This Document Contains Chapters 4 to 5 Chapter 4: Developing Competitive Advantage and Strategic Focus Chapter Outline I. Introduction A. Beyond the Pages 4.1 discusses innovation as one of the key competitive advantages of the twenty-first century. B. The synthesis of information gathered from the situation analysis is critical in developing competitive advantages and the strategic focus of the marketing plan. C. SWOT (strengths, weaknesses, opportunities, and threats) analysis is a widely used tool for organizing and using the information gathered from the situation analysis. A SWOT analysis encompasses both the internal and external environments of the firm. D. SWOT analysis is considered to be one of the most effective tools in the analysis of marketing data and information. SWOT analysis has many benefits; and is so useful and logical that many underestimate its value in planning. [Exhibit 4.1] II. Making SWOT Analysis Productive [Exhibit 4.2] A. Stay Focused 1. A mistake planners often make in conducting SWOT analysis is to complete one generic analysis for the entire organization or business unit. 2. In most firms, there should be a series of analyses, each focusing on a specific product/market combination. The only time a single SWOT analysis would be appropriate is when an organization has only one product/market combination. B. Search Extensively for Competitors 1. Information on competitors and their activities is an important aspect of a well-focused SWOT analysis. The key is not to overlook any competitor, whether a current rival or one on the horizon. 2. The firm will focus most of its efforts on brand competition. However, the firm must watch for any current or potential direct product substitutes. C. Collaborate with Other Functional Areas 1. The final outcome of a properly conducted SWOT analysis should be a fusion of information from many areas. 2. While combining the SWOT analyses from individual areas, the marketing manager can identify opportunities for joint projects and cross selling of the firm's products. D. Examine Issues from the Customers' Perspective 1. Every issue in a SWOT analysis should be examined from the customers' perspective. Marketing planners must also gauge the perceptions of each customer segment that the firm attempts to target. 2. Examining issues from the customers' perspective also includes the firm's internal customers: its employees. 3. Taking the customers’ perspective can help the firm interpret the clichés they might develop. [Exhibit 4.3] E. Look for Causes, Not Characteristics 1. Many analysts simply list strengths, weaknesses, opportunities, and threats as descriptions or characteristics of the firm's internal and external environments without going deeper to consider the causes for these characteristics. 2. More often than not, the causes for each issue in a SWOT analysis can be found in the resources possessed by the firm and/or its competitors: financial resources, intellectual resources, legal resources, human resources, organizational resources, informational resources, relational resources, and reputational resources. F. Separate Internal Issues from External Issues 1. Internal issues are the firm's strengths and weaknesses, while external issues refer to opportunities and threats in the firm's environment. 2. The key test to differentiate a strength or weakness from an opportunity or threat is to ask, "Would this issue exist if the firm did not exist?" If the answer is yes, the issue should be classified as external. 3. The failure to understand the difference between internal and external issues is one of the major reasons for a poorly conducted SWOT analysis. III. SWOT-Driven Strategic Planning A. The role of SWOT analysis is to help the marketing manager make the transition from a broad understanding of the marketing environment to the development of a strategic focus for the firm’s marketing efforts. B. The issues that can be considered in a SWOT analysis are numerous and will vary depending on the particular firm or industry being examined. [Exhibit 4.4] C. Strengths and Weaknesses 1. Strengths and weaknesses exist either because of resources possessed (or not possessed) by the firm, or in the nature of the relationships between the firm and its customers, its employees, or outside organizations. 2. A strength is meaningful only when it serves to satisfy a customer need. When this is the case, that strength becomes a capability. 3. The marketing manager must also develop strategies to overcome the firm’s weaknesses, or find ways to minimize their negative effects. D. Opportunities and Threats 1. Opportunities and threats exist outside the firm, independently of internal strengths, weaknesses, or marketing options. Opportunities and threats typically occur within the firm’s customer or external environments. 2. The marketing manager must develop strategies to take advantage of opportunities and minimize or overcome the firm's threats. E. The SWOT Matrix 1. To utilize SWOT analysis successfully, the marketing manager must be cognizant of four issues: a) The assessment of strengths and weaknesses must look beyond the firm's resources and product offering(s) to examine processes that are key to meeting customers' needs. b) The achievement of the firm's goals and objectives depends on its ability to create capabilities by matching its strengths with market opportunities. c) Firms can often convert weaknesses into strengths, or even capabilities, by investing strategically in key areas. d) Weaknesses that cannot be converted into strengths become the firm’s limitations. 2. A SWOT matrix is a four-cell array that can be used to visually evaluate each element of a SWOT analysis. [Exhibit 4.5] 3. To begin the analysis, the manager must evaluate the issues within each cell of the matrix in terms of their magnitude and importance. This evaluation should be based on customers' perceptions. 4. It can be informative to quantitatively assess each cell of the SWOT matrix [Exhibit 4.6] 5. Elements with the highest total ratings (positive or negative) should have the greatest influence in developing the marketing strategy. IV. Developing and Leveraging Competitive Advantages A. The conversion of strengths into capabilities gives the firm a competitive advantage and allows it to serve customers' needs better than the competition. [Exhibit 4.7] B. While competitive advantages most often stem from real strengths possessed by the firm or in real weaknesses possessed by rival firms, competitive advantages can also be based more on perception than reality. C. Many successful firms have developed capabilities and competitive advantages based on one of three basic strategies: [Exhibit 4.8] 1. Operational excellence—focusing on efficiency of operations and processes, lower costs, and delivering good value to customers. 2. Product leadership—focusing on technology, product development, and delivering the most advanced, highest quality goods and services in the industry. 3. Customer intimacy—focusing on knowing customers, understanding their needs better than the competition, and developing long-term customer relationships. D. Beyond the Pages 4.2 discusses how the 3M Company uses a product leadership strategy to successfully compete in many markets. V. Establishing a Strategic Focus A. The firm’s strategic focus is the overall concept or model that guides the firm as it weaves various marketing elements together into a coherent strategy. B. A firm’s strategic focus is typically tied to its competitive advantages, or it can be geared toward compensating for the firm's weaknesses or defending against its vulnerabilities. C. There are four general directions for a firm’s strategic efforts: 1. Aggressive (many internal strengths and external opportunities) 2. Diversification (many internal strengths and external threats) 3. Turnaround (many internal weaknesses and external opportunities) 4. Defensive (many internal weaknesses and external threats) D. Many firms struggle with finding a focus that translates into a strategy that offers customers a compelling reason for purchasing the firm’s products. E. The strategy canvas, developed by Professors Kim and Mauborgne in their book Blue Ocean Strategy, is a useful tool for identifying a strategic focus. 1. A strategy canvas is a tool for visualizing a firm’s strategy relative to other firms in a given industry. [Exhibit 4.9] 2. The central portion of the strategy canvas is the value curve, or the graphic representation of the firm’s relative performance in its industry. 3. The key to using the strategy canvas (and the key to developing a compelling strategic focus) lies in identifying a value curve that: a) clearly depicts the firm’s strategic focus b) is distinctively different from competitors 4. Beyond the Pages 4.3 provides more information on the Blue Ocean approach to developing a strategic focus. VI. Developing Marketing Goals and Objectives A. Developing Marketing Goals 1. Goals are statements of broad, desired accomplishments and do not contain specific information about where the organization presently stands or where it hopes to be in the future. 2. Goals indicate the direction in which the firm attempts to move, as well as the set of priorities it will use in evaluating alternatives and making decisions. 3. All marketing goals should have these characteristics: a) Attainability—goals should be realistic and capable of being achieved b) Consistency—goals must be consistent with each other and with the goals of other functional areas c) Comprehensiveness—marketing goals should relate to the organization's goals and help to clarify the roles of all parties in the organization d) Intangibility—marketing goals should be somewhat ambiguous and open-ended to motivate employees by promoting comparisons with rival firms B. Developing Marketing Objectives 1. Objectives provide specific and quantitative benchmarks that can be used to gauge progress toward the achievement of the marketing goals. 2. A particular goal may require several objectives for its progress to be adequately monitored, usually across multiple business functions. 3. Goals without objectives are essentially meaningless because progress is impossible to measure. 4. All marketing objectives should have these characteristics: a) Attainability—marketing objectives should be realistic given the internal and external environments of the firm b) Continuity—objectives should be consistent with those set in previous periods (continuous objectives), or should be set to elevate the level of performance significantly (discontinuous objectives) [Exhibit 4.10] c) Time frame—objectives should have an appropriate time frame to allow for accomplishment with reasonable levels of effort d) Assignment of responsibility—an objective must identify the person, team, or unit responsible for achieving it C. Establishing goals and objectives sets into motion a chain of decisions and serves as a catalyst for the subsequent stages in the planning process. Questions for Discussion 1. Strengths, weaknesses, opportunities, and threats: Which is the most important? Why? How might your response change if you were the CEO of a corporation? What if you were a customer of the firm? An employee? A supplier? Although answers will vary, most students are likely to argue that strengths are the most important. If a firm has no strengths, it has little chance for success regardless of the opportunities available in the market. Customers will certainly care more about strengths because they translate into benefits. A CEO likely considers the external issues to be most important. Employees and suppliers are likely to see the firm’s weaknesses as most important to their success. 2. Support or contradict this statement: “Given the realities of today’s economy and the rapid changes occurring in business technology, all competitive advantages are short lived. There is no such thing as a sustainable competitive advantage that lasts over the long term.” Defend your position. Given the rapid pace of change in today’s economy, this statement is certainly truer than at any time in the past. Students are likely to point to firms that have been successful for a long time, such as Coca-Cola, Nike, Microsoft, Walmart, and 3M. Encourage them to identify the competitive advantages that make these firms stand out from others. 3. Is it possible for an organization to be successful despite having a value curve that is not distinct from the competition? In other words, can an organization be successful by selling a me-too product (a product that offers no compelling differences when compared to the competition)? Explain. The answer has to be “yes” because there are many examples of this phenomenon. For example, it is widespread in pharmaceuticals where many products provide the same basic benefits and the sales potential is so high. Throwing another “me-too” drug into the mix can lead to high sales and profit margins even if the product offers no compelling difference relative to the competition. In this case, even a very small share of the market can lead to high sales/profits. This, of course, assumes that sales/profits are the most important measure of success. Exercises 1. Perform a SWOT analysis using yourself as the product. Be candid about your resources and the strengths and weaknesses you possess. Based on the opportunities and threats you see in the environment, where do you stand in terms of your ability to attend graduate school, get a job, begin a career, or change careers? Student responses will vary. Most students struggle with doing a SWOT analysis on themselves, especially in the weaknesses section. Most don’t want to admit their weaknesses. They also tend to underestimate their strengths. 2. Choose two companies from the same industry: one that is quite successful and one that is struggling. For each company, list every strength and weakness you believe it possesses (both the company and its products). Compare your answers with those of your colleagues. What could these companies learn from your analysis? A good industry for this exercise is the movie rental business; so it is a good companion exercise to the Netflix case. Working in groups, have students compare Netflix, Redbox, and online sources (Apple, Amazon, Hulu) in terms of strengths and weaknesses. Then, have the groups share their analyses with the class. 3. Using the same companies from question 2 above, draw a strategy canvas that depicts the value curve of both firms, as well as the “average” firm in the industry (i.e., draw three value curves). What does the successful firm offer that the struggling firm does not offer? What might a firm do to break away from the industry’s traditional competitive factors? Again, a great follow up exercise at the conclusion of the Netflix case. One of the clear differences between Netflix and Redbox is the presence of physical kiosks. Online alternatives offer the best in terms of convenience. Exercise 4.1 Apple http://www.apple.com 1. Apple is consistently rated as one of the world’s most innovative companies. What evidence to this effect do you see on the website? How has Apple translated innovation into a major strength? Aside from the obvious innovation in terms of product design, Apple’s website is also innovative (it includes features such as tabbed pages, integrated video, and an exceptionally clean layout). Behind the scenes, Apple’s partnerships with music, movie, television, book, and newspaper providers are also innovative. Innovation is clearly a major strength for Apple—one that gives its products cache with customers. The most recent innovation is the iPad, which is a major threat to competing products such as netbooks and e-book readers. 2. Most of Apple’s products carry a premium price relative to those of the competition. Does Apple’s strengths in innovation overcome its weakness in price competitiveness? Explain. Virtually all of Apple’s products are wildly popular with consumers; hence, it is hard to say that Apple’s prices are anything more than a road bump for most customers. However, many students will argue that Apple’s products offer essentially the same features and benefits as competing products (especially true in music players and laptop computers). The key question is really how long the Apple cache will last with customers. If and when it begins to erode, Apple’s prices will have to fall in order for the company to remain competitive. Exercise 4.2 Ford Motor Company http://www.ford.com 1. Assume you are preparing a SWOT analysis for Ford. Based on the company’s website, identify several strengths, weaknesses, opportunities, and threats. Which are the most important for Ford’s future marketing strategies? This exercise requires that students apply the SWOT framework to Ford, a firm with a long history and a recent resurgence. Ford was the only U.S. automaker to not take a government bailout during the economic recession; a fact that has resonated with customers. Ford’s major strengths in its product line are based on stylish design and advanced technology. Ford’s promotional tie in with American Idol is also a strength. Competitively, however, Ford is not held in as high regard as Toyota, Honda, Hyundai, and Kia. In fact, students may argue that Ford’s biggest problem is that it is a U.S. company. 2. How can Ford leverage its strengths to create competitive advantages? Students may focus on Ford’s long history, reputation for quality, and diversity of product offerings. One of Ford’s major advantages is its reputation for safety. Chapter 5: Customers, Segmentation, and Target Marketing Chapter Outline I. Introduction A. Beyond the Pages 5.1 discusses how firms use data mining to discover unseen patterns in customer buying behavior. B. Customers can be individuals, institutions, or groups of individuals or institutions that have similar needs that can be met by a particular product offering. C. Whether the firm aims for the entire market or smaller market segments, the goal of marketing strategy is to identify specific customer needs, and then design a marketing program that can satisfy those needs. To do this effectively, the firm must have a comprehensive understanding of its current and potential customers, including their motivations, behaviors, needs, and wants. D. Until a firm has chosen and analyzed a target market, it cannot make effective decisions regarding other elements of the marketing strategy. II. Buyer Behavior in Consumer Markets A. The Consumer Buying Process [Exhibit 5.1] 1. The buying process depicts the possible range of activities that may occur in making purchase decisions. Consumers, however, do not always follow these stages in sequence and may even skip stages en route to making a purchase. 2. The buying process often involves a parallel sequence of activities associated with finding the most suitable merchant of the product in question. 3. The choice of a suitable merchant may actually take precedence over the choice of a specific product. In some cases, consumers are so loyal to a particular merchant that they will not consider looking elsewhere. B. Five Stages of the Consumer Buying Process 1. Need Recognition a) A need occurs when consumers realize that there is a discrepancy between their existing situation and their desired situation. b) The typical definition of needs as necessities is limited because everyone has a different perspective on what constitutes a need. c) A need occurs when an individual's current level of satisfaction does not equal their desired level of satisfaction. d) A want is a consumer's desire for a specific product that will satisfy the need. e) Understanding basic needs allows the firm to segment markets and create marketing programs that can translate consumer needs into wants for their specific products. f) Wants are not the same thing as demand. Demand occurs only when the consumer’s ability and willingness to purchase a specific product backs up their want for the product. 2. Information Search a) Marketing stimuli can prompt consumers to become interested in a product, leading to a desire to seek out additional information. b) In a passive information search, the consumer becomes more attentive and receptive to information. c) In an active information search, the consumer purposely seeks additional information. d) Information can come from a variety of internal (memories, past experiences) and external (advertising, displays, salespeople, friends, family) sources. e) The amount of time, effort, and expense dedicated to the search for information depends on: 1) the degree of risk involved in the purchase 2) the amount of expertise or experience the consumer has with the product category 3) the actual cost of the search in terms of time and money f) Consumers evaluate and reevaluate their initial set of products or brands until their list of potential choices has been narrowed to only a few products or brands that can meet their needs (the evoked set). 3. Evaluation of Alternatives a) At this stage, the consumer essentially translates his or her need into a want for a specific product or brand. b) Consumers evaluate products as bundles of attributes that have varying abilities to satisfy their needs. c) Important marketing considerations during the evaluation stage: 1) The marketer's products must be in the evoked set of potential alternatives. 2) Marketers must take steps to understand consumers' choice criteria and the importance they place on specific product attributes. 3) Marketers must often design marketing programs that change the priority of choice criteria or change consumers' opinions about a product's image. 4. Purchase Decision a) A consumer’s intention to purchase and the actual act of buying are distinct concepts. Several factors may prevent the actual purchase from taking place. b) Marketers can reduce or eliminate these problems by reducing the risk of purchase through warranties or guarantees, making the purchase stage as easy as possible, or finding creative solutions to unexpected problems. c) The key issues for marketers during the purchase stage are product availability and possession utility. 5. Postpurchase Evaluation a) Postpurchase evaluation is the connection between the buying process and the development of long-term customer relationships. b) In the postpurchase stage, buyers will experience one of these four outcomes: 1) Delight—the product’s performance greatly exceeds the buyer’s expectations 2) Satisfaction—the product’s performance matches the buyer’s expectations 3) Dissatisfaction—the product’s performance falls short of the buyer’s expectations 4) Cognitive Dissonance (Postpurchase Doubt)—the buyer is unsure of the product’s performance relative to his or her expectations c) Consumers are more likely to experience dissatisfaction or cognitive dissonance when the dollar value of the purchase increases, the opportunity costs of rejected alternatives are high, or the purchase decision is emotionally involving. C. Factors That Affect the Consumer Buying Process 1. Decision-Making Complexity—the primary reason why the buying process will vary across consumers and with the same consumer in different situations. 2. Individual Influences—Many individual influences (age, life cycle, occupation, and socioeconomic status) are fairly easy to understand and incorporate into the marketing strategy. Other factors (perceptions, motives, interests, attitudes, opinions, or lifestyles) are much harder to understand because they do not clearly coincide with demographic characteristics. 3. Social Influences—Social influences such as culture, subculture, social class, reference groups, and family have a profound impact on what, why, and how consumers buy. 4. Situational Influences—typically affect the amount of time and effort that consumers devote to the purchase task, or they affect specific product choices. [Exhibit 5.2] III. Buyer Behavior in Business Markets A. Four types of business markets: 1. Commercial markets buy raw materials for use in producing finished goods, and they buy facilitating goods and services used in the production of finished goods. 2. Reseller markets consist of channel intermediaries such as wholesalers, retailers, or brokers that buy finished goods from the commercial market and resell them at a profit. 3. Government markets include federal, state, county, city, and local governments. 4. Institutional markets consist of a diverse group of non-commercial organizations such as churches, charities, schools, hospitals, or professional organizations. B. Unique Characteristics of Business Markets 1. The Buying Center—The buying center can be complex and difficult to identify, in part because it may include three distinct groups of people—economic buyers, technical buyers, and users. 2. Hard and Soft Costs—Both consumers and organizations consider hard costs (monetary price, shipping, installation). Organizations must also consider soft costs (downtime, opportunity costs, and human resource costs associated with the compatibility of systems in the buying decision). 3. Reciprocity—Business marketing is often a two-way street, with each firm marketing products that the other firm buys. 4. Mutual Dependence—The buyer and seller are more likely to be dependent on one another, especially in situations of sole-source or limited-source buying. C. The Business Buying Process 1. Problem Recognition—Business buyers often recognize needs due to special circumstances, such as when equipment or machinery breaks or malfunctions. 2. Develop Product Specifications—Detailed product specifications often define business purchases because new purchases must be integrated with current technologies and processes. 3. Vendor Identification and Qualification—Business buyers must ensure that potential vendors can deliver on needed product specifications, within a specified time frame and in the needed quantities. 4. Solicitation of Proposals or Bids—The buying firm may request that qualified vendors submit proposals or bids. 5. Vendor Selection—The buying firm will select the vendor or vendors that can best meet its needs. Issues such as reputation, timeliness of delivery, guarantees, or personal relationships with the members of the buying center are often more important than price. 6. Order Processing—Processing involves the details of processing the order, negotiating credit terms, setting firm delivery dates, and any final technical assistance needed to complete the purchase. 7. Vendor Performance Review—In this stage, both product and vendor specifications can be evaluated. D. Factors That Affect the Business Buying Process 1. Environmental conditions can have a major influence on buyer behavior by increasing uncertainty, complexity, and risk. 2. Organizational factors (resources, strategies, policies, objectives, relationships with partners) can influence business buying decisions. 3. Interpersonal relationships and individual factors can affect the buying process. Examples include power struggles and the manager's personal preferences or prejudices. IV. Market Segmentation A. Market segmentation is the process of dividing the total market for a particular product or product category into relatively homogeneous segments or groups. B. The goal of segmentation is to create groups where the members within the group have similar likes, tastes, needs, wants, or preferences but where the groups themselves are dissimilar from each other. C. Beyond the Pages 5.2 examines how cultural differences within the United States create many challenges and opportunities in finding and serving target markets. D. Traditional Market Segmentation Approaches 1. Mass Marketing a) Mass marketing, which involves no segmentation whatsoever, occurs when companies aim marketing campaigns at the total (whole) market for a particular product. b) Companies that adopt mass marketing take an undifferentiated approach that assumes that all customers in the market have similar needs and wants that can be reasonably satisfied with a single marketing program. c) Mass marketing works best when the needs of an entire market are relatively homogeneous. d) Mass marketing is advantageous in terms of production efficiency and lower marketing costs; however, it is inherently risky. 2. Differentiated Marketing a) Most firms use some form of market segmentation by: 1) dividing the total market into groups of customers having relatively common or homogeneous needs, and 2) attempting to develop a marketing program that appeals to one or more of these groups. b) Within the differentiated approach there are two options: 1) Firms using the multisegment approach seek to attract buyers in more than one market segment by offering a variety of products that appeal to different needs. 2) Firms using the market concentration approach focus on a single market segment and attempt to gain maximum share in that segment. 3. Niche Marketing a) Some companies focus their efforts on one small, well-defined market segment or niche that has a unique, specific set of needs. b) Customers in niche markets will typically pay higher prices for products that match their specialized needs. c) The key to niche marketing is to understand and meet the needs of target customers so completely that the firm's substantial share makes the segment highly profitable. E. Individualized Segmentation Approaches 1. One-to-One Marketing a) Occurs when a company creates an entirely unique product or marketing program for each customer in the target segment. b) Historically, one-to-one marketing has been used less often in consumer markets. However, it is common in luxury and custom-made products, as well as in services. c) One-to-one marketing has grown rapidly in electronic commerce where customers can be targeted very precisely. 2. Mass Customization a) Mass customization refers to providing unique products and solutions to individual customers on a mass scale. b) Along with the Internet, advances in supply chain management have allowed companies to customize products in ways that are both cost effective and practical. 3. Permission Marketing a) Permission marketing occurs when customers choose to become part of a firm's market segment by giving companies permission to specifically target them in their marketing efforts. b) The most common tool used in permission marketing is the opt-in e-mail list, where customers permit a firm—or a third-party partner of the firm—to send periodic e-mail about goods and services. c) Permission marketing has a major advantage: Customers who opt-in have already shown interest in the products offered by the firm. F. Criteria for Successful Segmentation 1. Identifiable and Measurable—The characteristics of the segment's members must be easily identifiable. 2. Substantial—The segment must be large and profitable enough to make it worthwhile for the firm. 3. Accessible—The segment must be accessible in terms of communication and distribution. 4. Responsive—The segment must respond to the firm's marketing efforts, including changes to the marketing program over time. 5. Viable and Sustainable—The segment must meet the basic criteria for exchange, including being ready, willing, and able to conduct business with the firm. V. Identifying Market Segments A. The target market and the marketing program are interdependent, and changes in one typically require changes in the other. B. Beyond the Pages 5.3 discusses the challenges faced by cereal companies as they reformulate and reposition their products as healthy breakfast choices. C. Segmenting Consumer Markets [Exhibit 5.3] 1. Behavioral Segmentation a) Behavioral segmentation is the most powerful approach because it uses actual consumer behavior or product usage to make distinctions among market segments. b) Behavioral segmentation, unlike other types of consumer segmentation, is most closely associated with consumer needs. [Exhibit 5.4] c) The key to successful behavioral segmentation is to clearly understand the basic needs and benefits sought by different consumer groups. 2. Demographic Segmentation a) Demographic segmentation divides markets into segments using demographic factors such as gender, age, income, and education. b) Demographic segmentation tends to be the most widely used basis for segmenting consumer markets because demographic information is widely available and relatively easy to measure. c) Demographic segmentation becomes less useful when the firm has a strong interest in understanding the motives or values that drive buying behavior. 3. Psychographic Segmentation a) Psychographic segmentation deals with state-of-mind issues such as motives, attitudes, opinions, values, lifestyles, interests, and personality. b) Psychographic profiles are usually combined with demographic, geographic, or behavioral segmentation to create fully developed consumer profiles. c) One of the most successful and well-known tools of psychographic segmentation is VALS™, which divides adult U.S. consumers into one of eight profiles. [Exhibit 5.5] d) Psychographic segmentation is useful because it transcends purely descriptive characteristics to help explain personal motives, attitudes, emotions, and lifestyles. 4. Geographic Segmentation a) Geographic characteristics often play a large part in developing market segments, especially when retailers use geography to develop trade areas. b) Geographic segmentation is often most useful when combined with other segmentation variables. One of the best examples is geodemographic segmentation, or geoclustering. D. Segmenting Business Markets 1. The most basic method of segmenting business markets involves the four types of markets: commercial markets, reseller markets, government markets, and institutional markets. 2. Business buyers can also be segmented on: a) Type of Organization—Different types of organizations may require different and specific marketing programs, such as product modifications, different distribution and delivery structures, or selling strategies. b) Organizational Characteristics—The needs of business buyers often vary based on their size, geographic location, or product usage. c) Benefits Sought or Buying Processes—Organizations differ with respect to the benefits they seek and the buying processes they use. d) Personal and Psychological Characteristics—The personal characteristics of the buyers themselves often play a role in segmentation decisions. e) Relationship Intensity—Business markets can also be segmented based on the strength and longevity of the relationship with the firm. VI. Target Marketing Strategies A. Once the firm has completed segmenting a market, it must then evaluate each segment to determine its attractiveness and whether it offers opportunities that match the firm's capabilities and resources. B. There are five basic strategies for target market selection [Exhibit 5.6]: 1. Single Segment Targeting—Firms use single segment targeting when their capabilities are intrinsically tied to the needs of a specific market segment. 2. Selective Targeting—Firms that have multiple capabilities in many different product categories use selective targeting successfully. This strategy has several advantages, including diversification of the firm's risk and the ability to cherry pick only the most attractive market segments. 3. Mass Market Targeting—Only the largest firms have the capability to execute mass market targeting, which involves the development of multiple marketing programs to serve all customer segments simultaneously. 4. Product Specialization—Firms engage in product specialization when their expertise in a product category can be leveraged across many different market segments. 5. Market Specialization—Firms engage in market specialization when their intimate knowledge and expertise in one market allows them to offer customized marketing programs that not only deliver needed products, but also provide needed solutions to customers' problems. C. In addition to targeting a subset of current customers within the product/market, firms can also take steps to target noncustomers. 1. The key to targeting noncustomers lies in understanding the reasons that they do not buy and then finding ways to remove these obstacles. 2. Removing obstacles to purchase, whether they exist in product design, affordability, distribution convenience, or product awareness, is a major strategic issue in developing an effective marketing program. Questions for Discussion 1. Many people criticize marketing as being manipulative based on the argument that marketing activities create needs where none previously existed. Marketers of SUVs, tobacco products, diet programs, exercise equipment, and luxury products are typically the most criticized. Given what you now know about the differences between needs and wants, do you agree with these critics? Explain. Most students will argue that marketing does not create needs, but rather it makes consumers more aware of needs that are not expressed. That is, marketing gives consumers the appropriate language with which to express their needs. However, most students do believe that marketing can create wants where none previously existed. This is especially true with trendy products. 2. Many consumers and consumer advocates are critical of individualized segmentation approaches due to personal privacy concerns. They argue that technology has made it far too easy to track buyer behavior and personal information. Marketers counter that individualized segmentation can lead to privacy abuses, but that the benefits to both consumers and marketers far outweigh the risks. Where do you stand on this issue? What are the benefits and risks associated with individualized segmentation? The benefits and risks of individualized segmentation are fairly easy to discuss. The key for most students will be whether the consumer has control over how this information is used. Techniques like permission marketing are not problematic because the consumer chooses to participate. However, when consumers are targeted without their knowledge or permission, the issues of privacy and security become more prevalent. In the future, this issue will become more important as technologies such as RFID and near field communication (NFC) allow marketers to track consumers with an exceptionally high degree of specificity. 3. As we have seen thus far, the size of the consuming population over the age of 50 continues to grow. What are some of the current ethical issues involved in targeting this age group? As this group gets older, will these issues become more or less important? Explain. Older populations are less knowledgeable about technology, so the use of any advanced technology to track these consumers is a major ethical issue. Marketers must also be cognizant of how this information is used as many older consumers do not fully understand their rights in this area. A major fear is that health-related information could potentially be used to discriminate against older consumers. These issues are likely to become more important for a while (10-15 years perhaps), and then gradually lessen in importance as the population as a whole becomes more informed about these issues. Exercises 1. Consider the last purchase you made in these categories: personal electronics, clothing, and vacation destination. To what extent was your purchase decision influenced by decision-making complexity, individual influences, social influences, and situational influences? What specific issues were the most influential in making the decision? How could a marketer have swayed your decision in each case? Student answers will vary greatly depending on the product in question and the specific purchase situation. 2. One of the most exciting advances in market segmentation is the increasing use of geographic information systems (GIS) to map target markets. Go to www.gis.com and get a feel for the use of GIS in business and other fields. Then, go to http://mapapps.esri.com/create-map/index.html and enter your ZIP code to make a demographic map about where you live. What are the advantages of using GIS in market segmentation? Many students will have had no previous exposure to this topic. Hence, this subject makes an excellent companion lecture if the course schedule permits it. There are many advantages to using GIS, including pinpoint accuracy for marketing efforts, less wasted marketing coverage, visual representations of complex issues, accurate spatial planning for retail location decisions, etc. 3. As discussed in the chapter, VALS is one of the most popular proprietary segmentation tool used in marketing segmentation. Go to the VALS website (www.strategicbusinessinsights.com/vals/presurvey.shtml) and take the free VALS survey. Do you agree with the survey results? Why or why not? Students enjoy this exercise tremendously. Some argue that the system places too much emphasis on the level of resources available to the consumer. Have the students take the survey again, this time looking ahead to 5 years after graduation. The differences make for an interesting discussion session. Exercise 5.1 iVillage http://www.ivillage.com 1. Describe the markets that iVillage appears to be targeting. What variables are being used to segment these markets? Students should be able to offer specific evidence from the website to support their assessment of its intended audience. Most will cite women as the primary audience, but some will also point out that content is targeted at parents and professionals. Segmentation bases include gender, family life cycle, occupation, and age. 2. What companies use iVillage to promote their goods and services? Who are their target markets? Is iVillage a good metamediary for reaching these target markets? Students’ answers will depend on the banner advertising they see at the time of access, but they should be able to name specific companies as advertisers on iVillage and indicate whether the target market for these companies appears to match the target audience of iVillage. Most industry experts consider iVillage to be an excellent metamediary in the women’s and parents’ marketspace. Exercise 5.2 Amazon.com http://www.amazon.com Barnes & Noble http://www.barnesandnoble.com 1. Based on their websites, compare and contrast the apparent target markets and marketing mixes of Amazon and Barnes & Noble. Students should be able to cite specifics from the websites to substantiate their analysis of the firms’ target markets and marketing mixes. One of the noticeable differences is the much larger product portfolio offered by Amazon. In fact, Barnes & Noble has been enhancing its product mix in order to compete more effectively against Amazon. If students are former Amazon customers (and have the company’s cookies stored in their computer), they will see a customized opening page. Barnes & Noble does not seem to offer this feature. 2. Describe how these companies use their websites for positioning. What aspects of company and product differentiation are apparent within each website? In addition to Amazon’s larger product mix, they are also industry leaders in terms of customizing the online experience for customers. However, Barnes & Noble has become synonymous with book retailing, much more so than Amazon. This is interesting since Amazon’s roots are in online book retailing. Both companies also position themselves as leaders in e-book technology: Amazon with its Kindle line, and Barnes & Noble with its Nook line. Instructor Manual for Marketing Strategy, Text and Cases O. C. Ferrell, Michael Hartline 9781285073040, 9781285170435
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