Business functions component 1

Product orientation

When a business is product-orientated, it will base its products or services on what it perceives as its internal strengths. Businesses with a product-orientated approach to selling try to sell whatever they can make, without trying to find out if it is what the customers want.

Advantages of product orientation

Increased economies of scale,easier to apply production management methods,focus on product development,focus on quality

Assets led marketing advantages

Strengths linked to market needs,quality of output,progressive change,maximising return from assets.

Asset led marketing

The perfect situation is of course for a business to relate customer taste to the business’s own strengths. Therefore, a business should find out what the market wants, and then ask the question, ‘How using our skills, knowledge, assets and brands, can we meet these customer needs?’

Product orientation

When a business bases its marketing mix on what the business sees as its internal strengths.

Asset-led marketing

When marketing decisions are based on the needs of the consumer and the strengths of the business.

Market orientation

When a business bases its marketing mix on its perception of what the market wants.

Advantages of market orientation

New products designed to meet customer needs. Flexible to changes in taste and fashion. Decisions based on effective market research

Disadvantages of market-led orientation

high cost of market research to understand the market; • constant internal change as the needs of the market are met; • unpredictability of the future, especially from the point of view of staff; • abandonment of earlier product investment.

Marketing activities:

• Researching the market – this involves gathering and analysing information on consumers, the marketplace and competition.

Marketing activities:

Analysing the market – this is an examination of market conditions to identify new opportunities.

Marketing activities:

Setting of marketing goals – these must be linked to the business’s overall objectives. • Developing a marketing strategy – this involves constructing a plan which details how the marketing objectives can be achieved. This strategy should be based around the use of the marketing mix, the 4Ps of marketing: • product; • price; • promotion; • place

Product Portfolio

is the mix of products the business produces and sells. Having a product portfolio makes a great deal of sense in a number of ways.

What does a product portfolio do?

spreads fixed costs; • allows for greater economies of scale; • allows the targeting of wider markets; • reduces risk; • smoothes out overall sales; • creates opportunities for growth.

Products can be differentiated from the competition by:

• methods of promotion – creating a personality for the product; • packaging – eco-packaging; • form – making your products look different from the competition; • the provision of add-ons – Kia cars have a seven year warranty; • quality and reliability – these are features which can be emphasised (for example, BMW and Rolls Royce cars)

Introduction (product life cycle)

The product is new to the market and few potential consumers know of its existence. Price can be high and sales may be restricted to early adopters (those that must have new technology, gadgets or fashions first). Profits are often low as development costs have to be repaid and advertising expenditure can often be high.

Growth

The product is becoming more widely known and consumed. Advertising tries to establish or strengthen the brand and develop an image for the product. Profits may start to be earned but advertising expenditure is still high. Prices may fall.

Maturity

The product range may be extended. Competition will increase and this has to be responded to. Advertising should be used to firm-up the image of the product in the consumers’ minds. Sales are at their peak, profits should be high.

Saturation

Very few new customers are gained, replacement purchases are the trend. Businesses should try to reduce their costs, so that prices can be more flexible. The battle to survive is beginning and the market for the product is ‘full’. Profits may start to decline.

Decline

Sales can now fall fast and the product range may be reduced, with the business concentrating on core products. Advertising costs will be reduced, with attempts made to mop-up what is left of the potential market. Overall profits will fall. Price is likely to fall, but by concentrating on remaining market niches there may be some price stability

USP

the product or service has a feature or features that can be used to separate it from the competition. This could be the result of a technological advantage.

Extension strategies

These are used to extend the life cycle of the product.

Extension strategies include:

• repositioning the product in the marketplace; • relaunching the product, aiming at a different segment, e.g. promoting the healthy aspects of consuming the product; • using the ‘now with’ policy – this tactic is often used with limited edition cars.

Cash flow

very profitable products and expenditure on such things as advertising is relatively low. Customers know and understand the product, and brand value has been established.

Brand

The name given to a product to help differentiate it from other similar products.

Why use branding?

• To create increased consumer loyalty – this is important when competition is intense. • To separate the product from the herd – especially in markets where there is otherwise little differentiation and products are marked by their similarities rather than their differences.

Advantages of branding

• To increase price inelasticity of demand – this gives greater control over pricing strategies. • To increase value of the business – brand values are often higher than other asset values of a business. • To ease customer choice – brand identity makes recognition of products easier, making purchase more likely.

Disadvantages of branding

High cost of advertising – brands must constantly be kept in the consumer’s eye.•Loss of brand value for one product can affect a whole range of similarly branded products.• Brands invite competition – often from copycat manufacturers.• High cost of research and development in ensuring that the brand continues to develop and lead the market.

Extension strategies include;

repositioning the product in the marketplace; • relaunching the product, aiming at a different segment, e.g. promoting the healthy aspects of consuming the product; • using the ‘now with’ policy – this tactic is often used with limited edition cars.

Stars (High market share-fast market growth)

The market may be somewhat immature, with new customers being attracted to the marketplace and new competitors being tempted by potential profits and market share. Competition is high – businesses are fighting for a share of potentially huge profits. Stars are products that have a high market share in a fast growing market.

Question mark/Problem child (low market share in a fast growing market)

le. They have a product in a fast growing market but the products are not selling. They are being beaten by the competition. For products which are question marks, a product relaunch may solve the problem or a basic redesign may increase sales.

Dogs

Dogs have low market share in a mature market. It is not generally worth spending money on redeveloping, redesigning or advertising the products as it is unlikely to be recouped in increased revenue.It can be worth holding on to dogs especially if they provide synergies – for example, a company may boast that it provides a complete range of products, which can help attract customers who may occasionally wish to buy the dog.

How to use the Boston Matrix

• to judge how to manage individual products and the product range, given market conditions; • to recognise the importance of using successful, profitable products to fund the development of the stars and cash cows of the future; • to see whether they have products in fast growing and potentially very profitable market sectors.

Product depth and breadth

Breadth is the number of product lines a business produces or retails: its depth is the number of product varieties within each product line.

Market skimming

Market skimming means charging a high price to maximise profits on each item sold for a limited period. The aim is to gain as much profit as possible for a new product while it remains unique in the market. The ability to skim depends on having either a technological advantage or an advantage based on brand image.

Market penetration

In this case the objective is to gain market share. It involves pricing a product at a low level so that retailers and consumers are encouraged to purchase the product in large quantities. This pricing strategy can help establish brand loyalty – when the price of the product does rise from the initially low level, customers will continue to purchase it.

Going rate pricing

For many small businesses accepting the current market pricing structure is all they are able to do. When this is the only option there is a strong element of being a price taker. They must sell their goods or services at a price broadly in line with the price charged by their competitors.

Psychological pricing

Using this strategy, prices are set at the level that matches what consumers may expect to pay. Consumers perceive that they are receiving value from the price paid. Charging just below a round figure is an example of this.

Loss leader pricing

This strategy involves the selling of products at a loss, with the expectation that this will generate further sales of some form, elsewhere in the business. The additional sales that occur will hopefully recoup the initial loss and subsequently make a profit for the business.

Destroyer pricing

This is also known as predatory pricing. This involves setting a price low enough to drive competitors out of the market. Destroyer pricing is often seen as anti-competitive and therefore illegal.

Price taker

However, in certain circumstances, businesses will have to accept the price set by the market. This type of business is known as a price taker. Accepting the market price (being a price taker) is the only option under perfect competition.

Price makers

When a business is not a price taker, which is the case in the majority of markets, then it has the opportunity of using pricing strategies. Not all pricing strategies are available to all businesses, but there are still choices to be made.

Pricing strategies fall into 2 broad groups:

marketing-oriented strategies and cost-based strategies

Marketing-oriented strategies:

– businesses are market-orientated when they produce what the market wants. With regard to price, this means that a market-orientated business will set a price at the level the market is willing to accept

Cost-based strategies:

– businesses are product-orientated when they produce goods without in-depth reference to the needs of consumers. With regard to price, this means that a product-orientated business will set a price related to the cost of producing or supplying the product

Market-oriented pricing examples:

Psychological pricing ,Market skimming, Market penetration ,Loss leader pricing, Destroyer pricing, Going rate pricing.

Cost-based pricing examples:

Contribution pricing,Full cost pricing,Cost plus pricing.

Cost plus pricing:

Using this method, a profit percentage is added to the average cost of producing the good. This is known as adding a mark-up

Cost-plus pricing advantages

firstly changes in costs can be passed directly on to the buyer and secondly, every good sold is sold at a profit.

Cost-plus disadvantages

Actions of competitors are often totally ignored. This can lead to loss of sales or loss of profits if a higher price could be charged because of little or no competition. Also, for exporters, this method makes no allowance for currency changes that will affect the price of goods and order levels.

Full cost pricing

This means that each good will bear its proportion of overhead costs such as marketing and administration. The advantages and disadvantages are similar to cost plus pricing but there is the added disadvantage of the complexity of apportioning overhead costs.

Contribution pricing:

This is another variation on the same theme, but in this case price will be based on the variable costs plus a contribution towards overheads and profits. This method can give flexibility because orders can be accepted on a different contribution basis for different products. This flexibility allows pricing strategies, such as price discrimination between different buyers, to be used.

Criticisms of cost-based pricing

As a result of its product-orientated approach, cost-based pricing takes no account of customers’ needs or wishes. If prices are set too high then sales will inevitably suffer. Using these methods means that a further increase in prices must occur as overheads are redistributed. Also, when a business produces a large range of products, allocating overheads is a complex and time-consuming procedure. Cost-based pricing takes no account of the situation in the marketplace and is too rigid when the pattern of demand changes.

Advantages of cost-based pricing

It can still be argued, however, that businesses using cost-based pricing methods concentrate more on their strengths and do not waste time, energy and money on futile price wars or price-based competition.

What is promotion?

Promotion is the attempt, through various forms of media, to draw attention to a product and thereby gain and retain customers. All types of promotion try to communicate with the public in an attempt to encourage them to purchase a business’s products or services.

Objectives for promotion:

• To provide potential customers with readily available information about the product so that the consumer knows the benefits of using the product and where to access the product. This is often the objective for new product launches.

Objectives for promotion-establishing image:

To establish a corporate image. Some advertising does not sell a specific product or range of products; instead the objective is to establish the right image of the producer or retailer within the mind of the consumer.

Objectives of promotion: brand identity

To give the products an image, or to establish a brand identity. A great deal of promotional activity which takes place is done to keep the product in consumers’ minds. This reminds consumers why they bought the product and why they should continue using it over rival brands.

Promotion:business planning

To enable long-term business planning to take place. Promotion is part of the whole process of bringing a product or service to market. Effective promotion allows life cycles to be developed and prolonged. This then enables production and investment to occur with greater confidence.

Promotion :market share

• To increase sales or market share by targeting both existing customers and new customers.

Above the line promotion:

Above-the-line promotion is what is generally called advertising. It is used to reach a mass audience.Above-the-line promotion (advertising) is carried out through various independent media – the most important being TV, magazines, newspapers, radio, posters and, of increasing importance, the internet.

The choice of media depends on many things;

• Target market – who is the business trying to sell to? • Whether the objective is to convey information or another type of message – will the product sell only when consumers fully understand its function, or do people buy on impulse? • Cost – for many small businesses this is the first question they ask about any form of promotion. • The reach of the media – who reads the magazine or watches the adverts? Are they likely to buy the product? • The product itself – is the product suited to a certain type of promotion?

Below-the-line promotion

Below-the-line promotion offers a wide range of alternative promotional strategies and these are often used to support above-the-line promotion. Below-the-line promotion targets consumers directly.

Below-the-line promotion examples:

• personal selling; • packaging; • sales promotions; • direct mailing; • exhibitions and trade fairs; • public relations.

Factors impacting upon the promotional strategy: The marketing budget available

– it is normal to set a total budget for promotional activities based on the objectives of the business, the availability of cash and actions of competitors.

Factors impacting the promotional strategy: Competitor actions;

– the promotional strategies a competitor uses need to be taken into account as well. If a competitor is about to launch a campaign which targets a segment of the population not previously targeted, then perhaps a business needs to react in order to protect market share.

Factors impacting the promotional strategy: Cultural sensitivity

– if a product is to be launched in a new international market or translated across markets, it becomes imperative to take into consideration local affiliations and sensitivities. These include both cultural and religious considerations. Often, these issues may even present themselves within one country.

Factors impacting the promotional strategy: The stage in the product life cycle

– during the introduction and growth stages of the product life cycle there may be a more informative approach, in order to raise customer awareness. During the maturity and saturation stages a more persuasive approach may be adopted to reinforce customers’ allegiance.

Factors impacting the promotional strategy: the target market

the people who make up the target market need to be considered before committing to a promotional strategy. If a market is not tech-savvy (technically aware), then more traditional means may need to be employed. Conversely, the younger generation, used to accessing information on a daily basis via their iPhones, may be targeted via the internet.

Factors impacting the promotional strategy :Product differentiation

many markets are highly competitive. It is important that promotion provides a method of product differentiation. The role of promotion is to differentiate its product in the market and make it stand out from the crowd. The focus here remains on those features, functions or benefits that may not be offered by a competitor or may not be offered so well.

The two key questions businesses ask in place are:

Where shall we sell our products? 2. What methods shall we use to distribute the goods to the final consumer?

Place

Place is all about where businesses sell their products and what methods are used to distribute the goods to the customer. Place is ‘the marketplace’, where buyers and sellers meet and exchange payment in return for goods and services.

Why place is important

The place where a product is sold can be used as part of a strategy to establish a certain brand identity.Some goods are now sold through a wider range of outlets than ever before, which encourages higher levels of consumption.Prime selling space can be jealously protected. Manufacturers offer retailers discounts if their brand is given pride of place on supermarket shelves.

Distribution

Distribution is all about how to get the goods to the customer. Traditional methods have relied upon the ‘manufacturer – wholesaler – retailer – consumer’ chain. However, for many goods and services this relationship has broken down. Direct selling, whether through the internet, or through magazines, catalogues or junk mail, can allow businesses to supply their customers more readily – and often at much lower prices.

Methods of distribution: wholesaler

The wholesaler has a role in breaking bulk – this means buying large quantities from the manufacturer and selling smaller quantities to the retailer. This relationship is useful to all parties concerned. The manufacturer has the convenience of selling in bulk to the wholesaler

Methods of distributing :Manufacturer to retailer

Manufacturers supply most of their produce direct to the big retailers, each of which buys massive quantities. This reduction in the length of the distribution chain cuts costs for large businesses and represents a good example of a purchasing economy of scale.

Direct selling: manufacturer to consumer

Direct selling, whether through junk mail, magazines and increasingly through the internet, has allowed manufacturers to charge much lower prices. Selling direct allows manufacturers to keep more of the profits and attract customers through competitive prices and convenience.

Internet marketing;

E-commerce can offer a low-cost way for small businesses to compete against much larger rivals: products can be marketed and sold worldwide with an internet e-commerce enabled shop.

Multi-channel distribution:

using a combination of distribution channels to maximise as many advantages as possible through each distribution channel.

Clicks and bricks

businesses need to have a web presence (clicks), plus a physical presence on the high street or in shopping centres (bricks).

M-commerce

is the buying and selling of goods and services through wireless handheld devices such as mobile phones.

Decisions related tot the marketing mix:

What shall the price be? • What is the best design for the product? • Where should it be sold? • How should the product be promoted?

E-tailing

Online shopping (sometimes known as E-tailing, from ‘electronic retail’ or E-shopping) is a form of electronic commerce which allows consumers to directly buy goods or services from a seller over the internet. The internet has changed buying habits and E-tailing is now a very important part of the retail industry, and is continuing to grow.

Pricing and the internet

A comparison of prices has become a great deal easier for customers. Using the web, individuals can carry out their own research to find the best deal across a huge range of products. This access to pricing information has had an impact on prices charged by businesses.

Marketing goods vs services

Goods are perhaps easier to market than services. With goods there is a tangible product, but with services it is perhaps more difficult to identify what the customer needs.

Local marketing

Local markets allow specific marketing tactics to be used, adapting the 4Ps to local taste and incomes.

National markets

National markets need more consistency. A national marketing strategy needs to be developed, allowing the brand to become known and understood.

global marketing

With global markets we have seen the need to establish an identifiable global brand – making promotion as homogenous as possible.Where global marketing often differs is in relation to pricing. The level of income of the target market may vary from country to country and pricing needs to reflect this.

Marketing in niche markets

Often for businesses mass marketing is not an option – after all appealing to and developing products for a mass market is an expensive business. There are huge product development costs, massive expenditures on promotion and constant competition. Smaller businesses will therefore have to accept that aiming for specific niches may be their only option. With niche marketing a business will target a single niche within the market, ignoring the rest of the marketplace.

Niche marketing

Based on designing goods or services specifically tailored for the needs of a relatively small target market. Therefore, there must be a full understanding of the desires and needs of the niche. This understanding can be gained through market research, but is often based on an understanding of a particular market that comes through personal experience. The internet has allowed businesses selling niche products to access markets far more readily.

Zero budgeting

Zero budgeting involves managers starting with a clean sheet – they have to justify all expenditure made.

What does zero bugeting do?

• improves control; • helps with allocation of resources; • limits the tendency for budgets to increase annually with no real justification for the increase; • reduces unnecessary costs; • motivates managers to look at alternative options.

Budget

A financial plan for the future.Will describe expected levels of expenditure and revenues of a business.

Financial budget

– this will be based upon the business’s cash flow forecast. Will income be able to cover expenditure or will there be a need to examine methods of raising funds to finance other budgets?

Marketing budget

– both revenues and costs are combined. Revenues are from sales predicted and costs are from operating the business’s marketing strategy.

Production budget

the objectives of the business have established the output levels required. The production budget attempts to put these output levels into practice. This will involve costs of purchasing raw materials and components, direct labour costs and other costs of production. This is an expenditure only budget

Problems with budgeting:

• If budgets are inflexible, then changes in the market or other conditions may not be met by appropriate changes in the budget. For example, if a competitor starts a major new advertising campaign, and the marketing budget does not allow for a response to this, sales are likely to be lost. • Also an effective budget can only be based on good quality information. Many managers overstate their budgetary needs to protect their departments. This can lead to lack of control and poor allocation of resources.

Budget and control

Improved management control of the organisation. Managers know who is spending what, and why they are spending the money.Improved financial control. Part of the budgeting process is the monitoring of expenditure and revenues. Any changes from (variances from) budgeted amounts need to be explained and reacted to

Budgeting and responsibilities

Budgeting allows managers to be aware of their responsibilities. Managers who are in control of their budgets are aware of what they should be achieving and how their role fits in with organisational objectives.

Businesses and resources

• Budgeting ensures, or should ensure, that limited resources are used effectively. The budgeting process allocates resources to where they are most likely to help achieve the firm’s objectives.