5
1.
MARKETING
The Traditional View of Marketing
Traditionally, the marketing function is defined as “a process through
which people create, offer and exchange products of value with
others”. This implies that the primary role of the marketing
function is to maximize sales. So
Marketing strategy is…
“the set of plans and actions that an organization
undertakes to maximize the profitability of the sales of
its products.”
Marketing involves determining the product attributes which the
customers desire, and branding and positioning existing and new
products. Tactical decisions and actions then follow: prices must be
set, customers communicated with through advertising and other
means, distribution channels selected. These are the so-called “4 P’s”
of product, price, promotion and place.
The figure shown below represents the fundamental framework that is
used for marketing in Mike’s Bikes.
Marketing and the Business
Shareholder Value
ECONOMIC
CONDITIONS
Current Profit
COMPETITORS’
ACTIONS
Demand
Future Profit
Supply
Accounting
operating
decisions
investment
decisions
BUSINESS STRATEGY
Marketing
Strategy
Operations
Strategy
Finance
Strategy
Product
Development
Strategy
Copyright © 2001 - 2004 SymComm Limited. All rights reserved.
4
It illustrates the role of marketing relative to the other business
functions and its contribution to shareholder value. Specifically,
marketing complements decisions in operations, finance and product
development, and generates profits and shareholder value by
achieving a match between demand and supply.
Page 5-1
Copyright © 2001 - 2012 SymComm Limited. All rights reserved.
The MiniMBA l Marketing
2.
The Emerging view of Marketing
In response to a changing market place and the growth of information
and service-oriented businesses, a more sophisticated view of
marketing is now evolving. The trend towards a more team-orientated
and process-driven firm requires a broader role for marketing.
Marketers are no longer seen as purely functional specialists. Rather,
in the marketing- (or customer-) oriented firm, every employee is
seen as a marketer, whether on a full-time or a part-time basis.
Part-time marketers are found throughout the firm (for example, at
senior management and board level, and in customer service
personnel and technical departments at lower levels) while full-time
marketers are located in the marketing function – should this exist
(and increasingly it may not). All employees work together in some
way to maximize the long-term profits associated with sales.
The distinction between the traditional and emerging role for
marketing is subtle. In the first case marketers research the market,
determine customer needs and wants, and work with the production
department to arrive at a product offer that matches the market’s
requirements with the firm’s capabilities. Price and distribution
strategy are set, and the market is informed and persuaded of the
product’s competitive superiority. The end result is a transaction – the
customer makes a purchase.
Under the emerging view, the emphasis is on building long-term
customer relationships, or paying attention to streams of
transactions. The focus is directed at identifying and keeping the ‘right’
customers, rather than ‘getting’ customers indiscriminately on a oneoff transactional basis. To achieve this, consistently superior customer
value must be delivered over time, and this requires the firm to pay
close attention to all aspects of its performance, including achieving
lowest delivered cost. This in turn requires a cross-functional processoriented approach, and a great deal of interaction with both internal
and external parties. Excellent relationships must be built and
maintained inside and outside the firm with, for example:

The accounting and finance department (to ensure that the
firm monitors and controls delivery costs, among other
things)

The production department (to ensure performance in a
number of areas, including delivery and fitness for function)

External suppliers (eg, advertising agencies and packaging
suppliers).
While the trend towards service and relationship marketing is very
important, it is specifically excluded from this model. In Mike’s Bikes
the environment has been set up so that marketing tries to maximize
shareholder wealth by persuading people to purchase goods of value.
It is assumed that consumers buy according to a demand curve. Total
demand is determined by a range of factors – and marketing decisions
are just one of these. There are two other factors which affect the
demand for a product - its quality and its delivery time and
availability. For our purposes they are covered in the Operations
Function.
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The MiniMBA l Marketing
3.
Learning Objectives
In this chapter we explore some theory related to these issues, and
work through some simple numerical and more complex spreadsheet
examples.
The main learning objectives for this chapter are to understand the
following:

A framework for marketing

Market analysis and segmentation

The selection of target markets

The effect of branding

Product positioning using attributes and the perceptual
map

The perceptual map

The marketing mix (the 5 P’s)

Pricing strategy

Promotion/advertising
product PR

Distribution strategy and channel selection. (Product
quality and availability are covered in the Operations
Function.)

Determination of margin for channels

Determination of demand for products

Substitution of products

The marketing/operations interface

The marketing/finance interface

The marketing/product development interface

Strategic marketing
marketing plan.
strategy
control
and
and
media
selection,
development
of
a
While these issues may be considered in isolation, Mike’s Bikes
encourages users to view them as a part of the overall strategy and so
to think of the firm and industry as an interactive system.
4.
A Framework for the Marketing Process
The figure shown below represents the fundamental framework that is
used for marketing in Mike’s Bikes to generate profits and shareholder
value.
The strategic marketing process may be viewed as a number of
steps:

Analyze and segment markets

Select target market(s)

Determine branding and positioning strategy

Determine the best marketing mix to generate optimum
demand.
Marketing management implements the outcomes of the strategic
marketing process.
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The MiniMBA l Marketing
Marketing Strategy is…
“the
“theset
setof
ofplans
plansand
andactions
actionsthat
thatan
an
organization
organizationundertakes
undertakesto
tomaximize
maximizethe
the
profitability
profitabilityof
ofthe
thesales
salesof
ofits
itsproducts.”
products.”
And includes…
Marketing
Strategy
• Analysis of Markets
• Selection of Target Markets
• Marketing Mix
• Control
Copyright © 2001 - 2004 SymComm Limited. All rights reserved.
5.
6
Determining Strategic Objectives
From a strategic perspective, marketing has 3 main goals:

To determine which segments of the market to target

To achieve a certain number of sales in each market
segment

To achieve a given contribution margin (profit) from each
segment.
Sales performance then determines the required market share and
competitive position of the company in each of these market
segments.
To develop its strategic marketing objectives, the firm must do some
market analysis.
6.
Analyzing the Market
Market analysis considers the business environment in which an
organization operates, including the customer segments that could be
matched with the products that an organization produces or intends to
produce. Typically a lot of data is required to inform a sound market
analysis – and this data does not become a good basis for decisionmaking until it has been processed, structured and summarized.
Quality of information is vital. The most valuable information is current
information. However, this is generally also the most ill defined and
informal. It is better to be roughly right than precisely wrong, and the
art of analysis is to sort the nuggets of gold from the deserts of data.
In the case of Mike’s Bikes, this information is provided to you in the
form of some summary reports. In a real context, there is a lot of work
entailed in arriving at good summary information for effective
decision-making. The information provided in Mike’s Bikes can be
considered as the outcome of prodigious marketing research efforts.
A good way to cover key aspects of market analysis is to follow the
three C’s - Customer, Competitor and Company.
These are
discussed briefly below.
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The MiniMBA l Marketing
Analysis of Markets
Marketing
Strategy
Customer
Analysis
• Analysis of Markets
• Selection of Target Markets
• Marketing Mix
• Control
Competitor
Analysis
(see strategy)
Copyright © 2001 - 2004 SymComm Limited. All rights reserved.
Company
Competence
(see strategy)
9
CUSTOMERS - IDENTIFYING SEGMENTS
A good analysis should provide a map of the market. Management
can then use this map to decide how to segment the market and to
target a particular segment or segments with its product. The aim is
to achieve the best match with the organization’s capabilities and
resources.
Segmenting a market appropriately is as much an art as it is a
science. There are many ways to go about it. The ‘right’ way is the
one that results in the best insight into product sales! Many factors or
criteria may guide segmentation. These can be loosely categorized as
geographic, demographic, psychographic, and behavioral factors.
For example, the toothpaste market could be segmented in the
following ways:

Geographically: country or state user; rural or city user

Demographically: by family life cycle stage (eg, empty
nest user, young single user)

Psychographically: by attitude or lifestyle of users (eg.
educated green user or urban sophisticate user)

Behaviorally: by how many times per week the product is
used.
By looking at the requirements of the different segments, at
competitor activity and at the organization’s potential resources, the
firm can decide which segments of the market it wants to serve, and
the position it should adopt in each of these segments. There is a
strong need for consistency in these choices.
THE PERCEPTUAL MAP
The perceptual map is a useful tool for building understanding of
differing consumer needs in various segments or markets. This tool
identifies the product or service attributes which consumers value
most highly and positions a number of segments in relation to these
attributes. Several attributes may be important to a market (eg, in the
case of toothpaste these may include taste, sex appeal or whiteness,
appeal to children, ease of use). A perceptual map can only show 2 (or
3 if using a 3-D approach) of these attributes at any one time. Several
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The MiniMBA l Marketing
different maps may be constructed to get the overall picture. However
using more than 3 attributes makes it difficult to identify segments.
THE PERCEPTUAL MAP IN MIKE’S BIKES
Following extensive international research into the types of people who
purchase bikes, we have concluded that the potential bike market can
be broken into two key segments. The segments have been given the
names ‘Adventurer’ and ‘Leisure’.
Note that only the ‘Adventurer’ segment is currently being served by
RockHopper Bikes. ‘Adventurer’ customers desire trendy, highspecification, high quality mountain bikes and put them to reasonably
demanding use. They are prepared to pay retail prices ranging from
$500 to $4,000.
On the other hand, ‘Leisure’ customers purchase bikes for relaxed
Sunday afternoon bike rides. They want a lower spec, stylish bike with
a realistic retail price range from $100 to $600. As of 1998, no bikes
suitable for the Leisure segment are being sold.
THE
ADVENTURERS SEGMENT
The Adventurer segment is broadly typified by the young suburban
bicycle purchaser who wishes to buy a mountain bike. An Adventurer
is typically a young person, focused on fitness and the outdoors. He or
she wants a bike that will go anywhere and everywhere, and then
come back. Often the Adventurer will forego luxury features in favor of
a sturdy, high performance bike. The evidence is that the use of bikes
for fun adventures and blood-pumping action is very popular and in
fact this segment is experiencing strong growth. The people who buy
these bikes tend to be prepared to pay more for the right bike because
they have a specific purpose for it and do not want to be held back
with slow equipment or to have to stop for repairs. Given the many
and varied exciting opportunities for off-road biking in Erehwon, we
are confident this segment has good potential if appropriate bikes are
released into the market.
THE
LEISURE SEGMENT
The Leisure segment is made up of people who own a bike, but use it
only once or twice a month. These customers see their bike primarily
as a means of relaxation or leisure, and they go for a Sunday ride
every now and then, usually with others (often in family groups). The
Leisure segment therefore requires less in terms of high tech
components and accessories, with “leisurites” preferring comfort and
style. Purchasers who buy bikes for leisure purposes are not very
fussy, but they like to be able to buy a bike when they go out
shopping, so long as they’ve seen the bike on TV before. Consumers in
the leisure segment abhor having to wait to buy, even if it is the best
value for money. Because this segment is quite broad, it is also
typically very large. It accounts for 50% of new bike sales units
overseas.
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The MiniMBA l Marketing
THE RESULTS OF THE MARKET RESEARCH
To produce some data that would be useful in differentiating the
market segments, a market research house was commissioned to
undertake a survey. 1,000 potential bicycle purchasers were asked the
following questions:

Thinking about bicycles, what two factors would be most
important to you if you were to purchase a bike tomorrow?

How important would each factor be to you?
The two factors identified were:

The aesthetic style and design of a bike

The technical features and components
construction materials and strength).
(including
This research is ongoing. From year to year there may be slight
variations in the positioning of the segment points as customer needs
change. In general, it is safe to assume that people’s expectations will
increase with time.
INTERPRETING THE INFORMATION
The Perceptual Map Report shows the levels of Style/Design and
Technical Specs which each of the market segments (ie, Adventurers
and Leisure) desire. The circles indicate the acceptable ranges of
Style/Design and Technical Specs. The Perceptual Map Report shows
also how well your products (and unused product designs) match
these requirements. By selecting a different firm you can see this
information for its products too.
The segment centers are the best points on the map to aim for. These
are ‘ideal’ positions which satisfy all of the segment. You could of
course move away from these center points, and produce a product
which exceeds the style and technical specifications of the segment.
You could sell it at the same price as one that met exactly the needs of
that segment. However, the “better” product would not sell as well as
one exactly meeting the segment needs, because it is not what the
customer wants. Unnecessary features can be annoying for someone
who wants a simple bike. Extra style and design attributes can reduce
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The MiniMBA l Marketing
a bike’s performance and functionality for someone who uses the bike
for a specific purpose.
It is important to note that demand for a product is determined by
many factors in addition to the product’s attributes. These include
pricing, quality, advertising, and distribution. In most cases these
other factors are more significant than the closeness of a product to
the center of the circle on its perceptual map.
SEGMENT SUMMARY
Key information regarding each of the segments in Mike’s Bikes is
given in the tables below. The section below explains the process used
to collect this data.
Segment
Adventurers
Leisure
Segment
Sensitivity
Adventurer
Leisure
Est. Potential
Market Size
(Units)
70,000
50,000
Retail Price Range
Average Score
for Style/Design
Average Score for
Technical Specs
$500-$4,000
$100-$600
50
50
50
10
Price
Advertising
PR
Quality
Distribution
Delivery Time
Low
Med
Med
High
Med
Low
High
Low
Med
Med
Low
High
COMPETITORS
This section is covered in the Strategy Chapter. The content includes
the following analytical tools: environmental analysis, PESTE,
competitor profiles, and SWOT analysis and the concepts of vision,
mission, strategic intent, and core competencies.
COMPANY
This section is also covered in the Strategy Chapter. The content
includes issues such as the company’s mission, strategic intent and
core competencies.
CONJOINT ANALYSIS
OVERVIEW OF CONJOINT ANALYSIS1
Conjoint Analysis is a technique used specifically to understand how
respondents develop preferences for products or services. It is based
on the simple premise that consumers evaluate the value of a
product/service/idea by combining the separate amounts of value
provided by each attribute. It is unique in that the researcher first
constructs a set of hypothetical products or services by combining the
possible attributes at different levels. These hypothetical products are
then presented to respondents who provide only their overall
evaluations of the hypothetical products/services. Thus the researcher
is asking the respondent to perform a very realistic task - choosing
among a set of products. Because the researcher constructed the
hypothetical products/services in a specific manner, the importance of
1
Hair, J., Anderson, R., Tatham, R., Black, W., “Multivariate Data Analysis with Readings (3 rd Ed)”,
Macmillan, 1992
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The MiniMBA l Marketing
each attribute and each value of each attribute can be determined
even while having only the respondents’ overall ratings.
THE PROCESS OF DATA COLLECTION
Data collection in a conjoint study involves showing respondents a
series of cards that contain a written description of the product or
service. If a consumer product is being tested then a picture of the
product can be included along with a written description. Analysts are
able to use statistical manipulations to avoid having to make
consumers rate every possible combination. In a typical conjoint
study, respondents need rate only 10-20 cards. This data becomes the
input for the conjoint analysis. Analysts can then calculate consumer
preferences and perform simulations to identify which products will be
successful and which should be changed. Price simulations can also be
conducted to determine how sensitive the consumer is to changes in
prices.
AN EXAMPLE
The following card is an example of one of the cards which might make
up the set used in a conjoint study into the airline business traveler.
"On your next business flight overseas how likely would you be to choose a flight that has all the
following characteristics? Please circle the appropriate number from 1 to 10 to indicate your
feelings."
One stop en route
Extra-wide seats
Departure time: before 8:00 am
"Double" mileage points
$200 fee to change ticket
Would never choose this
flight
1
2
3
4
5
6
7
8
9
10
Would definitely choose this
flight
QUESTIONS CONJOINT ANALYSIS CAN ANSWER

Which new products will be successful?

Which features or attributes of a product or service drive
the purchase decision?

Do specific market segments exist for a product?

What advertising appeals will be most successful with these
segments?

Will changes in product
preference and sales?

What is the optimal price to charge consumers for a
product or service?

Can price be increased without a significant loss in sales?
design
increase
consumer
CONJOINT ANALYSIS IN MIKE’S BIKES
The results of a conjoint analysis survey conducted on members of
each of the segments identified in the Erewhon bike market are
available to firms in the industry. The attributes tested were price,
quality, delivery time, availability/distribution, style, and technical
specifications.
A summary of the results is shown in the table below.
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The MiniMBA l Marketing
Segment
Sensitivity
Adventurer
Leisure
7.
Price
Advertising
PR
Quality
Distribution
Delivery Time
Low
Med
Med
High
Med
Low
High
Low
Med
Med
Low
High
Selecting Target Segments
The selection of target segments follows once the groundwork (the
marketing analysis) is complete. Selecting a target segment is an
important decision. The basis for this is long-term segment
profitability. In real life, strategic criteria (such as fit with parent
company aspirations, or a desire to build competency in a particular
market) may also need to be considered.
Target
Segment
Required
Attributes
Segment
Potential
Racers
Style not
important (20
units on the
Perceptual Map)
Excellent
technical spec
(80 units on the
Perceptual Map)
25,000 units
per year
Expected
Competitor
Activity
Medium
2 competitors
willing to
maintain
profit
Company
Competence
Medium
compared
with others.
Need to
invest in
machinery
and hire
skilled staff
Profitability
$2,000,000
based on
10% market
share
SELECTING TARGET SEGMENTS IN MIKE’S BIKES
The table shows the process that one could go through to determine
the profitability of a segment in Mike’s Bikes. The first step is to assess
what the segment requires and its total sales potential. Total sales
potential must be assessed in view of likely competitor activity and the
ability of the firm to compete. This assessment will lead to an estimate
of the most profitable segment for the firm in that competitive
environment. It may be wise to start with a table using textual
descriptions and include the numerical measures later, as this data is
often difficult and/or expensive to obtain.
8.
Developing the Marketing Mix
The next step is to determine the details or tactics for achieving the
desired position in each of the segments. This involves considering the
appropriate marketing mix - loosely called the “four Ps” (product,
price, place, and promotion). More recently the importance of
relationships (often called People and the “fifth P”) has been
introduced. Mike’s Bikes focuses on the first four of these.
Product is the bundle of physical product and intangible service
benefits provided to the consumer (expressed in terms of the attribute
scores, ie, ‘stylishness’ and ‘technical specifications’). Price is the
retail price charged to the consumer. Place refers to the type of
distribution channel or store used to distribute the product.
Promotion entails communicating the total product bundle to the
target segments, resulting in brand and product awareness, and
(ideally) sales. People refers to the importance of building the trust
relationship with the customer that will lead to brand loyalty and
repeat sales.
These tactics will all influence segment demand. They are examined in
turn in the sections which follow. Demand will also be influenced by
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The MiniMBA l Marketing
delivery and quality.
Operations decisions.
In Mike’s Bikes these are assumed to be
PRODUCT2
Consumers base their purchase decisions on the attributes of the
products that are available to them. The closer these attributes to
what they require, the more likely they are to buy.
To manage these attributes, the firm needs to measure actual product
attributes and relate these to the ideal attributes desired by each
market segment and modeled using the Perceptual Map. The product
may then be modified (if necessary) to suit the market. This is shown
in the diagram below.
Positioning Strategy is...
“the development of the attributes of the
product so that it matches the
requirements of the target market.”
Product
Attributes
Position of
Segment
Price
Promotion
Distribution
(Place)
People
Attributes
of Product
Copyright © 2001 - 2004 SymComm Limited. All rights reserved.
In Mike’s Bikes, we have assumed that the most important physical
attributes of a bike are Style/Design and level of Technical
Specification (including components, construction materials and
strength). The product’s performance on these attributes (ie, its
actual attributes) can be assessed through market research and
compared to the segment’s ideal requirements (ie, its ideal attributes)
to compare the distance between the two. The closer the distance, the
more suited the product is to the segment’s requirements.
2
Price, quality, distribution, delivery, and product awareness are excluded from the perceptual map.
In general the more appropriate each of these is, the more likely all segments are to buy the bike.
In contrast, there are often other attributes where “better” is different for different market
segments. Consider seat height for example. Kids’ bike requirements are quite different from other
market segments. A higher (or lower) bike seat is not better for everyone!
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The MiniMBA l Marketing
THE PRODUCT DECISION IN MIKE’S BIKES
In Mike’s Bikes, you are restricted to selling bikes only. You need to
make decisions about when and how new bike products will be
launched and existing products modified and deleted. This is done on
the Products Screen shown above.
NEW PRODUCTS
New products can be launched at any time. These products are based
on the physical characteristics of a completed Product Development
Project (sometimes called a New Product Development Project). New
products can be used to enter new segments of the market or to
attempt to dominate a current segment. In general, firms should be
wary of product proliferation (ie, of producing many different
products). This increases complexity and costs. It may also increase
factory lead times, resulting in poor delivery performance. A direct
effect of product proliferation is that more head office marketing staff
are required. Depending on your workforce effectiveness, you may
need one head office marketing staff member for each product you
launch.
PRODUCT MODIFICATION
Current products can be modified using a completed Product
Development Project. Modifications can be made for a number of
reasons:

To adapt the product to the changing needs of a segment

To improve an existing well known product so that it
appeals to new market segments

To re-engineer processes - retaining the product’s same
physical
characteristics
but
simplifying
production
requirements and lowering costs.
Bear in mind that consumers may not always react positively to such
modifications!
Where the firm holds obsolete stocks of finished goods for a product
that has since been modified, the obsolete stocks are automatically
dumped at prime cost (material plus labor costs).
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The MiniMBA l Marketing
See the Product Development Chapter for information on how to
develop new products.
PRODUCT DELETION
Products can be abandoned at any time if they prove no longer
consistent with a firm’s strategy. Where the firm holds inventories of
finished goods for deleted products these are dumped at prime cost.
PRICE
Price is usually a key determinant of demand.
Several pricing
strategies are listed below. Price to suit your strategy.

Mark-up Pricing:
and above costs.
The firm applies a fixed margin over

Target Return
return/margin.

Perceived-Value Pricing:
consumer is willing to pay”.

Going Rate Pricing: The firm prices at the price which is
being charged in the market.
Pricing:
The
firm
sets
a
specific
The firm prices at “what the
THE PRICE DECISION IN MIKE’S BIKES
Pricing can be determined in any way that is considered appropriate.
This decision can be made on the Products Screen for each individual
product, as shown above. A price decision must be made for each
product. These prices should take account of the price sensitivity of
consumers in your target segments and the prices of competing
products.
PROMOTION
Marketing communications (or promotion) is important in generating
product demand. Marketing communications can include advertising,
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The MiniMBA l Marketing
public relations, personal selling, direct marketing, Internet activities,
outdoor signage and many other tactics and techniques. The aim of
marketing communications is to create consumer awareness, product
and brand recognition, and intention to purchase.
Promotion Strategy is...
“The ways in which an organization
generates a positive perception of its
products. It usually consists of product
advertising, branding and public relations.”
Product
Attributes
Price
Promotion
Advertising
Distribution
(Place)
People
Public
Relations
Copyright © 2001 - 2004 SymComm Limited. All rights reserved.
Brand advertising and product advertising work together. For
example, Toyota’s brand advertising creates an image and
communicates brand values for the Toyota brand as a whole. This
brand covers all of Toyota’s product variants or models.
By
comparison, specific model or product advertising (eg, for the Corolla
and Corona models) informs the consumer about the features and
benefits of a particular model. Brand advertising, in effect, leverages
the effectiveness of product advertising.
In Mike’s Bikes, brand awareness, product awareness and the
influence of product public relations (PR) depend on current budget
and the carryover effect from previous periods. The effectiveness of
product advertising and PR depends on choosing media that match the
target market’s media consumption habits. Brand advertising increases
the effectiveness of product advertising and results in increased
product awareness.
AN EXAMPLE
Given the S-curve shown below what increase in TV viewers’
awareness will an expenditure of $2m on TV advertising achieve?
How much product awareness will there be if we assume that product
awareness last period was 10% but half of this is lost each period, all
our target consumers watch TV, and brand advertising is ignored?
SOLUTION
$2m will achieve an increase of 35% among TV viewers.
Last period awareness = 10%; loss for this period = 5%; total product
awareness for this period = 10% - 5% +35% = 40%.
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The MiniMBA l Marketing
Advertising Awareness Curve for TV
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
00
0
$1
,0
00
,0
00
$1
,2
50
,0
00
$1
,5
00
,0
00
$1
,7
50
,0
00
$2
,0
00
,0
00
$2
,2
50
,0
00
$2
,5
00
,0
00
00
0
$7
50
,
00
0
TV Advertising Expenditure
$5
00
,
$0
0%
$2
50
,
Awareness Increase in TV Watchers
Work a Simple Example
Copyright © 2001 - 2004 SymComm Limited. All rights reserved.
31
PROMOTION IN MIKE’S BIKES
There are three forms of promotion (or marketing communications) in
Mike’s Bikes:

Brand advertising

Product advertising

Product PR
BRAND ADVERTISING
Only one brand is permitted (the name of the manufacturer, ie, Real
Cool Cycles) and this contributes to the effect of any other product
advertising that is carried out.
A budget can be allocated to brand advertising (as shown). This
determines the effectiveness of the advertising. In the next period,
consumers “forget” the advertising to some extent, but any new brand
advertising adds cumulatively to what is left.
PRODUCT ADVERTISING
Analyzing the Erehwon bike market has revealed that there are three
media choices for advertising bikes– TV, newspapers and magazines.
In general, consumers in the Adventurer segment are relatively heavy
readers of magazines, while the Leisure segment tend to be relatively
heavy readers of newspapers.
Both segments watch television.
Newspaper advertising is about half as expensive as TV and magazine
advertising per person reached.
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As of 1998, Real Cool Cycles and MountainTop Cycles have
concentrated advertising for RockHopper bikes on television.
Newspapers will be utilized more if and when Leisure bikes are
released onto the market. A brief description of each medium is given
below.
Segment
TV Reach
Newspaper Reach Magazine Reach
Adventurer
50%
10%
60%
Leisure
60%
60%
20%

Television: Erehwon has only one national TV network.
Television is a good way of reaching most market
segments.

Newspaper: There is one main newspaper in Erehwon - a
monthly called the Erehwon Herald. An awareness curve
like the one shown earlier for TV is available for newspaper
and magazine advertising in the Mike’s Bikes Help.

Magazines: There is a variety of monthly magazines in
Erewhon. Magazines related to the bike market range from
a specialist racing bike magazine through general outdoor
adventure magazines to very general leisure magazines.
PRODUCT PUBLIC RELATIONS
Product public relations related to the bike market include product
reviews and press releases. The idea is that consumers will give more
weight to news and independent reviews than advertisements. The
Adventurers are more sensitive to this kind of product promotion (see
the Media Reach table above).
MAKING THE PROMOTION DECISION
The brand advertising expenditure decision can be found on the
Marketing Decisions tab of the Main Decision Screen.
The
resulting brand awareness applies to all the firm’s products.
Specific product-related media advertising and public relations are
budgeted for each product on the Product Decision Screen.
Advertising activity affects the awareness levels of the product. It
should be remembered that awareness takes time to build and will
decline over time as consumers “forget”. Advertising experts estimate
that an investment of around $2m is required to achieve initial
awareness levels of 25%-50%. Less is required to maintain these
levels.
In deciding the level of investment in advertising, it is
important to remember that certain segments are more responsive to
advertising than others. The investment includes money spent on
advertising research to develop advertising messages.
Product PR works in a similar way to product media advertising.
However each market segment’s sensitivity to advertising may be
different from its sensitivity to PR.
PLACE (DISTRIBUTION)
Distribution (place) relates to the ability of the firm to make products
accessible to its target segments. This is achieved through distribution
channels – in this case through retail outlets. The effectiveness of
distribution (and hence its impact on demand) is determined by the
shopping habits of the target market and the number of stores in the
required channels that carry the product.
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For example, if Adventurers are being targeted, then it is more
effective to have a greater number of sports stores and bike shops in
the distribution channel.
Distribution Logic
Marketing
Marketing
Strategy
Strategy
Product
Attributes
• Analysis
of Markets
• Analysis
of Markets
• Selection
of Target
Markets
• Selection
of Target
Markets
• Marketing
MixMix
• Marketing
• Control
• Ongoing Management
Price
Promotion
Distribution
Number of
Stores
Expected
Sales
Shopping
Habits
Retailer
Margin
Copyright © 2001 - 2004 SymComm Limited. All rights reserved.
Extra
Support
37
The number of stores persuaded to stock a firm’s products is
determined by margin offered, expected product sales, and extra
support provided.
DISTRIBUTION CHANNELS IN MIKE’S BIKES
Distributors carry a complete line of products. You will need to decide
on broad or narrow coverage (ie, many or few different channels), and
the intensity of distribution (ie, number of stores in each channel).
This will be influenced by the shopping habits of the market segments
you are targeting. Another small influence on your decision is the fact
that the greater the number of distributors, the higher the number of
head office marketing staff that you will need.
(A head office
marketing staff person will be required for approximately every
hundred stores stocking your products.)
The number of stores in the channel which decide to stock your
products will depend on the retail price, margin, unit sales history, and
extra support offered. You must specify what margin and what extra
support (eg, in terms of special promotions and discounts) you are
going to offer the retailers in each channel. Note that the retailer
margin decision refers to the percentage of the retail price that the
retailer keeps. So a percentage of 60% means that they keep 60% of
the sales revenue and give you the remaining 40%.
Maintaining existing distributors and acquiring new ones requires
considerable resources. Costs associated with distribution include:
hiring and training retailers, field sales representatives and head office
sales staff; providing promotional literature; organizing delivery and
ordering of products; following up complaints; collecting accounts.
Distribution
costs
vary
with
the
number
and
types
of
distributors/retailers used.
Analyzing the Erehwon bike market has revealed that the vendors of
bikes may be broken into two categories: Bike Shops and Department
Stores. In general, the Adventurer segment favors the specialty bike
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shops while the Leisure segment simply shops in the familiar
department stores. An analysis of the costs of supporting retail stores
in the two channels has revealed that the Bike Shops are more
expensive to support per store, but this is balanced by the fact that
there are many more Department Stores.
In 1998, the majority of bikes sold are sold through Bike Stores.
Department Stores would be expected to be deliver more sales when/if
Leisure bikes are released onto the market. A brief description of each
channel is given below.
BIKE SHOPS
The bike shop (often called ‘the bike boutique’) is a specialty store
dedicated to bikes and bike-related products. Store assistants are
trained bike specialists, able to tailor specific bikes to specific
customers. People unsure of which bike to buy will usually go to a
bike shop, especially if the bike is required for a specific purpose. Bike
shops stock an extensive range of different models, catering to all
types of purchasers. Bike shops generally stock bikes in the mid to
high price range and bikes they stock in common with the department
stores are often priced slightly higher than in the department stores.
They are thus perceived as the quality bike vendor (at the cost of
being perceived as the most expensive bike vendor). Bike shops rely
on their higher margin to gain a profit, so are less likely to discount
their stock. Their customers tend to be less price sensitive than those
of department stores.
DEPARTMENT STORES
Department stores (eg, chain retailers such as Wal-Mart) stock a wide
range of goods - from consumer durables (such as refrigerators and
televisions) to apparel and kitchenware. They often specialize in
budget or exclusive items.
Department stores appeal to people
wanting to complete their weekly shopping in one store. They are
increasingly being built in mall sites surrounded by smaller satellite
stores catering to other shopping requirements. The typical shopper
at a department store is out with his or her family on Saturday or
Sunday afternoon. Often they do not have a definite purchase in
mind, but in walking around may see something that appeals. The
busiest time of year for department stores is prior to Christmas, when
gifts are in everyone’s thoughts.
In terms of support, department stores seem to offer little support to
bike manufacturers. They do not have salespeople who are bike
experts to give the customers information, nor do they take part in
many of the promotions that the manufacturers propose. They
typically stock a wide range of mid-priced bikes, stocking competing
brands side-by-side.
SUMMARY
Number of Dealers
Annual cost to support each dealer
Bike Shops
Department Stores
120
$450
300
$200
The costs of distributing through each distribution channel are shown
in the table above. Other distribution costs not shown here are the
salaries of head office marketing staff, and any extra support that you
allocate to either of the distribution channels.
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Estimates of the shopping habits of the different segments in the
different distribution channels are also given for use in deciding on a
distribution strategy.
Adventurers
Leisure
Bike Shops
Department Stores
70%
25%
30%
75%
AN EXAMPLE
Assume you are targeting the Adventurer segment. Assume that 20%
of consumers prefer to purchase in department stores and 40% prefer
bike shops. Your margin means that 50% of department stores and
80% of bike shop stock your product. Roughly what coverage of the
Adventurer segment do you have?
SOLUTION
Approximate coverage of the Adventurer segment = (0.2 x 0.5) + (0.4
x 0.8) = 0.42%
MAKING THE DISTRIBUTION DECISION
The Distribution Channels Screen is shown below. This is where
you enter your decisions about distributing your products for the
coming year. Here you decide the importance of the different channels.
To allocate the number of stores for a particular channel, click on
either the Bike Shops or Department Stores Icon. A summary of
decisions for the selected distribution channel appears towards the
bottom of the screen.
Then click the Allocate Button and enter your decision in the
dialogue box that appears.
You must specify what margin and what extra support (eg, in terms of
special promotions and discounts) you are going to offer the retailers
in each channel. This is the margin the retailers keep - so don’t
increase it too much!
The number of stores in each channel which decide to stock your
products will depend on the retail price, margin, unit sales history, and
extra support offered.
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9.
Generating demand
Traditional economics
Demand = Alpha – (Beta x Price)
Demand vs Avg Price for Adventurer Segment 1996-1999
200,000
y = -82.144x + 195182
150,000
100,000
50,000
0
$0
$500
$1,000
$1,500
$2,000
Can extend to include product specs, awareness, PR,
distribution, quality, delivery
Copyright © 2001 - 2004 SymComm Limited. All rights reserved.
42
Arguably, the objective of marketing activity is to generate demand.
This idea overlaps heavily with economic theory. The ‘Traditional
economics’ diagram above shows market demand, based on average
price. The higher the average price, the lower the demand (ie, this is
an elastic demand curve, or one where the level of demand is
relatively sensitive to changes in price). It is assumed that the
relationship is linear for a realistic range of prices.
The formula for demand is given. Obviously this is simplistic: in reality
price is not the only determinant of demand. To enrich our model to
include other factors (eg, relative product quality, consumer
awareness), we have defined a variable labeled ‘Value For Money’
(VFM) and have adjusted the market demand model to include these
factors.
The logic we follow in modeling demand for the bike scenario is shown
in the diagram below entitled ‘Generating Demand for the Adventurer
Segment’.
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Generating Demand for the Adventurer
Segment
Awareness
Product Specs
PR Influence
Distribution
Price
Delivery
Quality
Value for Money
Product’s Segment Share
Segment Demand
Total Product Demand
Copyright © 2001 - 2004 SymComm Limited. All rights reserved.
41
The steps involved in the calculation are as follows:

Step One: calculate a VFM or segment attractiveness score
for each product, based on attributes of price, advertising,
PR influence, quality, distribution and product delivery;

Step Two: calculate segment share for each product,
achieved by comparing VFM scores for different products.
(Note that products from the same firm selling to the same
segment cannibalize each other.)

Step Three: calculate segment share-weighted indices for
average price, quality, distribution, etc;

Step Four: calculate segment demand (based on the
weighted average indices).
The higher the index, the
greater the segment demand generated;

Step Five: calculate product demand – share of segment
demand, determined by the ratios of the VFM indices;

Step Six: calculate total product demand - the sum of all
segment demands for the product.
10. Ongoing Management and Control
None of this is a ‘set and forget’ one-off exercise. The market changes
over time. There is a constant requirement for feedback, updating of
market data, and modifications to plans in response. Planning and
strategy need to take into account the actions of competitors, and the
improved understanding of the environment that comes from
feedback. Internal consistency between marketing, operations and
finance is also critical to success.
Some key reports that could be used to assess market changes are

Sales

Market share

Margins

Customer satisfaction surveys.
Important organizational decisions relate to the desired position or
strategic posture which the company wishes to take – whether as
market innovators, followers, best-price firm or differentiators. These
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decisions cannot be made by the marketing department in isolation
but must be consistent with other organizational functions, and
recognize both organizational and competitor capabilities.
11. An Example of a Good Strategy for Mike’s
Bikes Using the Marketing Function Only
There is no one “correct” way to maximize shareholder value in
Mike’s Bikes. Please bear this in mind when you read through
this model answer!
NOTES
We arrived at this model answer by making decisions in the Decision
Screen of only one of the functional areas of the Mike’s Bikes
environment: the Marketing Function. We did not alter the decision
screens of the Operations, Finance or Product Development Functions.
At the end of each subsequent chapter, we give a model answer that
we have achieved by altering not only the Marketing Function but also
the function discussed in that particular chapter and in previous
chapters. That is:

At the end of the Operations Chapter (Chapter 6), the
model answer reflects decisions in the Marketing and
Operations Functions.

At the end of the Finance Chapter (Chapter 7), the model
answer reflects decisions in the Marketing, Operations
and Finance Functions.

At the end of the Product Development Chapter (Chapter
8), the model answer reflects decisions in the Marketing,
Operations, Finance and Product Development
Functions.
We have provided these model answers for several reasons:

The answers demonstrate very clearly that you achieve the
best results when you take an integrated approach (ie,
when you use all the functional tools available to you, and
ensure that all your functional strategies are internally
consistent, consistent with one another and consistent with
your overall strategy).

The answer that we give at the end of Chapter 8 (ie, using
this integrated approach) is a “good” answer in the sense
that it achieves shareholder value in excess of $50. It
shows that it is possible to achieve shareholder value of
over $50 (for all you doubters!)

The commentary that we provide after each chapter may
give you some ideas about how you should proceed with
the work you’ve already done in the Mike’s Bikes
environment. You may be able to get a better result than
we have here!
STRATEGY
Marketing Strategy

Since we can’t change capacity (no Operations Function),
the strategy that we choose to take is to be a low volume
high margin manufacturer.

We will produce the Adventurer bike only.
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
We will invest heavily in promotion to convince our target
consumers that our bikes are worth paying extra for.
TACTICAL DECISIONS
Marketing Decisions
Pricing

Increase unit price from $1,700 to $2,100
Promotion

Increase branding from $100K to $500K

Increase media advertising from $800K to $1.5m for first
period, then scale back to $1m

Increase PR from $500K to $1.5m for first period, then
scale back to $1m
Distribution

We can't afford to offer large margins to attract lots of
stores. Leave the 50% margin unchanged at present.
RESULTS AFTER 5 YEARS
Sales 15K units, profit $3.4m, shareholder value approximately
$15.
12. Questions to Assist Learning
1. Write a draft marketing plan for the Mike’s Bikes
environment for the next 2 years (2-3 pages). You should
include the following issues and use bullet form.
a)
What are your target segments? Why?
b)
For each of your market segments, what are your objectives
for products, price, advertising, and distribution?
Where
appropriate, indicate how you will achieve these objectives.
c)
Look at your competition. What is their sales potential?
d)
Make sure that you think about consistency – of marketing
objectives, with the overall strategy, and with the operations
and finance strategies.
2. Construct an advertising and promotion strategy for the
Mike’s Bikes environment for the next 2 years. This should
consider the following.
a)
What segments are you aiming at?
b)
What do the consumers in these segments watch/read and
what types of promotion are appropriate?
c)
How much do these promotions cost?
d)
How much awareness do they generate per dollar of cost?
e)
What is your plan, how much will it cost and how much extra
demand will it generate?
f)
Is this consistent with the distribution, operations and finance
strategies?
3. Write a draft distribution strategy for the Mike’s Bikes
environment for the next 2 years. This should consider the
following.
a)
What segments are you aiming at?
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b)
Where do your consumers go to make their purchases?
c)
How much do these distribution channels cost?
d)
How much coverage do they provide per dollar of cost?
e)
What is your plan, how much will it cost and how much extra
demand will it generate?
f)
Is this consistent with the advertising, operations/production
and finance strategies?
4. Write a draft pricing strategy for the Mike’s Bikes
environment for the next 2 years. This should consider the
following.
a)
What segments are you aiming at?
b)
With what products?
c)
How sensitive are the segments to price?
d)
What type of pricing strategy are you going to adopt?
e)
How will you react to competition?
f)
Is this consistent with the advertising,
operations/production and finance strategies?
promotion,
5. When positioning products, what are three key issues?
6. What is the difference between branding and product
advertising and how would you decide the correct mix
between the two?
7. What is the purpose of distribution channels and how do you
decide on the appropriate mix?
8. Why is it vital to coordinate marketing and production and
how is this achieved?
13. Appendix – Generating Demand in Mike’s Bikes
EXAMPLE ONE
Assume that segment demand for Leisure is given by:
Segment Demand = alpha
average awareness index.
+ beta * average price index + beta *
The numbers for this are:
Segment Demand = 20,000 + 10,000 x average price index + 5,000 x
average awareness index.
If average price index = 0.6 and average awareness index = 0.2, what
is the demand from the segment?
Which factor (price or awareness) has more effect on demand and by
how much?
SOLUTION
Segment Demand = 20,000 + (10,000 x 0.6) + (5,000 x 0.2) =
27,000.
Because the beta for price is twice that for awareness, price has twice
as much effect on demand as awareness per unit change in index.
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EXAMPLE TWO
Assume that the total potential demand from the Leisure segment is
24,000 units.
Assume that there are two products that sell to the segment - Cruiser
1 and Cruiser 2.
If the Value for Money of Cruiser 1 is 10 and for Cruiser 2 is 20, how
much potential demand will each get?
SOLUTION
Potential demand for Cruiser 1 = 10/(10+20) x 24,000 = 8,000 units.
Potential demand for Cruiser 2 = 20/(10+20) x 24,000 = 16,000
units.
14. References
1. Hair, J., Anderson, R., Tatham, R., Black, W., Multivariate
Data Analysis with Readings (3rd Ed), Macmillan, 1992
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