Strama Final Quiz PDF

Chapter 6: A Review of Formulating Marketing Strategies A market segment consists of a group of customers whose requirements for satisfaction in a product are similar. To create these segments, market segmentation studies usually collect four types of data: needs or desired end benefits, purchase b...

Chapter 6: A Review of Formulating Marketing Strategies A market segment consists of a group of customers whose requirements for satisfaction in a product are similar. To create these segments, market segmentation studies usually collect four types of data: needs or desired end benefits, purchase behavior, values/lifestyle measures, and classifying characteristics. Major jean manufacturers changed their focus from a one-size fits-all approach backed by national media campaigns to amore segmented approach. In the 1960s and 1970s the jean companies were driven by manufacturing.Their goal was to sell what they made to whatever takers were out there. In the 1990s the consumer has a wide variety of choices in jeans, According to Tim Lambeth, president of Lee Corporation, it is now imperative that jean manufacturers hit a responsive chord that they communicate to specific customers with specialized products and marketing. Market segmentation capitalizes on differences in consumers tastes and preferences by targeting segments with a product and marketing strategy consistent with their unique requirements. Three activities are involved in market segmentation: 1\. Formation and profiling of segments Evaluation of the market segments Selection of a segmentation strategy. Benefits and Needs Needs and benefits are characteristics or attributes of a product that consumers seek or consider important. This approach to formation of market segments is sometimes called benefit segmentation. Consumers are clustered together on the basis of the benefits they seek. Consider the market for snowmobiles. The benefits desired from snowmobiles may vary with how they are going to be used. Some users, for example, weekend riders, may use their snowmobiles only in a group and close to home, whereas other users, say hunters, may use their snowmobiles individually and in remote areas. These two groups are likely to value different aspects of snowmobiles. Both want a snowmobile, but what is required for satisfaction in one group may be important to another group. Multi-Item Scale One approach to formation of needs-based segments is to have consumers indicate how important or unimportant each benefit is to them. Statistical methods are then used to form groups of consumers who are seeking the same end benefits. Referring to above illustrations, do you think hunters and weekend users of snowmobiles, would rate the importance of instrument accuracy, styling, or seat for second rider the same? The resulting groups are the market segments. The preferences of consumers within a group are similar to each other but different from other segments. A needs based approach to market segmentation begins with the identification of needs that customers attempt to satisfy when buying products or services. A competitive advantage, which can also be cost-effective, can be created by forming groups of customers with similar patterns of needs and then targeting product development, marketing, and sales efforts toward the satisfaction of the needs of the groups, or segments, that offer the greatest revenue and profitability potential. A market-segmentation study conducted for the food industry discovered that a need-based approach was useful, even for consumers who are very similar age. These mature market, consumers over the age of 50, can be classified into one of three market segments based on the desired end benefits: nutrition-concerned, fast and healthy individuals, and the traditional. Segments in the Mature Market Nutrition concerned people make up 46 percent of the over-50 population. This group believes that what you eat affects how you feel. When they shop, they stick to their lists and read labels, but admit that they do consider advertising when buying. Fast and healthy individuals are also concerned about health and nutrition, but are more interested in convenience. They tend to cook only when the family is together and rely heavily on their microwave ovens. Traditional couponers show the least interest in nutrition and are the only segment that doesn\'t worry about eating enough fiber or too much fat. When they shop, they are most interested in using coupons and buying their favorite brands. As an example of segmenting markets with conjoint data analysis, assume that a sample of 1000 representatives of the target market ranked ordered the pizza scenarios described above. Part-worth utility values could be calculated for all 1000 consumers. Statistical techniques could then be used to form groups of people with similar likes and dislikes; that is, form segments of people with similar preference functions. Table 4-6 presents three possible segments. The numbers in the table are part-worth utilities and, for convenience, have been scaled to sum to one. Segment 1 is a price segment. The representatives place a lot of value on a low price and receipt of a second pizza free. There is no strong preference for the other attributes. Segment 2 wants quick delivery and either thick or pan pizza; price is not very important. Segment 3 shows a preference for the regular pizza and the split toppings. This segment is also interested in an average-to-lower price. Conjoint data analysis is well suited to market segmentation because: 1\. The focus of conjoint analysis is specifically on buyers\' preferences for levels of attributes 2\. The analysis is micro-based; part-worth utilities can be calculated for each respondent Behavioral Measures Behavioral measures ask consumers to indicate which brands (services) they have purchased over a certain time period. For many product classes, consumers are asked which brands they have purchased in the last month, or the last 3 months. They also may be asked to provide information about their intentions to purchase brands in the future. These data can be used to develop switching patterns among the brands, and the switching patterns can be utilized to form groups of consumers who purchase and switch among the same brands. They recorded consumption as follows: a\. When and where consumed b\. The nature of the situation c\. If at a meal, what type of meal d\. The quantity consumed e\. Brand, color, and variety of wine f\. How many others were present g\. How many were also drinking wine h\. Who decided to have wine, who chose a specific wine as well These data were employed to form segments based on the occasion during which the wine was consumed. The largest occasion segment, which accounted for 35 percent of the volume, was called the social segment. Motives associated with this segment were sociability, sharing, celebration, friendship, and fun. The second largest segment, which accounted for 24 percent of the volume, was called introspective. Motives associated with this occasion were thirst, pleasure, sleep, relaxation, indulgence, good feelings, and ease in serving. Values/Lifestyle Measures Values and lifestyle measures are used to determine what consumers like and dislike: What are their activities, opinions, and interests. Use of values and/or lifestyle data to segment markets is commonly referred to as psychographic segmentation. The List of Values (LaV) scale is based on a set of values identified by Rokeach. The LaV scale consists of nine values: a sense of belonging, excitement, fun and enjoyment in life, self-fulfillment, being well respected, warm relationships with others, security, accomplishment, and self-respect. To understand a person\'s choice of vacation spots, marketing researchers administered the LaV scale to approximately 400 English speaking tourists in Scandinavia. The results indicated that comprehension of a person\'s values is important to an understanding of what lures a tourist to a particular destination. The most prevalent use of values and lifestyles in market segmentation is SRI International\'s values and lifestyles (VALS) program. The VALS approach is based on the notion that people define a social self-image and that the image is reflected in their conduct and consumer behavior. People buy products and services and seek experiences that they see as characteristic of themselves. The products and services help give shape, substance, character, and satisfaction to their lives. To establish the values/lifestyle segments, respondents are asked to agree or disagree with a battery of items describing different values, attitudes, and lifestyles. Three patterns of response have been identified as effective predictors of consumer behavior. 1\. Principle-oriented. These consumers are guided by abstract idealized criteria rather than by their feelings or a desire for approval. 2\. Status-oriented. These consumers are heavily influenced by the actions, approval, and opinions of others. 3\. Action-oriented. These consumers are guided by a desire for social or physical activity, variety, and risk taking. Classifying Characteristics Classifying characteristics represent geographic and/or demographic information. Geographic variables include region, state, county, and city size; urban versus rural communities; climate; and so on. Demographic variables include age, sex, income, education, race, religion, household size, nationality, and so forth. The results of a market-segmentation study are evaluated against five criteria: uniqueness, responsiveness, action ability, stability, and profitability. Uniqueness It refers to large between-group differences in the segments. Greater differences in a group\'s desired benefits render segments that are more unique. The best basis for forming market segments is the one that creates segments that are most unique. The objective of market segmentation is to achieve competitive power by translating the segmentation scheme into integrated strategic and tactical actions. The more unique the segments are, the easier it is to translate the segmentation results into strategic and tactical actions. Responsiveness If we design specific strategic and tactical actions for a particular segment, then we would expect that segment to be more responsive to the tactical actions than another segment. Consider the demand for air travel between the United States and Europe. Illustration above contains demand curves for two market segments. The dashed line represents the tactical action of a price change for the segments. Notice that there is little response to a price change in segment A, whereas a significant response to a change in price exists for segment B. These types of responses might be expected for business versus pleasure travellers. The business travellers are not very responsive to a price change, whereas the pleasure travellers are very responsive to a price change Actionability Actionability is the extent to which the marketing manager can take action on the results of the segmentation analysis. In some cases, segments are formed based on needs, and these needs-based segments are unique; however, no relationship(s) among the needs segments and the other segmentation variables-values/lifestyles, purchase behavior, or classifying characteristics-can be formed. Therefore, the marketing manager cannot act on the results produced by the segmentation study. One approach to making the segmentation results more actionable is to simultaneously include classifying characteristics and the other measures. The segments are formed by using both needs and classifying characteristics and, therefore, are as predictive as possible in terms of the behavioral criteria. Stability Managers hope that the segments formed are stable over time with respect to desired end benefits and classification factors. It is not necessary that the same people remain in the segment, but people with needs identified by the segment should have the same classification characteristics as the segment. Or, alternatively, people with the same classification characteristics should have the same needs. For example, consider a strategy aimed at a segment of people with children under the age of 5. People who are in the segment now will move out of the segment as their children grow up. They will move into another segment and, if the segments are stable, will then have needs similar to those defined by the next segment in the family life cycle. Profitability In upcoming Chapters, we discuss procedures for analyzing profitability and productivity. These techniques need to be applied to the segments to ensure that they are consistent with the firm\'s mission and objectives. The last step in a segmentation study is to select a segmentation strategy. Management must first decide whether it wants to take a mass marketing approach, mass producing one product and promoting it to all buyers, or whether it wants to take a segmented approach. If the decision is to target segments, then management must decide whether to target all market segments or only certain market segments. For example, Porsche targets a market segment, whereas Chevrolet targets multiple-market segments. The decision will rely on the number, size, and profitability of the market segments identified in the evaluation stage of the market-segmentation study. The ultimate segmentation strategy would be to treat each customer as a segment. The use of computer databases is increasing the ability of marketers to tailor their promotion and marketing strategies to individual customers or households. They can send the marketing message directly to the designated households. Competitive intelligence involves the collection and analysis of data to establish the relationship of the firm to its competitors and business environment. For example, the threat of deregulation in the electric utility industry motivated Duquesne Light Company to study the changing dynamics of the industry in order to position itself better should deregulation become a reality. Competitive analysis focuses on five fundamental questions with emphasis on the first three: 1\. What are the fundamental characteristics of my industry? 2\. Who are my competitors? 3\. What are the current positions of my competitors? 4\. What moves are my competitors most likely to make? 5\. What moves can we make to achieve a sustainable competitive advantage? A market-profile analysis is a useful approach to the first question. Perceptual mapping and product positioning techniques can be used to answer the second and third questions. Creating a Market Profile A market profile should include sections dealing with industry characteristics and competitor profiles. Industry Characteristics To assess the forces that create the competitive environment within an industry, marketing managers need information relating to: 1\. Size and growth rate of the industry 2\. Substitute products 3\. Suppliers to the industry Principal customers 5\. Manufacturing and distribution 6\. Social and economic conditions affecting the industry 7\. Barriers to entry The two most heavily used sources for collecting are trade journals and external databases. The greater the choices offered to consumers, the greater the competition among the suppliers offering the choices. Marketing strategy must consider the requirements of the market, the firm\'s position in the market, and the competitive environment. Market segmentation and product position are two methods used by marketing managers to understand the needs of the market so that they can position products brands within the market to achieve competitive advantage. As summarized in above illustrations, organizations must assess the competitive environment in which they will operate and the competitive advantages (and disadvantages) they will have in a potential target market. Clearly, the process of segmenting and profiling market segments is a critical prerequisite to the selection of a marketing strategy, as the situation at Mobil Corporation suggests. Primary-demand Strategies Primary-demand strategies are designed to increase the level of demand for a product form or class. Firms that are pioneers in marketing new product forms (such as Procter & Gamble in disposable diapers or Boeing in jumbo jets) will, by necessity, pursue primary-demand strategies. Additionally, firms with large market shares in established markets (such as Heinz ketchup or Microsoft in personal computer software) often devote at least part of their marketing effort to the expansion of primary demand because, as market leaders, they have the most to gain from expanding the market. Basically, there are two sources of new demand for a product form or class: nonusers and users who might expand their rate of usage. Primary-demand strategies can, therefore, be categorized in terms of how the strategy is directed. Strategies for Attracting Nonusers To increase the number of users, the firm must increase customers\' willingness or ability to buy the product. ♦ Increasing the Willingness to Buy ♦ The willingness to buy may be stimulated by one of three approaches: \* Demonstrating the benefits already offered by a product form \* Developing new products with benefits that will be more appealing to certain segments \* Demonstrating or promoting new benefits from existing products A focus on demonstrating the basic product-form benefits is often necessary when a new product form is being marketed. For instance, Procter & Gamble had to demonstrate the convenience and performance of Pampers disposable diapers to a market in which washing cloth diapers was a time-honored behavior. Similarly, the popular Miller Lite beer advertisements successfully stimulated the willingness of beer drinkers to try a new product form (light beer) by emphasizing the \"tastes great, less filling\" attributes. When new products yield significant additions to the benefits offered by existing product forms, the needs of potential customers are likely to be met. For example, scientists at Minnesota Mining & Manufacturing (3M) Company developed a new type of soap pad for use on nonstick cookware. Such cookware now accounts for about three-fourths of all cookware sales, but conventional soap pads ruin the pans. 3M expected the soap pad category to expand by over 15 percent as a result of this innovation. Often, industry trade associations undertake primary-demand strategies on behalf of the producers in a market to emphasize benefits that may not be widely known. For example, the American Iron and Steel Institute is campaigning heavily to promote the benefits of using steel in place of lumber for framing houses. The institute argues that steel is a superior alternative because it is durable, stable, maintenance-free, noncombustible, termite-proof, and recyclable. Potentially, the demand for steel framing could be twice as large as the current demand for steel for use in the automotive industry. The importance of this strategy type is paramount when a new product form or class is introduced, because new products seldom sell themselves. Additionally, this strategy may not be important in advanced economies if a product is well established, but can be critical in bringing a product to a new market in a different culture. Thus, in the United States, Procter & Gamble must focus its marketing strategy for Pampers on acquiring potential still be emphasizing customers from the basic competitors advantages but, of in disposable developing diapers countries, in order it will to stimulate primary demand. Increasing the Ability to Buy The ability to buy can be improved by offering lower prices or credit, or by providing greater availability (through more distributors, more frequent delivery, or fewer stockouts). For example, reduced prices brought rapid sales increases to the cellular phone market in the late 1980s. Similarly innovative financing plans can often help stimulate primary demand. Strategies for Increasing the Purchasing Rate among Users When managers are concerned with gaining more rapid growth in a sluggish but mature market, the marketing strategy may be geared toward increasing the willingness to buy more often or in more volume, using one of the following approaches. Broadening Usage Buyers may expand usage if the variety of uses or use occasions can be expanded. In recent years, a number of advertising campaigns have conducted to suggest broadened applications for products or services. Increasing Product Consumption Levels Lower prices or special-volume packaging may lead to higher average volumes and, possibly, to more rapid consumption for products such as soft drinks and snacks. Or, consumption levels may be stimulated if buyers\' perceptions of the benefits of a product or service change. Encouraging Replacement Product redesign may be thought of as a selective-demand strategy. It is, however, largely a primary-demand strategy in the fashion industry and in other durable-goods industries. In sum, primary-demand strategies may be implemented in a number of ways. Although these strategies are generally less widely used than selective-demand strategies, they can be extremely useful if market measurements show large gaps between market potential and industry sales. Further, the analysis of the buying process may identify the factors limiting the ability or willingness to buy or to adopt a product class or form. If so, managers should have some insights into the kinds of programs that can be used to stimulate primary demand. As suggested in below illustrations, selective demand can influence the market in three distinct ways: 1\. by expanding the served market, 2\. by acquiring competitors\' customers, and 3\. by retaining and expanding sales within the firm\'s current customer base. Strategies for Expanding the Served Market As we saw in previous, firms define their relevant market in terms of the product forms or classes in which they compete. The served market is that portion of the relevant market that a firm chooses to serve, as reflected by the scope of its product and distribution offerings. Broadening Distribution A firm\'s sales and distribution programs are designed to make products available to the target market and, often, to gain effective delivery, display, or promotional support. As firms grow, the increase in their capital may allow them to move into new geographic markets. Product-Line Extension A firm can expand the line of products it offers within a market through new-product development programs. Specifically, a firm can choose from two main routes when using new-product, development to serve new markets. A vertical product-line extension involves adding a new product at a noticeably different price point. A horizontal product-line extension occurs when a firm adds a new product with different features at more or less the same price level. Strategies for Acquiring Competitors\' Customers A firm\'s most direct competitors are those it competes with within the same served market. For General Motors\' Saturn the most direct competitors are products such as Chrysler\'s Neon and Honda\'s Civic. When buyers make choices within a given served market, those who view the choice process as non-routine will compare the alternatives in terms of the various attributes. Because choices will largely be based on these perceptions, customer acquisition strategies will essentially be based on how the product is positioned in the market. That is, a product\'s position represents how it is perceived relative to the competition on the determinant attributes desired by each segment. From a managerial perspective, a firm has two basic strategic options: head-to-head positioning or differentiated positioning. Head-To-Head Positioning With this strategy, a firm offers basically the same benefits as the competition, but tries to outdo the competition in some way. One approach to head-to-head competition is to make a superior marketing effort (in terms of quality, selection, availability, or brand name recognition). Differentiated Positioning In differentiated positioning, a firm is trying to distinguish itself either by offering distinctive attributes (or benefits) or by catering to a specific customer type. In customer-oriented positioning (also known as niching), a firm tries to separate itself from major competitors by serving one or a limited number of special customer groups in a market. Often, niches are defined in terms of particular usage situations or buyer characteristics. Nyquil was the first cold medicine designed to serve a night time usage situation. Positioning and Brand Equity Products that are successful in implementing a positioning strategy usually develop a high level of brand equity. Brand equity is the added value that knowledge about a brand brings to a product offering over and above its basic functional qualities. The foundations of brand equity are (1) extensive brand awareness and (2) strong, unique, and favorable brand associations. Brand equity may create a variety of benefits for a firm. Specifically, with strong brand equity a firm can more easily obtain strong promotional support from wholesalers or retailers. Also, strong brand equity reinforces customer loyalty to a brand. Three such strategic options are: 1\. Maintain a high level of customer satisfaction 2\. Build a strong economic or interpersonal relationship with the customer 3\. Develop complementary products that will appeal to current customers Maintain Satisfaction Loyalty occurs if a customer continues to purchase goods or services from the same source over time. As noted in Chapter 1, customer satisfaction is the main cause of loyalty. In addition, satisfaction and loyalty are enhanced by a strong brand equity. Brands like Coca-Cola (in soft drinks), Campbell\'s (in soups), Gillette (in razors), and Kellogg\'s (in cereals) have maintained their leading market shares for three-quarters of a century, in large measure because of their brand imagery. This equity can be maintained and enhanced as long as such firms continue to produce a high level of product quality and invest in their brand associations. Relationship Marketing A relationship marketing strategy is designed to enhance the chances of repeat business through development of formal interpersonal ties with the buyer. Long-term relationships are often established through contractual or membership arrangements with customers or distributors. Typically, these arrangements are only successful because of some discount or an economic incentive associated with the cost of purchasing. For example, consumers who buy season tickets for a symphony orchestra series are essentially engaged in a membership relationship. Similarly, annual fees charged by health spas ensure at least 1-year relationship. In industrial marketing, simplification programs such as long-term protection against price increases or inventory management assistance are frequently so desirable to buyers or to distributors that they will commit themselves to use one supplier as their sole source of supply for a period of time. Another recent development involves the placement of computer terminals (and often, associated software) in customers\' offices. These terminals are then hooked into the sellers\' terminals, enabling customers to order products instantly (and thus better manage their inventories), check on the progress of deliveries, and obtain technical assistance. In recent years, firms that have experienced success with these systems include Cigna Corp.(assistance on industrial customers\' insurance problems), Baxter Health Care (reordering supplies for hospitals), and Benjamin Moore (analyzing color samples provided by paint stores to provide pigment prescriptions). A particular form of relationship marketing that has become increasingly popular is frequency marketing, a strategy designed to encourage increased purchases from a firm\'s best customers. Frequency marketing requires the establishment of customer databases (as discussed in Chapter 5) that permit the targeting of messages and incentives directly to key customers. For example, the Wisconsin-based catalog firm Land\'s End will examine each household\'s past purchases and modify the catalogs it sends accordingly. Households that regularly buy crew-neck sweaters or dress shirts may receive catalogs with more displays of those products or even special catalogs devoted to a product category. As the following example illustrates, however, most frequency marketing involves direct economic incentives to encourage more purchasing from the existing customer base. Complementary Products In previous chapters, we discussed the fact that an increase in the sales of one product could lead to increased sales for related complementary products, and we listed the reasons a complementary relationship might occur. Complementary products can often be designed and marketed in a way that helps retain customers. Expanding the number of relationships between a seller and a buyer makes switching to an alternative supplier more expensive for the customer. Many financial institutions try to get checking account customers to use the institution as a source for their credit cards, loans, and savings accounts. In theory, as consumers concentrate their business in one financial institution, they will be less likely to switch their business for anyone product because it would reduce the convenience of one-stop banking. In other cases, the primary strategic value of complementary products is to apply leverage to the business relationship with current customers in order to sell additional products. Two popular ways of implementing this strategy are bundling and systems selling. Bundling involves the development of a specific combination of products sold together (such as personal computers, printers, and software) at a special price. This can be especially effective if some of the products in the bundle are more popular than others; in such cases, some buyers will purchase the full bundle, including the lessdesirable elements in order to receive the savings. In systems selling, a firm designs its products so that they are especially compatible with one another. So IBM will try to design software for networking among IBM computers that is more efficient than competing software. To choose the best marketing strategy, a manager must consider kinds of information (see above illustrations). First, the marketing must be consistent with the product objective. Second, the nature and size of the market opportunity should be clearly established based on the market analysis and market measurements. Finally, managers must understand what kinds of competitive advantage and marketing expenditure levels will be necessary to achieve market success. A firm must usually change the strategy for a product over time because competition, costs, and the nature of demand change. The concept of the product life cycle has enjoyed broad acceptance as useful in understanding the strategic implications of these changes. The product life cycle represents a pattern of sales over time, with the pattern typically broken into four stages (see above illustrations). The four stages are usually defined as follows: 1\. Introduction. The product is new to the market. Because there are therefore no direct competitors, buyers must be educated about what the product does, how it is used, who it is for, and where to buy it. 2\. Growth. The product is now more widely known and the sales grow rapidly because new buyers enter the market and, perhaps, because buyers find more ways to use the product. Sales growth stimulates many competitors to enter the market, and the increase of market share becomes the major marketing task. 3\. Maturity. Sales growth levels off as nearly all potential buyers have entered the market. Consumers are now knowledgeable about the alternatives, repeat purchasers dominate sales, and product innovations are restricted to minor improvements. As a result, only the strongest competitors survive. It is very difficult for weaker firms to obtain distribution and to increase their market share. 4\. Decline. Sales slowly decline because of changing buyer needs or because of the introduction of new products that are sufficiently different to have their own life cycles. The Product Life Cycle and Strategy Selection From a strategic point of view the product life cycle helps managers analyze past and forthcoming changes in their situations. These changes (which are summarized in above illustrations) can impact both the selection of a marketing strategy and the design of marketing programs that will be used to implement that strategy. The most obvious impact of the product life cycle is the shift from a primary to a selective-demand strategy as the life cycle shifts from the introductory stage to the growth and maturity stages. As buyers become more knowledgeable about the product category, and as the primary-demand gap declines, the need for and payoff from primary-demand strategies decline. A second consideration is that retention strategies should seldom be relied on, even by a market leader, until the life cycle is well into maturity. As long as markets are growing rapidly, acquisition strategies are important. Third, product-line extensions should be developed as soon as segmentation opportunities arise. Although some marketing consultants have argued that such products should be used to try to reinvigorate life cycles in maturity, the conventional wisdom is now changing. Often, line extensions are necessary to move a product through the growth stage because the variation in basic customer needs (for example, personal computers or microwave ovens) is very large. Additionally, market leaders who offer a full product line may preempt competitive opportunities from new entrants or be better able to meet competitive challenges.