Market Definition

In marketing, the term market refers to the group of consumers or organizations that is interested in the product, has the resources to purchase the product, and is permitted by law and other regulations to acquire the product. The market definition begins with the total population and progrssively narrows as shown in the following diagram.

Market DefinitionConceptual Diagram

Beginning with the total population, various terms are used to describe the market based on the level of narrowing:

Total population Potential market - those in the total population who have interest in

acquiring the product.

Available market - those in the potential market who have enough money to buy the product.

Qualified available market - those in the available market who legally are permitted to buy the product.

Target market - the segment of the qualified available market that the firm has decided to serve (the served market).

Penetrated market - those in the target market who have purchased the product.

In the above listing, "product" refers to both physical products and services.

The size of the market is not necessarily fixed. For example, the size of the available market for a product can be increased by decreasing the product's price, and the size of the qualified available market can be increased through changes in legislation that result in fewer restrictions on who can buy the product.

Defining the market is the first step in analyzing it. Since the market is likely to be composed of consumers whose needs differ, market segmentation is useful in order to better understand those needs and to select the groups within the market that the firm will serve.

Ansoff Matrix

To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firm's present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible product-market combinations. Ansoff's matrix is shown below:

Ansoff Matrix

Ansoff's matrix provides four different growth strategies:

  Existing Products New Products

ExistingMarkets Market Penetration

    Product Development  

NewMarkets     Market Development     Diversification

Market Penetration - the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share.

Market Development - the firm seeks growth by targeting its existing products to new market segments.

Product Development - the firms develops new products targeted to its existing market segments.

Diversification - the firm grows by diversifying into new businesses by developing new products for new markets.

Selecting a Product-Market Growth Strategy

The market penetration strategy is the least risky since it leverages many of the firm's existing resources and capabilities. In a growing market, simply maintaining market share will result in growth, and there may exist opportunities to increase market share if competitors reach capacity limits. However, market penetration has limits, and once the market approaches saturation another strategy must be pursued if the firm is to continue to grow.

Market development options include the pursuit of additional market segments or geographical regions. The development of new markets for the product may be a good strategy if the firm's core competencies are related more to the specific product than to its experience with a specific market segment. Because the firm is expanding into a new market, a market development strategy typically has more risk than a market penetration strategy.

A product development strategy may be appropriate if the firm's strengths are related to its specific customers rather than to the specific product itself. In this situation, it can leverage its strengths by developing a new product targeted to its existing customers. Similar to the case of new market development, new product development carries more risk than simply attempting to increase market share.

Diversification is the most risky of the four growth strategies since it requires both product and market development and may be outside the core competencies of the firm. In fact, this quadrant of the matrix has been referred to by some as the "suicide cell". However, diversification may be a reasonable choice if the high risk is compensated by the chance of a high rate of return. Other advantages of diversification include the potential to gain a foothold in an attractive industry and the reduction of overall business portfolio risk.

The BCG Growth-Share Matrix

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. It is based on the observation that a company's business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name "growth-share". Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability.

BCG Growth-Share Matrix

This framework assumes that an increase in relative market share will result in an increase in the generation of cash. This assumption often is true because of the experience curve; increased relative market share implies that the firm is moving forward on the experience curve relative to its competitors, thus developing a cost advantage. A second assumption is that a growing market requires investment in assets to increase capacity and therefore results in the consumption of cash. Thus the position of a business on the growth-share matrix provides an indication of its cash generation and its cash consumption.

Henderson reasoned that the cash required by rapidly growing business units could be obtained from the firm's other business units that were at a more mature stage and generating significant cash. By investing to become the market share leader in a rapidly growing market, the business unit could move along the experience curve and develop a cost advantage. From this reasoning, the BCG Growth-Share Matrix was born.

The four categories are:

Dogs - Dogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash. However, dogs are

cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture.

Question marks - Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash comsumption. A question mark (also known as a "problem child") has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.

Stars - Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out. If a star can maintain its large market share, it will become a cash cow when the market growth rate declines. The portfolio of a diversified company always should have stars that will become the next cash cows and ensure future cash generation.

Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume. Such business units should be "milked", extracting the profits and investing as little cash as possible. Cash cows provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders. Because the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis.

Under the growth-share matrix model, as an industry matures and its growth rate declines, a business unit will become either a cash cow or a dog, determined soley by whether it had become the market leader during the period of high growth.

While originally developed as a model for resource allocation among the various business units in a corporation, the growth-share matrix also can be used for resource allocation among products within a single business unit. Its simplicity is its strength - the relative positions of the firm's entire business portfolio can be displayed in a single diagram.

Limitations

The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed. Some of its weaknesses are:

Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matrix overlooks many other factors in these two important determinants of profitability.

The framework assumes that each business unit is independent of the others. In some cases, a business unit that is a "dog" may be helping other business units gain a competitive advantage.

The matrix depends heavily upon the breadth of the definition of the market. A business unit may dominate its small niche, but have very low market share in the overall industry. In such a case, the definition of the market can make the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing a corporation's business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units.

Here is the ' Seven Steps to Brand-Led Marketing ' that we promised you...

Step 1: Become truly 'Marketing Minded' When many people think of marketing they think of meeting customers needs. Understanding and responding to changing customer needs is essential, but there is another dimension. Brand-led marketing ensures that you meet customer needs in a way that is different from your competitors . If you can't find this point of difference you're in danger of becoming a price-based commodity.

Ask yourself: Do my customers really see me as different from my closest competitors? How/Why? What can I do to make my business more distinctive and appealing to help secure them as long-term and profitable customers?

Step 2: Monitor the Changing Environment We live in a rapidly changing world of many threats and opportunities. Few business managers take adequate time out to stop, look around, and reflect on how these changes might have an impact. As a result, most companies die young.

Ask yourself, at least once a quarter : What are the changing consumer trends, competitor activity, legislation, economic trends or technology developments that might have an impact on my business?

Step 3: Have a Meaningful Vision for your Business and your Brand A business Vision (or Mission ) has a number or roles: most important of which are to inspire and guide. Too many business Visions include words like 'leader', 'best', 'preeminent', 'most successful'. Words like this can mean many different things to different people. Because of that they are of limited help in inspiring or guiding the behaviour of the business team. Brand Visions have just the same function. Make sure that you have a written Vision for your brand that is strong enough to inspire and guide behavior.

Ask yourself : Do I have a brand Vision that everyone understands and has bought into? How might I improve my brand Vision, so it is a stronger inspiration and guide?

Step 4: Build Your Brand 'From the Inside Out ' Building a brand is not just about advertising or 'marketing communications'. Nor is it just about your 'product' or 'service'. Your brand is really what your customers think of you, and how much trust they have in you. To build a strong brand you have to have a clear idea of how you want to be thought of, and then consider everything that you say and do.

In everything that you say and do, ask yourself : Will this get me closer to where I want to be in the mind of my customers?

Step 5: Plan for Success There is a phrase: " If you don't know where you want to go, any road will get you there ". This is true in life, and it is true in business. If you want to succeed you have to have clear, measurable objectives - you have to know where you want to get to!

Ask yourself : Do I have a brand plan with clear, measurable objectives? (And am I measuring the things that are really important!).

Step 6: Become a 'Learning Business' Continuously improving your brand-led effectiveness is essential to long-term success. The best way to achieve this is to ensure that you take a little time to become a 'Learning Business' by building learning into your processes.

For every marketing initiative you undertake, ask yourself : How can I build learning into this, so that I can find out what works and what doesn't, and do it better next time?

Step 7: Be Prepared to Change What worked in the past may not work in the future. If you can achieve steps 1 - 6 that's great, but you have to go one step further. You have to be prepared to

change. Don't just do the same things better, look around for new ways of pursuing your vision and your desired brand. Explore, experiment and anticipate.

Generic Strategies - Michael Porter (1980)

Generic strategies were used initially in the early 1980s, and seem to be even more popular today. They outline the three main strategic options open to organization that wish to achieve a sustainable competitive advantage. Each of the three options are considered within the context of two aspects of the competitive environment:

Sources of competitive advantage - are the products differentiated in any way, or are they the lowest cost producer in an industry? Competitive scope of the market - does the company target a wide market, or does it focus on a very narrow, niche market?

The generic strategies are: 1. Cost leadership, 2. Differentiation, and 3. Focus.

1. Cost Leadership

The low cost leader in any market gains competitive advantage from being able to many to produce at the lowest cost. Factories are built and maintained, labor is recruited and trained to deliver the lowest possible costs of production. 'cost advantage' is the focus. Costs are shaved off every element of the value chain. Products tend to be 'no frills.' However, low cost does not always lead to low price. Producers could price at competitive parity, exploiting the benefits of a bigger margin than competitors. Some organization, such as Toyota, are very

good not only at producing high quality autos at a low price, but have the brand and marketing skills to use a premium pricing policy.

2. Differentiation

Differentiated goods and services satisfy the needs of customers through a sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin. The benefits of differentiation require producers to segment markets in order to target goods and services at specific segments, generating a higher than average price. For example, British Airways differentiates its service. The differentiating organization will incur additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales. Costs must be recovered. There is also the chance that any differentiation could be copied by competitors. Therefore there is always an incentive to innovated and continuously improve.

3. Focus or Niche strategy

The focus strategy is also known as a 'niche' strategy. Where an organization can afford neither a wide scope cost leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable. Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche. A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus. With a cost focus a firm aims at being the lowest cost producer in that niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment. There are potentially problems with the niche approach. Small, specialist niches could disappear in the long term. Cost focus is unachievable with an industry depending upon economies of scale e.g. telecommunications.

The danger of being 'stuck in the middle.'

Make sure that you select one generic strategy. It is argued that if you select one or more approaches, and then fail to achieve them, that your organization gets stuck in the middle without a competitive advantage.

Market Segmentation

Market segmentation is the identification of portions of the market that are different from one another. Segmentation allows the firm to better satisfy the needs of its potential customers.

The Need for Market Segmentation

The marketing concept calls for understanding customers and satisfying their needs better than the competition. But different customers have different needs, and it rarely is possible to satisfy all customers by treating them alike.

Mass marketing refers to treatment of the market as a homogenous group and offering the same marketing mix to all customers. Mass marketing allows economies of scale to be realized through mass production, mass distribution, and mass communication. The drawback of mass marketing is that customer needs and preferences differ and the same offering is unlikely to be viewed as optimal by all customers. If firms ignored the differing customer needs, another firm likely would enter the market with a product that serves a specific group, and the incumbant firms would lose those customers.

Target marketing on the other hand recognizes the diversity of customers and does not try to please all of them with the same offering. The first step in target marketing is to identify different market segments and their needs.

Requirements of Market Segments

In addition to having different needs, for segments to be practical they should be evaluated against the following criteria:

Identifiable: the differentiating attributes of the segments must be measurable so that they can be identified.

Accessible: the segments must be reachable through communication and distribution channels.

Substantial: the segments should be sufficiently large to justify the resources required to target them.

Unique needs: to justify separate offerings, the segments must respond differently to the different marketing mixes.

Durable: the segments should be relatively stable to minimize the cost of frequent changes.

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

Bases for Segmentation in Consumer Markets

Consumer markets can be segmented on the following customer characteristics.

Geographic Demographic

Psychographic Behavioralistic

Geographic Segmentation

The following are some examples of geographic variables often used in segmentation.

Region: by continent, country, state, or even neighborhood Size of metropolitan area: segmented according to size of population

Population density: often classified as urban, suburban, or rural

Climate: according to weather patterns common to certain geographic regions

Demographic Segmentation

Some demographic segmentation variables include:

Age Gender Family size Family lifecycle Generation: baby-boomers, Generation X, etc. Income Occupation Education Ethnicity Nationality Religion Social class

Many of these variables have standard categories for their values. For example, family lifecycle often is expressed as bachelor, married with no children (DINKS: Double Income, No Kids), full-nest, empty-nest, or solitary survivor. Some of these categories have several stages, for example, full-nest I, II, or III depending on the age of the children.

Psychographic Segmentation

Psychographic segmentation groups customers according to their lifestyle. Activities, interests, and opinions (AIO) surveys are one tool for measuring lifestyle. Some psychographic variables include:

Activities

Interests Opinions Attitudes Values

Behavioralistic Segmentation

Behavioral segmentation is based on actual customer behavior toward products. Some behavioralistic variables include:

Benefits sought Usage rate Brand loyalty User status: potential, first-time, regular, etc. Readiness to buy Occasions: holidays and events that stimulate purchases

Behavioral segmentation has the advantage of using variables that are closely related to the product itself. It is a fairly direct starting point for market segmentation.

Bases for Segmentation in Industrial Markets

In contrast to consumers, industrial customers tend to be fewer in number and purchase larger quantities. They evaluate offerings in more detail, and the decision process usually involves more than one person. These characteristics apply to organizations such as manufacturers and service providers, as well as resellers, governments, and institutions.

Many of the consumer market segmentation variables can be applied to industrial markets. Industrial markets might be segmented on characteristics such as:

Location Company type Behavioral characteristics

Location

In industrial markets, customer location may be important in some cases. Shipping costs may be a purchase factor for vendor selection for products having a high bulk to value ratio, so distance from the vendor may be critical. In some industries firms tend to cluster together geographically and therefore may have similar needs within a region.

Company Type

Business customers can be classified according to type as follows:

Company size Industry Decision making unit Purchase Criteria

Behavioral Characteristics

In industrial markets, patterns of purchase behavior can be a basis for segmentation. Such behavioral characteristics may include:

Usage rate Buying status: potential, first-time, regular, etc. Purchase procedure: sealed bids, negotiations, etc.

The Marketing Concept

The marketing concept is the philosophy that firms should analyze the needs of their customers and then make decisions to satisfy those needs, better than the competition. Today most firms have adopted the marketing concept, but this has not always been the case.

In 1776 in The Wealth of Nations, Adam Smith wrote that the needs of producers should be considered only with regard to meeting the needs of consumers. While this philosophy is consistent with the marketing concept, it would not be adopted widely until nearly 200 years later.

To better understand the marketing concept, it is worthwhile to put it in perspective by reviewing other philosophies that once were predominant. While these alternative concepts prevailed during different historical time frames, they are not restricted to those periods and are still practiced by some firms today.

The Production Concept

The production concept prevailed from the time of the industrial revolution until the early 1920's. The production concept was the idea that a firm should focus on those products that it could produce most efficiently and that the creation of a supply of low-cost products would in and of itself create the demand for the products. The key questions that a firm would ask before producing a product were:

Can we produce the product? Can we produce enough of it?

At the time, the production concept worked fairly well because the goods that were produced were largely those of basic necessity and there was a relatively high level of unfulfilled demand. Virtually everything that could be produced was sold easily by a sales team whose job it was simply to execute transactions at a price determined by the cost of production. The production concept prevailed into the late 1920's.

The Sales Concept

By the early 1930's however, mass production had become commonplace, competition had increased, and there was little unfulfilled demand. Around this time, firms began to practice the sales concept (or selling concept), under which companies not only would produce the products, but also would try to convince customers to buy them through advertising and personal selling. Before producing a product, the key questions were:

Can we sell the product? Can we charge enough for it?

The sales concept paid little attention to whether the product actually was needed; the goal simply was to beat the competition to the sale with little regard to customer satisfaction. Marketing was a function that was performed after the product was developed and produced, and many people came to associate marketing with hard selling. Even today, many people use the word "marketing" when they really mean sales.

The Marketing Concept

After World War II, the variety of products increased and hard selling no longer could be relied upon to generate sales. With increased discretionary income, customers could afford to be selective and buy only those products that precisely met their changing needs, and these needs were not immediately obvious. The key questions became:

What do customers want? Can we develop it while they still want it? How can we keep our customers satisfied?

In response to these discerning customers, firms began to adopt the marketing concept, which involves:

Focusing on customer needs before developing the product Aligning all functions of the company to focus on those needs Realizing a profit by successfully satisfying customer needs over the long-

term

When firms first began to adopt the marketing concept, they typically set up separate marketing departments whose objective it was to satisfy customer needs. Often these departments were sales departments with expanded responsibilities. While this expanded sales department structure can be found in some companies today, many firms have structured themselves into marketing organizations having a company-wide customer focus. Since the entire organization exists to satisfy customer needs, nobody can neglect a customer issue by declaring it a "marketing problem" - everybody must be concerned with customer satisfaction.

The marketing concept relies upon marketing research to define market segments, their size, and their needs. To satisfy those needs, the marketing team makes decisions about the controllable parameters of the marketing mix.

The Marketing Mix (The 4 P's of Marketing)

Marketing decisions generally fall into the following four controllable categories:

Product Price Place (distribution) Promotion

The term "marketing mix" became popularized after Neil H. Borden published his 1964 article, The Concept of the Marketing Mix. Borden began using the term in his teaching in the late 1940's after James Culliton had described the marketing manager as a "mixer of ingredients". The ingredients in Borden's marketing mix included product planning, pricing, branding, distribution channels, personal selling, advertising, promotions, packaging, display, servicing, physical handling, and fact finding and analysis. E. Jerome McCarthy later grouped these ingredients into the four categories that today are known as the 4 P's of marketing, depicted below:

The Marketing Mix

These four P's are the parameters that the marketing manager can control, subject to the internal and external constraints of the marketing environment. The goal is to make decisions that center the four P's on the customers in the target market in order to create perceived value and generate a positive response.

Product Decisions

The term "product" refers to tangible, physical products as well as services. Here are some examples of the product decisions to be made:

Brand name Functionality Styling Quality Safety Packaging Repairs and Support Warranty Accessories and services

Price Decisions

Some examples of pricing decisions to be made include:

Pricing strategy (skim, penetration, etc.) Suggested retail price Volume discounts and wholesale pricing

Cash and early payment discounts Seasonal pricing Bundling Price flexibility Price discrimination

Distribution (Place) Decisions

Distribution is about getting the products to the customer. Some examples of distribution decisions include:

Distribution channels Market coverage (inclusive, selective, or exclusive distribution) Specific channel members Inventory management Warehousing Distribution centers Order processing Transportation Reverse logistics

Promotion Decisions

In the context of the marketing mix, promotion represents the various aspects of marketing communication, that is, the communication of information about the product with the goal of generating a positive customer response. Marketing communication decisions include:

Promotional strategy (push, pull, etc.) Advertising Personal selling & sales force Sales promotions Public relations & publicity Marketing communications budget

Limitations of the Marketing Mix Framework

The marketing mix framework was particularly useful in the early days of the marketing concept when physical products represented a larger portion of the economy. Today, with marketing more integrated into organizations and with a wider variety of products and markets, some authors have attempted to extend its usefulness by proposing a fifth P, such as packaging, people, process, etc. Today however, the marketing mix most commonly remains based on the 4 P's. Despite its limitations and perhaps because of its simplicity, the use of this framework remains strong and many marketing textbooks have been organized around it.

Target Market Selection

Target marketing tailors a marketing mix for one or more segments identified by market segmentation. Target marketing contrasts with mass marketing, which offers a single product to the entire market.

Two important factors to consider when selecting a target market segment are the attractiveness of the segment and the fit between the segment and the firm's objectives, resources, and capabilities.

Attractiveness of a Market Segment

The following are some examples of aspects that should be considered when evaluating the attractiveness of a market segment:

Size of the segment (number of customers and/or number of units) Growth rate of the segment

Competition in the segment

Brand loyalty of existing customers in the segment

Attainable market share given promotional budget and competitors' expenditures

Required market share to break even

Sales potential for the firm in the segment

Expected profit margins in the segment

Market research and analysis is instrumental in obtaining this information. For example, buyer intentions, salesforce estimates, test marketing, and statistical demand analysis are useful for determining sales potential. The impact of applicable micro-environmental and macro-environmental variables on the market segment should be considered.

Note that larger segments are not necessarily the most profitable to target since they likely will have more competition. It may be more profitable to serve one or more smaller segments that have little competition. On the other hand, if the firm can develop a competitive advantage, for example, via patent protection, it may find it profitable to pursue a larger market segment.

Suitability of Market Segments to the Firm

Market segments also should be evaluated according to how they fit the firm's objectives, resources, and capabilities. Some aspects of fit include:

Whether the firm can offer superior value to the customers in the segment The impact of serving the segment on the firm's image

Access to distribution channels required to serve the segment

The firm's resources vs. capital investment required to serve the segment

The better the firm's fit to a market segment, and the more attractive the market segment, the greater the profit potential to the firm.

Target Market Strategies

There are several different target-market strategies that may be followed. Targeting strategies usually can be categorized as one of the following:

Single-segment strategy - also known as a concentrated strategy. One market segment (not the entire market) is served with one marketing mix. A single-segment approach often is the strategy of choice for smaller companies with limited resources.

Selective specialization- this is a multiple-segment strategy, also known as a differentiated strategy. Different marketing mixes are offered to different segments. The product itself may or may not be different - in many cases only the promotional message or distribution channels vary.

Product specialization- the firm specializes in a particular product and tailors it to different market segments.

Market specialization- the firm specializes in serving a particular market segment and offers that segment an array of different products.

Full market coverage - the firm attempts to serve the entire market. This coverage can be achieved by means of either a mass market strategy in which a single undifferentiated marketing mix is offered to the entire market, or by a differentiated strategy in which a separate marketing mix is offered to each segment.

The following diagrams show examples of the five market selection patterns given three market segments S1, S2, and S3, and three products P1, P2, and P3.

SingleSegment

SelectiveSpecialization

ProductSpecialization

MarketSpecialization

Full MarketCoverage

  S1S2S3

P1

P2

P3

  S1S2S3

P1

P2

P3

  S1S2S3

P1

P2

P3

  S1S2S3

P1

P2

P3

  S1S2S3

P1

P2

P3

A firm that is seeking to enter a market and grow should first target the most attractive segment that matches its capabilities. Once it gains a foothold, it can expand by pursuing a product specialization strategy, tailoring the product for different segments, or by pursuing a market specialization strategy and offering new products to its existing market segment.

Another strategy whose use is increasing is individual marketing, in which the marketing mix is tailored on an individual consumer basis. While in the past impractical, individual marketing is becoming more viable thanks to advances in technology.

The Product Life Cycle

A product's life cycle (PLC) can be divided into several stages characterized by the revenue generated by the product. If a curve is drawn showing product revenue over time, it may take one of many different shapes, an example of which is shown below:

Product Life Cycle Curve

The life cycle concept may apply to a brand or to a category of product. Its duration may be as short as a few months for a fad item or a century or more for product categories such as the gasoline-powered automobile.

Product development is the incubation stage of the product life cycle. There are no sales and the firm prepares to introduce the product. As the product progresses through its life cycle, changes in the marketing mix usually are required in order to adjust to the evolving challenges and opportunities.

Introduction Stage

When the product is introduced, sales will be low until customers become aware of the product and its benefits. Some firms may announce their product before it is introduced, but such announcements also alert competitors and remove the element of surprise. Advertising costs typically are high during this stage in order to rapidly increase customer awareness of the product and to target the early adopters. During the introductory stage the firm is likely to incur additional costs associated with the initial distribution of the product. These higher costs coupled with a low sales volume usually make the introduction stage a period of negative profits.

During the introduction stage, the primary goal is to establish a market and build primary demand for the product class. The following are some of the marketing mix implications of the introduction stage:

Product - one or few products, relatively undifferentiated Price - Generally high, assuming a skim pricing strategy for a high profit

margin as the early adopters buy the product and the firm seeks to recoup development costs quickly. In some cases a penetration pricing strategy is used and introductory prices are set low to gain market share rapidly.

Distribution - Distribution is selective and scattered as the firm commences implementation of the distribution plan.

Promotion - Promotion is aimed at building brand awareness. Samples or trial incentives may be directed toward early adopters. The introductory promotion also is intended to convince potential resellers to carry the product.

Growth Stage

The growth stage is a period of rapid revenue growth. Sales increase as more customers become aware of the product and its benefits and additional market segments are targeted. Once the product has been proven a success and customers begin asking for it, sales will increase further as more retailers become interested in carrying it. The marketing team may expand the distribution at this point. When competitors enter the market, often during the later part of the growth stage, there may be price competition and/or increased promotional costs in order to convince consumers that the firm's product is better than that of the competition.

During the growth stage, the goal is to gain consumer preference and increase sales. The marketing mix may be modified as follows:

Product - New product features and packaging options; improvement of product quality.

Price - Maintained at a high level if demand is high, or reduced to capture additional customers.

Distribution - Distribution becomes more intensive. Trade discounts are minimal if resellers show a strong interest in the product.

Promotion - Increased advertising to build brand preference.

Maturity Stage

The maturity stage is the most profitable. While sales continue to increase into this stage, they do so at a slower pace. Because brand awareness is strong, advertising expenditures will be reduced. Competition may result in decreased market share and/or prices. The competing products may be very similar at this point, increasing the difficulty of differentiating the product. The firm places effort into encouraging competitors' customers to switch, increasing usage per customer, and converting non-users into customers. Sales promotions may be offered to encourage retailers to give the product more shelf space over competing products.

During the maturity stage, the primary goal is to maintain market share and extend the product life cycle. Marketing mix decisions may include:

Product - Modifications are made and features are added in order to differentiate the product from competing products that may have been introduced.

Price - Possible price reductions in response to competition while avoiding a price war.

Distribution - New distribution channels and incentives to resellers in order to avoid losing shelf space.

Promotion - Emphasis on differentiation and building of brand loyalty. Incentives to get competitors' customers to switch.

Decline Stage

Eventually sales begin to decline as the market becomes saturated, the product becomes technologically obsolete, or customer tastes change. If the product has developed brand loyalty, the profitability may be maintained longer. Unit costs may increase with the declining production volumes and eventually no more profit can be made.

During the decline phase, the firm generally has three options:

Maintain the product in hopes that competitors will exit. Reduce costs and find new uses for the product.

Harvest it, reducing marketing support and coasting along until no more profit can be made.

Discontinue the product when no more profit can be made or there is a successor product.

The marketing mix may be modified as follows:

Product - The number of products in the product line may be reduced. Rejuvenate surviving products to make them look new again.

Price - Prices may be lowered to liquidate inventory of discontinued products. Prices may be maintained for continued products serving a niche market.

Distribution - Distribution becomes more selective. Channels that no longer are profitable are phased out.

Promotion - Expenditures are lower and aimed at reinforcing the brand image for continued products.

Limitations of the Product Life Cycle Concept

The term "life cycle" implies a well-defined life cycle as observed in living organisms, but products do not have such a predictable life and the specific life cycle curves followed by different products vary substantially. Consequently, the life cycle concept is not well-suited for the forecasting of product sales. Furthermore, critics have argued that the product life cycle may become self-fulfilling. For example, if sales peak and then decline, managers may conclude that the product is in the decline phase and therefore cut the advertising budget, thus precipitating a further decline.

Nonetheless, the product life cycle concept helps marketing managers to plan alternate marketing strategies to address the challenges that their products are likely to face. It also is useful for monitoring sales results over time and comparing them to those of products having a similar life cycle.

Positioning

In their 1981 book, Positioning: The Battle for your Mind, Al Ries and Jack Trout describe how positioning is used as a communication tool to reach target customers in a crowded marketplace. Jack Trout published an article on positioning in 1969, and regular use of the term dates back to 1972 when Ries and Trout published a series of articles in Advertising Age called "The Positioning Era." Not long thereafter, Madison Avenue advertising executives began to develop positioning slogans for their clients and positioning became a key aspect of marketing communications.

Positioning: The Battle for your Mind has become a classic in the field of marketing. The following is a summary of the key points made by Ries and Trout in their book.

Information Overload

Ries and Trout explain that while positioning begins with a product, the concept really is about positioning that product in the mind of the customer. This approach is needed because consumers are bombarded with a continuous stream of advertising, with advertisers spending several hundred dollars annually per consumer in the U.S. The consumer's mind reacts to this high volume of advertising by accepting only what is consistent with prior knowledge or experience.

It is quite difficult to change a consumer's impression once it is formed. Consumers cope with information overload by oversimplifying and are likely to

shut out anything inconsistent with their knowledge and experience. In an over-communicated environment, the advertiser should present a simplified message and make that message consistent with what the consumer already believes by focusing on the perceptions of the consumer rather than on the reality of the product.

Getting Into the Mind of the Consumer

The easiest way of getting into someone's mind is to be first. It is very easy to remember who is first, and much more difficult to remember who is second. Even if the second entrant offers a better product, the first mover has a large advantage that can make up for other shortcomings.

However, all is not lost for products that are not the first. By being the first to claim a unique position in the mind the consumer, a firm effectively can cut through the noise level of other products. For example, Miller Lite was not the first light beer, but it was the first to be positioned as a light beer, complete with a name to support that position. Similarly, Lowenbrau was the most popular German beer sold in America, but Beck's Beer successfully carved a unique position using the advertising,

"You've tasted the German beer that's the most popular in America. Now taste the German beer that's the most popular in Germany."

Consumers rank brands in their minds. If a brand is not number one, then to be successful it somehow must relate itself to the number one brand. A campaign that pretends that the market leader does not exist is likely to fail. Avis tried unsuccessfully for years to win customers, pretending that the number one Hertz did not exist. Finally, it began using the line,

"Avis in only No. 2 in rent-a-cars, so why go with us? We try harder."

After launching the campaign, Avis quickly became profitable. Whether Avis actually tried harder was not particularly relevant to their success. Rather, consumers finally were able to relate Avis to Hertz, which was number one in their minds.

Another example is that of the soft-drink 7-Up, which was No. 3 behind Coke and Pepsi. By relating itself to Coke and Pepsi as the "Uncola", 7-Up was able to establish itself in the mind of the consumer as a desirable alternative to the standard colas.

When there is a clear market leader in the mind of the consumer, it can be nearly impossible to displace the leader, especially in the short-term. On the other hand, a firm usually can find a way to position itself in relation to the market leader so

that it can increase its market share. It usually is a mistake, however, to challenge the leader head-on and try to displace it.

Positioning of a Leader

Historically, the top three brands in a product category occupy market share in a ratio of 4:2:1. That is, the number one brand has twice the market share of number two, which has twice the market share of number three. Ries and Trout argue that the success of a brand is not due to the high level of marketing acumen of the company itself, but rather, it is due to the fact that the company was first in the product category. They use the case of Xerox to make this point. Xerox was the first plain-paper copier and was able to sustain its leadership position. However, time after time the company failed in other product categories in which it was not first.

Similarly, IBM failed when it tried to compete with Xerox in the copier market, and Coca-Cola failed in its effort to use Mr. Pibb to take on Dr. Pepper. These examples support the point that the success of a brand usually is due to its being first in the market rather than the marketing abilities of the company. The power of the company comes from the power of its brand, not the other way around.

With this point in mind, there are certain things that a market leader should do to maintain the leadership position. First, Ries and Trout emphasize what it should not do, and that is boast about being number one. If a firm does so, then customers will think that the firm is insecure in its position if it must reinforce it by saying so.

If a firm was the first to introduce a product, then the advertising campaign should reinforce this fact. Coca-Cola's "the real thing" does just that, and implies that other colas are just imitations.

Another strategy that a leader can follow to maintain its position is the multibrand strategy. This strategy is to introduce multiple brands rather than changing existing ones that hold leadership positions. It often is easier and cheaper to introduce a new brand rather than change the positioning of an existing brand. Ries and Trout call this strategy a single-position strategy because each brand occupies a single, unchanging position in the mind of the consumer.

Finally, change is inevitable and a leader must be willing to embrace change rather than resist it. When new technology opens the possibility of a new market that may threaten the existing one, a successful firm should consider entering the new market so that it will have the first-mover advantage in it. For example, in the past century the New York Central Railroad lost its leadership as air travel became possible. The company might have been able to maintain its leadership position had it used its resources to form an airline division.

Sometimes it is necessary to adopt a broader name in order to adapt to change. For example, Haloid changed its name to Haloid Xerox and later to simply Xerox. This is a typical pattern of changing Name 1 to an expanded Name 1 - Name 2, and later to just Name 2.

Positioning of a Follower

Second-place companies often are late because they have chosen to spend valuable time improving their product before launching it. According to Ries and Trout, it is better to be first and establish leadership.

If a product is not going to be first, it then must find an unoccupied position in which it can be first. At a time when larger cars were popular, Volkswagen introduced the Beetle with the slogan "Think small." Volkswagen was not the first small car, but they were the first to claim that position in the mind of the consumer.

Other positions that firms successfully have claimed include:

age (Geritol) high price (Mobil 1 synthetic engine lubricant)

gender (Virginia Slims)

time of day (Nyquil night-time cold remedy)

place of distribution (L'eggs in supermarkets)

quantity (Schaefer - "the one beer to have when you're having more than one.")

It most likely is a mistake to build a brand by trying to appeal to everyone. There are too many brands that already have claimed a position and have become entrenched leaders in their positions. A product that seeks to be everything to everyone will end up being nothing to everyone.

Repositioning the Competition

Sometimes there are no unique positions to carve out. In such cases, Ries and Trout suggest repositioning a competitor by convincing consumers to view the competitor in a different way. Tylenol successfully repositioned aspirin by running advertisements explaining the negative side effects of aspirin.

Consumers tend to perceive the origin of a product by its name rather than reading the label to find out where it really is made. Such was the case with vodka when most vodka brands sold in the U.S. were made in the U.S. but had

Russian names. Stolichnaya Russian vodka successfully repositioned its Russian-sounding competitors by exposing the fact that they all actually were made in the U.S., and that Stolichnaya was made in Leningrad, Russia.

When Pringle's new-fangled potato chips were introduced, they quickly gained market share. However, Wise potato chips successfully repositioned Pringle's in the mind of consumers by listing some of Pringle's non-natural ingredients that sounded like harsh chemicals, even though they were not. Wise potato chips of course, contained only "Potatoes. Vegetable oil. Salt." As a resulting of this advertising, Pringle's quickly lost market share, with consumers complaining that Pringle's tasted like cardboard, most likely as a consequence of their thinking about all those unnatural ingredients. Ries and Trout argue that is usually is a lost cause to try to bring a brand back into favor once it has gained a bad image, and that in such situations it is better to introduce an entirely new brand.

Repositioning a competitor is different from comparative advertising. Comparative advertising seeks to convince the consumer that one brand is simply better than another. Consumers are not likely to be receptive to such a tactic.

The Power of a Name

A brand's name is perhaps the most important factor affecting perceptions of it. In the past, before there was a wide range of brands available, a company could name a product just about anything. These days, however, it is necessary to have a memorable name that conjures up images that help to position the product.

Ries and Trout favor descriptive names rather than coined ones like Kodak or Xerox. Names like DieHard for a battery, Head & Shoulders for a shampoo, Close-Up for a toothpaste, People for a gossip magazine. While it is more difficult to protect a generic name under trademark law, Ries and Trout believe that in the long run it is worth the effort and risk. In their opinion, coined names may be appropriate for new products in which a company is first to market with a sought-after product, in which case the name is not so important.

Margarine is a name that does not very well position the product it is describing. The problem is that it sounds artificial and hides the true origin of the product. Ries and Trout propose that "soy butter" would have been a much better name for positioning the product as an alternative to the more common type of butter that is made from milk. While some people might see soy in a negative light, a promotional campaign could be developed to emphasize a sort of "pride of origin" for soy butter.

Another everyday is example is that of corn syrup, which is viewed by consumers as an inferior alternative to sugar. To improve the perceptions of corn syrup, one

supplier began calling it "corn sugar", positioning it as an alternative to cane sugar or beet sugar.

Ries and Trout propose that selecting the right name is important for positioning just about anything, not just products. For example, the Clean Air Act has a name that is difficult to oppose, as do "fair trade" laws. Even a person's name impacts his or her success in life. One study showed that on average, schoolteachers grade essays written by children with names like David and Michael a full letter grade higher than those written by children with names like Hubert and Elmer.

Eastern Airlines was an example of a company limited by its name. Air travel passengers always viewed it as a regional airline that served the eastern U.S., even though it served a much wider area, including the west coast. Airlines such as American and United did not have such a perception problem. (Eastern Airlines ceased operations in 1991.)

Another problem that some companies face is confusion with another company that has a similar name. Consumers frequently confused the tire manufacturer B.F. Goodrich with Goodyear. The Goodyear blimp had made Goodyear tires well-known, and Goodyear frequently received credit by consumers for tire products that B.F. Goodrich has pioneered. (B.F. Goodrich eventually sold its tire business to Uniroyal.)

Other companies have changed their names to something more general, and as a result create confusion with other similar-sounding companies. Take for instance The Continental Group, Inc. and The Continental Corporation. Few people confidently can say which makes cans and which sells insurance.

The No-Name Trap

People tend use abbreviations when they have fewer syllables than the original term. GE is often used instead of General Electric. IBM instead of International Business Machines. In order to make their company names more general and easier to say, many corporations have changed their legal names to a series of two or three letters. Ries and Trout argue that such changes usually are unwise.

Companies having a broad recognition may be able to use the abbreviated names and consumers will make the translation in their minds. When they hear "GM", they think "General Motors". However, lesser known companies tend to lose their identity when they use such abbreviations. Most people don't know the types of business in which companies named USM or AMP are engaged.

The same applies to people's names as well. While some famous people are known by their initials (such as FDR and JFK), it is only after they become famous that they begin using their initials. Ries and Trout advise managers who aspire for name recognition to use an actual name rather then first and middle

initials. The reason that initials do not lead to recognition is that the human mind works by sounds, not by spellings.

Most companies began selling a single product, and the name of the company usually reflected that product. As the successful firms grew in to conglomerates, their original names became limiting. Ries and Trout advise companies seeking more general names to select a shorter name made of words, not individual letters. For example, for Trans World Airlines, they favored truncating it simply to Trans World instead removing all words and using the letters TWA.

The Free-Ride Trap

A company introducing a new product often is tempted to use the brand name of an existing product, avoiding the need to build the brand from scratch. For example, Alka-Seltzer named a new product Alka-Seltzer Plus. Ries and Trout do not favor this strategy since the original name already in positioned in the consumer's mind. In fact, consumers viewed Alka-Seltzer Plus simply as a better Alka-Seltzer, and the sales of Alka-Seltzer Plus came at the expense of Alka-Seltzer, not from the market share of the competition.

Some firms have built a wide range of products on a single brand name. Others, such as Procter & Gamble have selected new names for each new product, carefully positioning the product in a different part of the consumer's mind. Ries and Trout maintain that a single brand name cannot hold multiple positions; either the new product will not be successful or the original product bearing the name will lose its leadership position.

Nonetheless, some companies do not want their new products to be anonymous with an unrecognized name. However, Ries and Trout propose that anonymity is not so bad; in fact, it is a resource. When the product eventually catches the attention of the media, it will have the advantage of being seen without any previous bias, and if a firm prepares for this event well, once under the spotlight the carefully designed positioning can be communicated exactly as intended. This moment of fame is a one-shot event and once it has passed, the product will not have a second chance to be fresh and new.

The Line Extension Trap

Line extensions are tempting for companies as a way to leverage an existing popular brand. However, if the brand name has become near generic so that consumers consider the name and the product to be one and the same, Ries and Trout generally do not believe that a line extension is a good idea.

Consider the case of Life Savers candy. To consumers, the brand name is synonymous with the hard round candy that has a hole in the middle. Nonetheless, the company introduced a Life Savers chewing gum. This use of

the Life Savers name was not consistent with the consumer's view of it, and the Life Savers chewing gum brand failed. The company later introduced the first brand of soft bubble gum and gave it a new name: Bubble Yum. This product was very successful because it not only had a name different from the hard candy, it also had the the advantage of being the first soft bubble gum.

Ries and Trout cite many examples of failures due to line extensions. The consistent pattern in these cases is that either the new product does not succeed, or the original successful product loses market share as a result of its position being weakened by a diluted brand name.

When Line Extensions Can Work

Despite the disadvantages of line extensions, there are some cases in which it is not economically feasible to create a new brand and in which a line extension might work. Some of the cases provided by Ries and Trout include:

Low volume product - if the sales volume is not expected to be high. Crowded market - if there is no unique position that the product can

occupy.

Small ad budget - without strong advertising support, it might make sense to use the house name.

Commodity product - an undifferentiated commodity product has less need of its own name than does a breakthrough product.

Distribution by sales reps - products distributed through reps may not need a separate brand name. Those sold on store shelves benefit more from their own name.

Positioning Has Broad Applications

The concept of positioning applies to products in the broadest sense. Services, tourist destinations, countries, and even careers can benefit from a well-developed positioning strategy that focuses on a niche that is unoccupied in the mind of the consumer or decision-maker.

Brand Equity

A brand is a name or symbol used to identify the source of a product. When developing a new product, branding is an important decision. The brand can add significant value when it is well recognized and has positive associations in the mind of the consumer. This concept is referred to as brand equity.

What is Brand Equity?

Brand equity is an intangible asset that depends on associations made by the consumer. There are at least three perspectives from which to view brand equity:

Financial - One way to measure brand equity is to determine the price premium that a brand commands over a generic product. For example, if consumers are willing to pay $100 more for a branded television over the same unbranded television, this premium provides important information about the value of the brand. However, expenses such as promotional costs must be taken into account when using this method to measure brand equity.

Brand extensions - A successful brand can be used as a platform to launch related products. The benefits of brand extensions are the leveraging of existing brand awareness thus reducing advertising expenditures, and a lower risk from the perspective of the consumer. Furthermore, appropriate brand extensions can enhance the core brand. However, the value of brand extensions is more difficult to quantify than are direct financial measures of brand equity.

Consumer-based - A strong brand increases the consumer's attitude strength toward the product associated with the brand. Attitude strength is built by experience with a product. This importance of actual experience by the customer implies that trial samples are more effective than advertising in the early stages of building a strong brand. The consumer's awareness and associations lead to perceived quality, inferred attributes, and eventually, brand loyalty.

Strong brand equity provides the following benefits:

Facilitates a more predictable income stream. Increases cash flow by increasing market share, reducing promotional

costs, and allowing premium pricing. Brand equity is an asset that can be sold or leased.

However, brand equity is not always positive in value. Some brands acquire a bad reputation that results in negative brand equity. Negative brand equity can be measured by surveys in which consumers indicate that a discount is needed to purchase the brand over a generic product.

Building and Managing Brand Equity

In his 1989 paper, Managing Brand Equity, Peter H. Farquhar outlined the following three stages that are required in order to build a strong brand:

1. Introduction - introduce a quality product with the strategy of using the brand as a platform from which to launch future products. A positive evaluation by the consumer is important.

2. Elaboration - make the brand easy to remember and develop repeat usage. There should be accessible brand attitude, that is, the consumer should easily remember his or her positive evaluation of the brand.

3. Fortification - the brand should carry a consistent image over time to reinforce its place in the consumer's mind and develop a special relationship with the consumer. Brand extensions can further fortify the brand, but only with related products having a perceived fit in the mind of the consumer.

Alternative Means to Brand Equity

Building brand equity requires a significant effort, and some companies use alternative means of achieving the benefits of a strong brand. For example, brand equity can be borrowed by extending the brand name to a line of products in the same product category or even to other categories. In some cases, especially when there is a perceptual connection between the products, such extensions are successful. In other cases, the extensions are unsuccessful and can dilute the original brand equity.

Brand equity also can be "bought" by licensing the use of a strong brand for a new product. As in line extensions by the same company, the success of brand licensing is not guaranteed and must be analyzed carefully for appropriateness.

Managing Multiple Brands

Different companies have opted for different brand strategies for multiple products. These strategies are:

Single brand identity - a separate brand for each product. For example, in laundry detergents Procter & Gamble offers uniquely positioned brands such as Tide, Cheer, Bold, etc.

Umbrella - all products under the same brand. For example, Sony offers many different product categories under its brand.

Multi-brand categories - Different brands for different product categories. Campbell Soup Company uses Campbell's for soups, Pepperidge Farm for baked goods, and V8 for juices.

Family of names - Different brands having a common name stem. Nestle uses Nescafe, Nesquik, and Nestea for beverages.

Brand equity is an important factor in multi-product branding strategies.

Protecting Brand Equity

The marketing mix should focus on building and protecting brand equity. For example, if the brand is positioned as a premium product, the product quality should be consistent with what consumers expect of the brand, low sale prices should not be used compete, the distribution channels should be consistent with what is expected of a premium brand, and the promotional campaign should build consistent associations.

Finally, potentially dilutive extensions that are inconsistent with the consumer's perception of the brand should be avoided. Extensions also should be avoided if the core brand is not yet sufficiently strong.

Pricing Strategy

One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, channel decisions, and promotion.

While there is no single recipe to determine pricing, the following is a general sequence of steps that might be followed for developing the pricing of a new product:

1. Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning.

2. Make marketing mix decisions - define the product, distribution, and promotional tactics.

3. Estimate the demand curve - understand how quantity demanded varies with price.

4. Calculate cost - include fixed and variable costs associated with the product.

5. Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc.

6. Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo).

7. Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts.

These steps are interrelated and are not necessarily performed in the above order. Nonetheless, the above list serves to present a starting framework.

Marketing Strategy and the Marketing Mix

Before the product is developed, the marketing strategy is formulated, including target market selection and product positioning. There usually is a tradeoff between product quality and price, so price is an important variable in positioning.

Because of inherent tradeoffs between marketing mix elements, pricing will depend on other product, distribution, and promotion decisions.

Estimate the Demand Curve

Because there is a relationship between price and quantity demanded, it is important to understand the impact of pricing on sales by estimating the demand curve for the product.

For existing products, experiments can be performed at prices above and below the current price in order to determine the price elasticity of demand. Inelastic demand indicates that price increases might be feasible.

Calculate Costs

If the firm has decided to launch the product, there likely is at least a basic understanding of the costs involved, otherwise, there might be no profit to be made. The unit cost of the product sets the lower limit of what the firm might charge, and determines the profit margin at higher prices.

The total unit cost of a producing a product is composed of the variable cost of producing each additional unit and fixed costs that are incurred regardless of the quantity produced. The pricing policy should consider both types of costs.

Environmental Factors

Pricing must take into account the competitive and legal environment in which the company operates. From a competitive standpoint, the firm must consider the implications of its pricing on the pricing decisions of competitors. For example, setting the price too low may risk a price war that may not be in the best interest of either side. Setting the price too high may attract a large number of competitors who want to share in the profits.

From a legal standpoint, a firm is not free to price its products at any level it chooses. For example, there may be price controls that prohibit pricing a product too high. Pricing it too low may be considered predatory pricing or "dumping" in the case of international trade. Offering a different price for different consumers may violate laws against price discrimination. Finally, collusion with competitors to fix prices at an agreed level is illegal in many countries.

Pricing Objectives

The firm's pricing objectives must be identified in order to determine the optimal pricing. Common objectives include the following:

Current profit maximization - seeks to maximize current profit, taking into account revenue and costs. Current profit maximization may not be the best objective if it results in lower long-term profits.

Current revenue maximization - seeks to maximize current revenue with no regard to profit margins. The underlying objective often is to maximize long-term profits by increasing market share and lowering costs.

Maximize quantity - seeks to maximize the number of units sold or the number of customers served in order to decrease long-term costs as predicted by the experience curve.

Maximize profit margin - attempts to maximize the unit profit margin, recognizing that quantities will be low.

Quality leadership - use price to signal high quality in an attempt to position the product as the quality leader.

Partial cost recovery - an organization that has other revenue sources may seek only partial cost recovery.

Survival - in situations such as market decline and overcapacity, the goal may be to select a price that will cover costs and permit the firm to remain in the market. In this case, survival may take a priority over profits, so this objective is considered temporary.

Status quo - the firm may seek price stabilization in order to avoid price wars and maintain a moderate but stable level of profit.

For new products, the pricing objective often is either to maximize profit margin or to maximize quantity (market share). To meet these objectives, skim pricing and penetration pricing strategies often are employed. Joel Dean discussed these pricing policies in his classic HBR article entitled, Pricing Policies for New Products.

Skim pricing attempts to "skim the cream" off the top of the market by setting a high price and selling to those customers who are less price sensitive. Skimming is a strategy used to pursue the objective of profit margin maximization.

Skimming is most appropriate when:

Demand is expected to be relatively inelastic; that is, the customers are not highly price sensitive.

Large cost savings are not expected at high volumes, or it is difficult to predict the cost savings that would be achieved at high volume.

The company does not have the resources to finance the large capital expenditures necessary for high volume production with initially low profit margins.

Penetration pricing pursues the objective of quantity maximization by means of a low price. It is most appropriate when:

Demand is expected to be highly elastic; that is, customers are price sensitive and the quantity demanded will increase significantly as price declines.

Large decreases in cost are expected as cumulative volume increases.

The product is of the nature of something that can gain mass appeal fairly quickly.

There is a threat of impending competition.

As the product lifecycle progresses, there likely will be changes in the demand curve and costs. As such, the pricing policy should be reevaluated over time.

The pricing objective depends on many factors including production cost, existence of economies of scale, barriers to entry, product differentiation, rate of product diffusion, the firm's resources, and the product's anticipated price elasticity of demand.

Types of Pricing Strategies

An organisation can adopt a number of pricing strategies. The pricing strategies are based much on what objectives the company has set itself to achieve.

Penetration pricing: Here the organisation sets a low price to increase sales and market share. Once market share has been captured the firm may well then increase their price.

Skimming pricing: The organisation sets an initial high price and then slowly lowers the price to make the product available to a wider market. The objective is to skim profits of the market layer by layer.

Competition pricing: Setting a price in comparison with competitors. Really a firm has three options and these are to price lower, price the same or price higher.

Product Line Pricing: Pricing different products within the same product range at different price points. An example would be a DVD manufacturer offering different DVD recorders with different features at different prices eg A HD and non HD version.. The greater the features and the benefit obtained the greater the consumer will pay. This form of price discrimination assists the company in maximising turnover and profits.

Bundle Pricing: The organisation bundles a group of products at a reduced price. Common methods are buy one and get one free promotions or BOGOF's as they are now known. Within the UK some firms are now moving into the realms of buy one get two free can we call this BOGTF i wonder?

Psychological pricing: The seller here will consider the psychology of price and the positioning of price within the market place. The seller will therefore charge 99p instead £1 or $199 instead of $200. The reason why this methods work, is because buyers will still say they purchased their product under £200 pounds or dollars, even thought it was a pound or dollar away. My favourite pricing strategy.

Premium pricing: The price set is high to reflect the exclusiveness of the product. An example of products using this strategy would be Harrods, first class airline services, Porsche etc.

Optional pricing: The organisation sells optional extras along with the product to maximise its turnover. This strategy is used commonly within the car industry as i found out when purchasing my car.

Cost Based Pricing: The firms takes into account the cost of production and distribution, they then decide on a mark up which they would like for profit to come to their final pricing decision.

Cost Plus Pricing: Here the firm add a percentage to costs as profit margin to come to their final pricing decisions. For example it may cost £100 to produce a widget and the firm add 20% as a profit margin so the selling price would be £120.00

Pricing Methods

To set the specific price level that achieves their pricing objectives, managers may make use of several pricing methods. These methods include:

Cost-plus pricing - set the price at the production cost plus a certain profit margin.

Target return pricing - set the price to achieve a target return-on-investment.

Value-based pricing - base the price on the effective value to the customer relative to alternative products.

Psychological pricing - base the price on factors such as signals of product quality, popular price points, and what the consumer perceives to be fair.

In addition to setting the price level, managers have the opportunity to design innovative pricing models that better meet the needs of both the firm and its customers. For example, software traditionally was purchased as a product in which customers made a one-time payment and then owned a perpetual license to the software. Many software suppliers have changed their pricing to a subscription model in which the customer subscribes for a set period of time, such as one year. Afterwards, the subscription must be renewed or the software no longer will function. This model offers stability to both the supplier and the customer since it reduces the large swings in software investment cycles.

Price Discounts

The normally quoted price to end users is known as the list price. This price usually is discounted for distribution channel members and some end users. There are several types of discounts, as outlined below.

Quantity discount - offered to customers who purchase in large quantities.

Cumulative quantity discount - a discount that increases as the cumulative quantity increases. Cumulative discounts may be offered to resellers who purchase large quantities over time but who do not wish to place large individual orders.

Seasonal discount - based on the time that the purchase is made and designed to reduce seasonal variation in sales. For example, the travel industry offers much lower off-season rates. Such discounts do not have to be based on time of the year; they also can be based on day of the week or time of the day, such as pricing offered by long distance and wireless service providers.

Cash discount - extended to customers who pay their bill before a specified date.

Trade discount - a functional discount offered to channel members for performing their roles. For example, a trade discount may be offered to a small retailer who may not purchase in quantity but nonetheless performs the important retail function.

Promotional discount - a short-term discounted price offered to stimulate sales.

3Cs model (Ohmae)

Three key factors to create a successful business strategy. Explanation of 3C's Model of Ohmae

The 3C's model of Kenichi Ohmae, a famous Japanese strategy guru, stresses that a strategist should focus on three key factors for success. In the construction of any business strategy, three main players must be taken into account:

1. The corporation itself. 2. The customer. 3. The competition.

The Strategic triangle

Only by integrating the three C's (Customer, Corporate, and Competitor) in a strategic triangle, a sustained competitive advantage can exist. Ohmae refers to these key factors as the three C's or the strategic triangle.  

1: Corporate-based strategies

These strategies aim to maximize the corporation's strengths relative to the competition in the functional areas that are critical to achieve success in the industry:

Selectivity and sequencing. The corporation does not have to lead in every function to win. If it can gain a decisive edge in one key function, it will eventually be able to improve its other functions which are now mediocre.

A case of make or buy. In case of rapidly rising wage costs, it becomes a critical decision for a company to subcontract a major share of its assembly operations. If its competitors are unable to shift production so rapidly to subcontractors and vendors, the resulting difference in cost

structure and/or in the company's ability to cope with demand fluctuations may have significant strategic implications.

Improving cost-effectiveness. This can be done in three basic ways: 1. Reducing basic costs much more effectively than the competition. 2. Simply to exercise greater selectivity in terms of:

The orders that are accepted. The products that are offered. The functions that are performed.

This means cherry-picking operations with a high impact, so that when other operations are eliminated, functional costs will drop faster than sales revenues.

3. To share a certain key function with the corporation's other businesses or even with other companies. Experience indicates that there are many situations in which sharing resources in one or more basic sub-functions of marketing can be advantageous.

2: Customer-based strategies

Clients are the basis of any strategy according to Ohmae. There is no doubt that a corporation's foremost concern ought to be the interests of its customers rather than that of its stockholders and other parties. In the long run, the corporation that is genuinely interested in its customers will be interesting for its investors.

 Segmentation is advisable:

Segmenting by objectives. Here, the differentiation is done in terms of the different ways that different customers use the product. Take coffee, for example. Some people drink it for waking up or staying alert, while others view coffee as a way to relax or socialize (coffee breaks).

Segmenting by customer coverage. This type of strategic segmentation normally emerges from a trade-off study of marketing costs versus market coverage. There appears always to be a point of diminishing returns in the cost-versus-coverage relationship. The corporation's task, therefore, is to optimize its range of market coverage. Be it geographical or channel. So that its cost of marketing will be advantageous relative to the competition.

Segmenting the market once more. In a fiercely competitive market, the corporation and its head-on competitors are likely to be dissecting the market in similar ways. Over an extended period of time, therefore the effectiveness of a given initial strategic segmentation will tend to decline. In such a situation it is useful to pick a small group of key customers and reexamine what it is that they are really looking for.

Changes in customer mix:Such a market segment change occurs where the market forces are altering the

distribution of the user-mix over time by influencing demography, distribution channels, customer size, etc. This kind of change means that the allocation of corporate resources must be shifted and/or the absolute level of resources committed in the business must be changed. 

3: Competitor-based strategies

According to Kenichi Ohmae, these strategies can be constructed by looking at possible sources of differentiation in functions such as: purchasing, design, engineering, sales and servicing. Ways to do this:

The power of an image. Both Sony and Honda sell more than their competitors as they invested more heavily in public relations and advertising. And they managed these functions more carefully than did their competitors. When product performance and mode of distribution are very difficult to differentiate, image may be the only source of positive differentiation. But the case of the Swiss watch industry shows that a strategy built on image can be risky and must be monitored constantly.

Capitalizing on profit- and cost-structure differences. Firstly, the difference in source of profit might be exploited. For profit from new product sales, profit from services etcetera. Secondly, a difference in the ratio of fixed cost and variable cost might also be exploited strategically. Because a company with a lower fixed cost ratio can lower prices in a sluggish market. In this way it can win market share. This hurts the company with a higher fixed cost ratio. The market price is too low to justify its high fixed cost and low volume operation.

Tactics for flyweights. If such a company chooses to compete in mass-media advertising or massive R&D efforts, the additional fixed costs will absorb a large portion of its revenue. Its giant competitors will inevitably win. It could however calculate its incentives on a gradual percentage basis, rather than on absolute volume, thus making the incentives variable by guaranteeing the dealer a larger percentage of each extra unit sold. Of course, the big three market players cannot afford to offer such high percentages across the board to their respective franchised shops; their profitability would soon be eroded.

Hito-Kane-Mono. A favorite phrase of Japanese business planners is hito-kane-mono, or people, money, and things (fixed assets). They believe that streamlined corporate management is achieved when these three critical resources are in balance without any surplus or waste. For example: cash over and beyond what competent people can intelligently expend is wasted. Too many managers without enough money will exhaust their energies and involve their colleagues in a time-wasting warfare over the allocation of the limited funds. Of the three critical resources, funds should be allocated last. The corporation should first allocate management talent, based on the available mono: plant, machinery, technology, process know-how, and functional strengths. Once these hito have

developed creative and imaginative ideas to capture the business's upward potential, the kane, or money, should be allocated to the specific ideas and programs generated by individual managers.

Cosumer Behaviour:

Research suggests that customers go through a five-stage decision-making process in any purchase. This is summarised in the diagram below:

This model is important for anyone making marketing decisions. It forces the marketer to consider the whole buying process rather than just the purchase decision (when it may be too late for a business to influence the choice!)

The model implies that customers pass through all stages in every purchase. However, in more routine purchases, customers often skip or reverse some of the stages.

For example, a student buying a favourite hamburger would recognise the need (hunger) and go right to the purchase decision, skipping information search and evaluation. However, the model is very useful when it comes to understanding any purchase that requires some thought and deliberation.

The buying process starts with need recognition. At this stage, the buyer recognises a problem or need (e.g. I am hungry, we need a new sofa, I have a headache) or responds to a marketing stimulus (e.g. you pass Starbucks and are attracted by the aroma of coffee and chocolate muffins).

An “aroused” customer then needs to decide how much information (if any) is required. If the need is strong and there is a product or service that meets the need close to hand, then a purchase decision is likely to be made there and then. If not, then the process of information search begins.

A customer can obtain information from several sources:

• Personal sources: family, friends, neighbours etc• Commercial sources: advertising; salespeople; retailers; dealers; packaging; point-of-sale displays• Public sources: newspapers, radio, television, consumer organisations; specialist magazines• Experiential sources: handling, examining, using the product

The usefulness and influence of these sources of information will vary by product and by customer. Research suggests that customers value and respect personal sources more than commercial sources (the influence of “word of mouth”). The challenge for the marketing team is to identify which information sources are most influential in their target markets.

In the evaluation stage, the customer must choose between the alternative brands, products and services.

How does the customer use the information obtained?

An important determinant of the extent of evaluation is whether the customer feels “involved” in the product. By involvement, we mean the degree of perceived relevance and personal importance that accompanies the choice.

Where a purchase is “highly involving”, the customer is likely to carry out extensive evaluation.

High-involvement purchases include those involving high expenditure or personal risk – for example buying a house, a car or making investments.

Low involvement purchases (e.g. buying a soft drink, choosing some breakfast cereals in the supermarket) have very simple evaluation processes.

Why should a marketer need to understand the customer evaluation process?

The answer lies in the kind of information that the marketing team needs to provide customers in different buying situations.

In high-involvement decisions, the marketer needs to provide a good deal of information about the positive consequences of buying. The sales force may need to stress the important attributes of the product, the advantages compared with the competition; and maybe even encourage “trial” or “sampling” of the product in the hope of securing the sale.

Post-purchase evaluation - Cognitive Dissonance

The final stage is the post-purchase evaluation of the decision. It is common for customers to experience concerns after making a purchase decision. This arises from a concept that is known as “cognitive dissonance”. The customer, having bought a product, may feel that an alternative would have been preferable. In these circumstances that customer will not repurchase immediately, but is likely to switch brands next time.

To manage the post-purchase stage, it is the job of the marketing team to persuade the potential customer that the product will satisfy his or her needs. Then after having made a purchase, the customer should be encouraged that he or she has made the right decision.

Loss Leader Pricing Strategies

What it is: Low pricing (often pricing at cost or below cost) on a product or number of products to bring customers to the storefront (physical or digital). These customers often buy on price alone.

The pricing strategy assumption is that while the customer is in the store to buy the very low-priced product, they will look around and will likely buy other products at regular or higher prices (you can make up the loss on the low pricing with higher pricing on other items).

For a business-to-business product, you might sell one of your mature or declining products (in your product life cycle) at a loss leader price and expect that customers will buy other products or services.

For example, if you are a graphic designer specializing in web site design, you might offer a below cost price on the website banner design and then expect to receive a higher price for some of your other services, such as special interactive form design.

Why and When to use it: Use this strategy when you have products in the mature or declining stage of their product life cycle and when you want to stimulate a renewed interest in that product. This strategy can also be used if you have high inventory of a product that you want to move quickly.

When NOT to use it: Do not use this strategy if the product will go dramatically up in price next week or next month - at least don't do this unless you have made it very clear in all of your promotional efforts that this is a very special low price (because you have excess inventory, the product has a short shelf life (e.g. fresh fruits, vegetables, etc.)or will be discontinuing the product, or it's a seasonal product, etc.).

Do not use this strategy if you are in the introductory or growth stages of your product's life-cycle. Why: because by selling at a low price you are setting a new low expectation - customers will expect that that low price is where that product should be priced and they will not want to buy at a higher price.

Characteristics of loss leaders

A loss leader may be placed in an inconvenient part of the store, so that purchasers must walk past other goods which have higher profit margins.

A loss leader is usually a product that customers purchase frequently—thus they are aware of its usual price and that a lower price is a bargain.

Loss leaders are often scarce, to discourage stockpiling. The seller must use this technique regularly if he expects his customers to come back.

The retailer will often limit how much a customer can buy. Some loss leader items are perishable, and thus can't be stockpiled

Some examples of typical loss leaders include milk, eggs, rice, and other inexpensive items that grocers wouldn't want to sell without other purchases.

POISEProfits (desire for)Offensive (stay) instead of defenseIntegrate (with other business functions)Strategic (be)Effective (be result oriented)

Selling Vs Marketing:

Many people mistakenly think that selling and marketing are the same - they aren't. You might already know that the marketing process is broad and includes all of the following:

1. Discovering what product, service or idea customers want.2. Producing a product with the appropriate features and quality.3. Pricing the product correctly.4. Promoting the product; spreading the word about why customers should

buy it.5. Selling and delivering the product into the hands of the customer.

Selling is one activity of the entire marketing process.

Selling is the act of persuading or influencing a customer to buy (actually exchange something of value for) a product or service.

Marketing activities support sales efforts. Actually, they are usually the most significant force in stimulating sales. Oftentimes, marketing activities (like the production of marketing materials and catchy packaging) must occur before a sale can be made; they sometimes follow the sale as well, to pave the way for future sales and referrals.

Contrasting the Sales Concept with the Marketing ConceptThe concepts surrounding both selling and marketing also differ. There is a need for both selling and marketing approaches in different situations. One approach is not always right and the other always wrong - it depends upon the particular situation.In a marketing approach, more listening to and eventual accommodation of the target market occurs. Two-way communication (sometimes between a salesperson and a customer) is emphasized in marketing so learning can take place and product offerings can be improved.

A salesperson using the sales concept, on the other hand, sometimes has the ability to individualize components of a sale, but the emphasis is ordinarily upon helping the customer determine if they want the product, or a variation on it, that is already being offered by the company. In the sales approach, not much time is spent learning what the customer's ideal product would be because the salesperson has little say in seeing that their company's product is modified. Furthermore, they aren't rewarded for spending time listening to the customer's desires unless they have a product to match their desires that will result in a sale. (Note, however, that sales people aren't restricted to the use of the sales concept; oftentimes they use the marketing concept instead.)

At the heart of the sales concept is the desire to sell a product that the business has made as quickly as possible to fulfill sales volume objectives. When viewed through the marketing concept lens, however, businesses must first and foremost fulfill consumers' wants and needs. The belief is that when those wants and needs are fulfilled, a profit will be made.

Do you see the difference? The selling concept, instead of focusing on meeting consumer demand, tries to make consumer demand match the products it has produced. Whereas marketing encompasses many research and promotional activities to discover what products are wanted and to make potential customers aware of them.

Sandler Insight: Marketing is the role of identifying groups of people or companies that may be a fit with your product/service before person-to-person contact is made.  Selling is the effort applied to those “possible fits” initiated by person-to-person contact…

Effective Marketing:  Targets many prospects at a time.Effective Selling:  Targets a single company or person.

Effective Marketing:  Generates interest in a product/service with one-way communication (i.e. print, radio, or TV).Effective Selling:  Uses questioning techniques to uncover compelling reasons to buy in 2-way interactions, allowing the prospect to do most of the talking.

Effective Marketing:  Gives something away that is valuable (i.e. coupons, new concepts, research studies).Effective Selling:  Avoids “unpaid” consulting.

Effective Marketing:  Provides generic concepts and solutions to a mass audience.Effective Selling:  Uncovers the unique benefits that will solve a particular customer’s problem.

Effective Marketing:  Causes the prospect to ask for more information.Effective Selling:  Causes the prospect to make a yes/no decision.

Effective Marketing:   Is more effective when repeated many times to a large prospective audience.Effective Selling:         Attempts to minimize the sales cycle and the number of follow-ups made with a single prospect.

Sandler Rule: Sell today, educate tomorrow.

There’s nothing wrong with educating customers! The problem arises when salespeople begin educatingprospects. Marketing is cost-effective because the advertising medium reaches a large number of people. It becomes prohibitively expensive if it only reaches a small number of prospects. Monitor your sales calls and see if they are turning into marketing to a single prospect.

DIFFERENCES BETWEEN MARKETING & SELLING

Compiled by : Prof.(Dr.) Sameer Sharma, Amity University, NOIDA.S. No. Marketing

S. No.

Sales

1 Marketing starts with the buyer and focuses constantly on buyer’s needs.

1 Selling starts with the seller and is preoccupied all the time with the seller’s needs.

2 Seeks to convert “customer needs” into ‘products’.

2 Seeks to convert ‘products’ into “Cash”.

3 Views business as a customer satisfying process.

3 Views business as a goods producing process.

4 Marketing effort leads to the products that the customers actually want to buy in their own interest.

4 The company makes the product first and then figures out how to sell it and make a profit.

5 Marketing communication is looked upon as a tool for communicating the benefits/ satisfactions provided by the product

5 Seller’s motives dominate marketing communication (promotions).

6 Consumers determine the price; price determines costs.

6 Cost determines the price.

7 Marketing views the customer as the very purpose of the business. It sees the business from the point of view of the customer.Customer consciousness permeates the entire organization – all departments, all the people and all the time.

7 Selling views the customer as the last link in the business.

8 ‘Customer satisfaction’ is the primary motive.

8 ‘Sales’ is the primary motive.

9 External market orientation. 9 Internal company orientation. 10 Marketing concept takes an outside in

perspective10 Selling concept takes an inside-out

perspective.11 It is a broad composite and worldwide

concept, more so in this era of globalisation.

11 It is a narrow concept related to product, seller and sales activity.

12 Marketing is more ‘pull’ than ‘push’. 12 Selling involves ‘push’ strategy.13 Marketing begins much before the

production of goods and services, i.e. with identification of customers’ needs. It continues even after the sale to ensure customer satisfaction through after sales services.

13 Selling comes after production and ends with the delivery of the product and collection of payment.

14 Marketing has a wider connotation and includes many activities like marketing research, product planning & development, pricing, promotion, distribution, selling etc.

14 Selling is a part of marketing.

15 It concerns itself primarily and truly with the ‘value satisfactions’ that should flow to the customer from the exchange.

15 It over emphasizes “the exchange’ aspect, without caring for the ‘value satisfactions’ inherent in the exchange.

16 It assumes: “Let the seller beware”. 16 It assumes: “Let the buyer beware”.17 Marketing generally has a matrix type of

organizational structure.17 It has a functional structure.

18 The main job is to find the right products 18 The main job is to find the customers for

for your customers. your products.19 The mindset is “What is that we can

make here or source from outside to satisfy the needs of the target customers”.

19 The mindset is “Hook the customer”.

20 Conceptual and analytical skills are required.

20 Selling and conversational skills are required.

THE MARKET ORIENTATION MATRIX Although Slater and Narver (1994a) found no main effect for customer versus competitor-focus on market performance, they do recognize that "because businesses have limited resources to generate market intelligence, trade-offs between customer and competitor monitoring must necessarily be made" (Slater and Narver 1994, p.47). Consequently, firms may frequently emphasize one external variable in their environmental monitoring at the expense of the other, leading to a specific market orientation profile. By combining these two important external variables, customers and competitors, a four-cell market orientation matrix emerges as shown in Figure 1.

FIGURE 1 Market Orientation Matrix

Customer Focus High Low

Competitor Focus

High Strategically Integrated

Marketing Warriors

Low Customer Preoccupied

Strategically Inept

Customer Preoccupied Firms emphasizing customer-focused intelligence gathering activities at the expense of competitor information may be classified as "customer preoccupied." Because the marketing concept promotes putting the interests of customers first, many researchers consider a customer-focus to be the most fundamental aspect of corporate culture (Deshpande, Farley, and Webster 1993, Lawton and Parasuraman 1980). According to Slater and Narver (1994a), however, a customer emphasis is most important when the market is growing and when markets are fragmented and buyer power is low. When markets are growing, it is important to focus on lead users because they may serve as reference points for later adopters (Von Hippel 1986). Also, when markets are fragmented and buyer power is low, customer needs are less well understood, so a customer emphasis should have a greater impact on performance (Slater and Narver 1994a). In addition, Day and Wensley (1988) suggest that "in dynamic markets with shifting mobility barriers, many competitors, and highly segmented end-user markets, a customer-focus is mandatory" (p. 17). As such, the first proposition is suggested. Proposition 1: Increases in customer-focus lead to increases in market share performance in growing markets.

Marketing Warriors Borrowing from the famous warfare analogy proposed by Ries and Trout (1986), firms with a predominant emphasis on competitors in their external market analyses have been labeled "marketing warriors." According to Slater and Narver (1994b), a competitor-focus entails gathering intelligence on three main questions: (1) Who are the competitors? (2) What technologies do they offer? and (3) Do they represent an attractive alternative from the perspective of the target customers? Using target rivals as a frame of reference, competitor-focused firms seek to identify their own strengths and weaknesses and to keep pace with or stay ahead of the rest of the field (Han, Kim, and Srivastava 1998). According to Day and Wensley (1988), when market demand is predictable, the competitive structure is concentrated and stable, and there are few powerful customers, the emphasis is necessarily on competitors. Moreover, the lesser the degree of competitive hostility, the greater the positive impact of competitor emphasis on performance (Slater and Narver 1994a). Proposition 2: Increases in competitor-focus lead to increases in market share performance in stable and predictable markets. Strategically Integrated Firms characterized as strategically integrated assign equal emphasis to the collection, dissemination, and use of both customer and competitor intelligence. A focus on both customers and competitors is important because a complete

Academy of Marketing Science Review Volume 2000 No. 1 Available: http://www.amsreview.org/articles/heiens01-2000.pdf Copyright © 2000 – Academy of Marketing Science. Heiens / Market Orientation 3 reliance on either customer-focused or competitor-focused decision making can often lead to an incomplete business strategy, leaving an organization handicapped by a reactive posture (Day and Wensley 1988). According to Day and Wensley (1988, p. 2), focusing primarily on either customers or competitors could lead to "a partial and biased picture of reality." In examining the impact of customer versus competitor-focus, Slater and Narver (1994a) found little empirical support for the effectiveness of different relative emphases within a market orientation. Consequently, Slater and Narver (1994a) suggest a balance between the two perspectives is most desirable, and firms should seek to remain sufficiently flexible to shift resources between customer and competitor emphasis as market conditions change in the short run. However, due to the high cost of monitoring both customers and competitors, these firms may sacrifice ROI for market share.

Proposition 3: Increases in both customer-focus and competitor-focus lead to increases in market share performance and decreases in ROI.

Strategically Inept The external analysis is an integral part of strategic planning. According to Kohli and Jaworski (1990, p. 13), "a market orientation appears to provide a unifying focus for the efforts and projects of individuals and departments within the organization." As such, failure to develop an external market orientation may adversely effect business performance (Deshpande, Farley, and Webster 1993, Jaworski and Kohli 1993, Ruekert 1992, Slater and Narver 1994a). However, in some cases, firms may still succeed by concentrating on internal operations,

technological advantages, and the establishment of core competencies. Yet, firms that fail to orient their strategic decision making to the market environment without any substantial internal strength may appropriately be labeled as "strategically inept."

Proposition 4: Shifting resources from external monitoring to internal operations may lead to increases in ROI in stable and predictable markets.

Businesses can develop new products based on either a marketing orientated approach or a product orientated approach.

A marketing orientated approach means a business reacts to what customers want. The decisions taken are based around information about customers’ needs and wants, rather than what the business thinks is right for the customer. Most successful businesses take a market-orientated approach.

A product orientated approach means the business develops products based on what it is good at making or doing, rather than what a customer wants. This approach is usually criticised because it often leads to unsuccessful products - particularly in well-established markets.

Most markets are moving towards a more market-orientated approach because customers have become more knowledgeable and require more variety and better quality. To compete, businesses need to be more sensitive to their customers needs otherwise they will lose sales to their rivals.

On the other hand some products are argued to create a need or want in the customer, especially products with a very high technological content. Mobile phones have moved from being a business accessory to being a big consumer brand item, with many additional gadgets, such as pictures, video and Internet access. Innovations create the need rather than the customer being able to second-guess how new technology is going to develop.