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Chapter 6- Developing a Business Strategy The Concept of Business Strategy - The long-term success of an organization, and its ability to evolve and grow, is predicated on two principles: 1. The ability to define and create a strategic direction and market position for the organization (strategic plan) 2. The ability to execute the core tactical initiatives within the plan in a manner that ensures the organization’s success Strategy Made Simple Core Elements for Assessing Business Strategy 1. Purpose - Mission of the organization and the vision its managers or owners have for the business - Mission = organization’s purpose or reason for existence - Mission statements identify the broad goals around which a company was formed and how an organization will get to where it wants to go; when combined with ethics policies and statements of behaviour or values, guide the overall direction and activities of a business - Vision = forward-thinking statement that defines what a company wants to become and where it is going 2. Markets - Specific markets or market segments the business sees itself competing in - Markets should be assessed in terms of their current and future profitability and growth potential - Markets with more potential receive more resources - Harvesting = strategy that reflects a reduced commitment to a particular market given its perceived weak future growth or profitability potential 3. Products and Services - Review of the current products and services offered by a business, as well as potential new products/services that are to be added to the products portfolio - Products can become undesirable because of technology, tastes, substitutes, and new competitors 4. Resources - Allocation of a business’s resources in support of its strategic decisions - There are capacity limitations as to the amounts of products that can be produced, the amount of money that can commit to projects, and the variety of tasks their workforce can handle at any given time - Sometimes changes need to be made to account for lack of expertise 5. Business System Configuration - Modifying the organization’s infrastructure and the way it does business to ensure the success of the plan - This could mean making changes to the organization’s distribution outlets, warehousing or product delivery, plants and facilities, manufacturing or assembly processes, marketing, etc. 6. Responsibility and Accountability - Identifying who within the business will be responsible for each aspect of the strategic plan - To assist managers in meeting objectives, initiatives within a strategic plan are built around what are termed SMAC principles: specific, measurable, actionable, and controllable - Strategic plans must identify who is responsible for each element within the plan and also identify how accountability for the success of the plan will be measured - For businesses, a strategic plan is the road map to success. It defines a specific route the business intends to undertake, provides benchmarks to measure its success along the way, and identifies where and how the organization will interact with its customers as it seeks to meet its overall mission and vision The Strategic Planning Process - Process is all about observations, analyses, choices, and actions tailored to each company - Revisit our purpose: who are we and where do we want to go? - Undertake an I/E (internal/external) analysis to understand our environment: what changes or shifts are occurring that threaten us or that provide us with opportunities? - Assess our view of our world: based on what we know, what are our choices? - Choose a direction: given our capabilities, competencies, competitive advantage, and resources, which strategic choices should we pursue (where will we play)? What threats must we respond to? - Implement our strategy: how do we develop the strategic thrusts and tactics to achieve our objectives and successfully execute the plan (how we will win)? I/E (Internal/External) Analysis - Assessing business risk and change in key areas: macroeconomic, industry, competitor, and company - The external portion of the I/E analysis focuses on understanding what is influencing markets today and what will influence them going forward - In many cases, it is an assessment by management of the magnitude of change that is occurring within a given market arena and what shift in business risk has occurred, or will occur, as a result of such changes - SWOT = stands for strengths, weaknesses, opportunities, and threats Business Model Focus of Analysis PESTEL Guides us in developing an understanding of the macro-economic environment-political, economic, societal, technological, environmental, legal - Allows us to get a sense of the broad market environment and external influences that could impact demand for our products and services, and change the nature of the way in which we do business Porter’s Five Forces - At the industry level, our main focus would be on this - The value lies in its ability to assist us in identifying fundamental changes or disruptions to the industry within which we compete Guides us in understanding the dynamics of the industry within which we compete- Porter’s five forces are: - Intensity of rivalry within the industry - Threat of new entrants into the industry - Threat of new product/service substitutes within the industry - Power or control of suppliers within the industry - Power or control of buyers within the industry Types of Competition Guides us in understanding the nature of the industry’s competitive landscape: - Perfect competition - Monopolistic competition - Oligopoly - Monopoly SWOT Analysis Strengths, weaknesses, opportunities, threats - Popular way to size up the competition - Asks managers to analyze a competitor on the basis of four elements: strengths, weaknesses, what market opportunities it seeks to attack, and what threats it poses to your organization - Also conduct SWOT on their own organization: full audit of resources, organizational competencies, operational capacities, human resource skills, and overall capacity; managers can then determine which markets to compete in 3C Analysis An assessment of our competencies, capabilities, and capacity with respect to the resources that we possess - Businesses need to anticipate and react to new initiatives and changes in strategy and market positioning by their competitors - Customer analysis focuses on trying to identify what shifts have taken place in our customer base in terms of attitudes, behaviours, and needs; takes into consideration demographic changes to our customer base, shifts in the desires of customers for the types of products and services they are looking to buy, and the impact of the economic climate on both current and future demand for our goods and services o Also looks to identifying new opportunities - Internal Analysis: As part of the organizational evaluation process, managers need to assess the competencies of their own organization and the level of resources they have access to in order to determine what their capacity and overall capabilities are as a company o Represents a form of enterprise risk management- it seeks to identify the financial, operational, technological, and market risks that would need to be assumed if a certain opportunity were pursued, and measures the ability of the organization to be able to respond- and manage- such risk prior to the implementation of these initiatives - From the I/E analysis, the organization hopes to be in a position to determine where, and how, it wants to compete. A critical part of this I/E analysis process is to identify opportunities that exist for the organization, as well as any threats that may be present and that must be appropriately assessed from a risk perspective. Another key outcome should be the ability of the organization to define any temporary or sustainable competitive advantage it has over its competition Competitive Advantage(s) Identification - A company enjoys competitive advantage when it can provide customers with a product/service that offers more value than alternate products/services offered by its competitors - Strategic advantages- thought of as “first mover” actions in a marketplace; that is, the ability to see how your organization can change the rules of the game in the markets the company chooses to compete in o Ex. Apple’s innovative products - Operational advantage- result of being able to execute the day-to-day activities required of the transformation and marketing support processes within the organization in a manner that is superior to the same execution requirements of competitors o More effective or efficient - Areas for competitive advantage opportunities: innovation, customer responsiveness, quality, efficiency Strategy Development - Next step is to make decisions as to which opportunities to pursue and how resources will be allocated in support of these market opportunities - These decisions are then formulated into the organization’s strategic plan, which can be thought of as possessing three parts: corporate-level strategy, business-level strategy, and the operating plan - Corporate-level strategy = defines what the organization intends to accomplish and where it plans to compete; outlining the “big picture” - Business-level strategy = outlines specific objectives the organization hopes to achieve for each of its identified business initiatives and/or business units; defines how the organization intends to accomplish the corporate-level strategy - Operating plan = detailed, immediate-term set of objectives and corresponding tactics designed to achieve a specific business initiative - Once corporate-level and business-level strategies and objectives have been identified, operating plans are developed that will ensure their successful execution. Key components of the operating plan development process include: a) Specifics as to how to compete b) Identification of the key revenue drivers and as assessment of the total potential revenue forecasts the business can expect from a particular initiative c) Identification of the upfront and ongoing cost commitments necessary to develop the market opportunity that the business has decided to focus on d) Identification of the required market position and marketing communication initiatives required to support the business initiative or unit in question e) Identification of staffing, infrastructure, and process realignment required in support of the initiatives undertaken - At the end of the day, the strategy being recommended should define, for the organization, where and how it intends to compete in the marketplace, which weapons of competitive rivalry it will leverage as its products and services battle for market share, and the marketing and operating plans that will be required to effectively and efficiently execute the plan - Prior to the implementation (execution) of the strategic plan, managers should review the plan with the intent of confirming the following: 1. The operational activities within the plan are properly aligned to achieve the plan’s objectives 2. The budgets established, and the money to be generated, are realistic when compared to sales forecasts 3. The resources needed to successfully execute the plan are available or can be acquired 4. A series of benchmarks or performance indicators have been established that will enable the management team to effectively monitor the plan’s progress Strategy Execution - Portion of the process where management shifts its emphasis from what it wants to do, and hopes to achieve, to actively engaging the business into executing the desired strategic thrusts and tactics - Directional lock-in = level of financial and operational commitment an organization incurs as a result of implementing the organization’s strategies; level directly equates to the level of riskiness of the plan, as the higher the capital amount and resource-base being committed, the greater the impact on the organization should the plan not be executed properly and fail to meet its required objectives - Organizations commit their capital resources for needs such as building plants, retooling existing plants, building new equipment, funding research and development for new products and services, undertaking marketing and advertising campaigns, funding warehouse and distribution logistics support, and hiring staff - For any business to be successful in recovering its capital investment and covering the operating costs associated with delivering products and services to customers, the execution plans need to be effectively implemented - Organization will only experience true growth if the end result is that the company has enough revenue from sales to cover its operating costs, meet its financial obligations relating to debt, and return the investment back to the company - A key requirement of the execution phase is for managers to continuously monitor the success of the implementation of the strategy and to take corrective action quickly in the event that things are not going well Strategy Challenges in the SME (Small and Medium-Sized Enterprises) Sector - SME managers and owners often find themselves acting as the marketing, human resource, operations, and financial managers, all rolled into one - They usually don’t have any time to plan because they are too busy fixing problems - Usually don’t have the resources for a full strategic review - Strategic planning enables managers and business owners to make more efficient use of their resources and to minimize impulse spending or copycat initiatives that may result in little to no revenue or profitability gains for the organization - The need to plan strategically is just as important for a small business as it is for a major multinational organization Strategic Planning in the NFP Sector (Social Economy) - In the social economy, not-for-profit leaders are challenged to succeed while balancing their effectiveness of their economic activities with the social goal or purpose of the organization - Their actions are assessed by some organized collective (membership base, government entity, or community board) - In formulating and implementing strategy in the social economy, managers must ensure that their actions, in addition to guiding the economic activity of the NFP, effectively respond to the following: 1. Mission balance- maintain the balance between the need to create an effective economic base for the NFP while ensuring that the social mission and the goals of the NFP are met 2. Vitality- enhance the vitality of the organization through maintenance and growth of its membership or community support base o Vitality= ability of the NFP to grow and sustain its membership base and donor base 3. Collective entrepreneurship- maintain an atmosphere of collective entrepreneurship, which means ensuring that the involvement of the community where it is located and the population it serves are reflected in the formulation and implementation of the strategy 4. Rootedness- enhance the rootedness of the organization by strengthening partnerships and NFP networks that are supportive of the mission and work of the NFP o Rootedness = extent to which the NFP is interwoven into the fabric of the community that it serves and is supported by a broad representation of its organizations, businesses, and citizens 5. Operational effectiveness- operate in a manner that demonstrates the products and services offered by the NFP are priced at levels that ensure their accessibility by the targeted social audience, and provide mechanisms for support for those who are in need yet truly unable to pay **A successful strategy is one that properly assesses the external environment, defines the changes and opportunities within market segments the organization intends to serve, and effectively allocates resources and maximizes capabilities in a manner that is supportive of the products and services it delivers to the marketplace. Chapter 10- The Marketing Challenge Marketing’s Purpose - Marketing = is the process through which organizations design, develop, and communicate the value of their products and/or services - Value in this context refers to the ability of an organization to communicate, to existing and potential customers, why its products/service offering meets the needs of these individuals and businesses, and why it should be judged superior to those of competitive alternatives - Fundamental principles associated with customer behaviour that show important of marketing: 1. Customers don’t buy products or services- they buy solutions to problems or needs 2. Customers will not pay more for a product if they can get a similar product for less - Value proposition = service benefits + product benefits + brand benefits + cost benefits + emotional benefits - A customer’s value relationship with an organization can be summed up as the overall experience that the customer has when interacting with an organization Marketing: It’s Link to Strategy - Marketing is fundamentally responsible for connecting customers to the products and services offered by an organization, and reinforcing the needs and desires that are being satisfied. - Six R’s of marketing: o The right need to pursue o The right solution to offer o The right value proposition to position the organization’s products and services around o The right methodology for delivery o The right price to charge o The right communication message to use - Six Core Challenges of Marketing 1. Need identification 2. Assessment of our ability to respond 3. Value proposition and creation and positioning 4. Distribution capabilities 5. Price point validation 6. Message development and delivery - Properly positioned products, combined with a superior marketing effort, lead to organizational profitability and growth leads to the achievement of product and/or service objectives that support the achievement of business objectives  ultimately the achievement of organizational objectives and the company’s overall vision and mission - To be successful in the execution of its overall corporate strategy, an organization must be successful at both the product strategy level and its business strategy level The Concept of Positioning - Positioning = the ability of an organization to develop a unique, credible, sustainable, and valued place in the minds of our customers for its brand, products, and/or services - Marketing Formula: An effective and well-defined market position + superior marketing effort = profitability and growth - Four Key Objectives to be Successful: 1. Communicate the solution effectively to the targeted customers 2. Understand the market to be served 3. Understand the customers to be targeted 4. Deliver the solution in a way that is superior to competitors - Positioning is all about developing a unique, credible, sustainable, and valued place in the minds of our customers for our brand, products, and/or services Segmentation and Target Marketing - Successful marketers focus on trying to identify particular segments within the market and then delivering products/services specifically aligned with meeting the needs of customers within these segments Marketing Research: A First Step in the Segmentation Process - The concept of market segmentation recognizes that “one size does not fit all” - Segmentation = determining the best way to divide the market in a manner that will result in a better understanding of potential customer needs, interests, preferences, attitudes and behaviours - The development of marketing research information that we can use in determining which segments to target can be thought of as coming from two sources: 1. Primary sources of information = those that an organization develops or utilizes to generate information specific to the organization and the products and services it offers o Customer surveys, input from social media sites, focus groups, formal test marketing initiatives, and behavioural observations o Social media sites enable marketers to get a much earlier and stronger sense of trends occurring the marketplace o Reviewer blogs provide information on the strengths and weaknesses of product releases o Behavioural and attitudinal trends can also be monitored and better understood as a result of assessing the commentary and “chat” occurring among specific demographic groups 2. Secondary sources of information = those that already exist and are available at no cost or on a fee basis; managers use these information sources to conduct research and draw conclusions o Statistics Canada research, media options to better understand current social and cultural trends, Google, etc. o In tying marketing research to segmentation, marketers will create a profile of the customers within the various segments that consists of four core characteristics: 1. Demographics- age, gender, income 2. Geographic clustering- location, reach 3. Psychographics- lifestyle, status, ego, emotion, tastes, trends 4. Behavioural- use, buying patterns o Three fundamental questions that drive the marketing effort: 1. What are the key decision criteria that potential and/or existing customers use in determining which products/services they will buy? 2. What is the priority or ranking of these criteria? Is there any one criterion that will predominately influence the purchase decision? 3. How can we best position our product/service offering to align most closely to meeting these key decision criteria used by our sought-after customer base when measured against our competitors? Transitioning Segmentation Analysis to Target Marketing - Utilizing market research to assist in better understanding the marketplace and how it is segmented enables marketers and managers to determine which segments are the most attractive recipients to the marketing message that the organization intends to convey The Marketing Process - Target marketing = process whereby organizations determine which market segments represent the strongest clustering or potential customers who are most likely to purchase the product and who have the capacity to do so - Target marketing allows organizations to focus on those potential customers who are most likely to purchase the product and who have the capacity to do so Industry/Sector (100%)  Potential Market (30%)  Interested Market (15%)  Able Market (10%)  Target Market (5%) - Segmentation defines the level of need, and target marketing defines those who will pay for the need - Knowing what the need is, who has it the most, and who is most willing to pay for it enables us to develop a value proposition that is tailored to offer our product and/or service as the best solution - Create a communication message that perfectly aligns the product/service to the ideal solution Marketing’s Challenge Need Identification - Focuses on assessing opportunities that exist within the marketplace for our current and potential products and/or services - Attempting to identify untapped or unmet needs within the marketplace and leveraging our R&D capabilities to develop products/services that will meet such needs - Deciding where opportunities exist that will enable us to maximize their revenue and profitability potential - Considers whether our emphasis should be on new customer acquisition, further leveraging relationships with existing customers, or a combination or the two 1. Where do opportunities exist? 2. What market dynamics present themselves in the segments we are considering? - Seeking out opportunities that enhance the success of the products/services we offer or that identify untapped needs in various market segments furthers the achievement of the organization’s overall strategy and is a fundamental role of marketing. Managers need to recognize that such opportunities can come from a variety of sources - Igor Ansoff produced the product/opportunity matrix that suggests that managers should focus their analytical review in four areas when assessing market opportunity: 1. Market penetration opportunities- focus a manager’s attention on growing the sales revenue of the organization’s existing products through its existing customer base o This means seeking ways to (a) get its existing customers to purchase the organization’s products/services more frequently, or (b) increase the average transaction revenue per purchase at the time when these customers are buying o To be successful, an organization’s marketing team must develop ways that will stimulate the additional frequency of purchase or provide incentives for customers to increase their share of wallet they are willing to spend with the organization (i.e. coupons, rebates, etc.) 2. New product and/or service opportunities- focus a management team on identifying and developing new products and/or services for the existing markets within which it competes, and/or the existing customer base that it serves 3. Market development opportunities- focus a management team on identifying and cultivating new customers for the existing products an organization currently offers o Segmentation stretch = expanding the focus of a product/service to similar and related market segments that share a positive affinity for the product/service offering o Or can just be expanding the use of a product to previously uninterested markets o Cannibalism = reduction in sales of an existing product/service due to the launch of a new, similarly targeted product/service offering o Customer desertion = when customers move to a competitive offering due to a change in brand or product communication message focus 4. Diversification opportunities- focus managers on assessing opportunities that lie outside the organization’s current products and/or services, and represent the creation or development of new markets served by new products and/or services o New business initiatives o Could be in related or unrelated areas of current market and business expertise Understanding the Consumer Decision-Making Process - A critical aspect of marketing is the identification of needs that exist in the marketplace to which an organization can respond - Equally important, however, is ensuring that we understand why potential customers purchase a particular product and/or service, and how they determine, out of a number of competitive offerings, which product/service to buy The Buying Process - In making a decision to buy, customers go through a four-phase process: initial consideration of options, active consideration and evaluation of options, point of purchase, and post-purchase influence - Length of time spent in each is dependent upon the potential customers’ familiarity with the product/service, the various alternatives offered in the marketplace, whether it is a first-time purchase or a repeat purchase, and the level of financial commitment associated with the transaction - As marketers, our goals with respect to this process are the following: o Be at the top of the potential customers’ purchase list as he/she enters into the decision-making process, and reinforce and support the purchase of our product as the potential customer transitions to the point of purchase o If we are not at the top of the potential customer’s purchase list during the initial consideration of purchase alternatives, then our goal is to disrupt the potential customer’s predetermined list of viable purchase alternatives in a way that creates awareness and preference for our products and/or services o Assuming that we have won the battle for the initial purchase, reinforce and support the customer in a way that encourages him/her to develop a loyalty and commitment to our product, thereby making future purchases almost automatic with little consideration of alternative products and/or services being offered by our competitors - Marketer’s Tool Box to interrupt buying process and influence customer to buy our product Category Tools of the Trade Company-Driven Marketing Techniques Advertising Sales promotion Publicity Point of purchase displays Dedicated sales force Consumer-Driven Marketing Techniques Internet searches Product reviews Peer recommendations Analyst’s blogs Social media websites and commentary Channel Support and Interaction Techniques Dealer incentives Point-of-purchase discounts Channel member training Exclusivity arrangements Salesperson recommendations - Marketing does not end at the point of purchase. Considerable emphasis needs to be placed on the post-purchase period, which is where true customer loyalty and commitment is developed - Considerable emphasis is placed on the post-purchase period, which is where true customer loyalty and commitment is developed. This is important for three reasons: 1. Customers need immediate and ongoing reinforcement that the purchase they made was the right one. Reinforcing the purchase decision, particularly decisions that require a significant financial commitment, is fundamental to developing customer loyalty and commitment 2. For many purchases, particularly business-based purchases, ongoing servicing and training may be core aspects of the buying decision. The quality of such support services is, in many cases, as important as the initial purchase 3. Satisfied customers tell others about the quality of the products and services that they purchase and use. Active referrals from current customers assist us in broadening our customer base - For marketers, the challenge is a continuous need to reinforce and reward our existing customers, thereby minimizing customer desertion (customers leaving us) while attempting to continually attract new customers in order to further grow our customer base Responding to Needs: Value Proposition Development and Communication - The role of marketing is to communicate the value proposition for an organization’s products/services as the “best” solution to the needs of a targeted market of prospective customers - This value proposition demonstrates, beyond the functionality of the product and/or service, why our organization’s product/service offerings should be considered superior to those of our competitors when assessed from a price/quality perspective - For customers, the end result is that (a) the product/service offering meets their needs, and (b) they believe they have received the best value for the price paid - The need to respond to consumer-driven marketing techniques and channel support point-of-sale techniques grows in importance the farther the potential customer moves through the decision-making process A Note Pertaining to Not-for-Profits - The concept of social marketing needs to ensure that the organization becomes fully rooted as a valuable resource to the community it serves, and is seen as a valued benefit in a way that encourages individuals, business, and government(s) to support the delivery of such products and services through philanthropy, membership or program fees, or budgetary commitment - The vitality of the NFP organization is predicated on positioning itself as the preferred provider of products and/or services, and in meeting the needs of its user base in a way that generates loyalty, empathy, and commitment to the cause the NFP aspires to respond to Management Reflection- Back to Strategy - Mission critical factors associated with marketing strategy 1. Market clarity and stability 2. Customer analysis 3. Competitor analysis 4. Competitive advantage analysis 5. Culture and business system analysis Chapter 11- Understanding the Marketing Effort Four Pillars of the Marketing Effort - Marketing mix = organization’s strategic and tactical decisions relating to its products/service offerings, pricing, distribution, and marketing communication efforts and approaches o Four pillars: communication strategy, product strategy, pricing strategy, distribution strategy (connectors) - Our effort is on developing, demonstrating, and communicating to our current and potential customers why our product is the best solution to their need, and then ensuring that it is available for customer acquisition through a convenient delivery option and at a price point that represents the best price/quality trade off - An effective marketing mix ensures a definitive “fit” between our product/service offering and the needs of our potential customers Product Strategy: Value Proposition Attributes versus Product Attributes - Product attributes: functionality, packaging, component make-up, etc. - Value proposition attributes: branding, emotional bonding, peer acceptance, and post-purchase service support - Including a value proposition strategy becomes the overall “experience” that the customer has with the product and the organization offering it - Viewing product strategies as the development of value proposition attributes shifts the marketing team’s focus from simply “building a better mouse trap” to creating positive performance gaps between the company and its competitors - Total Customer Experience encompasses brand leveraging, cost advantages, behaviour linkage, point-of-sale and post-purchase services and benefits, financial incentives and benefits, tangible product attributes, and psychological and social benefits The Power of Brands - Truly successful brands, which add power to a company and/or its products and services, are those that have evolved to the top end of the brand ladder - Strong brand names communicate quality, reliability, product consistency, and peer acceptance - Brands that have reach the “brand commitment” level on the ladder have an active and loyal customer base that continually places the brand at the top of their predetermined purchase list - Predetermined purchase list= ranking of products/services that purchasers develop for all the options available when making a purchase decision - To achieve such a relationship organizations must successfully connect with them on three levels: product attributes, benefits, and emotional ties Brand awareness  brand preference  brand loyalty  brand commitment - The ability to transition a brand from awareness to commitment is all about delivering the value proposition in a way that demonstrates distinctiveness and creates emotional and psychological ownership with customers as the proven solution to solving their needs Pricing Strategy: Return on Sales Maximization - Businesses are being challenged with a downward pressure in all sectors o Increasing competitive intensity and product substitutability, coupled with the rapidity of technological innovation and change, continues to contribute to this downward pressure o Constant challenge of “expense creep” (upward pressure in expenses) places additional pressure on organizations to maintain and protect their operating margins - We have to be able to differentiate our product - The ability to effectively differentiate ourselves will enable us to minimize price as a major point of comparison, thereby reducing its influence on the decision-making process Managing the Pricing Process - Pricing involves considering a number of factors and requires solid knowledge of both internal and external influences - Internally, managers must fully understand the cost base of the organization and the margins that are needed in order to ensure that the price being charged is sufficient to cover the operating expenses and to support the investment needs of the organization - Externally, managers need to assess the competitiveness of their price against alternate product offerings, and against the willingness of the customer to “pay for the solution to the pain” at the price point being considered - Four key fundamentals are needed in the price decision: 1. Fully identify the cost structure components of the product/service that the organization intends to offer to the targeted market 2. Research and identify the cost structures of your major competitors, and the extent to which they intend to focus on price as a major point of comparison 3. Analyse the price elasticity of the target market; that is, the change in demand that is anticipated to occur at various price points. An additional aspect of this is to understand the price range that consumers will conclude is acceptable for the product/service you intend to offer. A core fundamental is the ability to define the consumer price threshold: the maximum price point that the customer is willing to pay for your product or service o Price elasticity = change in demand that is anticipated to occur at the various price points the organization is considering for its product and/or service 4. Determine the degree of value proposition positioning strength that the product/service commands in the marketplace. This will enable marketers and managers to identify the premiums that can be allocated to the base pricing model given core differentiators such as brand strength, emotional ties, psychological attribute uniqueness, publicity initiatives, and other positioning-based communication message tactics - Managers also need to take into account long-term expense obligations - Profit expectations, which should include acceptable returns on the investment made in the product within a defined payback period, also need to be taken into consideration o Payback period = length of time required to recover, or earn back, the cost of an investment - Successful pricing strategies seek to maximize the return on sales on the product/service we offer in a way that ensures competitiveness, lies within our customers’ acceptable price range, results in a recognized value advantage between our product/service and those of our competitors and contributes to the long-term wealth of the organization Distribution Strategy: Connecting with Customers - Integrated decision process involving 3 decision areas: direct, indirect, or mixed systems, product/service delivery options, and degree of sales support Direct, Indirect, or Mixed Systems - Direct distribution= connecting directly with customers and handling the final sale of products and/or the delivery of services without the assistance of a channel intermediary o Without the assistance of a channel intermediary = an organization that assist a company in the distribution and delivery of goods or services to its customers o Direct distribution channels as a result of a believe that their product is better supported by dedicated company-employed sales personnel, and/or that they can gain greater customer loyalty and greater “share of wallet” by dealing directly with the customer o More control over distribution and transportation - Indirect distribution = use of a channel intermediary, such as a broker, wholesaler, or retailer, to facilitate the sales of a company’s products and/or services to its customers o Indirect as a result of the belief that significantly greater market reach and support can be provided by leveraging the expertise, locations, facilities, and experience of channel intermediaries - Mixed distribution systems= distribution systems that incorporate both direct and indirect distribution options within their distribution strategy Product/Service Delivery Options - Need strategy and tactics to “connect” with customers; organization needs to think in terms of accessibility and convenience in addition to cost and distribution efficiencies - Maximize options to purchase and obtain a product - Private label brands= products that are created by one company for sale by another company under this latter company’s own brand name - Multi-channel distribution= incorporation of a number of different channel connections through which customers can purchase a product and/or service Degree of Sales Support within the Channel - Type of channel they believe will best support the customer during the buying process and to do this management needs to determine the level of sales support that is needed for your product/service - Although customers care about the quality of the product and its price, it’s a positive buying experience that really drives value - The distribution channel’s maximum value lies in the stage of alternative selection and supporting the purchase decision - The greater the complexity of the product, the greater the lack of familiarity with the product category by the customer, and the greater the price, the more important the sales support becomes at the time of the purchase - Normally assess the best fit around the following channel relationship categories: 1. Intensive distribution= decision by an organization to distribute the product and/or service through as many locations or channel outlets as is possible o See the product/service wherever you go o Convenience goods= good purchased by customers on a regular basis, with minimum effort and little emotional connection (i.e. soda) o No focused commitment by distributors 2. Selective distribution= a decision by an organization to sell its products and/or services through a limited number of channel intermediaries o Usually based on need for heightened sales support o Greater degree of control o Can minimize direct competition by limiting the number of competitive offerings 3. Exclusive distribution= decision by an organization to offer its products and/or services through a single market representative o Used when the selling process requires the highest levels of support, or when the organization is attempting to break into new markets o Maximum control in how a product is marketed and sold Importance of Channel Intermediaries - Successful companies recognize that channel intermediaries are not simply an outlet for the sales of an organization’s products and services, but rather are viewed as a key stakeholder and partner in the overall demand generation and selling process - In many situations, channel intermediaries bring to the market experience and expertise that the manufacturing and/or service company does not possess in-house - Significant risk mitigation can also take place through channel intermediaries, who commit to purchasing products and/or services in advance, and absorb the cost of unsold inventory once these products are purchased - Can help make the connections with customers more effective, assist in driving down costs, and help to identify profit leaks, thereby improving the overall performance of product and service-supplying organizations o Profit leaks= inefficiencies within an organization’s marketing mix that result in margin erosion and loss of profit Communication Strategy: Communicating the “Fit” - Advertising and promotion - Communication strategy needs to demonstrate the “fit” of the value proposition developed as the best solution to the needs of the target market being focused on - Message rifling= making sure you are communicating the right product/service value proposition components, to the right audience, at the right time, via the right message mechanism o Focused message, driven by a well-defined and developed value proposition, that is targeted specifically at a defined audience - The development of the marketing communication strategy is really the commencement of the selling process - The key is to determine how to link the strategy for the products and services being offered to the marketplace in a manner that enables us to get targeted potential customers to listen to our message and to build a relationship with them, which results in their adoption of our products/services - Four key questions for developing a communication strategy: 1. Do we understand why these customers need our products and/or services? 2. Do we understand the level of knowledge that our customers possess concerning the products/services we are asking them to purchase? 3. Do we understand who the actual decision maker is when making such a purchase? 4. Are we able to clearly define, in simple terms, what makes our products/services different? Growing Importance of Social Media as Part of the Communication Strategy - Today’s customers, armed with access to almost unlimited information via digital and Web-based resources, are looking for marketers to engage them in the buying process, not dictate to them what they should buy - This means shifting the emphasis to a much broader marketing mandate: 1. Coordinating communication activities in a way that engages the customer through an increasingly Web-based information and social-network-driven purchase decision 2. Creating interest in the brand in a way that enables the customer to personalize a relationship with the brand and, hence, act as an ambassador for it 3. Recognizing the need to create and manage access to an increasing demand for content relating to the products and/or services being offered, the distribution channels being used, and the promotions being offered 4. Increasing the emphasis on selective utilization of social media and third-party Web-based options in a way that ensures targeted potential customers are reached - Social media marketing, if managed properly, can create reach for an organization and can build loyalty for its products and services in a way never before seen - Effective social media marketing requires identification of established objectives and evaluation measurements against quantifiable performance metrics - Need to have a commitment: always need to be updating, information collected needs to be used, monitor perceptions - To be successful social media marketing needs to: 1. Capture interest among general internet traffic 2. Increase customer engagement with the organization 3. Turn interest and engagement into sales 4. Build active customer loyalty - Marketing communication objectives support specific objectives (improving profitability, increasing market share, educating customers, etc.) for a defined business period - A critical aspect of the communication effort lies in its support of the execution strategies in place as a product/service, positioned by its value proposition, moves through its life cycle Managing a Product’s Life Cycle - The lives of products/services are defined by a life cycle, the length of which and its success are determined by both the success of the positioning strategy and the successful execution of its marketing mix - Five specific life stages: development, introduction, growth, maturity, and decline - Development is important because it reflects a significant risk to the organization in terms of both resource consumption and financial commitment Traditional Product Lifestyle - For managers, it is important to assess what a potential life cycle would look like, and be prepared to make adjustments to the marketing effort and the overall product strategy once the life cycle is underway - Life cycles can be very short or very long - Examples of lifecycles page 303 - The ability to effectively position a product and execute a successful marketing effort will significantly influence the length and success of its life cycle Managing across the Life Cycle - Success within the life cycle of a product or service comes down to possessing an effective positioning strategy backed by a successful marketing effort formulated around a meaningful (in the eyes of customers) value proposition - We need to be able to sense the stage for our product and the industry at large - Key is to knowing how to succeed during each stage Managing a Product Portfolio - Product portfolios can be a family of products under a primary brand (i.e. Cheerios) or a series of complementary products such as Frito-Lay snacks - As managers, we need to make decisions on where to expand the investment in support of a particular product, where to maintain a given level, when to reduce investment, and finally, when to divest ourselves of it - Portfolio management is all about making decisions on where to invest in order to improve the organization’s market position going forward - We will always need to define priorities in where to distribute resources - Responsibility lies in doing what is best to improve the overall performance of the organization vs. any one individual product line Assessing Future Product Potential A Note Pertaining to Not-for-Profits - The key components for survival lie in the ability of the organization to achieve rootedness within the community and vitality through membership, philanthropic gifts, and the meaningful delivery of its services in support of its mission - Sustainable business models, even in the not-for-profit sector, are built around the four pillars of marketing Chapter 12- Cost-Base Analysis and Pricing Understanding the Organization’s Cost Base - To develop a good understanding of an organization’s cost base, managers need to focus on: 1. The make-up of their cost base 2. The percentage of the cost base that lies within their control in the near term 3. The market pressures that will impact the cost base going forward 4. The volume and dollar requirements necessary to achieve breakeven 5. Evaluating their cost structure with respect to “good” costs versus “bad” costs 6. Evaluating their costs in comparison to the cost base of their competitors - Having a good understanding of cost base information will enable managers to better assess their financial options in the event of unexpected changes in market dynamics, unanticipated reductions in revenue, and strategic positioning shifts that the organization is planning The Composition of an Organization’s Cost Base - Consists of the total costs associated with delivering the organization’s products or services to the marketplace - Cost Base: procurement of parts, manufacturing costs, distribution costs, marketing and sales costs, administration costs, and post-purchase service and support costs - In analysing the composition of an organization’s cost base, there are two fundamental conclusions that we, as managers, hope to identify: 1. The percentage of our costs that are considered to be direct or variable costs versus the percentage that are considered to be indirect (fixed or semi-fixed) 2. The cost areas (if any) that make up a significant percentage of our overall cost base Variable vs. Fixed Costs - Variable costs = costs that are directly tied to the manufacturing of a product or the delivery of the service depending on the type of business being assessed o Material costs, labour costs, distribution costs o If we no longer produce a product, we no longer have variable costs - Fixed costs = costs that, although not directly tied to the manufacturing of a specific product or the delivery of a specified service, nonetheless exist as a result of conducting our business and operating our company o Insurance, utilities, interest, administration costs o Uncontrollable in the near term o Committed costs- costs that the organization commits itself to within an operating year, and that often are spent in advance or at the front end of a manufacturing/sales cycle  Marketing, advertising, software upgrades, research and development o Indirect cost base: fixed costs + committed current period costs = an organization’s indirect cost base - Understanding an organization’s cost base is essential to determining the required pricing strategy that will be utilized in marketing the product and its corresponding impact on profit Degree of Managerial Control - Managers must also understand how the composition of this cost base (relationship between variable and fixed costs to the total cost base) will influence their ability to manage their company - In general, the more the cost base is composed of variable or direct costs, the more control managers have over the actual management of this cost base on a day-to-day basis - The more the cost base is composed of fixed or indirect costs, the more difficult it is for managers to use cost- reduction strategies to protect the organization’s profitability in response to decreases in demand for products and services and their corresponding reductions in revenue - Market dynamics will influence the composition and overall competitiveness of an organization’s cost base - Quality, uniqueness, importance, and overall value are continually being assessed by customer’s against the prices that companies are charging - The ability to manage an organization’s cost base is not limited to the relationship between variable costs and fixed costs, but also is dependent on the ability of management to have flexibility and choice in adjusting these costs in order to effectively support and execute an organization’s corporate and business-level strategies ** Cost-cutting decisions and tendencies must remain aligned with the organization’s overall strategy The Concept of Breakeven Point Analysis (BEP) - Breakeven Point (BEP)= level of sales revenue or volume that is required for the organization to cover all its costs o Point where the total revenue of the organization equals its total costs, resulting in a profit of $0 - For managers, the breakeven point is considered to be the minimum acceptable position for the business in the short term - Operating at breakeven means the company is NOT making a profit - Operating below breakeven means the company needs to access reserves or external cash resources - Computing an organization’s BEP is a two-step process: 1. Estimate (within a degree of decision-making credibility) an organization’s costs, and determine the nature of these costs (variable or fixed costs) 2. Take this cost analysis and incorporate it into the breakeven point formula in order to effectively calculate the BEP for the organization. Keep in mind, again, that BEP is that point where total sales revenue equals total costs - Breakeven point analysis takes this information and adds to it the anticipated revenue of the organization, based on its intended selling price, for the volume of units to be manufactured and sold Calculating BEP in Units - Two approaches: BEP in units or BEP in dollars BEP (units) = Total Fixed Costs (Selling Price per Unit – Variable Costs per Unit) BEP ($$) = Total Fixed Costs 1 – Variable Cost % - Total Variable costs per unit: material costs per unit, labour costs per unit, packing costs per unit, shipping costs per unit - Total Fixed costs: plant overhead, administration costs, R&D costs, marketing costs, interest expense - Managers need to continually reassess their breakeven position in order to understand how changes to their cost structure or to their selling price will impact BEP - Variable Cost %: total variable costs as a percent of revenue - BEP is used to identify the level that sales revenue has to reach in order to cover the total operating costs of an organization Using BEP to Understand Profit Objectives - Investors, shareholders, and management teams are not in business to break even. Expectations are that organizations will strive to achieve a defined level of profit, in a given year, as well as ongoing profitability - Understanding revenue is fundamental to determining the feasibility of various profit objective levels and the determination of what profit objective the organization should strive for - How much revenue or units sold are needed to reach a certain profit objective BEP + P = Total Fixed Costs + Profit Objective (Selling Price per Unit – Variable Costs per Unit) BEP $$$ + P = Total Fixed Costs + Profit Objective (1 – Variable Cost %) Using BEP to ensure that Full Cash
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