Introdruction to Business Management ch12,15

Marketing

An organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.

Relationship Marketing:

A marketing strategy that emphasizes building lasting relationships with customers and suppliers

Customer Relationship Management (CRM):

An organized method that enterprises use to build better information connections with clients.

Marketing Plan:

Identifies the marketing objectives stating what marketing will accomplish in the future

Steps of the Marketing Plan

1. Identify the objective or goal to be achieved.

2. Plan for when it will happen, and for the paths (or routes) that will be taken to get there.

3. Evaluate resource requirements and availabilities.

4. Adjust plans as needed to become realistic and feasible.

5. Keep notes and data about what happened because learning from this experience increases the chances for greater success on the next

Marketing Objectives

The goals the marketing plan intends to accomplish

Marketing Mix

Product, pricing, place, and promotion, that marketing managers use to satisfy customers in target markets.

Product

A good, a service, or an idea designed to fill a customer’s needs or wants

Product Differentiation

The creation of a feature or image that makes a product differ enough from existing products to attract customers

Pricing

Selecting the best price at which to sell a product

Place

Refers to distribution. Getting the product from the producer to the consumer.

Promotion

Techniques for communicating information about products

Promotional Tools

Advertising, personal selling, sales promotions, publicity/public relations, and direct or interactive marketing.

Market Segmentation

Dividing a market into categories of customer types or “segments."

Target Market

Groups of people or organizations with similar wants and needs who can be expected to show interest in the same products.

Segmentation

A strategy for analyzing consumers, not products

5 important segmentation approaches

1. Demographic

2. Geographic

3. Geo-Demographic

4. Psychographic

5. Behavioural Segmentation

Demographic Variables

Describe populations by identifying characteristics such as age, income, gender, ethnic background, marital status, race, religion, and social class

Geographic Variables

Geographical units, from countries to neighbourhoods, that may be important in a segmentation strategy.

Geo-Demographic Variables

A combination of geographic and demographic traits, and they are becoming the most common segmentation tool

Psychographic Variables

Characteristics such as lifestyles, opinions, interests, and attitudes.

Behavioural Variables

Include benefits sought, user status, usage rate, loyalty status, and occasion for use

Marketing Research

The study of what customers need and want and how best to meet those needs and wants.

Role of Marketing Research

Increase competitiveness by clarifying the interactions among a firm’s stakeholders (including customers), marketing variables, environmental factors, and marketing decisions.

Consumer Behaviour

The study of the decision process by which people buy and consume products.

4 Major Influences on Consumer Behaviour

- Psychological

- Personal

- Social

- Cultural

Psychological Influence

Include an individual’s motivations, perceptions, ability to learn, and attitudes.

Personal Influence

Include lifestyle, personality, and economic status.

Social

Include family, opinion leaders (people whose opinions are sought by others), and reference groups such as friends, co-workers, and professional associates.

Cultural

Include culture (the way of living that distinguishes one large group from another), subculture (smaller groups with shared values), and social class (the cultural ranking of groups according to criteria such as background, occupation, and income).

5 Stages of Consumer Buying

1. Problem/need recognition

2. Information seeking,

3. Evaluation of alternatives,

4. Purchase decision,

5. Post-purchase evaluation.

Problem/need recognition

- This process begins when the consumer recognizes a problem or need.

- Need recognition also occurs when you have a chance to change your buying habits.

Information Seeking

- Having recognized a need, consumers often seek information.

- Before making major purchases, most people seek information from personal sources, public sources, and experience.

Evaluation of Alternatives

- By analyzing product attributes (price, prestige, quality) of the consideration set (the group of brands they will consider buying), consumers compare products before deciding which one best meets their needs.

Purchase decision

"Buy” decisions are based on rational motives, emotional motives, or both.

Rational Motives

Involve the logical evaluation of product attributes: cost, quality, and usefulness

Emotional Motives

Involve non-objective factors and include sociability, imitation of others, and aesthetics.

Post-Purchase Evaluation

- Marketers want consumers to be happy after buying products so that they are more likely to buy them again.

- Because consumers do not want to go through a complex decision process for every purchase, they often repurchase products.

Product Features

The qualities, tangible and intangible, that a company builds into its products.

Value Package

Customers see a product as a bundle of attributes, benefits and features.

Branding

The use of symbols to communicate the qualities of a product made by a producer

Brand Equity

The added value a brand name provides to a product beyond its basic functional benefits.

Methods for Gaining Brand Awareness

Product Placement, Buzz Marketing, Viral Marketing and Social Networking

Product Placement

A promotional tactic for brand exposure in which characters in television, film, music, magazines, or video games use a real product with its brand visible to viewers.

Buzz Marketing

- Relies on word of mouth to spread “buzz” about a product or idea.

- Buzz marketing agencies provide volunteer participants with new products to try and ask them to share the buzz with their friends, family, co-workers, and others in their social network.

Viral Marketing and Social Networking

- Buzz that relies on social networking to spread information “like a virus” from person to person.

- Viral marketing is used to achieve consumer awareness goals faster, with wider reach, and at lower cost than via traditional media messages.

- It works for two reasons.

1. People rely on the internet for information they used to get from traditional media.

2. The interactive element: The customer becomes a participant in the process of spreading the word by forwarding information to other internet users.

Financial Managers

Plan and control the acquisition and distribution of the company’s financial assets

Finance

The business functions involving decisions about a firms long-term investments and obtaining the funds to pay for those investments

4 Responsibilities of a Financial Manager

1. Determining a firm’s long-term investments

2. Obtaining funds to pay for those investments

3. Conducting the firm’s everyday financial activities

a. including short-term funding needs and sources for those short-term funding needs

4. Managing the risks that the firm takes

Short Term Length

Less than 1 year

Long Term Length

More than 1 year

Short-Term (Operating) Expenditures

- A firm incurs short-term expenditures regularly in its everyday business activities.

- Financial managers must pay attention to: Accounts Payable, Accounts Receivable, Inventories, Long Term (Capital) Expenditures

Accounts Payable

- Unpaid bills owed to suppliers plus wages and taxes due within a year.

- For most companies, this is the largest single category of short-term debt.

- To plan for funding flows, financial managers want to know in advance the amounts of new accounts payable, as well as when they must be repaid.

Accounts Receivable

- Funds due from customers who have bought on credit

- Because accounts receivables represent an investment in products for which a firm has not yet received payment, they temporarily tie up its funds.

- A sound financial plan requires financial managers to project accurately both how much credit is advanced to buyers and when they will make payments.

Credit Policies

The rules governing a firm’s extension of credit to customers.

- Predicting payment schedules is a function of credit policy

- This policy sets standards as to which buyers are eligible for what type of credit.

Inventories

- Materials and goods that a firm will sell within the year.

- Too little inventory of any kind can cost a firm sales,

- Too much inventory means tied-up funds that cannot be used elsewhere.

Raw-Materials Inventory

- The basic supplies a firm buys to use in its production process

- Ex. Levi Strauss’s raw-materials inventory includes huge rolls of denim.

Work-in-Process Inventory

- Goods partway through the production process.

- Ex. Cut-out but not-yet-sewn jeans are part of the work-in-process inventory at Levi’s.

Finished-Goods Inventory

- Items that are ready for sale

- Ex. Completed blue jeans ready for shipment to Levi’s dealers

Long Term (Capital) Expenditures

- Companies need funds to cover long-term expenditures for fixed assets such as land, buildings, and machinery.

- More carefully planned than short-term outlays because long term poses special problems.

Sources Firms use to Fund Operations and Plans

Trade Credit, Secured Short-Term Loans, Unsecured Short-Term Loans,

Trade Credit

The granting of credit by one firm to another, is effectively a short-term loan.

Forms of Trade Credit

- Open Book Credit

- Promissory Notes

- Trade Draft

Open-Book Credit:

- An informal agreement.

- Buyers receive merchandise along with invoices stating credit terms.

- Sellers ship products on faith that payment will be forthcoming.

- Most common form

Promissory Notes

- The agreement states when and how much money will be paid to the seller.

- When sellers want more reassurance, they may insist that buyers sign it before merchandise is shipped

Trade Draft

- States the promised date and amount of payment due.

- Attached to the merchandise shipment by the seller.

- To take possession of the merchandise, the buyer must sign the draft.

- Once signed by the buyer, the document becomes a trade acceptance.

- Drafts and Acceptances are useful for international transactions

Secured Short-Term Loans

- A short term loan in which the borrower is required by the bank to put up collateral

- Inventories, accounts receivable, and other assets (e.g., stocks and bonds) may serve as collateral for a secured loan.

- Secured loans allow borrowers to get funds when they might not qualify for unsecured credit.

- Moreover, they generally carry lower interest rates than unsecured loans.

Inventory as Collateral

- When a loan is made with inventory as a collateral asset, the lender lends the borrower some portion of the stated value of the inventory

- Inventory is more attractive as collateral when it can be readily converted into cash.

Accounts Receivable as Collateral

- When accounts receivable are used as collateral, the process is called pledging accounts receivable.

- In the event of nonpayment, the lender may seize the receivables (funds owed the borrower by its customers)

- If these assets are not enough to cover the loan, the borrower must make up the difference.

- This option is especially important to service companies such as accounting firms and law offices because they do not maintain inventories

Factoring Accounts Receivable

- A firm can also raise funds by factoring (i.e., selling) its accounts receivable.

- The purchaser of the receivables (called a “factor”) might, for example, buy $50,000 worth of receivables for 80% of that sum ($40,000).

- The factor then tries to collect on the receivables and profits to the extent that the money it eventually collects exceeds the amount it paid for the receivables.

Unsecured Short-Term Loans:

- A short-term loan in which the borrower does not have to put up collateral

- In many cases, however, the bank requires the borrower to maintain a compensating balance—the borrower must keep a portion of the loan amount on deposit with the bank in a non-interest-bearing account.

- The terms of an unsecured loan—amount, duration, interest rate, and payment schedule—are negotiated.

- To receive such a loan, a firm must ordinarily have a good banking relationship with the lender

- Once an agreement is made, a promissory note will be executed, and the funds transferred to the borrower.

3 common types of unsecured loans:

1. Lines of Credit

2. Revolving Credit Agreements

3. Commercial Paper

Lines of Credit

A standing agreement between the bank and a firm in which the bank specifies the maximum amount it will make available to the borrower for a short-term unsecured loan; the borrower can then draw on those funds, when available

Revolving Credit Agreements

- A guaranteed line of credit for which the firm pays the bank interest on funds borrowed, as well as a fee for extending the line of credit

- A lender agrees to make some amount of funds available on demand to a firm for continuing short-term loans.

- The lending institution guarantees that funds will be available when sought by the borrower.

- In return, the bank charges a commitment fee—a charge for holding open a line of credit for a customer even if the customer does not borrow any funds.

Commercial Paper

- A method of short-term fundraising in which the firm sells unsecured notes for less than the face value and then repurchases them at the face value withing 270 days; buyers profits are the difference between the original price paid and the face value.

- Backed solely by the issuing firm’s promise to pay, is an option for only the largest and most creditworthy firms

How Commercial Paper Works

- Corporations issue commercial paper with a face value. Companies that buy commercial paper pay less than that value.

- At the end of a specified period (usually 30 to 90 days, but legally up to 270 days), the issuing company buys back the paper—at the face value.

- The difference between the price the buying company paid and the face value is the buyer’s interest earned

Ways Firms Receive Long-Term Funds

1. Debt Financing

2. Equity Financing

3. Hybrid Fancing: Preferred Stock

Debt Financing:

- Raising money to meet long-term expenditures by borrowing from outside the company; usually takes the form of long-term loans or the sale of corporate bonds

- Debt financing is most appealing to companies that have predictable profits and cash-flow patterns.

2 Sources of Debt Financing

1. Long Term Loans

2. Bonds

Long Term Loans

- Most corporations get their long-term loans from a chartered bank, usually one with which the firm has developed a long-standing relationship.

- Long-term loans are usually matched with long-term assets.

- Interest rates for the loan are negotiated between the borrower and lender.

- Although some bank loans have fixed rates, others have floating rates tied to the prime rate that they charge their most creditworthy customers

Long Term Loans Advantages

- They can be arranged quickly,

- The duration of the loan is easily matched to the borrower’s needs

- If the firm’s needs change, the loan usually contains clauses making it possible to change the terms

Long Term Loans Disadvantages and Restrictions

Disadvantages

- Large borrowers may have trouble finding lenders to supply enough funds.

Restrictions (placed on them as conditions of the loan)

- They may have to pledge long-term assets as collateral.
- And they may have to agree not to take on any more debt until the borrowed funds are repaid.

Bonds

- Bonds are the major source of long-term debt financing for most large corporations.

- Attractive when companies need large amounts of funds for long periods of time; in many cases, bonds may not be redeemed for 30 years

- But bonds involve expensive administrative and selling costs, and they may also require high interest payments if the issuing company has a poor credit rating.

Corporate Bond

A promise by the issuing company or organization to pay the bondholder a certain amount of money (the principal) on a specified date, plus interest, in return for use of the investor’s money.

Bond Indenture

Spells out the terms of the bond, including the interest rate that will be paid, the maturity date of the bond, and which of the firm’s assets, if any, are pledged as collateral.

Default

If a company fails to make a bond payment

Registered Bonds

Register the names of holders with the company, which then mails out cheques to the bondholders

Bearer (or Coupon) Bonds

Require bondholders to clip coupons from certificates and send them to the issuer to receive payment. Coupons can be redeemed by anyone, regardless of ownership

Secured Bonds:

Bonds issued by borrower's who pledge assets as collateral in the event of nonpayment

- Borrowers can reduce the risk of their bonds by pledging assets to bondholders in the event of default

- If the corporation does not pay interest when it is due, the firm’s assets can be sold and the proceeds used to pay the bondholders.

Debentures

Unsecured bonds

- No specific property is pledged as security for these bonds.

- Holders of unsecured bonds generally have claims against property not otherwise pledged in the company’s other bonds.

- Accordingly, debentures have inferior claims on the corporation’s assets.

- Financially strong corporations often use debentures.

3 Types of Maturity Date Bonds

1. Callable Bonds

2. Serial Bonds

3. Convertible Bonds

Callable Bonds

- The issuer of callable bonds may call them in and pay them off before the maturity date at a price stipulated in the indenture.

- Issuers usually call in existing bonds when prevailing interest rates are lower than the rate being paid on the bond.

- The issuer must still pay a call price to call in the bond which usually gives a premium to the bondholder

Serial Bonds

With a serial bond, the firm retires portions of the bond issue in a series of different preset dates.

Convertible Bonds

Convertible bonds can be converted into the common stock of the issuing company.

Equity Financing

Raising money to meet long-term expenditures by issuing common stock or by retaining earnings

Equity Financing Takes the Form of

- Issuing Stock

- Retaining the Firms Earnings

Issuing Stock

- By selling shares of common stock, the company obtains the funds it needs to buy land, buildings, and equipment.

- Individuals and companies buy a firm’s stock, hoping that it will increase in value (a capital gain) or will provide dividend income.

Common stock values are expressed in 3 ways

1. Par Value

2. Book Value

3. Market Value

Par Value

The face value of a share of stock. Set by the issuing company’s board of directors

Book Value

Represents shareholders’ equity (the sum of a company’s common stock par value, retained earnings, and additional paid-in capital) divided by the number of shares.