CH-7-8 Analyzing Business Markets – Marketing Management: A South Asian Perspective : Chapter Notes

This Document Contains Chapters 7 to 8 Chapter 7 Analyzing Business Markets LEARNING OBJECTIVES In this chapter, we will address the following questions: What is the business market, and how does it differ from the consumer market? What buying situations do organizational buyers face? Who participates in the business-to-business buying process? How do business buyers make their decisions? How can companies build strong relationships with business customers? How do institutional buyers and government agencies do their buying? CHAPTER SUMMARY Organizational buying is the decision-making process by which formal organizations establish the need for purchased products and services, then identify, evaluate, and choose among alternative brands and suppliers. The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. Compared to consumer markets, business markets generally have fewer and larger buyers, a closer customer supplier relationship, and more geographically concentrated buyers. Demand in the business market is derived from demand in the consumer market and fluctuates with the business cycle. Nonetheless, the total demand for many business goods and services is quite price inelastic. Business marketers need to be aware of the role of professional purchasers and their influencers, the need for multiple sales calls, and the importance of direct purchasing, reciprocity, and leasing. The buying center is the decision-making unit of a buying organization. It consists of initiators, users, influencers, deciders, approvers, buyers, and gatekeepers. To influence these parties, marketers must be aware of environmental, organizational, interpersonal, and individual factors. The buying process consists of eight stages called buyphases: (1) problem recognition, (2) general need description, (3) product specification, (4) supplier search, (5) proposal solicitation, (6) supplier selection, (7) order-routine specification, and (8) performance review. Business marketers must form strong bonds and relationships with their customers and provide them added value. Some customers, however, may prefer a transactional relationship. Technology is aiding the development of strong business relationships. The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that provide goods and services to people in their care. Buyers for government organizations tend to require a great deal of paperwork from their vendors and to favor open bidding and domestic companies. Suppliers must be prepared to adapt their offers to the special needs and procedures found in institutional and government markets. OPENING THOUGHT Students unfamiliar with business and business operations will have a difficult time understanding the concept of organizational buying. The major differences between the consumer market and the B-to-B market lie in the complexity of the decision process and the amount of people involved in the final purchasing decision. Instructors can best serve their student audiences by incorporating guest speakers from the business community who are responsible for purchasing products and/or services to help students understand the complexity in the buying process for businesses. Salespeople, who sell to businesses, are also good resources to have as guest speakers when covering this chapter. Instructors can also use university situations or other common business examples to get across the concept of organizational buying to their students. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS At this point in the semester-long marketing project, no presentations are necessary unless the instructor has approved a business-to-business product or service. Students should compare and contrast the complexity of that buying process to the ones noted in Chapter 6—Analyzing Consumer Markets. How and where are the major points of differences between the two markets in their purchase intensions? Can a firm market its products to both the industrial and consumer markets with one strategy? Are there sufficient differences between markets for different products and strategies to be developed? Marketing Plan: Business-to-business marketers have to understand their markets and the behavior of members of the buying center in order to develop appropriate marketing plans. Get students to find out: What specific types of businesses appear to fit the business market definition for their product or service? What needs could their product or service address for these businesses? Who would participate in and influence the purchase of their product or service for use in these businesses? Which environmental, interpersonal, and individual influences are likely to be most important to business buyers of their product or service, and why? Report their findings and conclusions in a written marketing plan or type them into the Market Demographics and Target Markets sections of Marketing Plan Pro. ASSIGNMENTS Have each of the students read “Business brands: Same impact as consumer brands?” (http://www.marketingmo.com) and share their views about the importance of relationships in a B2B context. Contact your local Pearson sales representative and ask him/her to make a presentation to the class on how he/she sells to your college or university. In small groups (five students suggested as the maximum), have the students visit your college or university’s Central Purchasing or Procurement department (you may have to clear this with your administration before assigning). Have the students conduct interviews with purchasing personnel on how they buy, who is involved in a purchase decision, and what characteristics do the best salespeople who call on them share. Students should format their questions to the key concepts contained in this chapter. Student reports should also characterize the differences found between government or institutional buying, business-to-business buying, and consumer purchasing. To improve effectiveness and efficiency, business suppliers and customers are exploring different ways to manage their relationships. Have the students visit each of the company’s Web sites mentioned throughout the chapter. Which one(s) do the students feel most effectively and efficiently addresses the needs of the corporate buyer? Which Web sites do not? Why and what in their opinion is missing from the least effective Web sites? How can the firm do better in its execution? Have the students visit Thomson Medical Pte Ltd’s Web site (http://www.thomsonmedical.com/). In context to the major points of this chapter, have the students define how TM is addressing the needs of their hospital customers by the design of this Web site? Where and what is TM doing right, what is TM doing wrong, and where can TM improve? Small businesses have been described as the “lifeblood” of the economy. Students, who have after school jobs in small business, should be assigned to interview their employers, managers, or purchasing departments to understand how small businesses purchase goods and services. How many of the concepts in this chapter do small business owners actually employ (for example, is the purchasing habits of the student’s small business owner organized, how many decision makers are involved in purchasing, how important is the customer-supplier relationship to them, is their purchasing just transactional, etc.)? Students should prepare to present their findings to the class in either an oral or a written report. Students not employed should be prepared to question the presenting students as to their understanding of the “whys” for such actions. END-OF-CHAPTER SUPPORT MARKETING DEBATE—How Different Is Business-to-Business Marketing? Many business-to-business marketing executives lament the challenges of business-to business marketing, maintaining that many traditional marketing concepts and principles do not apply. For a number of reasons, they assert that selling products and services to a company is fundamentally different from selling to individuals. Others disagree, claiming that marketing theory is still valid and only involves some adaptation in the marketing tactics. Take a position: Business-to-business marketing requires a special, unique set of marketing concepts and principles versus Business-to-business marketing is really not that different and the basic marketing concepts and principles apply. Pro: Business-to business marketing requires a unique set of marketing concepts and principles versus consumer marketing. The special set of concepts and skills needed in business-to-business marketing include professional salespeople; products that meet specific and sometimes specially engineered needs of a set of a few customers; marketing promotional aspects that deemphasize price in exchange for services; delivery terms; special financing arrangements; and other traditional “non-marketing” considerations. Finally, the other major difference between consumer and business-to-business marketing usually involves the amount of people involved in the sale: from both the sellers firm and the purchasing firm. In consumer selling, the user is generally the purchaser. In the business-to-business, marketing both the selling firm and the buying firm includes members of other disciplines (engineering, transportation, warehousing, finance, and others) from the beginning of the process to the time of actual purchase. The addition of these people fosters strong ties between the two firms but also lengthens the time and complexity of the sale. Con: Business-to-business marketing does not really differ from the consumer market in one’s approach. The major differences between the two is not in “delivering value to the consumer” but in the implementation and time phase. Buyers still buy to “solve problems” and business-to-business marketing and consumer marketing still has to solve the buyers’ problems. Time and attention to detail may be extended for business-tobusiness marketers but the accepted marketing principles of price, place, promotion, and product still apply; it is just their implementation and application(s) that differ. MARKETING DISCUSSION—Applying B-to-C Concepts to B-to-B Consider some of the consumer behavior topics from Chapter 6. How might you apply them to business-to-business settings? For example, how might non-compensatory models of choice work? Suggested Response: From Chapter 6 we have learned that consumer behavior is influenced by cultural factors, social factors, and personal factors. These are individual considerations that apply to the business-to-business market as well as to the consumer market. The difference is that all of the members of the buying center will possess different sets of these considerations and that the business-to-business marketer must try to appeal to all of these simultaneously. In addition, there are four main psychological processes: motivation, perception, learning, and memory apply as well to the business-to-business market. Again, in business-to-business marketing, each member of the buying center will exhibit different degrees of each of these processes. Finally, in the business-to-business buying situation, problem recognition, information search, evaluation of alternatives, purchase decisions, and post-purchase behavior will differ from the consumer market. The difference(s) lie in the amount of time involved, the degree of research expended, the decision-maker’s role, and the evaluation of the product or service. In the business-to-business market, more attention is paid to information search, purchase decisions, the evaluation of alternatives, and the fact that the “user” may not be the final decision maker. In the business-to-business market, there are seven roles demonstrated by people within the company (initiators, users, influencers, deciders, approvers, buyers, and gatekeepers), each of which must be considered as a factor in the selling process. In the consumer market, many of these roles are included in the single role as buyer. Non-compensatory choice models and other “impartial” decision-making tools receive a greater degree of importance as the business-to-business buying center tries to remove personal choice options from the equation. In B-to-B settings, non-compensatory models of choice can apply by focusing on critical criteria such as product reliability and supplier reputation, where certain factors cannot be compensated for by other attributes. Business buyers often use these models to eliminate options that fail to meet essential requirements, similar to how consumers may discard products that don’t meet key criteria. Marketing Lesson: NEPTUNE ORIENT LINES Why was cost leadership strategy not appealing to the management of NOL in B-to-B marketing? Suggested Answer: If NOL adopted a cost leadership strategy then they would have to continually focus on lowering and controlling costs. In a B-to-B context, NOL would attract the price buyers, customers who are not loyal, but are looking for the lowest price. If another company figures out how to sell products for less than NOL, the latter would be in trouble. Knowing this, NOL focuses on service quality, operational excellence and innovation as a means to achieve competitive advantage. Cost leadership strategy wasn't appealing to NOL in B-to-B marketing because it risked compromising service quality and reliability, which are critical factors in the logistics and shipping industry where trust and efficiency are paramount. Would the strategy of striving for operational excellence appeal to NOL’s business customers? Why or why not? Suggested Answer: Yes. The benefits of operational excellence outweigh the costs customers have to bear in return for service innovation, improved transit times and capacity and customer service standards. Yes, striving for operational excellence would appeal to NOL's business customers because it emphasizes reliability, efficiency, and consistency in service delivery, which are crucial in the logistics and shipping industry to meet client expectations and maintain competitive advantage. Marketing Lesson: ACCENTURE What has Accenture done well to target its B-to-B audience? Suggested Answer: The company came up with the name Accenture which connoted accent of the future, retained the Ac of the original company and helped retain some of its former brand equity and the web URL. Accenture also helps by playing a role as a partner to aid execution of strategy. Accenture also see its differentiation as having the ability to provide both innovative ideas (strategy) and the expertise in IT to execute them well. Accenture has effectively utilized thought leadership content and personalized digital marketing strategies to engage B-to-B audiences, demonstrating industry expertise and addressing specific client challenges. Has Accenture done the right thing by dropping Tiger Woods as its spokesperson? Discuss the pros and cons of its decision. Suggested Answer: Student opinions will vary, but good students should note that “focus groups showed that consumers were too distracted by the scandal to focus on Accenture’s strategic message,” which is not something one wants happening to one’s brand. Yes, Accenture made the right decision by dropping Tiger Woods to maintain brand reputation amid his personal scandal, avoiding potential negative association; however, they lost a high-profile spokesperson known for excellence and global recognition, impacting visibility. DETAILED CHAPTER OUTLINE Business organizations do not only sell; they also buy vast quantities of raw materials, manufactured components, plant and equipment, supplies, and business services. According to the Census Bureau, there are roughly 6 million businesses with paid employees in the United States alone. To create and capture value, sellers need to understand these organizations’ needs, resources, policies, and buying procedures. Many principles of basic marketing also apply to business marketers. They need to embrace holistic marketing principles, such as building strong relationships with their customers, just like any marketer. But they also face some unique considerations in selling to other businesses. WHAT IS ORGANIZATIONAL BUYING? Webster and Wind define organizational buying as the decision-making process by which formal organizations establish the need for purchased products and services and identify, evaluate, and choose among alternative brands and suppliers. The Business Market versus the Consumer Market The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. More dollars and items are involved in sales to business buyers than to consumers. Business markets have several characteristics that contrast sharply with those of consumer markets: Fewer, larger buyers Close supplier-customer relationship 3) Professional purchasing Multiple buying influences Multiple sales calls Derived demand Inelastic demand Fluctuation demand Geographically concentrated buyers Direct purchasing Buying Situations The business buyer faces many decisions in making a purchase. How many depends on the complexity of the problem being solved, newness of the buying requirement, number of people involved, and time required. Three types of buying situations are the straight rebuy, modified rebuy, and new task. Straight rebuy is when the purchasing department reorders on a routine basis and chooses from suppliers on an “approved list.” Modified rebuy is when the buyer wants to change product specifications, prices, delivery requirements, or other terms. New task is when the purchaser buys a product or service for the first time. The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. New-task buying is the marketer’s greatest opportunity and challenge. The process passes through several stages: awareness, interest, evaluation, trial, and adoption. In the new-task situation, the buyer has to determine product specifications, price limits, delivery terms and times, service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier. This situation is the marketer’s greatest opportunity and challenge. Because of the complicated selling required, many companies use a missionary sales force consisting of their most effective salespeople for new-task situations. Once a customer has been acquired, in-suppliers are continually seeking ways to add value to their market offer to facilitate rebuys. Customers considering dropping six or seven figures on one transaction for bigticket goods and services want all the information they can get. One way to entice new buyers is to create a customer reference program in which satisfied existing customers act in concert with the company’s sales and marketing department by agreeing to serve as references. Business marketers are also recognizing the importance of their brand and how they must execute well in a number of areas to gain marketplace success. Systems Buying and Selling Many business buyers prefer to buy a total solution to a problem from one seller. Called systems buying, this practice originated with the government. It consists of: A) Prime contractors. The prime contractor would thus provide a turnkey solution, socalled because the buyer simply had to turn one key to get the job done. B) Second-tier contractors. One variant of systems selling is systems contracting, in which a single supplier provides the buyer with its entire requirement of MRO (maintenance, repair, operating) supplies. Systems selling is a key industrial marketing strategy in bidding to build large-scale industrial projects such as dams, steel factories, irrigation systems, sanitation systems, pipelines, utilities, and even new towns. Customers present potential suppliers with a list of project specifications and requirements. PARTICIPANTS IN THE BUSINESS BUYING PROCESS Purchasing agents are influential in straight-rebuy and modified-rebuy situations, whereas engineering personnel usually have a major influence in selecting product components, and purchasing agents dominate in selecting suppliers. The Buying Center Webster and Wind call the decision-making unit of a buying organization the buying center. It consists of “all those individuals and groups who participate in the purchasing decision-making process, who share some common goals and the risks arising from the decisions.” The buying center includes all members of the organization who play any of seven roles in the purchase decision process: Initiators—requests the product Users—will use the product Influencers—influences the buying decision Deciders—makes the decision of what to purchase Approvers—authorizes the proposal Buyers—have the formal authority to purchase Gatekeepers—have the power to prevent seller information from reaching members of the buying center Several people can occupy a given role such as user or influencer, and one person may play multiple roles. Buying Center Influences Buying centers usually include several participants with differing interests, authority, status, and persuasiveness. Each member of the buying center is likely to give priority to very different decision criteria. Business buyers also have personal motivations, perceptions, and preferences influenced by their: Age Income Education Job position Personality Attitudes toward risk Culture Individuals are motivated by their own needs and perceptions in an attempt to maximize the rewards. Personal needs “motivate” the behavior of individuals. Organizational needs “legitimate” the buying decision process and its outcomes. People are not buying “products;” they are buying solutions to two problems: 1) The organization’s economic and strategic problem. 2) Their own personal “problem” for individual achievement and reward. Targeting Firms and Buying Centers Successful business-to-business marketing requires that business marketers know which types of companies to focus on in their selling efforts, as well as who to concentrate on within the buying centers in those organizations. TARGETING FIRMS As discussed in Chapter 8, business marketers may divide the marketplace in many different ways to decide on the types of firms to which they will sell. Targeting Within the Business Center To target their efforts properly, business marketers have to figure out: Who are the major decision participants? What decisions do they influence? What is their level of influence? What evaluation criteria do they use? Small sellers concentrate on reaching the key buying influencers. Larger sellers go for multilevel in-depth selling to reach as many participants as possible. Business marketers must periodically review their assumptions about buying center participants. THE PURCHASING/PROCUREMENT PROCESS Business buyers seek to obtain the highest benefit package (economic, technical, services, and social) in relation to a market offering’s costs. A business buyer’s incentive to purchase will be a function of the difference between perceived benefits and perceived costs. The marketer’s task is to construct a profitable offering that delivers superior customer value to the target buyers. Business marketers must therefore ensure that customers fully appreciate how the firm’s offerings are different and better. Framing occurs when customers are given a perspective or point of view that allows the firm to “put its best foot forward.” Framing can be as simple as making sure customers realize all the benefits or cost savings afforded by the firm’s offerings, or becoming more involved and influential in the thought process behind how customers view the economics of purchasing, owning, using and disposing product offerings. Framing requires understanding how business customers currently think of and choose among products and services, and then determining how they should ideally think and choose. Supplier diversity is a benefit that may not have a price tag but that business buyers overlook at their risk. A diverse supplier base is a business imperative, especially in Asia. STAGES IN THE BUYING PROCESS Robinson and Associates have identified eight stages and called them buyphases. The stages are shown in Table 7.1. This model is called the buygrid framework. Problem recognition General need description Product specification Supplier search Proposal solicitation Supplier selection Order-routine specification Performance review PROBLEM RECOGNITION The buying process begins when someone in the company recognizes a problem or need. The recognition can be triggered by internal or external stimuli. GENERAL NEED DESCRIPTION AND PRODUCT SPECIFICATION Next, the buyer determines the needed item’s general characteristics and required quantity. The buying organization now develops the item’s technical specifications. Product Value Analysis (PVA) is an approach to cost reduction in which components are studied to determine if they can be redesigned or standardized or made by cheaper methods of production. SUPPLIER SEARCH The buyer next tries to identify the most appropriate suppliers through trade directories, contacts with other companies, trade advertisements, trade shows, and the Internet. Companies that purchase over the Internet are utilizing electronic marketplaces in several forms: Catalog sites Vertical markets “Pure Play” auction sites Spot or (exchange) markets Private exchanges Barter markets Buying alliances Online buying offers several advantages: Shaves transaction costs Reduces time between order and delivery Consolidates purchasing systems Forges closer relationships On the downside, online ordering may: A) Erode supplier-buyer loyalty. B) Create potential security problems. Marketing Insight: The Asian B2b Environment Companies building B2B marketplaces in Asia have to address and adapt to the Asian business environment: Manufacturing dominates Less efficient supply chains Less well-developed infrastructure Smaller markets E-Procurement Web sites are organized around two types of e-hubs: vertical hubs centered on industries and functional hubs. In addition to using these Web sites, companies can do e-procurement in other ways: Set up direct extranet links to major suppliers Form buying alliances Set up company buying sites Lead Generation The supplier’s task is to get listed in major online catalogs or services, develop a strong advertising and promotion program, and build a good reputation in the marketplace. This often means creating a well-designed and easy-to-use Web site. Suppliers that lack the required production capacity or suffer from a poor reputation will be rejected. Those who qualify may be visited by the buyer’s agents, who will examine the suppliers’ manufacturing facilities and meet their personnel. After evaluating each company, the buyer will end up with a shortlist of qualified suppliers. PROPOSAL SOLICITATION The buyer next invites qualified suppliers to submit proposals. If the item is complex or expensive, the proposal will be written and detailed. Business marketers must be skilled in researching, writing, and presenting proposals. SUPPLIER SELECTION Before selecting a supplier, the buying center will specify and rank desired supplier attributes, often using a supplier-evaluation model such as the one shown in Table 7.2. Marketing Memo: Developing Compelling Customer Value Propositions States that to command price premiums in competitive B-to-B markets, firms must create compelling customer value propositions. Refer to list of the top 8 ways to research the customer. Overcoming Price Pressures The buying center may attempt to negotiate with preferred suppliers for better prices and terms before making the final selection. Despite moves toward strategic sourcing, partnering, and participation in crossfunctional teams, buyers still spend a large chunk of their time haggling suppliers on price. Marketers can counter request for a lower price in a number of ways. “total cost of ownership” “life-cycle cost” They can also cite the value of the services the buyer now receives, especially if those services are superior to those offered by competitors. Number of Suppliers Companies are increasing reducing the number of suppliers in order to cut costs. These companies want their chosen suppliers to be responsible for a larger component system, they want them to achieve continuous quality and performance improvement, and at the same time they want them to lower prices each year by a given percentage. They expect their suppliers to work closely with them during product development, and they value their suggestions. There is even a trend toward single sourcing, though companies that use multiple sources often cite the threat of a labor strike as the biggest deterrent to single sourcing. ORDER-ROUTINE SPECIFICATIONS After selecting suppliers, the buyer negotiates the final order, listing the technical specifications, the quantity needed, the expected time of delivery, return policies, warranties, and so on. The lessee gains a number of advantages: the latest products, better service, the conservation of capital, and some tax advantages. The lessor often ends up with a larger net income and the chance to sell to customers that could not afford outright purchase. The lessor often ends up with a larger net income and the chance to sell to customers who could not afford outright purchase. Buyers are moving toward blanket contracts rather than periodic purchase orders for maintenance, repair, and operating items. A blanket contract establishes a long-term relationship in which the supplier promises to resupply the buyer as needed, at agreed-upon prices, over a specified period of time. Because the stock is held by the seller, blanket contracts are sometimes called stockless purchase plans. Some companies go further and shift the ordering responsibility to their suppliers in systems called vendor managed inventory. These suppliers are privy to the customer’s inventory levels and take responsibility to replenish it automatically through continuous replenishment programs. PERFORMANCE REVIEW The buyer periodically reviews the performance of the chosen supplier(s). Many companies have set up incentive systems to reward purchasing managers for good buying performance, in much the same way sales personnel receive bonuses for good selling performance. MANAGING BUSINESS-TO-BUSINESS CUSTOMER RELATIONSHIPS To improve effectiveness and efficiency, business suppliers and customers are exploring different ways to manage their relationships. Closer relationships are driven in part by supply chain management, early supplier involvement, and purchasing alliances. Cultivating the right relationships with business is paramount with any holistic marketing program. “Marketing Insight: Rules of Social and Business Etiquette” shows how business relationships are handled in Asia. The Benefits of Vertical Coordination Much research has advocated greater vertical coordination between buying partners and sellers, so they can transcend merely transacting and instead engage in activities that create more value for both parties. Marketing Insight: Establishing Corporate Trust and Credibility Corporate credibility refers to the extent to which customers believe that a firm can design and deliver products and services that satisfy their needs and wants. It reflects the supplier’s reputation in the marketplace and is the foundation for a strong relationship. Corporate credibility depends on three factors: Corporate expertise—The extent to which a company is seen as able to make and sell products or conduct services. Corporate trustworthiness—The extent to which a company is seen as motivated to be honest, dependable, and sensitive to customer needs. Corporate likability—The extent to which a company is seen as likable, attractive, prestigious, dynamic, etc. Research has found that buyer-supplier relationships differed according to four factors: availability of alternatives; importance of supply; complexity of supply; and supply market dynamism. Based on these four factors, they classified buyer-supplier relationships into eight different categories: Basic buying and selling Bare bones Contractual transaction Customer supply Cooperative systems Collaborative Mutually adaptive Customer is king Business Relationships: Risks and Opportunism Researchers have noted that establishing a customer-supplier relationship creates tension between safeguarding (ensuring predictable solutions) and adaptation (allowing for flexibility for unanticipated events). Specific investments are those expenditures tailored to a particular company and value chain partner. Specific investments also entail considerable risk to both customer and supplier. Opportunism is “some form of cheating or undersupply relative to an implicit or explicit contract.” Opportunism is a concern because firms must devote resources to control and monitoring. The presence of a significant future time horizon and/or strong solidarity norms typically causes customers and suppliers to strive for joint benefits. New Technology and Business Customers Top firms are comfortable using technology to improve the way they do business with their business-to-business customers. RELATIONSHIP MARKETING IN THE KEIRETSU AND CHAEBOL One of the criteria that defines these industrial groups is that their members buy and sell among each other, with transactions often brokered by the trading company in the group. In general, the family-owned chaebol is smaller (in terms of sales, workforce, and overseas branches) and more tightly integrated than the keiretsu. However, as they face similar issues, the keiretsu is used as our expository vehicle. More specifically, the production keiretsu will be examined as it sets the most relevant context for B2B relationship marketing. The production keiretsu is characterized by the vertical integration of manufacturers and their suppliers. INSTITUTIONAL AND GOVERNMENT MARKETS The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that must provide goods and services to people in their care. Many of these organizations are characterized by low budgets and captive clienteles. In most countries, government organizations are a major buyer of goods and services. Government purchases have also been marked by kickbacks and bribery in some Asian countries (see “Marketing Insight: Government Procurement in Korea” for an example). Because their spending decisions are subject to public review, government organizations require considerable paperwork from suppliers, who often complain about bureaucracy, regulations, decision-making delays, and frequent shifts in procurement staff. However, being on good terms with government officials alone may no longer suffice, even in Asia. As China shifts from a low-cost manufacturing center to an innovative market economy, foreign companies will need to develop strategic and sustainable approaches to corporate-government relationship management, beyond that of personal relationships. China’s unique business situation calls for adherence to a few principles: Interact with all levels of government in China. Develop relations with the government through organizations such as foreign enterprise associations, social organizations, and domestic industry associations. Personal relationship or guanxi is not enough in forging good relations with the government. There is no one-size-fits-all solution. Business in China should be conducted by placing the operations in the hands of someone who understands Chinese issues and is familiar with government officials and structures. Chapter 8 Identifying Market Segments and Targets LEARNING OBJECTIVES In this chapter, we will address the following questions: What are the different levels of market segmentation? In what ways can a company divide a market into segments? What are the requirements for effective segmentation? How should business markets be segmented? How should a company choose the most attractive target markets? CHAPTER SUMMARY Target marketing includes three activities: market segmentation, market targeting, and market positioning. Market segments are large, identifiable groups within a market. Two bases for segmenting consumer markets are consumer characteristics and consumer responses. The major segmentation variables for consumer markets are geographic, demographic, psychographic, and behavioral. Marketers use them singly or in combination. Business marketers use all these variables along with operating variables, purchasing approaches, and situational factors. To be useful, market segments must be measurable, substantial, accessible, differentiable, and actionable. We can target markets at four main levels: mass, multiple segments, single (or niche) segment, and individuals. A mass market targeting approach is adopted only by the biggest companies. Many companies target multiple segments defined in various ways such as various demographic groups who seek the same product benefit. A niche is a more narrowly defined group. Globalization and the Internet have made niche marketing more feasible to many. More companies now practice individual and mass customization. The future is likely to see more individual consumers take the initiative in designing products and brands. Marketers must choose target markets in a socially responsible manner at all times. OPENING THOUGHT The first challenges presented in this chapter are the concepts of market segmentation and the segmentation processes used by marketing firms. Students may have difficulty understanding the various steps of the segmentation process as well as differentiating between target markets and market positioning. The instructor is urged to use personal examples of target markets—the differences between the instructor’s age cohort and that of his/her students—for example in illustrating the different markets. Second, the concepts of consumer characteristics and responses may be new to many students as it applies across different age groups and different consumers. Students who have little contact with other people outside their sphere of influence may have a hard time realizing that other consumers hold differing views and have different usages for products and services. To help students understand the degree of sophistication used by marketers, show examples of how many firms provide differing products to different consumers. Toyota, for example offers the Toyota line of cars and the Lexus family of cars. Both of these brands can be used to illustrate product differentiation and target marketing. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS Students should turn in their market segmentation segment of their semester-long new product or service report. Students should select a product or service that they are familiar with, such as jeans, computers, or mp3 players. Once these items are selected, the students must undertake research into the specific items: target market and market segmentation. Student reports should contain information as to: How large is the target market, what is the future growth potential of this target market, how do/does the marketer reach this target market and so on? The second section of this project is for the students to “re-position” this product to another market segment. For example, if the students select mp3 players as their product of choice, and confirm that the target market for this is Gen Y, then the students should define how the manufacturers of mp3 players would attempt to re-position the product to attract the baby boomer generation to increase their purchases of mp3 players. Market segmentation is an important part of any marketing plan. It is the first step in the STP process that precedes any marketing strategy: segmentation, targeting, and positioning. The purpose of STP is to identify and describe distinct market segments, target-specific segments, and then pinpoint the differentiating benefits to being stressed in marketing. Get students to look at the SWOT Analysis, Market Description, and Competitive Review sections and then answer: Which variables should they use to segment consumer markets? Which variables should they use to segment business markets? How should they evaluate the attractiveness of each identified segment? Should they pursue full market coverage, market specialization, product specialization, selective specialization, or single-segment concentration? Why? Report their conclusions in a written marketing plan or enter them in the Market Demographics and Target Markets sections of Marketing Plan Pro. They should also note any additional research in the Marketing Research Section of Marketing Plan Pro. ASSIGNMENTS The magnitude and wealth of older consumers should be important to many different marketers. Senior consumers, those 65 and older, are expected to spend $1.5 trillion annually within the Asia-Pacific region. This segment is growing rapidly in some Asian countries. In small groups, have the students detail the demographic information on this group in the Asia-Pacific region (ages, buying power, perception of themselves, etc.) and suggest some key marketing opportunities mined from this information. For example, if seniors often make buying decisions based on lifestyle and not age, as the vignette mentions, does this information present marketing opportunities for such industries as travel, bio-medical industries, at-home exercise equipment, and cars? If so, who is going to be affected and to what extent? Student answers should contain detailed demographic information about this target market and should draw a connection between what the information says and what is the potential for marketers. The success of China’s one-child policy and the fact that more of China’s increasingly well off are choosing not to have children, are producing one of the most rapidly aging societies ever. Assuming that this is true, either in small groups or individually, ask the students to comment on how this demographic shift will change the segmentation in: a) the supermarket industry, b) the fast-food industry, and c) the casual dining industry. Student answers should include key demographic and lifestyle facts and figures about this market and its consumers. Figure 8.1 outlines the major VALS® segmentation (www.sric-bi.com). Students are asked to characterize either themselves, family members, or others and place them in one of these groups. How closely does the person the student selected, “fit” the profile? If so, can the marketer rely on these characterizations in mapping out marketing plans? Are there major differences? If major differences exist, what impact does this have on marketers’ developing marketing plans? Effective segmentation criteria are necessary for target market identification. Market segments must be measurable, substantial, accessible, differentiable, and actionable. However, not all segmentation schemes are useful—the text uses table salt buyers for example. Students are to provide three examples of those products or services in which: segmentation criteria are not necessary and three examples where segmentation criteria are an absolute necessity. Students are to exchange their findings and explain these differences. Additional discussion (or assignment) could be to have the students devise a segmentation strategy for the products or services that they found not currently, where segmentation criteria are necessary. In other words, to “create” a segmentation distinction for—“table salt”! END-OF-CHAPTER SUPPORT MARKETING DEBATE—Is Mass Marketing Dead? With marketers increasingly adopting more and more refined market segmentation schemes—fueled by the Internet and other customization efforts—some critics claim that mass marketing is dead. Others counter that there will always be room for large brands that employ marketing programs targeting the mass market. Take a position: ‘Mass marketing is dead’ versus ‘Mass marketing is still a viable way to build a profitable brand’. Pro: People are consumers and people have a number of basic personal and societal needs that transcends individuality. Certain basic human physical needs (food, clothing, and shelter, for example) can be best met through mass marketing. In addition, consumers desire low prices and functionality in some of their basic products and services. Mass marketing allows the firm to foster the lowest price through economies of production, distribution, and marketing. Additionally, people like to have their daily life remain uncomplicated; that is best served through mass produced products. Asking the consumer to make too many choices can backfire on marketers as it can overly complicate and stress consumers—for example, the design of a new home can be both a rewarding and stressful experience; the intended owner(s) is(are) asked to make literally hundreds of decisions about size, floor plans, colors, and options throughout the process. Not complicating a consumer’s life, through mass production and mass marketing of products can create a viable marketing niche for companies. Con: People are consumers and with the plethora of product and service choices available to solve their problems today, a firm must produce individual and customized products to compete. Basic human needs and wants can be delivered to the consumer by a wide range of choices. Technology has given the consumer the power and ability to interact with manufacturers in producing the exact product, with the exact features, and at the target price desired. Consumers are better educated and better informed than previous generations. Consumers are also more sophisticated than ever before. These increases in information, technology, and sophistication are causing firms to respond to the consumers’ wishes for individuality. Accepting the concept of “individuality” in the production of goods and services is the only option for many firms. Individuality and the service that that concept demands can lead to a “supplier– consumer” relationship that can and will build strong brand preferences. Those firms who choose not to compete or fail to compete in these arenas run the risk of falling behind competition and in experiencing the subsequent losses in market share and profits. MARKETING DISCUSSION—Descriptive Versus Behavioral Market Segmentation Schemes Think of various product categories. How would you classify yourself in terms of the various segmentation schemes? How would marketing be more or less effective for you depending on the segment involved? How would you contrast demographic versus behavioral segment schemes? Which ones do you think would be most effective for marketers trying to sell to you? Suggested Response: Each student’s answer will vary depending upon the product chosen. However, all answers should contain some of the following terms. Niche markets Local marketing Customerization marketing Geographic segmentation Age and life-cycle stage Life stage Gender Income Generation Social class Psychographic segments (VALS) Behavioral variables Usage rates Buyer-readiness stages Loyalty status In various product categories, I might be classified demographically by age and income, or behaviorally by purchase frequency and brand loyalty. Marketing is more effective when it aligns with behavioral segments, as it targets specific purchasing habits and preferences. Behavioral segmentation often provides deeper insights into consumer motivations compared to demographic schemes, which are broader and less dynamic. Marketing Lesson: HSBC What are the risks and benefits of HSBC’s positioning itself as the World’s Local Bank? Suggested Answer: Successful target marketing includes segmentation, targeting, and market positioning well. HSBC positioning as the “world’s local bank” requires HSBC to be very accurate and definitive in its execution of these three activities across all of the world’s countries, a huge undertaking. HSBC's positioning as the "World’s Local Bank" offers benefits like appealing to global clients seeking personalized, local expertise while leveraging its international presence. However, risks include potential challenges in balancing global consistency with local customization and the complexity of managing diverse market expectations and regulatory environments. Who is HSBC’s target group? Suggested Answer: HSBC targets different people and communities from all over the world, catering its offerings according to the needs of individual markets, “blending local knowledge with a worldwide operating platform.” HSBC’s target group includes affluent individuals, multinational corporations, and businesses with international operations or aspirations. They focus on clients seeking comprehensive global financial services and local market expertise. Does HSBC’s most recent campaign resonate with its target audience? Why or why not? Suggested Answer: Students’ answers will vary. Good students will comment on how this most recent campaign embraces the notion of multiple viewpoints and different interpretations across countries and peoples. Also, according to the note, this strategy is stated as “It encapsulates our global outlook that acknowledges and respects that people value things in very different ways.” HSBC’s most recent campaign resonates with its target audience by emphasizing global connectivity and local expertise, aligning with the needs of multinational clients. However, its effectiveness can vary based on how well it addresses specific regional nuances and the evolving expectations of its diverse clientele. Marketing Lesson: FULLA DOLLS: THE ALTERNATIVE BARBIE What are the pros and cons of Fulla doll’s selective target marketing? Suggested Answer: Student answers will vary as to the pros and cons of Fulla doll’s selective target marketing. Fulla doll is associated with Islamic values and selectively targets the Muslim consumer segment. The Fulla doll’s lifestyle and appearance are its advantage and make it an immediate and logical choice for Muslim girls worldwide. At the same time, its lifestyle and positioning limits its appeal to the Muslim consumer segment, while making it unappealing to the rest of the global consumer market. Pros: Selective target marketing allows Fulla to cater specifically to Muslim girls, meeting their cultural and religious preferences effectively. Cons: It may limit market reach outside Muslim-majority regions and potential growth opportunities among diverse customer segments. How can Fulla doll expand its sales? Is its segmentation strategy too selective? Why or why not? Suggested Answer: Fulla doll could expand its sales by representing “good values” instead of Islamic values in countries where the majority of consumers are non-Muslims, this would make the doll more relatable. Students’ answers will vary in terms of whether its segmentation strategy is too selective. Contrast students’ various responses and justifications as both “Yes” and “No” opinions may be valid. Fulla can expand sales by diversifying its product range to appeal to broader cultural audiences while maintaining its core Muslim-centric values. Its segmentation strategy is selective but strategic, focusing on a niche market that appreciates cultural authenticity and religious sensitivity, which could foster brand loyalty and differentiation. DETAILED CHAPTER OUTLINE Companies cannot connect with all customers in large, broad, or diverse markets. But they can divide such markets into groups of consumers or segments with distinct needs and wants. A company then needs to identify which market segments it can serve effectively. This decision requires a keen understanding of consumer behavior and careful strategic thinking. To develop the best marketing plans, managers need to understand what makes each segment unique and different. To compete more effectively, many companies are now embracing target marketing. Effective target marketing requires that marketers: Identify and profile distinct groups of buyers who differ in their needs and wants (market segmentation). Select one or more market segments to enter (market targeting). For each target market, establish and communicate the distinctive benefit(s) of the company’s market offering (market positioning). BASES FOR SEGMENTING CONSUMER MARKETS Market segmentation divides a market into well-defined groups. A market segment consists of a group of customers who share a similar set of needs and wants. The marketer’s task is to identify the appropriate number and nature of market segments and decide which one(s) to target. Two broad groups of variables are used to segment consumer markets. Some researchers try to form segments by looking at descriptive characteristics: geographic, demographic, psychographic, and behavioral. Then they examine whether these customer segments exhibit different needs or product responses. The major segmentation variables—geographic, demographic, psychographic, and behavioral segmentation—are summarized in Table 8.1. GEOGRAPHIC SEGMENTATION Geographic segmentation calls for dividing the market into different geographical units such as nations, states, regions, counties, cities, or neighborhoods. The company can operate in one or a few areas, or operate in all but pay attention to local variations. In that way, it can tailor marketing programs to the needs and wants of local customer groups in trading areas, neighborhoods, and even individual stores. In a growing trend called grassroots marketing, such activities concentrate on getting as close and personally relevant to individual customers as possible. More and more, regional marketing means marketing right down to a specific district. By mapping the densest areas, the retailer can resort to customer cloning, assuming that the best prospects live where most of his customers come from. Some approaches combine geographic data with demographic data to yield even richer descriptions of consumers and neighborhoods. Called geoclustering, it captures the increasing diversity of the population. DEMOGRAPHIC SEGMENTATION In demographic segmentation, we divide the market by variables such as age, family size, family life cycle, gender, income, occupation, education, religion, race, generation, nationality, and social class. Consumer needs, wants, usage rates, and product and brand preferences are often associated with demographic variables. Demographic variables are easy to measure. Age and Life-Cycle Stage Consumer wants and abilities change with age. Nevertheless, age and life cycle can be tricky variables. The target market for some products may be the psychologically young. Life Stage Persons in the same part of the life cycle may differ in their life stage. Life stage defines a person’s major concern. These life stages present opportunities for marketers who can help people cope with their major concerns. Gender Men and women have different attitudes and behave differently, based partly on genetic makeup and partly on socialization. Some traditionally more male-orientated markets, are beginning to recognize gender segmentation, changing how they design and sell their products. Income Income segmentation is a long-standing practice in product and service categories. Increasingly, companies are finding their markets are hourglass shaped as middle-market consumers migrate toward both discount and premium products. Marketing Insight: Trading Up, Down, and Over A new pattern in consumer behavior has emerged in recent years: “New Luxury” and in order to trade up to these brands that offer emotional benefits, consumers often “trade down” by shopping at discounters. Generation Each generation or cohort is profoundly influenced by the times in which it grows up. Demographers call these groups cohorts. They share similar outlooks and values. Marketers often advertise to a cohort by using the icons and images prominent in its experiences. Another generation group of interest to marketers is the Gen Y. Because Gen Y members are often turned off by overt branding practices and “hard sell,” marketers use different approaches to reach and persuade them. How about China’s Gen Y? (Refer to textbook p. 270) PSYCHOGRAPHIC SEGMENTATION Psychographics is the science of using psychology and demographics to better understand consumers. In psychographic segmentation, buyers are divided into different groups on the basis of psychological/personality traits, lifestyle, or values. One of the most popular commercially available classification systems is Strategic Business Insights’ VALS framework. The segmentation system is based on responses to a questionnaire featuring four demographic and 35 attitudinal questions (see Figure 8.1). The major tendencies of the four groups with high resources are: Innovators Thinkers Achievers Experiencers The major tendencies of the four groups with lower resources are: Believers Strivers Makers Strugglers The Japanese version of VALS (Japan-VALSTM) employs two key dimensions: life orientation (traditional ways, occupations, innovation, and self-expression) and attitudes to social change (sustaining, pragmatic, adapting, and innovating). Behavioral Segmentation In behavioral segmentation, marketers divide buyers into groups on the basis of their knowledge of, attitude toward, use of, or response to a product. Needs and Benefits Benefits: Not everyone who buys a product has the same needs or wants the same benefits from it. Needs-based or benefit-based segmentation is a widely used approach because it identifies distinct market segments with clear marketing implications. Decision Roles It is easy to identify the buyer for many products. People play five roles in a buying decision: Initiator, Influencer, Decider, Buyer, and User. User and Usage-Related Variables Many marketers believe variables related to various aspects of users or their usage— occasions, user status, usage rate, buyer-readiness stage, and loyalty status—are the best starting points for constructing market segments. Occasions User Status Usage Rate Buyer-Readiness Stage Loyalty Status Hard-core loyals B) Split loyals Shifting loyals Switchers Attitudes enthusiastic positive indifferent negative hostile Multiple bases. Figure 8.3 depicts one possible way to break down a target market by various behavioral segmentation bases. BASIS FOR SEGMENTING BUSINESS MARKETS Business markets can be segmented with some of the same variables used in consumer market segmentation, such as geography, benefits sought, and usage rate, but business marketers also use other variables. Thomas Bonoma and Benson Shapiro proposed segmenting the business market with the variables shown in Table 8.2. Within a given target market industry and customer size, a company can segment further by purchase criteria. Business marketers generally identify segments through a sequential process. The company first undertook macrosegmentation. It looked at which end-use market to serve: automobile, residential, or beverage containers. It chose the residential market, and it needed to determine the most attractive product application: semifinished material, building components, or aluminum mobile homes. Deciding to focus on building components, it considered the best customer size and chose large customers. The second stage consisted of microsegmentation. The company distinguished among customers buying on price, service, or quality. Because it had a highservice profile, the firm decided to concentrate on the service-motivated segment of the market. Business-to-business marketing experts Anderson and Narus have urged marketers to present flexible market offerings to all members of a segment. A flexible market offering consists of two parts: a naked solution containing the product and service elements that all segment members value, and discretionary options that some segment members value. Each option might carry an additional charge. MARKET TARGETING Once a firm has identified its market-segment opportunities, it must decide how many and which ones to target. This has led some researchers to advocate a needs-based market segmentation approach. Roger Best proposed the seven-step approach shown in Table 8.3. Effective Segmentation Criteria To be useful, market segments must rate favorably on five key criteria: Measurable Substantial Accessible Differentiable Actionable Michael Porter has identified five forces that determine the intrinsic long-run attractiveness of a market or market segment: industry competitors, potential entrants, substitutes, buyers, and suppliers. The threats these forces pose are as follows: Threat of intense segment rivalry Threat of new entrants Threat of substitute products Threat of buyers’ growing bargaining power Threat of suppliers’ growing bargaining power Evaluating and Selecting the Market Segments In evaluating different market segments, the firm must look at two factors: The segment’s overall attractiveness and the company’s objectives and resources. Full market coverage: The firm attempts to serve all customer groups with all the products they might need. In undifferentiated marketing, the firm ignores segment differences and goes after the whole market with one offer. In differentiated marketing, the firm operates in several market segments and designs different products for each segment. Marketing Insight: Segmentation Strategy for China McKinsey offers four important tips when designing a city cluster strategy in China (Refer to p. 282). Multiple Segment Specialization With selective specialization, a firm selects a subset of all the possible segments, each objectively attractive and appropriate. There may be little or no synergy among the segments, but each promises to be a moneymaker. Keeping synergies in mind, companies can try to operate in supersegments rather than in isolated segments. A supersegment is a set of segments sharing some exploitable similarity. With product specialization, the firm sells a certain product to several different market segments. A microscope manufacturer, for instance, sells to university, government, and commercial laboratories, making different instruments for each and building a strong reputation in the specific product area. The downside/risk is that the product may be supplanted by an entirely new technology. With market specialization, the firm concentrates on serving many needs of a particular customer group, such as by selling an assortment of products only to university laboratories. The firm gains a strong reputation among this customer group and becomes a channel for additional products its members can use. The downside/risk is that the customer group may suffer budget cuts or shrink in size. Single-Segment Concentration With single-segment concentration, the firm markets to only one particular segment. Through concentrated marketing, the firm gains deep knowledge of the segment’s needs and achieves a strong market presence. A niche is a more narrowly defined customer group seeking a distinctive mix of benefits within a segment. Marketers usually identify niches by dividing a segment into subsegments. Niche marketers aim to understand their customers’ needs so well that customers willingly pay a premium. As marketing efficiency increases, niches that were seemingly too small may become more profitable. (See “Marketing Insight: Chasing the Long Tail.”) Individual Marketing The ultimate level of segmentation leads to “segments of one,” “customized marketing,” or “one-to-one marketing. Today customers are taking more individual initiative in determining what and how to buy. They log onto the Internet; look up information and evaluations of product or service offerings; conduct dialogue with suppliers, users, and product critics; and in many cases design the product they want. Customerization combines operationally driven mass customization with customized marketing in a way that empowers consumers to design the product and service offering of their choice. Ethical Choice of Market Targets Market targeting sometimes generates public controversy. The public is concerned when marketers take unfair advantage of vulnerable groups (such as children) or disadvantaged groups (such as rural poor people), or promote potentially harmful products. The issue is not who is targeted, but rather, how and for what. Socially responsible marketing calls for targeting that serves not only the company’s interests, but also the interests of those targeted. Instructor Manual for Marketing Management: A South Asian Perspective Philip Kotler, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha 9789810687977, 9780132102926