strategic planning - setting objectives

Introduction

Objectives set out what the business is trying to achieve.

Objectives can be set at two levels:

(1) Corporate level

These are objectives that concern the business or organisation as a whole

Examples of “corporate objectives might include:
• We aim for a return on investment of at least 15%
• We aim to achieve an operating profit of over £10 million on sales of at least £100 million
• We aim to increase earnings per share by at least 10% every year for the foreseeable future

(2) Functional level

e.g. specific objectives for marketing activities

Examples of functional marketing objectives” might include:
• We aim to build customer database of at least 250,000 households within the next 12 months
• We aim to achieve a market share of 10%
• We aim to achieve 75% customer awareness of our brand in our target markets

Both corporate and functional objectives need to conform to the commonly used SMART criteria.

The SMART criteria (an important concept which you should try to remember and apply in exams) are summarised below:

Specific - the objective should state exactly what is to be achieved.

Measurable - an objective should be capable of measurement – so that it is possible to determine whether (or how far) it has been achieved

Achievable - the objective should be realistic given the circumstances in which it is set and the resources available to the business.

Relevant - objectives should be relevant to the people responsible for achieving them

Time Bound - objectives should be set with a time-frame in mind. These deadlines also need to be realistic.

http://tutor2u.net/business/strategy/objectives.htm

strategy - analysing competitive industry structure

Defining an industry

An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry).

Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry.

The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model, which is described below:

Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are

- The threat of entry of new competitors (new entrants)
- The threat of substitutes
- The bargaining power of buyers
- The bargaining power of suppliers
- The degree of rivalry between existing competitors

Threat of New Entrants

New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include

- Economies of scale
- Capital / investment requirements
- Customer switching costs
- Access to industry distribution channels
- The likelihood of retaliation from existing industry players.

Threat of Substitutes

The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:

- Buyers' willingness to substitute
- The relative price and performance of substitutes
- The costs of switching to substitutes

Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the industry.

The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:

- There are many buyers and few dominant suppliers
- There are undifferentiated, highly valued products
- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)
- Buyers do not threaten to integrate backwards into supply
- The industry is not a key customer group to the suppliers

Bargaining Power of Buyers

Buyers are the people / organisations who create demand in an industry

The bargaining power of buyers is greater when

- There are few dominant buyers and many sellers in the industry
- Products are standardised
- Buyers threaten to integrate backward into the industry
- Suppliers do not threaten to integrate forward into the buyer's industry
- The industry is not a key supplying group for buyers

Intensity of Rivalry

The intensity of rivalry between competitors in an industry will depend on:

- The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader

- The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price cutting

- Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry

- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier

- Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less

- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry.

http://tutor2u.net/business/strategy/porter_five_forces.htm

A COMPARATIVE PROFITABILITY AND OPERATING EFFICIENCY ANALYSIS OF STATE AND PRIVATE BANKS IN TURKEY

Abstract

In this study, a comparative performance analysis between state-owned and privately-owned commercial banks of Turkey is carried out over the period between 1997 and 2006. On the contrary to expectations, statistical findings of the study produce surprising results. The results suggest that state-owned banks are as efficient as private banks, and even more efficient at some aspects. Thus, it rises the question of "whether to privatize banks or not?"

Key words: Bank performance, state banks, private banks, Turkish banks.

JEL classification: E44, G21, M41.

1. Introduction

Since financial system is vital for an economy and banks play a pivotal role in the financial system, it is important for economies to have a sound financial and banking system. In this concept, liberalization policies have been employed all over the world especially after the 1980s. Turkey has been in a change in economic sense from closed to more liberal structures. As a result, financial sectors and especially banking sector have been in a gradual evolution towards to liberal structure.

The current picture of Turkey's banking industry gives us the chance of addressing the issue of government banks' relative performance. This is important for both the rationale behind bank privatization and the policy implications. In addition, it provides valuable information for further researches to make meaningful comparisons before and after privatization performances of government banks when their privatizations are observed in the future.

According to market forces theory, private banks have an advantage over state banks with respect to financial and operating efficiency. However, our study suggests that government banks are as profitable as private banks. The study, firstly, updates the regarded findings with most current data on Turkish banking industry. Secondly, most studies of this kind apply economies of scale and technical productivity measures whereas our study uses operating efficiency and profitability as the measures.

This study is organized on three main parts. In the first part, theoretical and empirical researches related to the subject, are supplied. In the following part, a summary on the history and working of banking system in Turkey is given. The data set employed is described in the third part. Testable hypotheses, methodology and empirical findings are also supplied in this part. Finally, the paper completes with conclusion.

2. Literature Review

Despite the common belief that the purpose in state-ownership of bank is to provide financing for projects with low profile of profitability yet necessary for macroeconomic goods and development, empirical studies in literature suggest differently. Like many other researchers, La Porta et al. (2002), Caprio and Feria (2000) and Earth et al. (2001) report that state ownership of banks does not serve the purpose of promoting economic growth and development but even lead to worsening economic development. Moreover, they argue that banking crises are linked with bank ownership of governments since political goals may prevent government banks to operate in their original path to serve for economic development and growth.

Since governments continue to own banks in most economies, with the exception of the US, such studies regarding bank performance cannot ignore the role of government in the banking business. In this respect, the role of governments in the industry goes beyond the regulation. When a government controls financial resources and has the ability to direct those resources to politicallymotivated projects through banks, there appears a possibility for corruption of public funds. This is especially the case for developing and underdeveloped countries that also lack a sound legal system. Despite the supporters of development view in the 1960s and 1970s, empirical findings of many researches like World Bank report (2001), Galindo and Micco (2004), Sapienza (2004), Dine (2005), and Micco et al. (2007) are consistent with the political view.

It should be also noted that here arises an important discussion issue in government bank ownership and performance. That is, as argued by Yevati et al. (2004), state-owned banks should be evaluated by their function on stabilizing effect but not by their profitability. The researchers underline the importance of causality issue that exists between government bank ownership and such variables as economic development, growth, and corruption. Furthermore, they also introduce new findings which suggest that state bank ownership's negative effects on financial development and growth are not as robust as thought earlier. Their study provides evidence showing that state-owned banks may play a positive role in reducing credit pro-cyclicality as in the case of Latin American economies. Findings in favor of state-owned banks are also reported by Bonin et al. (2005), Yevati et al. (2004), and Micco and Panizza (2004). For example, Bonin et al. (2005) report that private ownership alone does not assure bank efficiency in transition countries. In addition, Micco and Panizza (2004) suggest that state-owned banks may play a positive role in credit-smoothing.

Customer relationship management in an Era of branch renewal

Journal of Bank Cost & Management Accounting, The , 2003 by Kaster, James

CRM Grows Up

Taking center stage of previous enterprise approaches were customer relationship management (CRM) solutions. CRM, defined as "...a set of business processes that help manage client relationships and make improved internal company workflows,"5 was once viewed as the panacea for maintaining and growing a bank's share of wallet. Yet, these applications failed to make the leap from the marketing department to the front-line user. So, while banks were capturing more information, they were unprepared for the processing requirements and analyses. "The objectives of a CRM strategy are customer acquisition, development and retention. These must be specific and measurable."

Today, a successful CRM deployment means that data is captured, analyzed, campaigned, distributed, executed and tracked. The process repeats, continuously, as data is collected and customer and account profiles are updated.

At the heart of a new CRM deployment is a multi-channel architecture. Sometimes called customer interaction management or customer-centric technology (CCT) these new strategies focus on providing benefits to the bank and to the customer across all touch points. TowerGroup defines customer interaction management as "the process of first integrating delivery channel technologies and then making customer knowledge work by bringing the products of analysis to the channels where the customers interact with the bank."6

Drivers of change come from many sources. Customer, cost and competitive forces drive the business and technical requirements. From the customer's perspective, improved service means faster responses to their requests and faster engagements in the branches. For the bank, this same vision translates into improved processes that reduce costs and retain customers. Additionally, customers desire consistency of information across all channels. Balance, account and transaction information provided over the phone, VRU (voice response unit) or Internet should match the information provided by the branch. For many institutions, to make this happen requires a fresh approach and change.

Going forward, branch automation and renewal projects must demonstrate measurable success. CFO Research Services reports that, "Many companies have made significant investments in the technologies that support their relationships with customers, but there is a growing sense that much of this investment has been misguided or even wasted."4

To maximize the value of technology investments, success criteria must be defined and measured. "ROI is clearly the most prevalent financial metric used, but it is surpassed by customer satisfaction as a measure of value."4

Other customer measures that drive the change in branch automation include customer behavior such as branch traffic. While the number of branches in the United States has been steadily increasing, the number of visits per customer to the branches is declining. Yet, the branch remains the customers' preferred delivery channel. This impact is real. Financial institutions must take advantage of each branch contact to enhance the customer service experience and cross-sell meaningful products that deepen the relationship.7

Customer relationship management in an Era of branch renewal

Journal of Bank Cost & Management Accounting, The , 2003 by Kaster, James

Branch banking today is experiencing a resurgence of automation. Tagged as "branch renewal," financial institutions are again giving attention to this vital, yet almost neglected, customer delivery channel. According to Financial Insights, a provider of independent research services to users and providers of financial industry technology, branches are being asked to "provide increasingly higher levels of personalized service and to execute a customer management and service strategy within the retail bank to an increasingly demanding customer base."1

So, what happened? What is the catalyst of this change? The answers can be found in the behaviors of both financial institutions and consumers:

* Financial institutions

Over the past two to three decades, financial institutions concentrated on channels other than the retail branch. In the 70s and 80s, the emphasis was on building ATM networks, developing call centers and providing telephone banking. The 90s saw a spending boom by banks in online, Internet and e-mail technologies. As a result, most financial institutions' budgets favored building the new channels while branches continued to run on dated hardware and software.

* Consumers

As technology brought more convenience to consumers, it also made them more demanding. The contact center and e-mail channels were once thought of as being able to reduce or eliminate the need for branches. Yet while customers adopted these new delivery channels, they continued to use the branches. The American Banking Association estimates that 90 percent of customers use traditional branches and over half prefer the branch as their primary channel.1

The Challenge

The competitive nature of banking has changed significantly over the past 10 years. Banks face channel proliferation, channel integration, non-bank competitors, commoditization of products, introduction of new products and services and greater customer demands. All of these changes impact the customer experience and will ultimately erode a financial institution's market share if the challenges remain unanswered.

The response to branch renewal requires more than just a localized software and hardware update. For example, sharing data across the enterprise empowers bank personnel to respond to customer requests without passing them to other channels. With this handle-it-once approach, the customer experiences a fast, professional resolution to the request and the bank saves time, effort and money as retention rates rise.

Gartner, Inc., a research and advisory firm that helps clients leverage technology, further states, "Branch system software is no longer confined to teller and platform functionality and is no longer confined to implementation at the retail branch. Branch systems are moving toward an enterprise, multichannel architecture. This architecture enables the bank to deliver teller and sales and service platform functionality and data to the call center as well as other delivery channels. It also provides the opportunity for the branch and other channels to access enterprise customer and product data gathered and stored outside the branch system."2

While these market challenges shape the business direction, so do technological changes:

* OS/2 support has been terminated

* Older branch and teller solutions, for example IBM 4700 and DOS-based applications, have been sunsetted

* Aging hardware cannot run today's new robust applications

Another driving technology factor in branch automation decisions is the recent affordability of bandwidth, making web/Internet technologies more desirable. This underlying technology in a bank's branch renewal efforts can distinguish the financial institution from its competitors. Another benefit is that when technology is properly executed, costs are driven down and the customer experience is enhanced. In short, "The need to refresh branch technology has created a $500 million market for hardware, software and professional services that will be needed in the next three years alone."3

Investing in branch automation, however, requires greater scrutiny today. Decisions must be not only tactical to solve existing pain spots, but they must be strategic to handle future changes in the branch as well as other delivery channels. This requires an organizational alignment within the financial institution to envision the need for future upgrades, phase out silo solutions and adopt multi-channel delivery. CFO Research Services, a provider of original research and trend analysis in business and financial management, further emphasizes the impact change may have: "...meaningful benefits for customers is the most important success criteria for customer-centric technology initiatives, followed by strong management support."4

TowerGroup, the leading research and advisory firm focused exclusively on the financial services industry, agrees. "This kind of opportunity requires new tools, methods and cultures that rarely exist in the retail bank today. If banks are to take advantage of these new opportunities, they must have relationship-based systems and tie disparate information sources together to offer a full financial picture to the customer. Customer service systems and sales force automation tools will be combined to form powerful customer interaction systems that combine sales capabilities with the customer's transaction histories and financial planning tools. Retail branches will have trained representatives who can understand the customer's entire financial picture. Tellers will have access to customer histories as well, including interactions that may have occurred at other bank channels, and will be able to offer relationship management 'lite' by communicating more effectively with the customer and offering the services that are in line with the customer's actual financial needs."3

http://findarticles.com/p/articles/mi_qa3682/is_200301/ai_n9183907/?tag=content;col1

Customer Information Management (CIM): The key to successful CRM in financial services

Journal of Bank Cost & Management Accounting, The , 2003 by Morgan, Jim

Introduction

Building customer loyalty and "wallet share" are obviously critical strategic imperatives for financial institutions. Studies have shown that a 5% increase in customer retention increases a bank's profitability by an average of 50%. We also know that it is 5-10 times more costly to acquire a new customer than to retain an existing one. Attrition of a bank's most profitable customers is particularly damaging since the "80/20" rule is perhaps nowhere more evident than in financial services.

However, banks are finding it increasingly difficult to build enduring relationships with customers in an evolving competitive landscape fueled by deregulation and the Internet. As evidence, studies have shown that the average customer now has more accounts with a larger number of institutions than ever before.

The banks that will grow and prosper in this difficult environment are those that build a base of loyal customers and differentiate themselves through the quality of their customer service and the effectiveness of their sales and marketing efforts. Many banks have recently implemented Customer Relationship Management (CRM) programs to address those areas, but most have not realized the returns they expected on their CRM investments.

We believe this is because far too many banks have viewed CRM as a technology solution, not as a fundamental change in how they manage and use customer data. As a result, they have not focused on developing the required Customer Information Management (CIM) capabilities to leverage CRM technology effectively to drive customer loyalty, customer profitability and new customer acquisition. Our experience leads us to believe that banks will not meet their Return on Investment (ROI) objectives from CRM unless they use CIM as the basis for enabling the most fundamental of all CRM principles - "treating different customers differently."

CIM versus CRM

CRM vendors spent much of the past decade selling companies on the idea that implementing new CRM technologies would strengthen their relationships with customers and increase profitability. While vendors dominated the CRM scene during the late 1990s, most consulting firms were still focused on getting the last dollar out of Enterprise Resource Planning (ERP), Y2K and e-Business budgets. It was not until the beginning of this decade that a significant number of consulting firms turned their attention to helping companies develop CRM strategies to leverage those technologies effectively.

As an unfortunate result, most banks continue to view CRM as a technology perspective, as evidenced by the fact that CIOs are often given the responsibility for managing CRM programs. CRM technology vendors are now suffering the consequences as more and more reports come out about companies who failed to realize expected returns from their investments in CRM technologies. Meanwhile, many consulting firms are modifying their vernacular, inventing alternative acronyms to avoid the stigma currently attached to the term "CRM."

It is not difficult to see why most banks have not realized the ROI they expected from CRM. New contact center desktop, sales force automation or marketing campaign management applications do not inherently drive market share and "wallet share". Years of experience in CRM strategy and business intelligence consulting have taught us that CRM succeeds only when those technologies are used to meet the specific needs of a company's most profitable customer segments and to attract new customers who fit those profiles.

A bank's ability to identify customer needs, segment customers, and build accurate customer profiles all depend on how effectively it collects, manages and uses customer data. The importance of applying customer data to the development of CRM strategies and the deployment of CRM technology has led us to coin the acronym "CIM", or Customer Information Management - our own alternative to the now infamous "CRM."

Successful CRM Hinges on CIM

At this point, most financial institutions have invested in determining which customers fall into the "20" of the 80/20 rule, but many continue to lack a differentiated strategy for servicing, selling and marketing to those highly profitable customers. Likewise, while it is important to know which customers are least profitable, it is even more important to know how to make them more profitable and to know which ones will never be profitable.

Much of the challenge in developing optimal CRM strategies for each banking customer is the difficulty of coordinating customer-facing activities across several interaction channels. Banks also struggle with integrating and leveraging customer data from across numerous product-oriented divisions, functional silos and business partners.

Banks that have implemented CRM technologies without effectively applying CIM have been unable to generate the ROI they expected from CRM because they are:

* Not able to recognize high value customers during interactions

* Not differentiating service levels based on the importance of each customer to the bank

http://findarticles.com/p/articles/mi_qa3682/is_200301/?tag=content;col1

Strategy as Active Waiting

Harvard Business Review by Donald N. Sull

Successful executives who cut their teeth in stable industries or in developed countries often stumble when they face more volatile markets. They falter, in part, because they assume they can gaze deep into the future and develop a long-term strategy that will confer a sustainable competitive advantage. But visibility into the future of volatile markets is sharply limited because of the many different variables at play. Factors such as technological innovation, customers' evolving needs, government policy, and changes in the capital markets interact with one another to create unexpected outcomes. Over the past six years, Donald Sull, an associate professor at London Business School, has led a research project examining some of the world's most volatile arenas, from national markets like China and Brazil to industries like enterprise software, telecommunications, and airlines. One of the most striking findings from this research is the importance of taking action during comparative lulls in the storm. Huge business opportunities are relatively rare; they come along only once or twice in a decade. And, for the most part, companies can't manufacture those opportunities; changes in the external environment converge to make them happen. What managers can do is prepare for these golden opportunities by managing smart during the comparative calm of business as usual. During these periods of active waiting, leaders must probe the future and remain alert to anomalies that signal potential threats or opportunities; exercise restraint to preserve their war chests; and maintain discipline to keep the troops battle-ready.

Why Good Companies Go Bad

Harvard Business Review July 1999 by Donald N. Sull

One of the most common business phenomena is also one of the most perplexing: when successful companies face big changes, they often fail to respond effectively. Many assume that the problem is paralysis, but the real problem, according to Donald Sull, is active inertia--an organization's tendency to persist in established patterns of behavior. Most leading businesses owe their prosperity to a fresh competitive formula--a distinctive combination of strategies, relationships, processes, and values that sets them apart from the crowd. But when changes occur in a company's markets, the formula that brought success brings failure instead. Stuck in the modes of thinking and working that have been successful in the past, market leaders simply accelerate all their tried-and-true activities and, by attempting to dig themselves out of a hole, just deepen it. In particular, four things happen: strategic frames become blinders; processes harden into routines; relationships become shackles; and values turn into dogmas. To illustrate his point, the author draws on examples of pairs of industry leaders, like Goodyear and Firestone, whose fates diverged when they were forced to respond to dramatic changes in the tire industry. In addition to diagnosing the problem, Sull offers practical advice for avoiding active inertia. Rather than rushing to ask, "What should we do?" managers should pause to ask, "What hinders us?" That question focuses attention on the proper things: the strategic frames, processes, relationships, and values that can subvert action by channeling it in the wrong direction.

http://www.bnet.com/2439-13241_23-267616.html

strategy - the strategic audit

In our introduction to business strategy, we emphasised the role of the "business environment" in shaping strategic thinking and decision-making.

The external environment in which a business operates can create opportunities which a business can exploit, as well as threats which could damage a business. However, to be in a position to exploit opportunities or respond to threats, a business needs to have the right resources and capabilities in place.

An important part of business strategy is concerned with ensuring that these resources and competencies are understood and evaluated - a process that is often known as a "Strategic Audit".

The process of conducting a strategic audit can be summarised into the following stages:

(1) Resource Audit:

The resource audit identifies the resources available to a business. Some of these can be owned (e.g. plant and machinery, trademarks, retail outlets) whereas other resources can be obtained through partnerships, joint ventures or simply supplier arrangements with other businesses. You can read more about resources here.

(2) Value Chain Analysis:

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings: (1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and (2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("outsourced"). You can read more about Value Chain Analysis here.

(3) Core Competence Analysis:

Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage. You can read more about the concept of Core Competencies here.

(4) Performance Analysis

The resource audit, value chain analysis and core competence analysis help to define the strategic capabilities of a business. After completing such analysis, questions that can be asked that evaluate the overall performance of the business. These questions include:

- How have the resources deployed in the business changed over time; this is "historical analysis"
- How do the resources and capabilities of the business compare with others in the industry - "industry norm analysis"
- How do the resources and capabilities of the business compare with "best-in-class" - wherever that is to be found- "benchmarking"
- How has the financial performance of the business changed over time and how does it compare with key competitors and the industry as a whole? - "ratio analysis"

(5) Portfolio Analysis:

Portfolio Analysis analyses the overall balance of the strategic business units of a business. Most large businesses have operations in more than one market segment, and often in different geographical markets. Larger, diversified groups often have several divisions (each containing many business units) operating in quite distinct industries.

An important objective of a strategic audit is to ensure that the business portfolio is strong and that business units requiring investment and management attention are highlighted. This is important - a business should always consider which markets are most attractive and which business units have the potential to achieve advantage in the most attractive markets.

Traditionally, two analytical models have been widely used to undertake portfolio analysis:

- The Boston Consulting Group Portfolio Matrix (the "Boston Box");

- The McKinsey/General Electric Growth Share Matrix

(6) SWOT Analysis:

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats. SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. Read more about it here.

http://tutor2u.net/business/strategy/Strategic_audit.htm

stakeholders - interests and power

Common and conflicting interests of stakeholders

The different stakeholder groups have different interests some in common with other stakeholders and some in conflict.

Examples of common interests:

• Shareholders and employees have a common interest in the success of the organisation.
• High profits which not only lead to high dividends but also job security.
• Suppliers have an interest in the growth and prosperity of the firm.

Examples of conflicting interests

• Wage rises might be at the expense of dividend.
• Managers have an interest in organisational growth but this might be at the expense of short term profits.
• Growth of the organisation might be at the expense of the local community and the environment.

Thinking about stakeholder power
The study of stakeholders should not be limited to a description of the way in which the organisation impacts upon the stakeholders.
In the context of strategy, what is more important is the power and influence that a stakeholder has over the organisation and its objectives.

Stakeholder influence:
Current and future strategies of the organisation are affected by:

• External pressure from the market place, including competitors, customers, suppliers, shareholders, pressure groups threatening a boycott, the government (through taxation and spending).
• Internal pressures from existing commitments, managers, employees and their trade unions.
• The personal ethical and moral perspectives of senior managers

(adapted from Newbould and Luffman, Successful Business Policies 1979).

The importance of profit maximisation
Traditional economic theory is based on the assumption that firms seek to maximise profits.
It must be appreciated that this does not mean “any old level of profits” or even a certain target level of profits but it means squeezing the last penny of profits out of the firm’s operations.
This assumption was based on the circumstances of 19th century business where owners acted as managers and could ignore the interests of stakeholders such as the employees and the community.

Stakeholder theory
The profit maximising theory of the firm that characterised Neo-Classical Economics has to be modified to taken into account the power and influence of stakeholders.
Various writers have put forward theories based on an alternative to the profit maximising aim:

• Baumol (1959) put forward a theory based on a sales maximising objective.
• Williamson (1964) offered a theory based on managers setting the objectives to maximise their personal satisfaction.
• Marris (1964) offered theory based on growth as the key concern.

In all three cases:

• The objective the result of managerial power over decision making.
• Reflected the interests of managers rather than shareholders.
• There was a limiting factor- these objectives are pursued subject to producing a satisfactory level of profits.

Behavioural theory
In “A Behavioural theory of the Firm” (1963) Cyert and March argued the goals of an organisation are a compromise between members of a coalition made up of the stakeholders.

The outcome of decision making is a compromise or “trade off” between the interests of the various stakeholder groups.

In the process leading to compromise much will depend on the relative power of the different stakeholder groups.

Satisficing
The Cyert and March theory of decisions being a compromise between the different stakeholders has certain features in common with the idea of satisficing behaviour which is associated with Herbert Simon.

Simon argued that decisions are taken in conditions of uncertainty and ignorance.
Rather than an exhaustive search for the best or ideal solution, decision makers seek an acceptable or satisfactory outcome.

This is chosen because of the internal and external constraints such as time pressure, lack of information and the influence of powerful stakeholder.

Shareholders influence
In small private firms shareholders are in direct contact with managers and in, many cases, are directors of the company. They have the ability to influence the objectives and directions of the organisation.

But the individual shareholder in a large public company has very little influence.
In theory they can exert influence through voting at the annual shareholders meeting but unless individuals group together their votes will have little impact.

In any case they are likely to be outvoted by the big institutional investors (e.g. pension funds) who own large blocks of shares.

However, shareholders can exert influence through threatening to “vote with their feet” by selling shares. As a result, managers and directors must at least keep shareholders satisfied.

Determinants of stakeholder power

For stakeholders to have power and influence the desire to exert influence must be coupled with the means to exert leverage on the company.
How much power the stakeholder can exert will reflect the extent to which:

• The stakeholder can disrupt the organisations plans.
• The stakeholder causes uncertainty in the plans.
• The organisation needs and relies on the stakeholder.

Levers operated by internal stakeholders

Internal stakeholders have their own interests which they might pursue - e.g. managers might seek organisational growth over profits, employees seek high wages and favourable working conditions.
Managers make decisions and therefore have extensive power.
Internal stakeholders

• Have negative power to impede the implementation of strategy.
• Can threaten industrial action
• Can threaten to resign
• Might refuse to relocate.

Levers operated by connected stakeholders

• Shareholders have voting rights and can sell shares thus making the company vulnerable to take over.
• Creditors can refuse credit, charge high interest rates, take legal action for non-payment and, in extreme cases, initiate moves to liquidate the company.
• Suppliers can refuse future credit.
• Customers can seek to buy goods/services elsewhere and enjoy consumer protection rights.

Levers operated by government & pressure groups

The government can exert influence through taxation, government spending, legal action, regulation and threatened changes in the law.
Community and pressure groups can exert influence by:

• Publicising business activities they regard as unacceptable.
• Political pressure for changes in the law
• Refusing to buy goods/services fro named firms
• Illegal actions such as sabotage

Stakeholder analysis

“All animals are equal but some are more equal than others” [George Orwell, Animal Farm]

Inequality of influence:
It is naïve to believe that the stakeholders have equality in terms of power and influence.
Managers have more influence than environmental activists.
At the same time the institutional investor with 25% of shares will have a greater influence that the small shareholder.
Banks have a considerable impact on firms facing cash flow problems but can be ignored by a cash rich firm.

Primary and secondary stakeholders
A distinction can be drawn between the two groups of stakeholders.
Primary stakeholders;

• Those most vital to the organisation.
• A group without whose continuing participation the company cannot survive as a going concern.
• e.g. customers, suppliers.

Secondary stakeholders:
Those without whose continuing participation the company can still exist. e.g. the community.

Active and passive stakeholders
This is an alternative categorisation of stakeholders.

Active stakeholders
Seek to participate in the organisation’s activities. e.g. managers, employees, pressure groups.

Passive stakeholders
Do not normally seek to participate in an organisation’s policy making. e.g. most shareholders, government, local communities.

http://tutor2u.net/business/strategy/stakeholders-interests-and-power.html

How to Thrive in Turbulent Markets

Key ideas from the Harvard Business Review article by Donald Sull

The Idea in Brief

In today's volatile world, doing business feels like competing in a heavyweight boxing ring. To prevail, should your company rely on agility (nimbleness) to quickly spot and exploit market changes? For instance, shifting resources from struggling divisions to more promising ones can spur revenues.

Or should you rely on absorption (toughness) to withstand punches? For example, keeping a lot of cash on hand might enable your firm to weather unexpected threats.

Sull recommends agile absorption: deploying both capabilities in various combinations as needed. Through agile absorption, you consistently identify and seize opportunities while also retaining the structural heft your company needs to thrive.

Toyota, for example, maintains absorption by employing a large workforce, but unlike U.S. automakers, enhances agility with a combination of flexible work rules, variable job assignments, and employee involvement.

The Idea in Practice

Sources of Agility

Sources of Absorption

Achieving Agile Absorption

http://www.bnet.com/2439-13241_23-267616.html

How to Get Customers to Pay Up

by Christina Salerno

It’s a tough discipline, especially in a recession, but bill collection can make or break a business — and in some cases, it can bring others down with it. After defaulting on $275 million in loans, Idaho’s Tamarack Resort filed for bankruptcy protection in February and shut its doors March 4, leaving behind $22 million in unpaid bills from suppliers and contractors, many of whom had to lay off employees. And a French auto-parts maker recently sued Auburn Hills, Mich.-based Chrysler, claiming the car manufacturer owes $110 million for engineering and research costs.

To successfully collect payments on time, companies need a plan in place that includes more than just the threat of a bill collector calling six times per day. Here are three key steps to get clients to pay up in a down economy.

Things you will need:

• Time: Allow about three months to carefully craft, vet, and launch a new billing policy. Alert your customers to the changes and specify when the new policy will take effect.
• Money: Depends. If all goes as planned, collecting unpaid bills will add more cash to the company’s coffers. But if customers don’t pay up immediately, a plan B — such as debt settlement — could result in a loss.
• Task Force: Assemble a team of bright minds from legal, accounting, and public relations to refine a billing policy.
• Key Message: Be upfront about why your company is stepping up its collection efforts. Everyone knows the economy is in trouble, so go ahead and say it. Customers will be more accepting of any policy changes.

Use a Carrot and Stick

Goal: Encourage customers to pay on time by creating a reward-and-punishment billing system.

First, the carrot. Offer a discount if a client pays the debt early. The most common early payment discount is called the ‘2/10 net 30 rule’: Customers receive a 2 percent discount on a bill that is due in 30 days if they pay by the 10th day.

By offering a discount, “businesses can make huge returns in this economy,” that they otherwise wouldn’t get, says Jim Ullery, president of the Center for Organizational Energy and a management consultant who specializes in bill collection. Those returns come from clients who are eager for any opportunity to save money. J.P. Morgan, which operates an electronic payment service for firms and their suppliers, recently reported that the economic crisis has spurred more companies to take advantage of early payment discounts. In 2008, one of J.P. Morgan’s Fortune 500 clients in the telecommunications industry netted savings of $30 million in early payment discounts. A pharmaceutical customer captured more than $4 million in discount savings.

Now the stick. If customers face a mountain of unpaid bills and invoices, they need a good reason to pay your company first. Customers are more likely to cough up the cash if they know they will legally owe more money down the line. Here are a few ways to encourage payment:

• Start charging accrued interest on the day the bill is late.
• Include a clause in the service agreement or contract that says the client is responsible for all fees associated with bill collection.
• Require the business owner or principal to sign a personal guarantee.

Banks have a long-established practice of asking for collateral, such as equipment or property, when extending business loans. Companies should be no different, Ullery says. The reality is that “people pay banks and lenders who are going to repossess something first,” Ullery says. In this economic climate, a handshake won’t cut it; the only personal guarantee is one signed on the dotted line — with collateral attached.

What Not to Do

Surprise Customers

No one wants angry phone calls from customers slapped with unexpected late penalties. Clearly spell out every detail of the billing change in a letter, and include it with invoices: Does the 10-day period for the early discount start on the date of the invoice, or the day the customer receives it? What is the interest rate charged on late payments? Make new customers aware of the policy in a signed service agreement. Be transparent and explain why you are making the changes. Chances are, your customers are feeling the same pinch, and they’ll understand.

Strike the Right Tone

Goal: Express the gravity of the situation — without alienating the customer.

If the past-due date for a bill has come and gone, immediately send the first collection letter. “The day the payment isn’t there on time, establish an iron fist and a velvet glove,” Ullery says. He suggests a letter that is conversational, courteous, and specific — not full of legal jargon or generic statements. The tone of the letter is critical. Let the client know that it’s about more than just money — the business relationship is also at stake, Ullery says. And don’t be subtle, either. The letter must not leave any room for interpretation. Strike the line that says: “If your check has already been sent, ignore this letter.” That’s a wishy-washy sentence, and it’s also an out for the customer who may say that the check is in the mail, even if it’s not. One final tip: Toss the standard white envelopes that will get lost in a stack of mail. Instead, send collection letters in an oversized priority envelope that screams, “Important!”

For Example

Watch Your Words

Here’s an adapted excerpt from one of Ullery’s collection letters that is polite and conversational, yet firm in its tone:

“In a few days, decisions must be made on accounts that are seriously past due. Your goodwill has always been important to us; that is why we are reluctant now to take any action that might jeopardize your credit standing and cause you added expense. Our contract stipulates that you will be responsible for collection and legal fees.

We have contacted you numerous times without response, and now we must consider the possibility of placing your account with our collection agents or a law firm. Still, I am hopeful that you will act promptly and forward us your payment in full, immediately. That is why I am going to suspend further action until (date)

It is important, however, that I hear from you by then. Otherwise, a decision must be made that I am sure neither of us wants.”

Negotiate New Payment Terms

Goal: Work with your customers directly — and turn to collection agencies as a last resort.

The knee-jerk reaction to an unresponsive debtor is to turn the bill over to a collection agency, sell off the debt, or write it off. But first, call the debtor and offer to set up a payment plan, says Mike McDerment, CEO and founder of FreshBooks, an online invoicing service. “Negotiate some of the terms to be more flexible,” he recommends.

Open the conversation by asking why the customer hasn’t paid the bill. These are extraordinary economic times, and a customer who paid bills promptly in the past may be faced with unprecedented business challenges. “Understand the situation they are in today,” says McDerment. “Stay in tune with your customers. If you can work with someone through their tough times,” he says, then that business relationship will last past the economic downturn.

Another option is a debt settlement. With the financial climate making it increasingly difficult to fully collect on a bad debt, more firms are offering to forgive a portion of the debt rather than send it to a collection agency or write it off. Major credit card companies like Bank of America have quietly started offering debt settlements to some customers. Even though settling a debt means taking a loss, it will be faster than going through a collection agency or litigation. Also, clients who didn’t respond to other options may jump at the chance to settle.

If no other solution works, resort to a collection agency or litigation. “The longer you wait, the less likely you are to get the money,” says Ullery, who recommends waiting no longer than three months before sending a past-due account to collections. But beware: Sometimes collection agencies can go too far to collect a debt. The Illinois attorney general filed a lawsuit in January against a collection agency that made false threats, including telling debtors that the state’s child welfare agency would take away their children if they didn’t pay up. That’s an extreme case, but it underscores the importance of knowing what kind of agency you’re dealing with. Familiarize yourself with the Federal Trade Commission’s Fair Debt Collection Practices Act to make sure the collection agency is doing things by the book.

Nitty Gritty

Avoid Difficult Customers from the Start

Clients who already have plunked down a chunk of cash are more likely to finish paying their bills than those who haven’t paid anything, so try to weed out the non-payers before they jeopardize your bottom line. Consider requiring new clients to make a down payment of at least 25 percent — ditto for a long-time customer who is in obvious financial trouble. “Businesses want the next order so desperately that they become more vulnerable to being taken advantage of by deadbeats,” especially in a recession, says Susan Schreter, managing editor of takecommand.org and a professor of entrepreneurship at the University of Washington’s Foster School of Business. Even if requiring a down payment drives off a few potential customers, it’s worth the saved collection headaches.

http://www.bnet.com/2403-13240_23-276588.html

strategy - SWOT analysis

Definition:

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats

SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment.

Once key strategic issues have been identified, they feed into business objectives, particularly marketing objectives. SWOT analysis can be used in conjunction with other tools for audit and analysis, such as PEST analysis and Porter's Five-Forces analysis. It is also a very popular tool with business and marketing students because it is quick and easy to learn.

The Key Distinction - Internal and External Issues

Strengths and weaknesses are Internal factors. For example, a strength could be your specialist marketing expertise. A weakness could be the lack of a new product.

Opportunities and threats are external factors. For example, an opportunity could be a developing distribution channel such as the Internet, or changing consumer lifestyles that potentially increase demand for a company's products. A threat could be a new competitor in an important existing market or a technological change that makes existing products potentially obsolete.

it is worth pointing out that SWOT analysis can be very subjective - two people rarely come-up with the same version of a SWOT analysis even when given the same information about the same business and its environment. Accordingly, SWOT analysis is best used as a guide and not a prescription. Adding and weighting criteria to each factor increases the validity of the analysis.

Areas to Consider

Some of the key areas to consider when identifying and evaluating Strengths, Weaknesses, Opportunities and Threats are listed in the example SWOT analysis below:

http://tutor2u.net/business/strategy/SWOT_analysis.htm

strategic planning - values and vision

Introduction to Values and Vision

Values form the foundation of a business’ management style.

Values provide the justification of behaviour and, therefore, exert significant influence on marketing decisions.

Consider the following examples of a well-known business – BT Group - defining its values:

BT's activities are underpinned by a set of values that all BT people are asked to respect:
- We put customers first
- We are professional
- We respect each other
- We work as one team
- We are committed to continuous improvement.
These are supported by our vision of a communications-rich world - a world in which everyone can benefit from the power of communication skills and technology.
A society in which individuals, organisations and communities have unlimited access to one another and to a world of knowledge, via a multiplicity of communications technologies including voice, data, mobile, internet - regardless of nationality, culture, class or education.
Our job is to facilitate effective communication, irrespective of geography, distance, time or complexity.
Source: BT Group plc web site

Why are values important?

Many Japanese businesses have used the value system to provide the motivation to make them global market leaders. They have created an obsession about winning that is communicated at all levels of the business that has enabled them to take market share from competitors that appeared to be unassailable.

For example, at the start of the 1970’s Komatsu was less than one third the size of the market leader – Caterpillar – and relied on just one line of smaller bulldozers for most of its revenues. By the late 1980’s it had passed Caterpillar as the world leader in earth-moving equipment. It had also adopted an aggressive diversification strategy that led it into markets such as industrial robots and semiconductors.

If “values” shape the behaviour of a business, what is meant by “vision”?

To succeed in the long term, businesses need a vision of how they will change and improve in the future. The vision of the business gives it energy. It helps motivate employees. It helps set the direction of corporate and marketing strategy.

What are the components of an effective business vision?

Davidson identifies six requirements for success:

- Provides future direction
- Expresses a consumer benefit
- Is realistic
- Is motivating
- Must be fully communicated
- Consistently followed and measured

http://tutor2u.net/business/strategy/vision.htm

Distributional ratings of performance: more evidence for a new rating format - includes appendix

The evaluation of individual work performance has long posed a perplexing dilemma to researchers and practitioners alike. There is little debate that more often than not, the most complete, readily available, and efficient measure of an individual's performance involves ratings of that performance by another individual. The thrust of the dilemma, then, is how to reduce the subjectivity inherent in performance ratings. Due in large part to a strong psychometric emphasis, the development of "better" rating scale formats has received a great deal of attention as an approach to resolving this dilemma. As noted by Steiner, Rain and Smalley (1993) research focusing on rating scale development probably peaked in the 1960's and 1970's with the development of the Behaviorally Anchored Rating Scale (Smith & Kendall, 1963), the Behavioral Observation Scale (Latham & Wexley, 1977), and the Mixed Standard Scale (Blanz & Ghiselli, 1972). Unfortunately, research examining the efficacy of the different rating scale formats generally indicated that ratings were not affected by changes in rating scale format. This finding was so pervasive that Landy and Farr (1980) called for a moratorium on rating format research. Subsequently, very little research in the past decade has focused on rating format.

One exception to the lack of research on rating format development has been the development of rating scales that solicit ratings pertaining not only to an individual's level of performance but the distribution of that performance as well. One such system, labeled Performance Distribution Assessment (PDA) (Kane, 1983; 1986), is based on the distributional measurement model postulated by Kane and Lawler (1979). An important characteristic of this model is a focus on the range of performance observed. Specifically, the model stipulates that not only is the level of performance important, but the fluctuation or variance in performance must also be considered. For example, two individuals may both be appropriately characterized as "average performers"; however, if one is consistently average and the other alternates between very poor and very good, very different pictures emerge with respect to the individuals' performance. Thus, distributional ratings have the potential for providing a performance rating system with several practical advantages over other rating systems. First and foremost among these is that the information generated with distributional ratings gives a measurement of performance variability as well as performance level. In addition, this information is solicited in such a way as to not require substantially more effort or time than other rating formats.

Although distributional rating formats represent an interesting approach to the evaluation of work performance, very little research exists pertaining to this approach. We found only two studies to date that directly evaluated distributional rating scales (i.e., Jako & Murphy, 1990; Steiner, et al., 1993). One reason for this lack of research stems from the dilemma of how to compare and evaluate the efficacy of rating scale formats. Previous attempts to compare and evaluate rating scales focused on determining which produced the "best" ratings. This research most often took a criterion-related approach to the evaluation of performance ratings. The criterion being either the psychometric characteristics of the ratings (i.e., rating errors) or the accuracy of the ratings. As noted, this line of research did not prove to be very fruitful. However, one of the benefits of distributional ratings is that in addition to a single measurement of a ratee's performance level with respect to a particular performance domain (i.e., performance dimension), a measure of the variability or consistency of the ratee's performance within the dimension is also provided. Thus, distributional ratings would be preferable to more traditional global ratings to the extent that they reflect meaningful fluctuations of ratee performance within dimensions and thus provide information different than that provided by global ratings.

With this in mind, a number of questions emerge with respect to distributional ratings. The first question is to what extent are raters sensitive to different distributions of performance. Are raters able to recognize and report differences with respect to the variability of performance? Steiner et al. (1993) addressed this question and found that raters using a distributional rating format were in fact sensitive to differences in the variability of performance, even if the mean level of performance was the same. These results add to other evidence that raters are capable of both detecting and providing reasonably accurate estimates of the variability in social information (Holland, Holyoak, Nisbett & Thagard, 1986).

A second question focuses on the extent to which information obtained using ratings from a distributional format differs from that obtained using more typical global rating scales. Here, it is important to consider the nature of rater information processing requirements underlying distributional ratings as well as those underlying global rating scales. The latter requires raters to recognize and encode relevant behaviors and then later to recall, categorize, and intuitively integrate information about the frequency of relevant behaviors in order to generate a rating. Distributional rating formats, on the other hand, require raters to recognize and encode relevant behaviors and then later to report actual or estimated frequencies of different categories of behavior. Advocates of the distributional rating approach (e.g., Kane, 1983; 1986) postulate that distributional ratings may minimize the cognitive demands on the rater by asking for judgments about the distribution of performance, rather than more global evaluative judgments. More specifically, distributional ratings require raters to provide an estimate of the frequency at which ratees perform at various levels along a performance continuum. Mathematical algorithms can then be used to mechanically integrate this distributional information into composite indices of the level of job performance. The distributional information provided by raters may also be used to compute a measure of the variability (or consistency) of ratee performance. Thus, distributional rating formats can provide measures of within dimension variability, as well as overall performance level.

market segmentation - demographic segmentation

Demographic segmentation consists of dividing the market into groups based on variables such as age, gender family size, income, occupation, education, religion, race and nationality.

As you might expect, demographic segmentation variables are amongst the most popular bases for segmenting customer groups.

This is partly because customer wants are closely linked to variables such as income and age. Also, for practical reasons, there is often much more data available to help with the demographic segmentation process.

The main demographic segmentation variables are summarised below:

Age

Consumer needs and wants change with age although they may still wish to consumer the same types of product. So Marketers design, package and promote products differently to meet the wants of different age groups. Good examples include the marketing of toothpaste (contrast the branding of toothpaste for children and adults) and toys (with many age-based segments).

Life-cycle stage

A consumer stage in the life-cycle is an important variable - particularly in markets such as leisure and tourism. For example, contrast the product and promotional approach of Club 18-30 holidays with the slightly more refined and sedate approach adopted by Saga Holidays.

Gender

Gender segmentation is widely used in consumer marketing. The best examples include clothing, hairdressing, magazines and toiletries and cosmetics.

Income

Another popular basis for segmentation. Many companies target affluent consumers with luxury goods and convenience services. Good examples include Coutts bank; Moet & Chandon champagne and Elegant Resorts - an up-market travel company. By contrast, many companies focus on marketing products that appeal directly to consumers with relatively low incomes. Examples include Aldi (a discount food retailer), Airtours holidays, and discount clothing retailers such as TK Maxx.

Social class

Many Marketers believe that a consumers "perceived" social class influences their preferences for cars, clothes, home furnishings, leisure activities and other products & services. There is a clear link here with income-based segmentation.

Lifestyle

Marketers are increasingly interested in the effect of consumer "lifestyles" on demand. Unfortunately, there are many different lifestyle categorisation systems, many of them designed by advertising and marketing agencies as a way of winning new marketing clients and campaigns!

http://tutor2u.net/business/marketing/segmentation_bases_demographic.asp

market segmentation - bases of segmentation

It is widely thought in marketing that than segmentation is an art, not a science.

The key task is to find the variable, or variables that split the market into actionable segments

There are two types of segmentation variables:

(1) Needs

(2) Profilers

The basic criteria for segmenting a market are customer needs. To find the needs of customers in a market, it is necessary to undertake market research.

Profilers are the descriptive, measurable customer characteristics (such as location, age, nationality, gender, income) that can be used to inform a segmentation exercise.

The most common profilers used in customer segmentation include the following:

Profiler Examples

Geographic

• Region of the country
• Urban or rural

Demographic

• Age, sex, family size
• Income, occupation, education
• Religion, race, nationality

Psychographic

• Social class
• Lifestyle type
• Personality type

Behavioural

• Product usage - e.g. light, medium ,heavy users
• Brand loyalty: none, medium, high
• Type of user (e.g. with meals, special occasions)

http://tutor2u.net/business/marketing/segmentation_bases_introduction.asp

market segmentation - behavioural segmentation

Behavioural segmentation divides customers into groups based on the way they respond to, use or know of a product.

Behavioural segments can group consumers in terms of:

Occasions

When a product is consumed or purchased. For example, cereals have traditionally been marketed as a breakfast-related product. Kelloggs have always encouraged consumers to eat breakfast cereals on the "occasion" of getting up. More recently, they have tried to extend the consumption of cereals by promoting the product as an ideal, anytime snack food.

Usage

Some markets can be segmented into light, medium and heavy user groups

Loyalty

Loyal consumers - those who buy one brand all or most of the time - are valuable customers. Many companies try to segment their markets into those where loyal customers can be found and retained compared with segments where customers rarely display any product loyalty. The holiday market is an excellent example of this. The "mass-market" overseas tour operators such as Thomson, Airtours, JMC and First Choice have very low levels of customer loyalty - which means that customers need to be recruited again every year. Compare this with specialist, niche operators such as Laskarina which has customers who have traveled with the brand in each of the last 15-20 years.

Benefits Sought

An important form of behavioural segmentation. Benefit segmentation requires Marketers to understand and find the main benefits customers look for in a product. An excellent example is the toothpaste market where research has found four main "benefit segments" - economic; medicinal, cosmetic and taste.

http://tutor2u.net/business/marketing/segmentation_bases_behavioural.asp

market segmentation - geographic segmentation

Geographic segmentation tries to divide markets into different geographical units: these units include:

• Regions: e.g. in the UK these might be England, Scotland, Wales Northern Ireland or (at a more detailed level) counties or major metropolitan areas

• Countries: perhaps categorised by size, development or membership of geographic region

• City / Town size: e.g. population within ranges or above a certain level

• Population density: e.g. urban, suburban, rural, semi-rural

• Climate: e.g. Northern, Southern

Geographic segmentation is an important process - particularly for multi-national and global businesses and brands. Many such companies have regional and national marketing programmes which alter their products, advertising and promotion to meet the individual needs of geographic units.

http://tutor2u.net/business/marketing/segmentation_bases_geographic.asp

products - introduction

A product is defined as:

"Anything that is capable of satisfying customer needs"

This definition includes both physical products (e.g. cars, washing machines, DVD players) as well as services (e.g. insurance, banking, private health care).

The process by which companies distinguish their product offerings from the competition is called branding.

For most companies, brands are not developed in isolation - they are part of a product group.

A product group (or product line) is a group of brands that are closely related in terms of their functions and the benefits they provide (e.g. Dell's range of personal computers or Sony's range of televisions).

There are two main types of product brand:

(1) Manufacturer brands

(2) Own-label brands

Manufacturer brands are created by producers and use their chosen brand name. The producer has the responsibility for marketing the brand, by building distribution and gaining customer brand loyalty. Good examples include Microsoft, Panasonic and Mercedes.

Own-label brands are created and owned by distributors. Good examples include Tesco and Sainsbury's.

The main importance of branding is that, done well, it permits a business to differentiate its products, adding extra value for consumers who value the brand, and improving profitability for the company.

Businesses should manage their products carefully over time to ensure that they deliver products that continue to meet customer wants. The process of managing groups of brands and product lines is called portfolio planning.

Two models of product portfolio planning are widely known and used in business:

• The Boston Group Growth-Share Matrix, and

• GE Market Attractiveness model

These models are described in more detail in other tutor2u revision notes.

Businesses need to regularly look for new products and markets for future growth. A useful way of looking at growth opportunities is the Ansoff Growth matrix which suggests that there are four main ways in which growth can be achieved through a product strategy:

(1) Market penetration - Increase sales of an existing product in an existing market

(2) Product development - Improve present products and/or develop new products for the current market

(3) Market development - Sell existing products into new markets (e.g. developing export sales)

(4) Diversification - Develop new products for new markets

http://tutor2u.net/business/marketing/products_introduction.asp

products - product life cycle

We define a product as "anything that is capable of satisfying customer needs. This definition includes both physical products (e.g. cars, washing machines, DVD players) as well as services (e.g. insurance, banking, private health care).

Businesses should manage their products carefully over time to ensure that they deliver products that continue to meet customer wants. The process of managing groups of brands and product lines is called portfolio planning.

The stages through which individual products develop over time is called commonly known as the "Product Life Cycle".

The classic product life cycle has four stages (illustrated in the diagram below): introduction; growth; maturity and decline

Introduction Stage

At the Introduction (or development) Stage market size and growth is slight. it is possible that substantial research and development costs have been incurred in getting the product to this stage. In addition, marketing costs may be high in order to test the market, undergo launch promotion and set up distribution channels. It is highly unlikely that companies will make profits on products at the Introduction Stage. Products at this stage have to be carefully monitored to ensure that they start to grow. Otherwise, the best option may be to withdraw or end the product.

Growth Stage

The Growth Stage is characterised by rapid growth in sales and profits. Profits arise due to an increase in output (economies of scale)and possibly better prices. At this stage, it is cheaper for businesses to invest in increasing their market share as well as enjoying the overall growth of the market. Accordingly, significant promotional resources are traditionally invested in products that are firmly in the Growth Stage.

Maturity Stage

The Maturity Stage is, perhaps, the most common stage for all markets. it is in this stage that competition is most intense as companies fight to maintain their market share. Here, both marketing and finance become key activities. Marketing spend has to be monitored carefully, since any significant moves are likely to be copied by competitors. The Maturity Stage is the time when most profit is earned by the market as a whole. Any expenditure on research and development is likely to be restricted to product modification and improvement and perhaps to improve production efficiency and quality.

Decline Stage

In the Decline Stage, the market is shrinking, reducing the overall amount of profit that can be shared amongst the remaining competitors. At this stage, great care has to be taken to manage the product carefully. It may be possible to take out some production cost, to transfer production to a cheaper facility, sell the product into other, cheaper markets. Care should be taken to control the amount of stocks of the product. Ultimately, depending on whether the product remains profitable, a company may decide to end the product.

Examples

Set out below are some suggested examples of products that are currently at different stages of the product life-cycle:

INTRODUCTION	GROWTH	MATURITY	DECLINE
Third generation mobile phones	Portable DVD Players	Personal Computers	Typewriters
E-conferencing	Email	Faxes	Handwritten letters
All-in-one racing skin-suits	Breathable synthetic fabrics	Cotton t-shirts	Shell Suits
iris-based personal identity cards	Smart cards	Credit cards	Cheque books

http://tutor2u.net/business/marketing/products_lifecycle.asp

pricing - introduction

Setting the right price is an important part of effective marketing . It is the only part of the marketing mix that generates revenue (product, promotion and place are all about marketing costs).

Price is also the marketing variable that can be changed most quickly, perhaps in response to a competitor price change.

Put simply, price is the amount of money or goods for which a thing is bought or sold.

The price of a product may be seen as a financial expression of the value of that product.

For a consumer, price is the monetary expression of the value to be enjoyed/benefits of purchasing a product, as compared with other available items.

The concept of value can therefore be expressed as:

(perceived) VALUE = (perceived) BENEFITS – (perceived) COSTS

A customer’s motivation to purchase a product comes firstly from a need and a want:e.g.

• Need: "I need to eat

• Want: I would like to go out for a meal tonight")

The second motivation comes from a perception of the value of a product in satisfying that need/want (e.g. "I really fancy a McDonalds").

The perception of the value of a product varies from customer to customer, because perceptions of benefits and costs vary.

Perceived benefits are often largely dependent on personal taste (e.g. spicy versus sweet, or green versus blue). In order to obtain the maximum possible value from the available market, businesses try to ‘segment’ the market – that is to divide up the market into groups of consumers whose preferences are broadly similar – and to adapt their products to attract these customers.

In general, a products perceived value may be increased in one of two ways – either by:

(1) Increasing the benefits that the product will deliver, or,

(2) Reducing the cost.

For consumers, the PRICE of a product is the most obvious indicator of cost - hence the need to get product pricing right.

Factors affecting demand

Consider the factors affecting the demand for a product that are

(1) within the control of a business and

(2) outside the control of a business:

Factors within a businesses’ control include:

• Price (assuming an imperfect market – i.e. not perfect competition)

• Product research and development

• Advertising & sales promotion

• Training and organisation of the sales force

• Effectiveness of distribution (e.g. access to retail outlets; trained distributor agents)

• Quality of after-sales service (e.g. which affects demand from repeat-business)

Factors outside the control of business include:

• The price of substitute goods and services

• The price of complementary goods and services

• Consumers’ disposable income

• Consumer tastes and fashions

Price is, therefore, a critically important element of the choices available to businesses in trying to attract demand for their products.

http://tutor2u.net/business/marketing/pricing_introduction.asp