus, alongside the growth of fine hotels like Bangkok’s The Oriental and Hoi An’s Nam Hai Resort, we see the emergence of budget hotels and lower-cost hotels catering to clients who simply want the basic product. Great companies make great products and services, as evidenced by LEGO.3 Chapter 12 ó Setting product Strategy

LEGO—LEGO may have been one of the first masscustomized brands. Every child who has ever had a set of the Danish company’s most basic blocks has built his or her own unique creations with it, brick by plastic brick. Although LEGO defines itself as being in the “business of play,” parents like the idea of buying LEGO’s products as a means of also enhancing their children’s motor skills, creativity, and other cognitive capabilities. Some bricks and systems are exactly the same as they were 50 years ago, but the company is always developing new product offerings. Popular play sets tied in with the Pirates of the Caribbean and Star Wars film franchises also include video games. LEGO Design byME lets customers design, share, and build their own custom products by downloading free Digital Designer 3.0 software. The creations that result can exist—and be shared with other enthusiasts—solely online, or if customers want to build them, the software tabulates the pieces required and sends an order to LEGO’s warehouse in Enfield, Connecticut. Customers can request step-by-step building guide instructions and even design their own box to store the pieces. The success of The LEGO Movie in 2014 and The LEGO Batman Movie in 2017 further underscored the widespread popularity of the brand.

387 Timeless toy manufacturer Lego constantly innovates so that its brand stays relevant with kids of all ages.

12.1.2 Product Classifications Marketers classify products on the basis of durability, tangibility, and use (consumer or industrial). Each product type has an appropriate marketing-mix strategy.4

Durability and Tangibility Products can be classified into three groups, according to durability and tangibility: 1.

Non durable goods are tangible goods normally consumed in one or a few uses, like beer and soap. Because these goods are consumed quickly and purchased frequently, the appropriate strategy is to make them available in many locations, charge only a small markup, and advertise heavily to induce trial and build preference.

2.

Durable goods are tangible goods that normally survive many uses: refrigerators, machine tools, and clothing. Durable products normally require more personal selling and service, command a higher margin, and require more seller guarantees.

3.

Services are intangible, inseparable, variable, and perishable products. As a result, they normally require more quality control, supplier credibility, and adaptability. Examples include haircuts, legal advice, and appliance repairs.

Book stores such as Kinokuniya sells books but also offers services such as sourcing for books that they do not carry.

Consumer-Goods Classification The vast array of goods consumers buy can be classified on the basis of shopping habits. We can distinguish among convenience, shopping, specialty, and unsought goods. The consumer usually purchases convenience goods frequently, immediately, and with a minimum of effort. Examples include tobacco products, soaps, and newspapers. Convenience goods can be further divided. Staples are goods consumers purchase on a regular basis. A buyer might routinely purchase Maggi ketchup, Colgate toothpaste, and Nissin instant noodles. Impulse goods are purchased without any planning or search effort. Candy bars and magazines are impulse goods. Emergency goods are purchased when a need is urgent—umbrellas during a rainstorm, boots and shovels during the first winter snowstorm. Manufacturers of impulse and emergency goods will place them in those outlets where consumers are likely to experience an urge or compelling need to make a purchase. Shopping goods are goods that the consumer, in the process of selection and purchase, characteristically compares on such bases as suitability, quality, price, and style. Examples include furniture, clothing, used cars, and major appliances. Shopping goods can be further divided. Homogeneous shopping goods are similar in quality but different enough in price to justify shopping comparisons. Heterogeneous shopping goods differ in product features and services that may be more important than price. The seller of heterogeneous shopping goods carries a wide assortment to satisfy individual tastes and must have well-trained salespeople to inform and advise customers. Specialty goods have unique characteristics or brand identification for which a sufficient number of buyers are willing to make a special purchasing effort. Examples include cars, stereo components, photographic equipment, and men’s suits. A Mercedes is a specialty good because interested buyers will make an effort to buy one. Specialty goods do not involve making comparisons; buyers invest time only to reach dealers carrying the wanted products. Dealers do not need convenient locations, although they must let prospective buyers know their locations.

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Unsought goods are those the consumer does not know about or does not normally think of buying. The classic examples of known but unsought goods are life insurance, funeral services, and encyclopedias. Unsought goods require advertising and personal-selling support.

Industrial-Goods Classification Industrial goods can be classified in terms of their relative cost and how they enter the production process: materials and parts, capital items, and supplies and business services. Materials and parts are goods that enter the manufacturer’s product completely. They fall into two classes: raw materials and manufactured materials and parts. Raw materials fall into two major groups: farm products (e.g., wheat, livestock, fruits, and vegetables) and natural products (e.g., fish, timber, and crude petroleum). Farm products are supplied by many producers, who turn them over to marketing intermediaries, who provide assembly, grading, storage, transportation, and selling services. Their perishable and seasonal nature gives rise to special marketing practices. Their commodity character results in relatively little advertising and promotional activity, with some exceptions. At times, commodity groups will launch campaigns to promote their products—eggs, milk, and wheat. Some producers brand their products—Dole pineapples and Sunkist oranges. Natural products are limited in supply. They usually have great bulk and low unit value and must be moved from producer to user. Fewer and larger producers often market them directly to industrial users. Because the users depend on these materials, long-term supply contracts are common. The homogeneity of natural materials limits the amount of demand-creation activity. Price and delivery reliability are the major factors influencing the selection of suppliers. Manufactured materials and parts fall into two categories: component materials (iron, yarn, cement, wires) and component parts (small motors, tires, castings). Component materials are usually fabricated further—pig iron is made into steel, and yarn is woven into cloth. The standardized nature of component materials usually means that price and supplier reliability are key purchase factors. Component parts enter the finished product with no further change in form, as when small motors are put into vacuum cleaners, and tires are put on automobiles. Most manufactured materials and parts are sold directly to industrial users. Price and service are major marketing considerations, and branding and advertising tend to be less important.

Capital items are long-lasting goods that facilitate developing or managing the finished product. They include two groups: installations and equipment. Installations consist of buildings (factories, offices) and heavy equipment (generators, drill presses, mainframe computers, elevators). Installations are major purchases. They are usually bought directly from the producer, with the typical sale preceded by a long negotiation period. The producer’s sales force includes technical personnel. Producers have to be willing to design to specification and to supply postsale services. Advertising is much less important than personal selling. Equipment comprises portable factory equipment and tools (hand tools, lift trucks), and office equipment (personal computers, desks). These types of equipment do not become part of a finished product. They have a shorter life than installations but a longer life than operating supplies. Although some equipment manufacturers sell direct, more often they use intermediaries, because the market is geographically dispersed, the buyers are numerous, and the orders are small. Quality, features, price, and service are major considerations. The sales force tends to be more important than advertising, although the latter can be used effectively.

Business services include maintenance and repair services (window cleaning, copier repair), and business advisory services (legal, management consulting, advertising). Maintenance and repair services are usually supplied under contract by small producers or are available from the manufacturers of the original equipment. Business advisory services are usually purchased on the basis of the supplier’s reputation and staff.

12.2 Differentiation To be branded, products must be differentiated. Physical products vary in their potential for differentiation. At one extreme, we find products that allow little variation: eggs, aspirin, and steel. Yet even here, some differentiation is possible: Bayer aspirin, and India’s Tata Steel have carved out distinct identities in their categories. Kao makes household cleaners such as Magiclean and Quickle, each with a separate brand identity. At the other extreme are products capable of high differentiation, such as automobiles, commercial buildings, and furniture. Here the seller faces an abundance of design parameters, including form, features, performance quality, conformance quality, durability, reliability, repairability, and style.5

12.2.1 Product Differentiation Form Many products can be differentiated in form—the size, shape, or physical structure of a product. Consider the many possible forms taken by products such as aspirin. Although aspirin is essentially a commodity, it can be differentiated by dosage, size, shape, color, coating, or action time.

Aspirin comes in different forms to satisfy varying needs.

Chapter 12 ó Setting product Strategy

Supplies and business services are short-term goods and services that facilitate developing or managing the finished product. Supplies are of two kinds: maintenance and repair items (paint, nails, brooms), and operating supplies (lubricants, coal, writing paper, pencils). Together, they go under the name of MRO goods. Supplies are the equivalent of convenience goods; they are usually purchased with minimum effort on a straight rebuy basis. They are normally marketed through intermediaries because of their low unit value and the great number and geographic dispersion of customers. Price and service are important considerations, because suppliers are standardized and brand preference is not high.

389

Features Most products can be offered with varying features that supplement its basic function. A company can identify and select appropriate new features by surveying recent buyers and then calculating customer value vs. company cost for each potential feature. The company should also consider how many people want each feature, how long it would take to introduce each feature, and whether competitors could easily copy the feature. To avoid “feature fatigue,” the company must prioritize features and tell consumers how to use and benefit from them.6 Companies must also think in terms of feature bundles or packages. Each company must decide whether to offer feature customization at a higher cost or a few standard packages at a lower cost.

Performance Quality Most products are established at one of four performance levels: low, average, high, or superior. Performance quality is the level at which the product’s primary characteristics operate. Firms should not necessarily design the highest performance level possible. The manufacturer must design a performance level appropriate to the target market and competitors’ performance levels. A company must also manage performance quality through time. Continuously improving the product can produce high returns and market share. Lowering quality in an attempt to cut costs often has dire consequences.

Part 5 ó Shaping the Market Offerings

390 When Mercedes-Benz’s quality ratings took a dive, the automaker instituted a number of significant changes to bring them back up.

Mercedes-Benz—During the early to mid 2000s, Mercedes-Benz endured one of its most painful stretches in its 127-year history. Its stellar quality reputation took a beating in J.D. Power and other surveys, and BMW surpassed it in global sales. To recoup, a new management team reorganized the company around functional elements—motors, chassis, and electronic systems—instead of by model lines. Engineers began testing electronic systems a year earlier and put each new model through 10,000 tests that ran 24 hours a day for three weeks. Mercedes tripled its number of prototypes for new designs, allowing engineers to drive them three million miles before production. With these and other changes, the number of flaws in the cars dropped by as much as 72 percent and warranty costs decreased by 25 percent. As a side effect, Mercedes-Benz dealers had to contend with a sizable drop in their repair and service business.7

Conformance Quality Buyers expect a high conformance quality, the degree to which all the produced units are identical and meet the promised specifications. Suppose a Porsche 911 is designed to accelerate to 150 kilometers per hour within 10 seconds. If every Porsche 911 coming off the assembly line does this, the model is said to have high conformance quality. The problem with low conformance quality is that the product will disappoint some buyers.

Durability Durability, a measure of the product’s expected operating life under natural or stressful conditions, is a valued attribute for certain products like vehicles and kitchen appliances. The extra price for durability must not be excessive. Further, the product must not be subject to rapid technological obsolescence, as is the case with personal computers and mobile phones.

Reliability Buyers normally will pay a premium for more reliable products. Reliability is a measure of the probability that a product will not malfunction or fail within a specified time period. Panasonic, which manufactures major home appliances, has an outstanding reputation for creating reliable appliances.

Repairability Repairability is a measure of the ease of fixing a product when it malfunctions or fails. Ideal repairability would exist if users could fix the product themselves with little cost in money or time. Some products include a diagnostic feature that allows service people to correct a problem over the telephone or advise the user how to correct it. Many computer hardware and software companies offer technical support over the phone, by fax or email, or by real-time “chat” online.

Style

In Asia, there is a widespread interest in and demand for aesthetic products—i.e., those that have an attractive look, touch, feel, and attention to detail. In particular, three aesthetic principles may be useful in guiding style decisions in Asia:9 1.

Complexity and decoration—Asians love the display of multiple forms, shapes, and colors. This feature is most pronounced in Chinese, Thai, Malay, and Indonesian aesthetics.

2.

Balancing various aesthetic elements—Harmony in aesthetic expression is viewed as a particularly important goal.

3.

Naturalism—In China, symbols and displays of natural objects such as mountains, rivers, dragons, and phoenixes are frequently found in packaging, advertising, and on logos (e.g., Dragonair and Tiger Beer). In Japan, gardens, trees, and flowers are objects of aesthetic symbolism.

Chapter 12 ó Setting product Strategy

Style describes the product’s look and feel to the buyer. Car buyers pay a premium for Jaguars because of their extraordinary look. Aesthetics play a key role in such brands as Apple computers, Montblanc pens, Samsung mobile phones, and Harley-Davidson motorcycles.8 Strong style does not always mean high performance. A car may look sensational but spend a lot of time in the repair shop.

391

Customization Customized products and marketing allow firms to be highly Asians traditionally like complex designs, although with global influence, relevant by finding out what a customer wants—and doesn’t the younger generation may prefer designs that are more minimalistic. want—and delivering on that. NikeiD allows customers to personalize and design their own shoes and clothing either online or in-store at NikeiD studios. M&M’s allows customers to print specialized messages on the candies. Burberry allows customers to select the fabric, color, and style to customize their own personalized trench coat.

12.2.2 Services Differentiation When the physical product cannot easily be differentiated, the key to competitive success may lie in adding valued services and improving their quality. The main service differentiators are ordering ease, delivery, installation, customer training, customer consulting, and maintenance and repair.

Ordering Ease Ordering ease refers to how easy it is for the customer to place an order with the company. B2B Web site Alibaba’s navigation tools make it easy for customers to find suppliers. Many financial institutions offer secure online sites to help customers get information and complete transactions more efficiently.

Delivery Delivery refers to how well the product or service is delivered to the customer. It includes speed, accuracy, and care attending to the delivery process. Today’s customers have grown to expect delivery speed: pizza delivered in one-half hour, film developed in one hour, eyeglasses made

in one hour, cars lubricated in 15 minutes. Giordano has a computerized Quick Response System (QRS) that links the information systems of its suppliers, manufacturing plants, distribution centers, and retailing outlets.

Installation Installation refers to the work done to make a product operational in its planned location. Easeof-installation is a true selling point, especially when the target market is technology novices.

Customer Training Customer training refers to training the customer’s employees to use the vendor’s equipment properly and efficiently. General Electric not only sells and installs expensive X-ray equipment in hospitals; it also gives extensive training to users of this equipment. McDonald’s requires its new franchisees to attend Hamburger University for two weeks to learn how to manage the franchise properly. In 2010, it launched a Hamburger University in China, its seventh worldwide, to educate local talent before promoting them to management level.

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McDonald’s Hamburger University in China educates franchisees on management.

Customer Consulting Customer consulting refers to training the customer’s employees to use the vendor’s equipment properly and efficiently

Maintenance and Repair Maintenance and repair programs help customers keep purchased products in good working order. Hewlett-Packard offers online technical support, or “e-support,” to their customers. In the event of a service problem, customers can use various online tools to find a solution. Those aware of the specific problem can search an online database for fixes; those unaware can use diagnostic software that finds the problem and searches the online database for an automatic fix. Customers can also seek online help from a technician.10

Returns Although product returns are undoubtedly a nuisance to customers, manufacturers, retailers, and distributors alike, they are also an unavoidable reality of doing business, especially with online purchases. Although the average return rate for online sales is roughly 5 percent, return and exchange policies are estimated to serve as a deterrent for one-third to one-half of online buyers.

The cost of processing a return can be two to three times that of an outbound shipment, totaling an average of $30–$35 for items bought online. We can think of product returns in two ways:11 1.

Controllable returns result from problems, difficulties, or errors of the seller or customer and can mostly be eliminated with proper strategies and programs by the company or its supply chain partners.

2.

Uncontrollable returns result from the need for customers to actually see, try, or experience products in person to determine suitability and cannot be eliminated by the company in the short-run through any of these means.

12.3 Design As competition intensifies, design offers a potent way to differentiate and position a company’s products and services.12 Design is the totality of features that affect how a product looks, feels, and functions to a consumer. Design offers functional and aesthetic benefits and appeals to both our rational and emotional sides.13 As holistic marketers recognize the emotional power of design and the importance to consumers of how things look and feel as well as work, design is exerting a stronger influence in categories where it once played a smaller role. Samsung Electronics has won several design awards, an outcome of concerted efforts. Samsung—Much of Samsung’s remarkable marketing success comes from innovative new products that have captured the imagination of consumers all over the world. The company has invested heavily in R&D and in design capabilities, with big payoffs. It has a clear design philosophy it calls “Design 3.0” and an internal design slogan, “Make it Meaningful,” which reflects its relentless focus on making beautiful and intuitive products that will be integrated into customers’ lifestyles. Samsung applies three design criteria: (1) simple and intuitive, (2) efficient and long-lasting, and (3) adaptive and engaging. Like its chief rival Apple, the company organizes its design efforts through a cross-divisional Corporate Design Center that reports directly to the CEO. The Corporate Design Center aligns the design efforts of various divisions and analyzes cultural trends to help forecast the future of design. It also coordinates the work done at Samsung’s five Global Design Centers, located in London, San Francisco, Shanghai, Tokyo, and Delhi. Among the many awards the company has received for design were 49 IF Design Awards in 2017—from one of the world’s top three design contests. It received a Gold award for its ArtPCPulse, a premium desktop computer with expandable modules. Japanese design and style are increasingly being exported to the West.14 Anime is a growing trend in the United States, influencing how toys, cartoons, comics, video games, and movies look. Japanese kids have collected small dolls for years, even buying them in vending machines. Now, American versions like Disney’s Cuties and Mattel’s Shorties, inspired by Japanese animation, are in. Toyota, for example, had a hit among younger drivers with its Scion xB in the United States and Japan because of its distinctly boxy wagon. In the luxury goods market, Burberry and Bottega Veneta have turned to Japan as a source of inspiration. Japan outspends many other industrial countries on design. Forced to compete with lower-cost products from China and Korea, Japanese designers have differentiated their products by adding a bigger element of design and fashion.

Japanese design and style are increasingly embraced by the West.

Chapter 12 ó Setting product Strategy

One basic returns strategy is to eliminate the root causes of controllable returns while developing processes for handling uncontrollable product returns. The goal is to have fewer products returned and to put a higher percentage of returns back into the distribution pipeline to be sold again.

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Sony’s view is that designers are like lighthouse keepers for the engineer, who is like a ship. The engineer can go anywhere with his technology but does not know which direction to take. Hence, the lighthouse keeper must guide the ships. Together with Korea’s Samsung, Sony has won the Industrial Design Excellence Awards (IDEA) for making design the heart of their product-development strategies.

Power of Design In a visually oriented culture, transmitting brand meaning and positioning through design is critical. Design is especially important with long-lasting durable goods such as cars. As a senior GM executive says, “. . . every car has its own mood, whether it’s a van in India or a Cadillac in China, and needs to connect with customers at an emotional level.” Design can shift consumer perceptions to make brand experience more rewarding. Consider the lengths Boeing went to in making its 777 airplane seem roomier and more comfortable. Raised center bins, side luggage bins, divider panels, gently arched ceilings, and raised seats made the aircraft interior seem bigger. Design should penetrate all aspects of the marketing program so that all design aspects work together. In search of a universal identity scheme for Coca-Cola, the company established four core principles. Each design, whether of packaging, point of sale, equipment, or any other consumer touch point, should reflect (1) bold simplicity, (2) real authenticity, (3) the power of red, and (4) a “familiar yet surprising” nature.15

Approaches to Design

Part 5 ó Shaping the Market Offerings

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Given the creative nature of design, it is no surprise that there is not one widely adopted approach. Some firms employ formal, structured processes. Design thinking is a very data-driven approach with three phases: observation, ideation, and implementation. Design thinking requires intensive ethnographic studies of consumers, creative brainstorming sessions, and collaborative teamwork to decide how to bring idea to reality. On the other hand, Danish firm Bang & Olufsen (B&O) trusts the instincts of a handful of designers who rarely consult with consumers. B&O, who has received kudos for its product designs, does not introduce many new products in a given year, so every new product is expected to sell for years.

12.4 Luxury Products Design is often an important aspect of luxury products, though these products also face some unique issues. They are perhaps one of the purest examples of the role of branding, because the brand and its image are often key competitive advantages that create enormous value and wealth. Marketers for luxury brands such as Prada, Gucci, Cartier, and Louis Vuitton manage lucrative franchises that have endured for decades in what some believe is now a $270 billion industry.16

12.4.1 Characterizing Luxury Brands Significantly higher priced than typical items in their categories, luxury brands for years were about social status and who a customer was—or perhaps wanted to be. Times have changed, and especially in the aftermath of a crippling recession, luxury for many has become more about style as well as substance, combining personal pleasure and self-expression.17 A luxury shopper must feel he or she is getting something truly special. Thus, the common denominators of luxury brands are quality and uniqueness. A winning formula for many is craftsmanship, heritage, authenticity, and history, and this is often critical to justifying a sometimes extravagant price. Hermès, the French luxury leather-goods maker, sells its classic designs for hundreds or even thousands of dollars, “not because they are in fashion,” as one writer put it, “but [because] they never go out of fashion.”18 Here is how several luxury brands have become enduring market successes:

Sub-Zero refrigerators. Sub-Zero sells refrigerators that range from $1,600 for small, under-counter models to $12,000 for a specialty Pro 48 with a stainless steel interior. The target is customers with high standards of performance and design who cherish their home and what they buy to furnish it. Sub-Zero extensively surveys this group as well as the kitchen designers, architects, and retailers who recommend and sell its products.19 Patrón tequila. Cofounded by Paul Mitchell hair care founder John Paul DeJoria, Patrón came about after a 1989 trip to a distillery in the small Mexican state of Jalisco. Named Patrón to convey “the boss, the cool guy,” the smooth agave tequila comes in an elegant hand-blown decanter and is sold in individually numbered bottles for $45 or more. Essentially creating the high-end tequila market, with more than $1.1 billion in retail sales, Patrón has surpassed Jose Cuervo to become the world’s largest tequila brand.20

12.4.2 Growing Luxury Brands The recent recession challenged many luxury brands as they tried to justify their value proposition and avoid discounting their products.22 Those that had already successfully extended their brands vertically across a range of price points were usually the most immune to economic downturns.

With its unique product formulation and bottle, Patron pioneered the high end tequila market.

The Armani brand has extended from high-end Giorgio Armani and Giorgio Armani Privé to mid-range luxury with Emporio Armani to affordable luxury with Armani Jeans and Armani Exchange. Clear differentiation exists between these brands, minimizing the potential for consumer confusion and brand cannibalization. Each also lives up to the core promise of the parent brand, reducing chances of hurting the parent’s image. Horizontal extensions into new categories can also be tricky for luxury brands. Even the most loyal consumer might question a $7,300 Ferragamo watch or an $85 bottle of Roberto Cavalli vodka. Jewelry maker Bulgari has moved into hotels, fragrances, chocolate, and skin care, prompting some branding experts to deem the brand overstretched.23 In the past, iconic fashion designers such as Pierre Cardin licensed their names to so many ordinary products that the brands were badly tarnished. Ralph Lauren, however, has successfully marketed an aspirational luxury brand with wholesome all-American lifestyle imagery across a wide range of products. Besides clothing and fragrances, Lauren boutiques sell linens, candles, beds, couches, dishware, photo albums, and jewelry. Calvin Klein has adopted a similarly successful expansive strategy, though with different lifestyle imagery. Much of the growth in luxury brands in recent years has been geographical. China has overtaken the United States as the world’s largest luxury market; it’s forecast that one-third of all high-end goods will be sold there in the coming years. Although initially very “logo-driven” and interested in conspicuous brand signals, Chinese luxury consumers have also become more quality and design conscious, like luxury consumers in other parts of the world.24

12.4.3 Marketing Luxury Brands Luxury marketers have learned that luxury is not viewed the same way around the world. In post-communist Russia for a time, as in China, the bigger and gaudier the logo, the better. But in

Chapter 12 ó Setting product Strategy

Montblanc luxury goods. The goal of Montblanc, whose products now range from pens to watches to leather goods and fragrances, is to be a strong luxury brand to as many classes of luxury customers as possible while still retaining a prominent public image. The brand promise is that “the product you buy is of highest esteem, based on its timeliness, elegant design, and the high quality, which is derived from the excellence of our craftsmen.” The company branched out from its origins in writing instruments into categories such as leather goods and timepieces, where it could “rely on the trust of our customers, who believed in Montblanc as a brand that provides excellence in its core category writing instruments based on its philosophy of manufacturing competence, highest quality, sustainable value, and creativity.”21

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the end, luxury brand marketers have to remember they are often selling a dream, anchored in product quality, status, and prestige. Just like marketers in less expensive categories, those guiding the fortunes of luxury brands operate in a constantly evolving marketing environment. Globalization, new technologies, financial crises, shifting consumer cultures, and other forces require them to be skillful and adept at their brand stewardship to succeed. Table 12.1 summarizes some key guidelines in marketing luxury brands. One trend for luxury brands is to wrap personal experiences around the products. Top-end fashion retailers are offering such experiences alongside their wares, expecting that customers who have visited a workshop or met the designer will feel closer to the brand. For example, Gucci is inviting its biggest spenders to fashion shows, equestrian events, and the Cannes Film Festival.25 Porsche Sport Driving Schools and Experience Centers in Germany, the United States, and other parts of the world allow Porsche drivers to “train their driving skills and enjoy the all-out pleasure of driving, on-road, off-road, or on snow and ice.” The recently opened stateof-the-art facility in Southern California features 45-degree off-road inclines and a simulated ice hill.26 In an increasingly wired world, some luxury marketers have struggled to find the appropriate online selling and communication strategies for their brand.27 Some fashion brands have begun to go beyond glossy magazine spreads to listening to and communicating with consumers through Facebook, Twitter, Foursquare, and other digital and social media channels. Coach and Tiffany are two luxury brands praised for their Web site and digital operations. E-commerce has also begun to take hold for some luxury brands. Sites such as Gilt Groupe and Ideel now offer new ways for fashion brands to move high-end goods.28 Ultimately, luxury marketers are learning that, as for all marketers, success depends on getting the right balance of classic and contemporary imagery and of continuity and change in marketing programs and activities.

396 Part 5 ó Shaping the Market Offerings

Table 12.1 Guidelines for Marketing Luxury Brands 1. Maintaining a premium image for luxury brands is crucial; controlling that image is thus a priority. 2. Luxury branding typically includes the creation of many intangible brand associations and an aspirational image. 3. All aspects of the marketing program for luxury brands must be aligned to ensure highquality products and services and pleasurable purchase and consumption experiences. 4. Besides brand names, other brand elements—logos, symbols, packaging, signage— can be important drivers of brand equity for luxury products. 5. Secondary associations from linked personalities, events, countries, and other entities can boost luxury-brand equity as well. 6. Luxury brands must carefully control distribution via a selective channel strategy. 7. Luxury brands must employ a premium pricing strategy, with strong quality cues and few discounts and markdowns. 8. Brand architecture for luxury brands must be managed carefully. 9. Competition for luxury brands must be defined broadly because it often comes from other categories. 10. Luxury brands must legally protect all trademarks and aggressively combat counterfeits. Source: Based on Kevin Lane Keller, “Managing the Growth Tradeoff: Challenges and Opportunities in Luxury Branding,” Journal of Brand Management 16 (March–May 2009), pp. 290–301.

12.5 Environmental Issues Environmental issues are also playing an increasingly important role in product design and manufacturing. Many firms are considering ways to reduce the negative environmental consequences of conducting business, and some are changing the manufacture of their products or the ingredients that go into them. Marketing Memo: A Sip or a Gulp: Environmental Concerns in the Water Industry considers some of the environmental issues raised by the sale of bottled water. In a fascinating twist, Levi-Strauss found a highly creative way to address the problem of proliferating plastic bottles.29

Levi’s Waste