Marketing Plan Outline
I. Executive Summary
A high-level summary of the marketing plan.
II. The Challenge
Brief description of product to be marketed and associated goals, such as sales figures and strategic goals.
III. Situation Analysis
Company Analysis
* Goals
* Focus
* Culture
* Strengths
* Weaknesses
* Market share
Customer Analysis
* Number
* Type
* Value drivers
* Decision process
* Concentration of customer base for particular products
Competitor Analysis
* Market position
* Strengths
* Weaknesses
* Market shares
Collaborators
* Subsidiaries, joint ventures, and distributors, etc.
Climate
Macro-environmental PEST analysis :
* Political and legal environment
* Economic environment
* Social and cultural environment
* Technological environment
SWOT Analysis
A SWOT analysis of the business environment can be performed by organizing the environmental factors as follows:
* The firm's internal attributes can be classed as strengths and weaknesses.
* The external environment presents opportunities and threats.
IV. Market Segmentation
Present a description of the market segmentation as follows:
Segment 1
* Description
* Percent of sales
* What they want
* How they use product
* Support requirements
* How to reach them
* Price sensitivity
Segment 2
V. Alternative Marketing Strategies
List and discuss the alternatives that were considered before arriving at the recommended strategy. Alternatives might include discontinuing a product, re-branding, positioning as a premium or value product, etc.
VI. Selected Marketing Strategy
Discuss why the strategy was selected, then the marketing mix decisions (4 P's) of product, price, place (distribution), and promotion.
Product
The product decisions should consider the product's advantages and how they will be leveraged. Product decisions should include:
* Brand name
* Quality
* Scope of product line
* Warranty
* Packaging
Price
Discuss pricing strategy, expected volume, and decisions for the following pricing variables:
* List price
* Discounts
* Bundling
* Payment terms and financing options
* Leasing options
Distribution (Place)
Decision variables include:
* Distribution channels, such as direct, retail, distributors & intermediates
* Motivating the channel - for example, distributor margins
* Criteria for evaluating distributors
* Location
* Logistics, including transportation, warehousing, and order fulfilment
Promotion
* Advertising, including how much and which media.
* Public relations
* Promotional programs
* Budget; determine break-even point for any additional spending
* Projected results of the promotional programs
VII. Short & Long-Term Projections
The selected strategy's immediate effects, expected long-term results, and any special actions required to achieve them. This section may include forecasts of revenues and expenses as well as the results of a break-even analysis.
VIII. Conclusion
Summarize all of the above.
Market Segmentation
The division of a market into different homogeneous groups of consumers is known as market segmentation.
Rather than offer the same marketing mix to vastly different customers, market segmentation makes it possible for firms to tailor the marketing mix for specific target markets, thus better satisfying customer needs. Not all elements of the marketing mix are necessarily changed from one segment to the next. For example, in some cases only the promotional campaigns would differ.
A market segment should be:
• measurable
• accessible by communication and distribution channels
• different in its response to a marketing mix
• durable (not changing too quickly)
• substantial enough to be profitable
A market can be segmented by various bases, and industrial markets are segmented somewhat differently from consumer markets, as described below.
Consumer Market Segmentation
A basis for segmentation is a factor that varies among groups within a market, but that is consistent within groups. One can identify four primary bases on which to segment a consumer market:
• Geographic segmentation is based on regional variables such as region, climate, population density, and population growth rate.
• Demographic segmentation is based on variables such as age, gender, ethnicity, education, occupation, income, and family status.
• Psychographic segmentation is based on variables such as values, attitudes, and lifestyle.
• Behavioral segmentation is based on variables such as usage rate and patterns, price sensitivity, brand loyalty, and benefits sought.
The optimal bases on which to segment the market depend on the particular situation and are determined by marketing research, market trends, and managerial judgment.
Business Market Segmentation
While many of the consumer market segmentation bases can be applied to businesses and organizations, the different nature of business markets often leads to segmentation on the following bases:
• Geographic segmentation - based on regional variables such as customer concentration, regional industrial growth rate, and international macroeconomic factors.
• Customer type - based on factors such as the size of the organization, its industry, position in the value chain, etc.
• Buyer behavior - based on factors such as loyalty to suppliers, usage patterns, and order size.
Profiling the Segments
The identified market segments are summarized by profiles, often given a descriptive name. From these profiles, the attractiveness of each segment can be evaluated and a target market segment selected.
The Marketing Mix
(The 4 P's of Marketing)
The major marketing management decisions can be classified in one of the following four categories:
• Product
• Price
• Place (distribution)
• Promotion
These variables are known as the marketing mix or the 4 P's of marketing. They are the variables that marketing managers can control in order to best satisfy customers in the target market. The marketing mix is portrayed in the following diagram:
The Marketing Mix
Product
Place
Target
Market
Price
Promotion
The firm attempts to generate a positive response in the target market by blending these four marketing mix variables in an optimal manner.
Product
The product is the physical product or service offered to the consumer. In the case of physical products, it also refers to any services or conveniences that are part of the offering.
Product decisions include aspects such as function, appearance, packaging, service, warranty, etc.
Price
Pricing decisions should take into account profit margins and the probable pricing response of competitors. Pricing includes not only the list price, but also discounts, financing, and other options such as leasing.
Place
Place (or placement) decisions are those associated with channels of distribution that serve as the means for getting the product to the target customers. The distribution system performs transactional, logistical, and facilitating functions.
Distribution decisions include market coverage, channel member selection, logistics, and levels of service.
Promotion
Promotion decisions are those related to communicating and selling to potential consumers. Since these costs can be large in proportion to the product price, a break-even analysis should be performed when making promotion decisions. It is useful to know the value of a customer in order to determine whether additional customers are worth the cost of acquiring them.
Promotion decisions involve advertising, public relations, media types, etc.
A Summary Table of the Marketing Mix
The following table summarizes the marketing mix decisions, including a list of some of the aspects of each of the 4Ps.
Summary of Marketing Mix Decisions
Product Price Place Promotion
Functionality
Appearance
Quality
Packaging
Brand
Warranty
Service/Support List price
Discounts
Allowances
Financing
Leasing options Channel members
Channel motivation
Market coverage
Locations
Logistics
Service levels Advertising
Personal selling
Public relations
Message
Media
Budget
The Product Life Cycle
A new product progresses through a sequence of stages from introduction to growth, maturity, and decline. This sequence is known as the product life cycle and is associated with changes in the marketing situation, thus impacting the marketing strategy and the marketing mix.
The product revenue and profits can be plotted as a function of the life-cycle stages as shown in the graph below:
Product Life Cycle Diagram
Introduction Stage
In the introduction stage, the firm seeks to build product awareness and develop a market for the product. The impact on the marketing mix is as follows:
• Product branding and quality level is established, and intellectual property protection such as patents and trademarks are obtained.
• Pricing may be low penetration pricing to build market share rapidly, or high skim pricing to recover development costs.
• Distribution is selective until consumers show acceptance of the product.
• Promotion is aimed at innovators and early adopters. Marketing communications seeks to build product awareness and to educate potential consumers about the product.
Growth Stage
In the growth stage, the firm seeks to build brand preference and increase market share.
• Product quality is maintained and additional features and support services may be added.
• Pricing is maintained as the firm enjoys increasing demand with little competition.
• Distribution channels are added as demand increases and customers accept the product.
• Promotion is aimed at a broader audience.
Maturity Stage
At maturity, the strong growth in sales diminishes. Competition may appear with similar products. The primary objective at this point is to defend market share while maximizing profit.
• Product features may be enhanced to differentiate the product from that of competitors.
• Pricing may be lower because of the new competition.
• Distribution becomes more intensive and incentives may be offered to encourage preference over competing products.
• Promotion emphasizes product differentiation.
Decline Stage
As sales decline, the firm has several options:
• Maintain the product, possibly rejuvenating it by adding new features and finding new uses.
• Harvest the product - reduce costs and continue to offer it, possibly to a loyal niche segment.
• Discontinue the product, liquidating remaining inventory or selling it to another firm that is willing to continue the product.
The marketing mix decisions in the decline phase will depend on the selected strategy. For example, the product may be changed if it is being rejuvenated, or left unchanged if it is being harvested or liquidated. The price may be maintained if the product is harvested, or reduced drastically if liquidated.
Product Diffusion Curve
Consumers can be grouped according to how quickly they adopt a new product. On the one extreme, some consumers adopt the product as soon as it becomes available. On the other extreme, some consumers are among the last to purchase a new product. As a whole, the new product adoption process can be modeled in the form of a bell-shaped diffusion curve similar to the following:
New Product Diffusion Curve
Defining bins one standard deviation wide about the mean, five different product adoption groups can be defined:
• Innovators - well-informed risk-takers who are willing to try an unproven product. Innovators represent the first 2.5% to adopt the product.
• Early adopters - based on the positive response of innovators, early adopters then begin to purchase the product. Early adopters tend to be educated opinion leaders and represent about 13.5% of consumers.
• Early majority - careful consumers who tend to avoid risk, the early majority adopts the product once it has been proven by the early adopters. They rely on recommendations from others who have experience with the product. The early majority represents 34% of consumers.
• Late majority - somewhat skeptical consumers who acquire a product only after it has become commonplace. The late majority represents about 34% of consumers.
• Laggards - those who avoid change and may not adopt a new product until traditional alternatives no longer are available. Laggards represent about 16% of consumers.
For this discussion, the term "consumers" represents both individuals and organizations.
The rate of adoption depends on many factors, including:
• perceived benefits over alternative products
• communicability of the product benefits
• price and ongoing costs
• ease of use
• promotional effort
• distribution intensity
• perceived risk
• compatibility with existing standards and values
• divisibility (the extent to which a new product can be tested on a limited basis)
Even if a product offers high value to the customer, the firm nonetheless faces the challenge of convincing potential customers to try the product and eventually to adopt it. The product diffusion curve is partly responsible for the product life cycle, which calls for different management strategies that depend on the product's stage in the life cycle.
Positioning
As Popularized by Al Ries and Jack Trout
In their 1981 book, Positioning: The Battle for your Mind, Al Ries and Jack Trout describe how positioning is used as a communication tool to reach target customers in a crowded marketplace. Jack Trout published an article on positioning in 1969, and regular use of the term dates back to 1972 when Ries and Trout published a series of articles in Advertising Age called "The Positioning Era." Not long thereafter, Madison Avenue advertising executives began to develop positioning slogans for their clients and positioning became a key aspect of marketing communications.
Positioning: The Battle for your Mind has become a classic in the field of marketing. The following is a summary of the key points made by Ries and Trout in their book.
Information Overload
Ries and Trout explain that while positioning begins with a product, the concept really is about positioning that product in the mind of the customer. This approach is needed because consumers are bombarded with a continuous stream of advertising, with advertisers spending several hundred dollars annually per consumer in the U.S. The consumer's mind reacts to this high volume of advertising by accepting only what is consistent with prior knowledge or experience.
It is quite difficult to change a consumer's impression once it is formed. Consumers cope with information overload by oversimplifying and are likely to shut out anything inconsistent with their knowledge and experience. In an over-communicated environment, the advertiser should present a simplified message and make that message consistent with what the consumer already believes by focusing on the perceptions of the consumer rather than on the reality of the product.
Getting Into the Mind of the Consumer
The easiest way of getting into someone's mind is to be first. It is very easy to remember who is first, and much more difficult to remember who is second. Even if the second entrant offers a better product, the first mover has a large advantage that can make up for other shortcomings.
However, all is not lost for products that are not the first. By being the first to claim a unique position in the mind the consumer, a firm effectively can cut through the noise level of other products. For example, Miller Lite was not the first light beer, but it was the first to be positioned as a light beer, complete with a name to support that position. Similarly, Lowenbrau was the most popular German beer sold in America, but Beck's Beer successfully carved a unique position using the advertising,
"You've tasted the German beer that's the most popular in America. Now taste the German beer that's the most popular in Germany."
Consumers rank brands in their minds. If a brand is not number one, then to be successful it somehow must relate itself to the number one brand. A campaign that pretends that the market leader does not exist is likely to fail. Avis tried unsuccessfully for years to win customers, pretending that the number one Hertz did not exist. Finally, it began using the line,
"Avis in only No. 2 in rent-a-cars, so why go with us? We try harder."
After launching the campaign, Avis quickly became profitable. Whether Avis actually tried harder was not particularly relevant to their success. Rather, consumers finally were able to relate Avis to Hertz, which was number one in their minds.
Another example is that of the soft-drink 7-Up, which was No. 3 behind Coke and Pepsi. By relating itself to Coke and Pepsi as the "Uncola", 7-Up was able to establish itself in the mind of the consumer as a desirable alternative to the standard colas.
When there is a clear market leader in the mind of the consumer, it can be nearly impossible to displace the leader, especially in the short-term. On the other hand, a firm usually can find a way to position itself in relation to the market leader so that it can increase its market share. It usually is a mistake, however, to challenge the leader head-on and try to displace it.
Positioning of a Leader
Historically, the top three brands in a product category occupy market share in a ratio of 4:2:1. That is, the number one brand has twice the market share of number two, which has twice the market share of number three. Ries and Trout argue that the success of a brand is not due to the high level of marketing acumen of the company itself, but rather, it is due to the fact that the company was first in the product category. They use the case of Xerox to make this point. Xerox was the first plain-paper copier and was able to sustain its leadership position. However, time after time the company failed in other product categories in which it was not first.
Similarly, IBM failed when it tried to compete with Xerox in the copier market, and Coca-Cola failed in its effort to use Mr. Pibb to take on Dr. Pepper. These examples support the point that the success of a brand usually is due to its being first in the market rather than the marketing abilities of the company. The power of the company comes from the power of its brand, not the other way around.
With this point in mind, there are certain things that a market leader should do to maintain the leadership position. First, Ries and Trout emphasize what it should not do, and that is boast about being number one. If a firm does so, then customers will think that the firm is insecure in its position if it must reinforce it by saying so.
If a firm was the first to introduce a product, then the advertising campaign should reinforce this fact. Coca-Cola's "the real thing" does just that, and implies that other colas are just imitations.
Another strategy that a leader can follow to maintain its position is the multibrand strategy. This strategy is to introduce multiple brands rather than changing existing ones that hold leadership positions. It often is easier and cheaper to introduce a new brand rather than change the positioning of an existing brand. Ries and Trout call this strategy a single-position strategy because each brand occupies a single, unchanging position in the mind of the consumer.
Finally, change is inevitable and a leader must be willing to embrace change rather than resist it. When new technology opens the possibility of a new market that may threaten the existing one, a successful firm should consider entering the new market so that it will have the first-mover advantage in it. For example, in the past century the New York Central Railroad lost its leadership as air travel became possible. The company might have been able to maintain its leadership position had it used its resources to form an airline division.
Sometimes it is necessary to adopt a broader name in order to adapt to change. For example, Haloid changed its name to Haloid Xerox and later to simply Xerox. This is a typical pattern of changing Name 1 to an expanded Name 1 - Name 2, and later to just Name 2.
Positioning of a Follower
Second-place companies often are late because they have chosen to spend valuable time improving their product before launching it. According to Ries and Trout, it is better to be first and establish leadership.
If a product is not going to be first, it then must find an unoccupied position in which it can be first. At a time when larger cars were popular, Volkswagen introduced the Beetle with the slogan "Think small." Volkswagen was not the first small car, but they were the first to claim that position in the mind of the consumer.
Other positions that firms successfully have claimed include:
• age (Geritol)
• high price (Mobil 1 synthetic engine lubricant)
• gender (Virginia Slims)
• time of day (Nyquil night-time cold remedy)
• place of distribution (L'eggs in supermarkets)
• quantity (Schaefer - "the one beer to have when you're having more than one.")
It most likely is a mistake to build a brand by trying to appeal to everyone. There are too many brands that already have claimed a position and have become entrenched leaders in their positions. A product that seeks to be everything to everyone will end up being nothing to everyone.
Repositioning the Competition
Sometimes there are no unique positions to carve out. In such cases, Ries and Trout suggest repositioning a competitor by convincing consumers to view the competitor in a different way. Tylenol successfully repositioned aspirin by running advertisements explaining the negative side effects of aspirin.
Consumers tend to perceive the origin of a product by its name rather than reading the label to find out where it really is made. Such was the case with vodka when most vodka brands sold in the U.S. were made in the U.S. but had Russian names. Stolichnaya Russian vodka successfully repositioned its Russian-sounding competitors by exposing the fact that they all actually were made in the U.S., and that Stolichnaya was made in Leningrad, Russia.
When Pringle's new-fangled potato chips were introduced, they quickly gained market share. However, Wise potato chips successfully repositioned Pringle's in the mind of consumers by listing some of Pringle's non-natural ingredients that sounded like harsh chemicals, even though they were not. Wise potato chips of course, contained only "Potatoes. Vegetable oil. Salt." As a resulting of this advertising, Pringle's quickly lost market share, with consumers complaining that Pringle's tasted like cardboard, most likely as a consequence of their thinking about all those unnatural ingredients. Ries and Trout argue that is usually is a lost cause to try to bring a brand back into favor once it has gained a bad image, and that in such situations it is better to introduce an entirely new brand.
Repositioning a competitor is different from comparative advertising. Comparative advertising seeks to convince the consumer that one brand is simply better than another. Consumers are not likely to be receptive to such a tactic.
The Power of a Name
A brand's name is perhaps the most important factor affecting perceptions of it. In the past, before there was a wide range of brands available, a company could name a product just about anything. These days, however, it is necessary to have a memorable name that conjures up images that help to position the product.
Ries and Trout favor descriptive names rather than coined ones like Kodak or Xerox. Names like DieHard for a battery, Head & Shoulders for a shampoo, Close-Up for a toothpaste, People for a gossip magazine. While it is more difficult to protect a generic name under trademark law, Ries and Trout believe that in the long run it is worth the effort and risk. In their opinion, coined names may be appropriate for new products in which a company is first to market with a sought-after product, in which case the name is not so important.
Margarine is a name that does not very well position the product it is describing. The problem is that it sounds artificial and hides the true origin of the product. Ries and Trout propose that "soy butter" would have been a much better name for positioning the product as an alternative to the more common type of butter that is made from milk. While some people might see soy in a negative light, a promotional campaign could be developed to emphasize a sort of "pride of origin" for soy butter.
Another everyday is example is that of corn syrup, which is viewed by consumers as an inferior alternative to sugar. To improve the perceptions of corn syrup, one supplier began calling it "corn sugar", positioning it as an alternative to cane sugar or beet sugar.
Ries and Trout propose that selecting the right name is important for positioning just about anything, not just products. For example, the Clean Air Act has a name that is difficult to oppose, as do "fair trade" laws. Even a person's name impacts his or her success in life. One study showed that on average, schoolteachers grade essays written by children with names like David and Michael a full letter grade higher than those written by children with names like Hubert and Elmer.
Eastern Airlines was an example of a company limited by its name. Air travel passengers always viewed it as a regional airline that served the eastern U.S., even though it served a much wider area, including the west coast. Airlines such as American and United did not have such a perception problem. (Eastern Airlines ceased operations in 1991.)
Another problem that some companies face is confusion with another company that has a similar name. Consumers frequently confused the tire manufacturer B.F. Goodrich with Goodyear. The Goodyear blimp had made Goodyear tires well-known, and Goodyear frequently received credit by consumers for tire products that B.F. Goodrich has pioneered. (B.F. Goodrich eventually sold its tire business to Uniroyal.)
Other companies have changed their names to something more general, and as a result create confusion with other similar-sounding companies. Take for instance The Continental Group, Inc. and The Continental Corporation. Few people confidently can say which makes cans and which sells insurance.
The No-Name Trap
People tend use abbreviations when they have fewer syllables than the original term. GE is often used instead of General Electric. IBM instead of International Business Machines. In order to make their company names more general and easier to say, many corporations have changed their legal names to a series of two or three letters. Ries and Trout argue that such changes usually are unwise.
Companies having a broad recognition may be able to use the abbreviated names and consumers will make the translation in their minds. When they hear "GM", they think "General Motors". However, lesser known companies tend to lose their identity when they use such abbreviations. Most people don't know the types of business in which companies named USM or AMP are engaged.
The same applies to people's names as well. While some famous people are known by their initials (such as FDR and JFK), it is only after they become famous that they begin using their initials. Ries and Trout advise managers who aspire for name recognition to use an actual name rather then first and middle initials. The reason that initials do not lead to recognition is that the human mind works by sounds, not by spellings.
Most companies began selling a single product, and the name of the company usually reflected that product. As the successful firms grew in to conglomerates, their original names became limiting. Ries and Trout advise companies seeking more general names to select a shorter name made of words, not individual letters. For example, for Trans World Airlines, they favored truncating it simply to Trans World instead removing all words and using the letters TWA.
The Free-Ride Trap
A company introducing a new product often is tempted to use the brand name of an existing product, avoiding the need to build the brand from scratch. For example, Alka-Seltzer named a new product Alka-Seltzer Plus. Ries and Trout do not favor this strategy since the original name already in positioned in the consumer's mind. In fact, consumers viewed Alka-Seltzer Plus simply as a better Alka-Seltzer, and the sales of Alka-Seltzer Plus came at the expense of Alka-Seltzer, not from the market share of the competition.
Some firms have built a wide range of products on a single brand name. Others, such as Procter & Gamble have selected new names for each new product, carefully positioning the product in a different part of the consumer's mind. Ries and Trout maintain that a single brand name cannot hold multiple positions; either the new product will not be successful or the original product bearing the name will lose its leadership position.
Nonetheless, some companies do not want their new products to be anonymous with an unrecognized name. However, Ries and Trout propose that anonymity is not so bad; in fact, it is a resource. When the product eventually catches the attention of the media, it will have the advantage of being seen without any previous bias, and if a firm prepares for this event well, once under the spotlight the carefully designed positioning can be communicated exactly as intended. This moment of fame is a one-shot event and once it has passed, the product will not have a second chance to be fresh and new.
The Line Extension Trap
Line extensions are tempting for companies as a way to leverage an existing popular brand. However, if the brand name has become near generic so that consumers consider the name and the product to be one and the same, Ries and Trout generally do not believe that a line extension is a good idea.
Consider the case of Life Savers candy. To consumers, the brand name is synonymous with the hard round candy that has a hole in the middle. Nonetheless, the company introduced a Life Savers chewing gum. This use of the Life Savers name was not consistent with the consumer's view of it, and the Life Savers chewing gum brand failed. The company later introduced the first brand of soft bubble gum and gave it a new name: Bubble Yum. This product was very successful because it not only had a name different from the hard candy, it also had the the advantage of being the first soft bubble gum.
Ries and Trout cite many examples of failures due to line extensions. The consistent pattern in these cases is that either the new product does not succeed, or the original successful product loses market share as a result of its position being weakened by a diluted brand name.
When Line Extensions Can Work
Despite the disadvantages of line extensions, there are some cases in which it is not economically feasible to create a new brand and in which a line extension might work. Some of the cases provided by Ries and Trout include:
• Low volume product - if the sales volume is not expected to be high.
• Crowded market - if there is no unique position that the product can occupy.
• Small ad budget - without strong advertising support, it might make sense to use the house name.
• Commodity product - an undifferentiated commodity product has less need of its own name than does a breakthrough product.
• Distribution by sales reps - products distributed through reps may not need a separate brand name. Those sold on store shelves benefit more from their own name.
Positioning Has Broad Applications
The concept of positioning applies to products in the broadest sense. Services, tourist destinations, countries, and even careers can benefit from a well-developed positioning strategy that focuses on a niche that is unoccupied in the mind of the consumer or decision-maker.
Marketing Warfare
The marketing concept states that a firm's goal should be to identify and profitably satisfy customer needs. In Marketing Warfare Al Ries and Jack Trout argue that marketing is war and that the marketing concept's customer-oriented philosophy is inadequate. Rather, firms would do better by becoming competitor-oriented. If the key to success were to introduce products closest to those wanted by customers, then the market leader simply would be the firm that performed the best market research. Clearly, much more is required.
To illustrate their point, Ries and Trout compare marketing to a football game. If a team simply identifies the goal line and moves the ball towards it without regard to the competing team, they most likely will be blocked in their effort. To win the game, the team must focus its efforts on outwitting, outflanking, or over-powering the other side. This is the case in football, war, and marketing, according to Marketing Warfare. Because of the importance of the competition faced by the firm, a good marketing plan should include an extensive section on competitors.
2500 Years of War
There is much that marketers can learn from military strategy. Ries and Trout tell the story of several famous battles in history that illustrate lessons of warfare. These battles range from Marathon in 490 B.C. when the Greeks used the phalanx to defeat the more numerous Persian invaders, to the Normandy invasion of the second world war.
The lessons from these famous battles illustrate the concepts of planning, maneuvering, and overpowering the opposing side. These principles are relevant not only to warfare, but also to marketing. In Marketing Warfare, Ries and Trout quote Karl von Clausewitz and apply his principles to marketing.
The Principle of Force
There's a saying that it is easier to get to the top than to stay there. Ries and Trout disagree, arguing that once at the top, a company can use the power of its leadership position to stay there.
All other things equal, an army with a larger number of troops has an advantage over smaller armies. A larger vehicle has an advantage over a smaller vehicle in a collision. When several companies enter a new market, the one with the larger sales force is likely to become the leader. The larger company has the resources to outnumber smaller competitors. It can advertise more, perform more R&D, open more sales outlets, etc.
This is not to say that smaller companies do not stand a chance. Rather, smaller companies must recognize the principle of force and attempt to win the battle by means of a superior strategy, not by brute force.
Some managers may believe that they can overcome a larger competitor through superior employees. Ries and Trout maintain that while it may be possible to assemble a small group of star performers, on a larger scale the employee abilities will approach the mean.
Another argument is that a better product will overcome other weaknesses. Again, Ries and Trout disagree. Once consumers already have in their minds that a product is number one, it is extremely difficult for another product, even if superior, to take over that number one place in the consumer's mind.
The way to win the battle is not to recruit superior employees or to develop a superior product. Rather, Ries and Trout argue that to win the battle, a firm must successfully execute a superior strategy.
The Superiority of the Defense
An entrenched defense that is expecting an attack has an advantage that can only be overcome by an overwhelmingly larger attacker. For example, a defensive position that is in a trench or foxhole will be shielded from the attackers, and the attackers will suffer many more casualties than the defenders. For this reason, the attackers require a much larger force to overcome the defensive positions.
The same is true in marketing warfare. Many companies with insufficient resources have tried unsuccessfully to attack a leader. A study was made of 25 brands that held the number one position. Sixty years later, 20 of those 25 brands still held the number one position. It is very difficult to overtake the market leader.
The element of surprise helps the attacker, but when the market leader is large the attackers also must be large, and the logistics of launching a large scale attack or a large promotional campaign are such that the element of surprise is difficult to maintain and the defensive position becomes yet more difficult to upset. When the defenders are taken by surprise, it usually is because they ignored warnings or did not take them seriously.
The New Era of Competition
Increasingly, one hears marketing terms that are borrowed from the vocabulary of military strategy. From "launching a breakthrough campaign" to the "cola wars", the analogy between marketing and warfare is evident.
As in military strategy, it is unwise for a firm to publicly state deadlines for its victory. Deadlines often are missed, and the firm loses credibility in the propaganda war if it fails to live up to a prediction. Politicians who are wise to this rule tend to make their campaign promises vague. Publicly stated marketing promises should be vague for the same reason.
Firms also should avoid the trap of thinking that if they work hard enough, they will succeed in their attack. Ries and Trout argue that it is strategy and not hard work that determines success. In warfare, when a battle turns to hand-to-hand combat, the advantage resulting from the strategic plan no longer exists. In marketing, a firm achieves victory through a smarter strategy, not by spending longer hours with meetings, reports, memos, and management reviews. When management declares that it is time to "redouble our efforts", then the marketing battle has turned to hand-to-hand combat and is likely to end in defeat.
The Nature of the Battleground
In military warfare, a battle often is named after the geographic location where it took place - for example, The Battle of Waterloo. Ries and Trout argue that marketing battles do not take place in geographic areas, nor in stores. Rather, marketing battles take place in the mind of the consumer.
Before a military battle, the battlefield usually is mapped and studied in great detail. In marketing, market research traditionally has served this function. However, Ries and Trout propose that the most important information is to know which positions are held by which companies in the mind of the consumer. In other words, who holds the high ground.
In military warfare, mountains and higher altitude areas represent strong positions and often are used to present a strong defense. In marketing warfare, the question is one of who holds the mountains in the consumer's mind. For example, in the U.S., Kleenex holds the facial tissue mountain since it is the number one facial tissue in the minds of most consumers and many consumers consider the word "Kleenex" to be synonymous with facial tissue.
Mountains often are segmented and competitors may launch different brands each targeting a specific segment. General Motors successfully attacked Ford's market leadership when it launched Chevrolet, Pontiac, Oldsmobile, and Buick, each targeting a specific segment of the automobile market. Too often, the leader responds by attempting to counterattack in each segment, only to fail and even to lose its original leadership position.
The Strategic Square
Ries and Trout discuss four strategies for fighting a marketing war:
• defensive
• offensive
• flanking
• guerrilla
A firm's market share relative to that of competitors determines which strategy is appropriate. There often is a significant market share gap between two competitors such that each has approximately a factor of two more market share compared to the next weaker competitor. Because of this large gap, the principle of force plays an important role in the choice of each firm's strategy. For this discussion, assume that there are four firms and each is approximately twice the size of the next closest to it.
In such an environment, each of the four firms has different objectives:
• Number 1 firm: market domination
• Number 2 firm: increased market share
• Number 3 firm: profitable survival
• Number 4 firm: survival
According to Ries and Trout, the main competitor of the market leader that holds the majority of market share is not one of the other firms in the industry, but rather, the government. If the market leader attempts to grow larger, then anti-trust issues will be raised. If a major market leader wins the marketing war and causes the next largest firm to exit the market, then the government may take steps to break up the firm that is dominating the market. Consequently, the best strategy for such a firm is a defensive one.
The number two firm's best strategy is an offensive attack on the market leader if there is a large gap between the number two firm and number three. The reason is that the gaining of market share from the number three firm is unlikely to make a large impact on the much larger number two firm. However, there are potentially significant rewards if market share can be gained from the dominant firm.
The number three firm is too small to sustain an offensive attack on a larger firm. Its best strategy often is to launch a flanking attack, avoiding direct competition, for example, by launching a product that is positioned differently from those of the larger firms.
The smallest firm probably does not have sufficient resources to launch any type of sustained attack. If it launched a flanking product, a larger competitor likely would launch a similar one and would have the resources to win more customers. The smallest firm would do best to pursue a guerrilla strategy, identifying a segment that is large enough to be interesting to the small firm but not large enough to attract competition from any of the larger firms.
On the mountains in the mind of the consumer (see The Nature of the Battleground discussed previously), the high ground at the top of the mountain is owned by the market leader. The number two firm's offensive battle would seek to gain high ground from the leader. The leader's defensive battle involves coming down from the top to fight off offensive attacks. The number three firm's flanking attack would go around the mountain. The smallest firm's guerrilla tactics involve its going under the mountain.
Principles of Defensive Warfare
A defensive strategy is appropriate for the market leader. Ries and Trout outline three basic principles of defensive marketing warfare:
1. Defensive strategies only should be pursued by the market leader. It is self-defeating for a firm to pretend that it is the market leader for the purpose strategy selection. The market leader is the firm who has attained that position in the mind of the consumer.
2. Attacking yourself is the best defensive strategy. Introducing products better than your existing ones preempts similar moves by the competition. Even if the new product has less profit margin and may reduce short-term profit, it accomplishes the more important long-term goal of protecting the firm's market share.
3. The leader always should block strong offensive moves made by competitors. If the leader fails to do so, the competitor may become entrenched and permanently maintain market share.
A classic example of a well-executed defensive block was that of Johnson & Johnson when Bristol-Meyers decided to launch Datril to compete directly with Johnson & Johnson's successful Tylenol brand. Datril was to be priced 35% lower than Tylenol.
Johnson & Johnson learned of Datril before its launch, and informed Bristol-Meyers that it was cutting the price of Tylenol to match that of Datril. Johnson & Johnson even extended credits to its distribution channels to make the price cut effective immediately. This move was intended to prevent Bristol-Meyers from advertising Datril as a lower-priced alternative to Tylenol. However, Bristol-Meyers responded by accelerating the launch of the television advertising campaign. Finally, Johnson & Johnson countered by convincing the television networks not to run the Datril ads since they no longer could truthfully claim that Datril was priced lower than Tylenol. Johnson & Johnson's efforts were successful and Datril achieved less than a 1% market share. Tylenol sales soared on the publicity and lower prices.
Legal issues are an important factor in a market leader's strategy. Successfully attacking the competition and winning raises anti-trust issues. Attacking oneself is less risky from an anti-trust perspective. It also is preferable to expand vertically rather than horizontally into new markets since laws prevent a firm from using its monopoly in one market to develop a competitive advantage in another.
Finally, once there is marketing peace and the brand has affirmed its dominance, it can grow its sales by growing the market. For example, Campbell's Soup can run ads to increase soup consumption in general (e.g. "Soup is good food.") since it enjoys such a large share of all soup sales.
Principles of Offensive Warfare
An offensive strategy is appropriate for a firm that is number 2 or possibly number 3 in the market. However, in some cases, no firms may be strong enough to challenge the leader with an offensive strategy. In such industries, the market leader should play a defensive strategy and the much smaller firms should play a flanking or guerrilla one.
Ries and Trout present the following three principles of offensive strategy:
1. The challenger's primary concern should be the strength of the leader's position, not the challenger's own strengths and weaknesses.
2. The challenger should seek a weakness in the leader's strength - not simply a weakness in the leader's position.
3. Attack on as narrow a front as possible. Avoid a broad attack.
The strength of the leader's position is of primary importance because the leader has the top position in the mind of the consumer, and it is this position that must be attacked.
A weakness in the leader's strength must be found. Simply attacking any weakness is insufficient. For example, the leader may charge a premium price and the price may appear to be a weakness. However, the leader may in fact have large profit margins and may be willing to lower the price as much as necessary to defend its position. The leader usually has the resources to defend against an attack against its weaknesses, whereas there may be weaknesses inherent in the leader's strengths that cannot be defended.
There often is a flip side to the leader's strength that can serve as the target of the challenger's attack. For example, a leader may be so successful that it is crowded with customers, and the challenger then can exploit that success by offering a better customer experience. For example, Avis Rent a Car once advertised, Rent from Avis. The line at our counter is shorter. Sometimes the weakness in the leader's strength arises from the fact that it has a major investment in assets that cannot be readily adapted. A more flexible challenger can use this fact to its advantage.
The challenger should attack on as narrow a front as possible. Generally, this means one product rather than a wide range of products. The reason for keeping the attack narrow is the principle of force; a narrow attack allows the challenger to concentrate its resources in the narrow area, and in that area may present more force than the leader. Many number two and number three companies ignore this principle and try to increase market share by broadening their product lines to compete in more areas, often with disastrous consequences. FedEx made this mistake in its early years by offering a wide array of transit times such as overnight, 2-day, and 3-day delivery. FedEx became successful only when it began to focus on the next-day delivery market and won that position in the mind of the consumer using the slogan, when it absolutely, positively has to be there overnight.
A narrow attack is particularly effective when the leader has attempted to be all things to all people with a single product. In that situation, a challenger can identify a segment within the leader's market and offer a product that serves only that segment. The challenger then stands a chance of winning a position in the consumer's mind for that more narrow class of product.
Principles of Flanking Warfare
A flanking attack is not a direct attack on the leader, but rather, an attack in an area where the leader has not established a strong position. Ries and Trout present the following three flanking principles:
1. A flanking move is best made in an uncontested area. The product should be in a new category that does not compete directly with the leader and should be the first to target the segment.
2. A flanking move should have an element of surprise. Surprise is important to prevent the leader from using its enormous resources to counter the move before it gains momentum. Test marketing should be minimized to maintain the element of surprise. In the earlier example of Datril vs. Tylenol, Johnson & Johnson first learned of the impending launch of Datril from Bristol-Meyers' localized test marketing of Datril.
3. Follow-through (pursuit) is equally as important as the attack itself. The firm should follow-through and focus on solidifying its position once it is established before competitors launch competing products. Too often, management turns its attention to the products that are not performing well rather than strengthening the position of the winners. If the firm does not have the resources to strengthen its newly won position, then perhaps it should have used a guerrilla strategy instead of a flanking one.
A flanking move does not require a totally new product. Instead, the product only needs to be different enough to carve its own position. Ries and Trout offer the following examples of product variations on which to base flanking moves:
• Low price - for example, Budget Rent a Car successfully flanked Hertz and Avis. Others such as Dollar and Thrifty followed, but Budget was ahead of the game and was able to solidify its position.
• High price - customers tend to use price as a measure of quality. Orville Redenbacher's Gourmet Popping Corn and Haagen-Daz super-premium ice cream are examples of products that successfully positioned themselves in the high-price category. The higher profit margins allow the firm to follow through and solidify its position.
• Small size - Sony with portable electronics and Volkswagen wth automobiles successfully won the position of small size. Volkswagen lost its position as it attempted to broaden its line to all sizes of cars.
• Large size - for example, the Prince oversized tennis racquet.
• Distribution - the product itself may not be substantially different but new distribution channels may be used. For example, Timex distributed its watches in drugstores and Hanes distributed L'eggs pantyhose in supermarkets using innovative packaging and displays.
• Product form - for example, Close-Up was the first gel toothpaste and Softsoap was the first liquid soap.
Flanking is not a low-risk strategy. Market acceptance of an innovative product is unknown, and test marketing must be kept to a minimum to guard the element of surprise. Whether the leader will take prompt action in response is an unknown. Being well-tuned to the trade is helpful since in their public speeches executives often provide clues about their stances on potential products. For some products such as automobiles, the development time is several years and thus the flanking product has the potential to establish its position before incumbants can respond.
Principles of Guerrilla Warfare
Guerrilla marketing differs from a flanking campaign in that the guerrilla move is relatively small and differs significantly from the leader's position. Guerrilla marketing is appropriate for companies that, relative to the competition, are too small to launch offensive or flanking moves. Ries and Trout list the following three principles of guerrilla marketing warfare:
1. Identify a segment that is small enough to defend. For example, the scope can be limited geographically, demographically, by industry, or by price.
2. Never act like the leader, even if successful in the guerrilla attack. Some companies that make a guerrilla move are successful in it and begin to act like the leader, building a larger, bureaucratic organization that slows it down and increases overhead costs. A guerrilla should resist the temptation to give up its lean and nimble organization.
3. Be ready to enter or exit on short notice. If the market for the product takes a negative turn, the guerrilla should exit quickly rather than waste resources. Because the guerrilla has a nimble organization, it is better able to make a quick exit without suffering huge losses. Similarly, the guerrilla can respond more quickly to a market opportunity without spending months or years having committees analyze it. Guerrilla opportunities sometimes arise when a large company discontinues a product, leaving a gap on which the guerrilla firm can capitalize if it acts quickly.
The idea of guerrilla marketing is to direct resources into a limited area, using the principle of force to win that area.
Examples of geographic guerrillas include local retailers who win customers with offerings better tailored to the locale compared to the offerings of national chains. Locally-tailored city business publications are an example that fill a need that cannot be filled by a national publication such as the Wall Street Journal. Banks and airlines also have used a limited geographic scope successfully.
Demographic guerrillas target a specific demographic segment of the populuation. Inc. magazine is an example that targets small business owners who were not well served by publications such as Business Week.
Industry guerrillas target a specific industry, using vertical marketing to tailor a product to the special needs of that industry. The focus is narrow and deep rather than broad and shallow.
Product guerrillas offer a unique product for which there is a small market. The Jeep is an example of such a product.
High-end guerrillas offer a premium high-priced product. Rolls-Royce is a guerrilla in very high-priced automobiles. Because the volume is small and Rolls-Royce already has the lead, other manufacturers are deterred from competing directly. The high price creates a mystique about the product and raises the curiosity of consumers who seek to find out what makes the product so special that it commands such a high price. Line extensions of the main product do not work well here; high-end products should have a new name in order to establish a new position that is not diluted by the position of other products.
Alliances often are instrumental in a guerrilla strategy. In certain industries such as hotels, creating a brand that independents can join has been a successful strategy for many. A critical question when forming alliances is who the competitor is. Ries and Trout use the example of two motels across the street from one another on a resort island. On the surface it might appear that they are each other's competitors. Another way to view the situation is that they are allies attempting to attract tourists to their island rather than another resort island. An alliance might be more beneficial to the two motels than direct competition with one another.
For most companies, guerrilla marketing is the appropriate strategy simply because in most industries only a small percentage of firms are large enough to pursue defensive, offensive, or flanking strategies.
Marketing Warfare Case Studies
In Marketing Warfare, Ries and Trout include several cases to illustrate their strategic principles.
The "cola war" between Coke and Pepsi has been fought for decades. In 1915 Coca-Cola introduced its unique 6-1/2 ounce bottle that became closely associated with the brand. The size and shape was just right to fit the hand, and this bottle and its association with Coca-Cola was a major strength. However, when Pepsi introduced a larger bottle for the same price as the smaller bottle of Coke, Coke did not have many options to respond. Because of the way the size and shape of the bottle fit the hand, it could not be enlarged easily. Furthermore, the dispensing machines for Coke were designed for nickels only, so the price could not easily be changed. These weaknesses were a direct result of Coke's strength and illustrate the second principle of offensive warefare: the challenger should seek a weakness in the leader's strength. Many of the successes and failures of the Coke vs. Pepsi cola wars can be explained by principles of marketing warfare, including the success and failures of smaller challengers such as 7-Up (the Uncola) and Royal Crown Cola.
Ries and Trout also use the "beer war" to illustrate marketing warfare principles. Schlitz was the top brand, but lost its lead to Budweiser in a close battle. Then Heineken entered the market as an import with a successful flanking attack, maintaining its import lead by following through with strong advertising budgets. In the 1970's many brewers introduced light beers as line extensions. Ries and Trout believe that the line extensions are unwise because the extensions inadvertantly flank a firm's own leading brand. This happened to Miller High Life after Miller Lite was introduced. Miller Lite was successful, but Miller High Life suffered as it lost its position in the mind of the consumer as the working man's beer.
In the fast food industry, Ries and Trout use the "burger war" to illustrate a flanking attack. McDonald's was the leader, and Burger King tried offensive maneuvers. The moves that were unsuccessful were those that extended the product line and that copied McDonald's. The campaigns that were successful differentiated Burger King from McDonald's. For example, Have it your way attacked a weakness in McDonald's consistent production line process that had the flip side of being inflexible. Even more successful were the advertisements emphasizing the fact that Burger King's burgers were flame-broiled while McDonald's were fried. Wendy's successfully flanked McDonald's by targeting adults rather than children, offering adult-size portions and launching the highly successful Where's the beef? campaign. Finally, White Castle was the low-end guerrilla who limited their geographic scope, did not add a confusing array of other products, and maintained a high level of sales in each establishment. White Castle observed the guerrilla principle of never acting like the leader, and as a result was able to coexist peacefully.
Ries and Trout further reinforce their marketing warfare principles with the "computer war". IBM became the market leader in the 1950's, and many other companies attempted to emulate IBM, but IBM continued to hold a majority market share. In the 1960's Digital Equipment Corporation launched a successful flanking attack by introducing the PDP-8 minicomputer, winning the position of small computers. According to Ries and Trout, IBM should have blocked this move by introducing their own minicomputer, but they failed to do so until 11 years later. With DEC owning the minicomputer market, Ries and Trout argue that DEC should have been the company to introduce the PC in the business market. DEC failed to do so, and IBM launched its PC in 1981 with virtually no competition in the business market. IBM effectively flanked DEC with a product in the small computer market, just as DEC had done to IBM 15 years earlier. Many companies introduced their own PC's but IBM pursued the defensive strategy that a leader should pursue by attacking itself, first with the improved PC-XT and then with the PC-AT. While IBM owned the business PC market, Apple took the lead in home PC's. IBM unsuccessfully attempted to attack Apple in the home computer market with the PCjr, illustrating that a company's position is more important than its size.
Strategy and Tactics
Strategy can be developed using a top-down or a bottom-up approach. Ries and Trout argue for the bottom-up approach because a deep knowledge of the tactics actually used on the battlefield is needed to formulate a strategy that has the goal of achieving tactical objectives. More specifically, Ries and Trout argue that the sole purpose of strategy is to put the forces in motion to overpower the competitor at the point of contact using the principle of force. On the military battlefield, this means having more soldiers or force at the point of battle. On the marketing battlefield, it means overpowering the competitor in a specific position in the mind of the customer.
Ries and Trout explain that a good strategy does not depend on brilliant tactics. Mediocre tactics usually are sufficient for a good strategy. Even the best possible tactics are unlikely to compensate for a poor strategy. In marketing, advertising can be considered tactics and many managers falsely assume that success depends almost entirely on the quality of the advertising campaign. If a strategy requires top-notch tactics to win the battle, Ries and Trout maintain that such a strategy is unsound because tactical brilliance is rare.
Any strategy should take into account the probable response of the competitor. The best way to protect against a response is to attack the weakness in the leader's strength so that the leader cannot respond without giving up its strength.
To support the argument of a bottom-up strategy, Ries and Trout point out that many large companies incorrectly believe that they can do anything if they simply allocate enough resources. History shows otherwise when one considers failed attempts such as Exxon's entry into office systems and Mobil's acquisition of Montgomery Ward. Such diversions shift resources away from the point of battle where they are needed. This is one of the dangers that can be avoided by a bottom-up strategy based on what can be accomplished on the tactical level.
The Marketing General
Ries and Trout believe in having relatively few people involved in the strategic process. The organization needs a strong marketing "general" to formulate the strategy from the tactical realities. A marketing general has the following characteristics:
• Flexibility - to adjust the strategy to the situation.
• Courage - to make a decision and stand by it.
• Boldness - to act without hesitation when the time is right.
• Knowing the facts - in order to formulate strategy from the ground up.
• Knowing the rules - but internalizing them so they can be forgotten.
• Lucky - marketing warfare has an element of chance; a good strategy only makes the odds more favorable.
Summary
Ries and Trout have identified interesting and useful commonalities between military strategy and marketing strategy. As in military warfare, the appropriate marketing warfare strategy depends on the firm's position relative to its opponents. In developing its strategy, the firm must objectively determine its position in the market. Once this is done, a defensive, offensive, flanking, or guerrilla strategy can be selected depending on the firm's position relative to the competition.
Market Share
Sales figures do not necessarily indicate how a firm is performing relative to its competitors. Rather, changes in sales simply may reflect changes in the market size or changes in economic conditions.
The firm's performance relative to competitors can be measured by the proportion of the market that the firm is able to capture. This proportion is referred to as the firm's market share and is calculated as follows:
Market Share = Firm's Sales / Total Market Sales
Sales may be determined on a value basis (sales price multiplied by volume) or on a unit basis (number of units shipped or number of customers served).
While the firm's own sales figures are readily available, total market sales are more difficult to determine. Usually, this information is available from trade associations and market research firms.
Reasons to Increase Market Share
Market share often is associated with profitability and thus many firms seek to increase their sales relative to competitors. Here are some specific reasons that a firm may seek to increase its market share:
• Economies of scale - higher volume can be instrumental in developing a cost advantage.
• Sales growth in a stagnant industry - when the industry is not growing, the firm still can grow its sales by increasing its market share.
• Reputation - market leaders have clout that they can use to their advantage.
• Increased bargaining power - a larger player has an advantage in negotiations with suppliers and channel members.
Ways to Increase Market Share
The market share of a product can be modeled as:
Share of Market = Share of Preference x Share of Voice x Share of Distribution
According to this model, there are three drivers of market share:
• Share of preference - can be increased through product, pricing, and promotional changes.
• Share of voice - the firm's proportion of total promotional expenditures in the market. Thus, share of voice can be increased by increasing advertising expenditures.
• Share of distribution - can be increased through more intensive distribution.
From these drivers we see that market share can be increased by changing the variables of the marketing mix.
• Product - the product attributes can be changed to provide more value to the customer, for example, by improving product quality.
• Price - if the price elasticity of demand is elastic (that is, > 1), a decrease in price will increase sales revenue. This tactic may not succeed if competitors are willing and able to meet any price cuts.
• Distribution - add new distribution channels or increase the intensity of distribution in each channel.
• Promotion - increasing advertising expenditures can increase market share, unless competitors respond with similar increases.
Reasons Not to Increase Market Share
An increase in market share is not always desirable. For example:
• If the firm is near its production capacity, an increase in market share might necessitate investment in additional capacity. If this capacity is underutilized, higher costs will result.
• Overall profits may decline if market share is gained by increasing promotional expenditures or by decreasing prices.
• A price war might be provoked if competitors attempt to regain their share by lowering prices.
• A small niche player may be tolerated if it captures only a small share of the market. If that share increases, a larger, more capable competitor may decide to enter the niche.
• Antitrust issues may arise if a firm dominates its market.
In some cases it may be advantageous to decrease market share. For example, if a firm is able to identify certain customers that are unprofitable, it may drop those customers and lose market share while improving profitability.
Marketing Strategy
The marketing concept of building an organization around the profitable satisfaction of customer needs has helped firms to achieve success in high-growth, moderately competitive markets. However, to be successful in markets in which economic growth has leveled and in which there exist many competitors who follow the marketing concept, a well-developed marketing strategy is required. Such a strategy considers a portfolio of products and takes into account the anticipated moves of competitors in the market.
The Case of Barco
In late 1989, Barco N.V.'s projection systems division was faced with Sony's surprise introduction of a better graphics projector. Barco had been perceived as a leader, introducing high quality products first and targeting a niche market that was willing to pay a higher price. Being a smaller company, Barco could not compete on price, so it traditionally pursued a skimming strategy in the graphics projector market, where it had a 55% market share of the small market. Barco's overall market share for all types of projectors was only 4%.
Even though Barco's market was mainly in graphics projectors, the company had not introduced a new graphics projector in over two years. Instead, it was spending a large portion of its R&D budget on video projector products. However, video projectors were not Barco's market.
Barco's engineers had been working long hours on their new projector that would not be as good as Sony's. Some people thought they should not stop work on that product since the engineers' morale would suffer after being told how important it was to work hard to get the product out. However, even considering the morale of the product team, it would not have been a good idea to introduce a product that was inferior to that of Sony. Barco wisely stopped working on the inferior product and put a major effort in developing a projector that outperformed Sony's.
The Barco case illustrates several marketing strategy concepts:
• Price / Selling Effort Strategies: A firm that follows a skimming strategy seeks to be the first to introduce a product with very good performance, selling it to the innovator market segment and charging a premium price for it. It makes as much profit as possible, then moves on when the competition arrives. The price is likely to fall over time as competition is encountered. Such a skimming strategy contrasts with a penetrating strategy, which seeks to gain market share by sacrificing short-term profits, and increasing the price over time as market share is gained.
• Competitors have certain strengths and abilities. To succeed, a firm must leverage its own unique abilities.
• A firm should prepare defensive strategies before potential threats arrive. If the competition surprises a firm with the introduction of a vastly superior product, the firm should resist the temptation to proceed with its mediocre product. A firm never should introduce a product that is obsolete when it hits the market.
• The competition's probable response to a firm's actions should be considered carefully.
Marketing Research for Strategic Decision Making
The two most common uses of marketing research are for diagnostic analysis to understand the market and the firm's current performance, and opportunity analysis to define any unexploited opportunities for growth. Marketing research studies include consumer studies, distribution studies, semantic scaling, multidimensional scaling, intelligence studies, projections, and conjoint analysis. A few of these are outlined below.
• Semantic scaling: a very simple rating of how consumers perceive the physical attributes of a product, and what the ideal values of those attributes would be. Semantic scaling is not very accurate since the consumers are polled according to an ordinal ranking so mathematical averaging is not possible. For example, 8 is not necessarily twice as much as 4 in an ordinal ranking system. Furthermore, each person uses the scale differently.
• Multidimensional scaling (MDS) addresses the problems associated with semantic scaling by polling the consumer for pair-wise comparisons between products or between one product and the ideal. The assumption is that while people cannot report reliably which attributes drive their choices, they can report perceptions of similarities between brands. However, MDS analyses do not indicate the relative importance between attributes.
• Conjoint analysis infers the relative importance of attributes by presenting consumers with a set of features of two hypothetical products and asking them which product they prefer. This question is repeated over several sets of attribute values. The results allow one to predict which attributes are the more important, the combination of attribute values that is the most preferred. From this information, the expected market share of a given design can be estimated.
Multi-Product Resource Allocation
The most common resource allocation methods are:
• Percentage of sales
• Executive judgement
• All-you-can-afford
• Match competitors
• Last year based
Another method is called decision calculus. Managers are asked four questions:
What would sales be with:
1. no sales force
2. half the current effort
3. 50% greater effort
4. a saturation level of effort.
From these answers, one can determine the parameters of the S-curve response function and use linear programming techniques to determine resource allocations.
Decision algorithms that result in extreme solutions, such as allocating most of the sales force to one product while neglecting another product often do not yield practical solutions.
For mature products, sales increase very little as a function of advertising expenditures. For newer products however, there is a very positive correlation.
Portfolio models may be used to allocate resources among major product lines or business units. The BCG growth-share matrix is one such model.
New Product Diffusion Curve
As a new product diffuses into the market, some types of consumers such as innovators and early adopters buy the product before other consumers. The product adoption follows a trajectory that is shaped like a bell curve and is known as the product diffusion curve. The marketing strategy should take this adoption curve into account and address factors that influence the rate of adoption by the different types of consumers.
Dynamic Product Management Strategies
Two fundamental issues of product management are whether to pioneer or follow, and how to manage the product over its life cycle.
Order of market entry is very important. In fact, the forecasted market share relative to the pioneering brand is the pioneering brand's share divided by the square root of the order of entry. For example, the brand that entered third is forecasted to have 1/√3 times the market share of the first entrant (Marketing Science, Vol. 14, No. 3, Part 2 of 2, 1995.) This rule was determined empirically.
The pioneering advantage is obtained from both the supply and demand side. From the supply side, there are raw material advantages, better experience effects to provide a cost advantage, and channel preemption. On the demand side, there is the advantage of familiarity, the chance to set a standard, and the choice of perceptual position.
Once a firm gains a pioneering advantage, it can maintain it by improving the product, creating a standard, advertise that it was the first, and introduce a new product in the market that may cannibalize the first but deter other firms from entering.
There also are disadvantages to being the pioneer. Being first allows a competitor to leapfrog the early technology. The incumbent develops inertia in its R&D and may not be a flexible as newcomers. Developing an industry has costs that the pioneer must bear alone, and the way the industry develops and its potential size are not deterministic.
There are four classic price/selling effort strategies:
Selling Effort Price
Low High
Low Necessity Goods
Classic Skim Strategy
Vulnerable to new entrants
High
Classic Penetration Strategy
Luxury Goods
In general, products are clustered in the low-low or high-high categories. If a product is in a mixed category, after introduction it will tend to move to the low-low or high-high one.
Increasing the breadth of the product line as several advantages. A firm can better serve multiple segments, it can occupy more of the distributors' shelf space, it offers customers a more complete selection, and it preempts competition. While a wider range of products will cause a firm to cannibalize some of its own sales, it is better to do so oneself rather than let the competition do so.
The drawbacks of broad product lines are reduced volume for each brand (cannibalization), greater manufacturing complexity, increased inventory, more management resources required, more advertising (or less per brand), clutter and confusion in advertising for both customers and distributors.
To increase profits from existing brands, a firm can improve its production efficiency, increase the demand through more users, more uses, and more usage. A firm also can defend its existing base through line extensions (expand on a current brand), flanker brands (new brands in an existing product area), and brand extensions.
Marketing Research
Managers need information in order to introduce products and services that create value in the mind of the customer. But the perception of value is a subjective one, and what customers value this year may be quite different from what they value next year. As such, the attributes that create value cannot simply be deduced from common knowledge. Rather, data must be collected and analyzed. The goal of marketing research is to provide the facts and direction that managers need to make their more important marketing decisions.
To maximize the benefit of marketing research, those who use it need to understand the research process and its limitations.
Marketing Research vs. Market Research
These terms often are used interchangeably, but technically there is a difference.
Market research deals specifically with the gathering of information about a market's size and trends. Marketing research covers a wider range of activities. While it may involve market research, marketing research is a more general systematic process that can be applied to a variety of marketing problems.
The Value of Information
Information can be useful, but what determines its real value to the organization? In general, the value of information is determined by:
• The ability and willingness to act on the information.
• The accuracy of the information.
• The level of indecisiveness that would exist without the information.
• The amount of variation in the possible results.
• The level of risk aversion.
• The reaction of competitors to any decision improved by the information.
• The cost of the information in terms of time and money.
The Marketing Research Process
Once the need for marketing research has been established, most marketing research projects involve these steps:
1. Define the problem
2. Determine research design
3. Identify data types and sources
4. Design data collection forms and questionnaires
5. Determine sample plan and size
6. Collect the data
7. Analyze and interpret the data
8. Prepare the research report
Problem Definition
The decision problem faced by management must be translated into a market research problem in the form of questions that define the information that is required to make the decision and how this information can be obtained. Thus, the decision problem is translated into a research problem. For example, a decision problem may be whether to launch a new product. The corresponding research problem might be to assess whether the market would accept the new product.
The objective of the research should be defined clearly. To ensure that the true decision problem is addressed, it is useful for the researcher to outline possible scenarios of the research results and then for the decision maker to formulate plans of action under each scenario. The use of such scenarios can ensure that the purpose of the research is agreed upon before it commences.
Research Design
Marketing research can classified in one of three categories:
• Exploratory research
• Descriptive research
• Causal research
These classifications are made according to the objective of the research. In some cases the research will fall into one of these categories, but in other cases different phases of the same research project will fall into different categories.
• Exploratory research has the goal of formulating problems more precisely, clarifying concepts, gathering explanations, gaining insight, eliminating impractical ideas, and forming hypotheses. Exploratory research can be performed using a literature search, surveying certain people about their experiences, focus groups, and case studies. When surveying people, exploratory research studies would not try to acquire a representative sample, but rather, seek to interview those who are knowledgeable and who might be able to provide insight concerning the relationship among variables. Case studies can include contrasting situations or benchmarking against an organization known for its excellence. Exploratory research may develop hypotheses, but it does not seek to test them. Exploratory research is characterized by its flexibility.
• Descriptive research is more rigid than exploratory research and seeks to describe users of a product, determine the proportion of the population that uses a product, or predict future demand for a product. As opposed to exploratory research, descriptive research should define questions, people surveyed, and the method of analysis prior to beginning data collection. In other words, the who, what, where, when, why, and how aspects of the research should be defined. Such preparation allows one the opportunity to make any required changes before the costly process of data collection has begun.
There are two basic types of descriptive research: longitudinal studies and cross-sectional studies. Longitudinal studies are time series analyses that make repeated measurements of the same individuals, thus allowing one to monitor behavior such as brand-switching. However, longitudinal studies are not necessarily representative since many people may refuse to participate because of the commitment required. Cross-sectional studies sample the population to make measurements at a specific point in time. A special type of cross-sectional analysis is a cohort analysis, which tracks an aggregate of individuals who experience the same event within the same time interval over time. Cohort analyses are useful for long-term forecasting of product demand.
• Causal research seeks to find cause and effect relationships between variables. It accomplishes this goal through laboratory and field experiments.
Data Types and Sources
Secondary Data
Before going through the time and expense of collecting primary data, one should check for secondary data that previously may have been collected for other purposes but that can be used in the immediate study. Secondary data may be internal to the firm, such as sales invoices and warranty cards, or may be external to the firm such as published data or commercially available data. The government census is a valuable source of secondary data.
Secondary data has the advantage of saving time and reducing data gathering costs. The disadvantages are that the data may not fit the problem perfectly and that the accuracy may be more difficult to verify for secondary data than for primary data.
Some secondary data is republished by organizations other than the original source. Because errors can occur and important explanations may be missing in republished data, one should obtain secondary data directly from its source. One also should consider who the source is and whether the results may be biased.
There are several criteria that one should use to evaluate secondary data.
• Whether the data is useful in the research study.
• How current the data is and whether it applies to time period of interest.
• Errors and accuracy - whether the data is dependable and can be verified.
• Presence of bias in the data.
• Specifications and methodologies used, including data collection method, response rate, quality and analysis of the data, sample size and sampling technique, and questionnaire design.
• Objective of the original data collection.
• Nature of the data, including definition of variables, units of measure, categories used, and relationships examined.
Primary Data
Often, secondary data must be supplemented by primary data originated specifically for the study at hand. Some common types of primary data are:
• demographic and socioeconomic characteristics
• psychological and lifestyle characteristics
• attitudes and opinions
• awareness and knowledge - for example, brand awareness
• intentions - for example, purchase intentions. While useful, intentions are not a reliable indication of actual future behavior.
• motivation - a person's motives are more stable than his/her behavior, so motive is a better predictor of future behavior than is past behavior.
• behavior
Primary data can be obtained by communication or by observation. Communication involves questioning respondents either verbally or in writing. This method is versatile, since one needs only to ask for the information; however, the response may not be accurate. Communication usually is quicker and cheaper than observation. Observation involves the recording of actions and is performed by either a person or some mechanical or electronic device. Observation is less versatile than communication since some attributes of a person may not be readily observable, such as attitudes, awareness, knowledge, intentions, and motivation. Observation also might take longer since observers may have to wait for appropriate events to occur, though observation using scanner data might be quicker and more cost effective. Observation typically is more accurate than communication.
Personal interviews have an interviewer bias that mail-in questionnaires do not have. For example, in a personal interview the respondent's perception of the interviewer may affect the responses.
Questionnaire Design
The questionnaire is an important tool for gathering primary data. Poorly constructed questions can result in large errors and invalidate the research data, so significant effort should be put into the questionnaire design. The questionnaire should be tested thoroughly prior to conducting the survey.
Measurement Scales
Attributes can be measured on nominal, ordinal, interval, and ratio scales:
• Nominal numbers are simply identifiers, with the only permissible mathematical use being for counting. Example: social security numbers.
• Ordinal scales are used for ranking. The interval between the numbers conveys no meaning. Median and mode calculations can be performed on ordinal numbers. Example: class ranking
• Interval scales maintain an equal interval between numbers. These scales can be used for ranking and for measuring the interval between two numbers. Since the zero point is arbitrary, ratios cannot be taken between numbers on an interval scale; however, mean, median, and mode are all valid. Example: temperature scale
• Ratio scales are referenced to an absolute zero values, so ratios between numbers on the scale are meaningful. In addition to mean, median, and mode, geometric averages also are valid. Example: weight
Validity and Reliability
The validity of a test is the extent to which differences in scores reflect differences in the measured characteristic. Predictive validity is a measure of the usefulness of a measuring instrument as a predictor. Proof of predictive validity is determined by the correlation between results and actual behavior. Construct validity is the extent to which a measuring instrument measures what it intends to measure.
Reliability is the extent to which a measurement is repeatable with the same results. A measurement may be reliable and not valid. However, if a measurement is valid, then it also is reliable and if it is not reliable, then it cannot be valid. One way to show reliability is to show stability by repeating the test with the same results.
Attitude Measurement
Many of the questions in a marketing research survey are designed to measure attitudes. Attitudes are a person's general evaluation of something. Customer attitude is an important factor for the following reasons:
• Attitude helps to explain how ready one is to do something.
• Attitudes do not change much over time.
• Attitudes produce consistency in behavior.
• Attitudes can be related to preferences.
Attitudes can be measured using the following procedures:
• Self-reporting - subjects are asked directly about their attitudes. Self-reporting is the most common technique used to measure attitude.
• Observation of behavior - assuming that one's behavior is a result of one's attitudes, attitudes can be inferred by observing behavior. For example, one's attitude about an issue can be inferred by whether he/she signs a petition related to it.
• Indirect techniques - use unstructured stimuli such as word association tests.
• Performance of objective tasks - assumes that one's performance depends on attitude. For example, the subject can be asked to memorize the arguments of both sides of an issue. He/she is more likely to do a better job on the arguments that favor his/her stance.
• Physiological reactions - subject's response to a stimuli is measured using electronic or mechanical means. While the intensity can be measured, it is difficult to know if the attitude is positive or negative.
• Multiple measures - a mixture of techniques can be used to validate the findings, especially worthwhile when self-reporting is used.
There are several types of attitude rating scales:
• Equal-appearing interval scaling - a set of statements are assembled. These statements are selected according to their position on an interval scale of favorableness. Statements are chosen that has a small degree of dispersion. Respondents then are asked to indicate with which statements they agree.
• Likert method of summated ratings - a statement is made and the respondents indicate their degree of agreement or disagreement on a five point scale (Strongly Disagree, Disagree, Neither Agree Nor Disagree, Agree, Strongly Agree).
• Semantic differential scale - a scale is constructed using phrases describing attributes of the product to anchor each end. For example, the left end may state, "Hours are inconvenient" and the right end may state, "Hours are convenient". The respondent then marks one of the seven blanks between the statements to indicate his/her opinion about the attribute.
• Stapel Scale - similar to the semantic differential scale except that 1) points on the scale are identified by numbers, 2) only one statement is used and if the respondent disagrees a negative number should marked, and 3) there are 10 positions instead of seven. This scale does not require that bipolar adjectives be developed and it can be administered by telephone.
• Q-sort technique - the respondent if forced to construct a normal distribution by placing a specified number of cards in one of 11 stacks according to how desirable he/she finds the characteristics written on the cards.
Sampling Plan
The sampling frame is the pool from which the interviewees are chosen. The telephone book often is used as a sampling frame, but have some shortcomings. Telephone books exclude those households that do not have telephones and those households with unlisted numbers. Since a certain percentage of the numbers listed in a phone book are out of service, there are many people who have just moved who are not sampled. Such sampling biases can be overcome by using random digit dialing. Mall intercepts represent another sampling frame, though there are many people who do not shop at malls and those who shop more often will be over-represented unless their answers are weighted in inverse proportion to their frequency of mall shopping.
In designing the research study, one should consider the potential errors. Two sources of errors are random sampling error and non-sampling error. Sampling errors are those due to the fact that there is a non-zero confidence interval of the results because of the sample size being less than the population being studied. Non-sampling errors are those caused by faulty coding, untruthful responses, respondent fatigue, etc.
There is a tradeoff between sample size and cost. The larger the sample size, the smaller the sampling error but the higher the cost. After a certain point the smaller sampling error cannot be justified by the additional cost.
While a larger sample size may reduce sampling error, it actually may increase the total error. There are two reasons for this effect. First, a larger sample size may reduce the ability to follow up on non-responses. Second, even if there is a sufficient number of interviewers for follow-ups, a larger number of interviewers may result in a less uniform interview process.
Data Collection
In addition to the intrinsic sampling error, the actual data collection process will introduce additional errors. These errors are called non-sampling errors. Some non-sampling errors may be intentional on the part of the interviewer, who may introduce a bias by leading the respondent to provide a certain response. The interviewer also may introduce unintentional errors, for example, due to not having a clear understanding of the interview process or due to fatigue.
Respondents also may introduce errors. A respondent may introduce intentional errors by lying or simply by not responding to a question. A respondent may introduce unintentional errors by not understanding the question, guessing, not paying close attention, and being fatigued or distracted.
Such non-sampling errors can be reduced through quality control techniques.
Data Analysis - Preliminary Steps
Before analysis can be performed, raw data must be transformed into the right format. First, it must be edited so that errors can be corrected or omitted. The data must then be coded; this procedure converts the edited raw data into numbers or symbols. A codebook is created to document how the data was coded. Finally, the data is tabulated to count the number of samples falling into various categories. Simple tabulations count the occurrences of each variable independently of the other variables. Cross tabulations, also known as contingency tables or cross tabs, treats two or more variables simultaneously. However, since the variables are in a two-dimensional table, cross tabbing more than two variables is difficult to visualize since more than two dimensions would be required. Cross tabulation can be performed for nominal and ordinal variables.
Cross tabulation is the most commonly utilized data analysis method in marketing research. Many studies take the analysis no further than cross tabulation. This technique divides the sample into sub-groups to show how the dependent variable varies from one subgroup to another. A third variable can be introduced to uncover a relationship that initially was not evident.
Conjoint Analysis
The conjoint analysis is a powerful technique for determining consumer preferences for product attributes.
Hypothesis Testing
A basic fact about testing hypotheses is that a hypothesis may be rejected but that the hypothesis never can be unconditionally accepted until all possible evidence is evaluated. In the case of sampled data, the information set cannot be complete. So if a test using such data does not reject a hypothesis, the conclusion is not necessarily that the hypothesis should be accepted.
The null hypothesis in an experiment is the hypothesis that the independent variable has no effect on the dependent variable. The null hypothesis is expressed as H0. This hypothesis is assumed to be true unless proven otherwise. The alternative to the null hypothesis is the hypothesis that the independent variable does have an effect on the dependent variable. This hypothesis is known as the alternative, research, or experimental hypothesis and is expressed as H1. This alternative hypothesis states that the relationship observed between the variables cannot be explained by chance alone.
There are two types of errors in evaluating a hypotheses:
• Type I error: occurs when one rejects the null hypothesis and accepts the alternative, when in fact the null hypothesis is true.
• Type II error: occurs when one accepts the null hypothesis when in fact the null hypothesis is false.
Because their names are not very descriptive, these types of errors sometimes are confused. Some people jokingly define a Type III error to occur when one confuses Type I and Type II. To illustrate the difference, it is useful to consider a trial by jury in which the null hypothesis is that the defendant is innocent. If the jury convicts a truly innocent defendant, a Type I error has occurred. If, on the other hand, the jury declares a truly guilty defendant to be innocent, a Type II error has occurred.
Hypothesis testing involves the following steps:
• Formulate the null and alternative hypotheses.
• Choose the appropriate test.
• Choose a level of significance (alpha) - determine the rejection region.
• Gather the data and calculate the test statistic.
• Determine the probability of the observed value of the test statistic under the null hypothesis given the sampling distribution that applies to the chosen test.
• Compare the value of the test statistic to the rejection threshold.
• Based on the comparison, reject or do not reject the null hypothesis.
• Make the marketing research conclusion.
In order to analyze whether research results are statistically significant or simply by chance, a test of statistical significance can be run.
Tests of Statistical Significance
The chi-square ( 2 ) goodness-of-fit test is used to determine whether a set of proportions have specified numerical values. It often is used to analyze bivariate cross-tabulated data. Some examples of situations that are well-suited for this test are:
• A manufacturer of packaged products test markets a new product and wants to know if sales of the new product will be in the same relative proportion of package sizes as sales of existing products.
• A company's sales revenue comes from Product A (50%), Product B (30%), and Product C (20%). The firm wants to know whether recent fluctuations in these proportions are random or whether they represent a real shift in sales.
The chi-square test is performed by defining k categories and observing the number of cases falling into each category. Knowing the expected number of cases falling in each category, one can define chi-squared as:
2 = ( Oi - Ei )2 / Ei
where
Oi = the number of observed cases in category i,
Ei = the number of expected cases in category i,
k = the number of categories,
the summation runs from i = 1 to i = k.
Before calculating the chi-square value, one needs to determine the expected frequency for each cell. This is done by dividing the number of samples by the number of cells in the table.
To use the output of the chi-square function, one uses a chi-square table. To do so, one needs to know the number of degrees of freedom (df). For chi-square applied to cross-tabulated data, the number of degrees of freedom is equal to
( number of columns - 1 ) ( number of rows - 1 )
This is equal to the number of categories minus one. The conventional critical level of 0.05 normally is used. If the calculated output value from the function is greater than the chi-square look-up table value, the null hypothesis is rejected.
ANOVA
Another test of significance is the Analysis of Variance (ANOVA) test. The primary purpose of ANOVA is to test for differences between multiple means. Whereas the t-test can be used to compare two means, ANOVA is needed to compare three or more means. If multiple t-tests were applied, the probability of a TYPE I error (rejecting a true null hypothesis) increases as the number of comparisons increases.
One-way ANOVA examines whether multiple means differ. The test is called an F-test. ANOVA calculates the ratio of the variation between groups to the variation within groups (the F ratio). While ANOVA was designed for comparing several means, it also can be used to compare two means. Two-way ANOVA allows for a second independent variable and addresses interaction.
To run a one-way ANOVA, use the following steps:
1. Identify the independent and dependent variables.
2. Describe the variation by breaking it into three parts - the total variation, the portion that is within groups, and the portion that is between groups (or among groups for more than two groups). The total variation (SStotal) is the sum of the squares of the differences between each value and the grand mean of all the values in all the groups. The in-group variation (SSwithin) is the sum of the squares of the differences in each element's value and the group mean. The variation between group means (SSbetween) is the total variation minus the in-group variation (SStotal - SSwithin).
3. Measure the difference between each group's mean and the grand mean.
4. Perform a significance test on the differences.
5. Interpret the results.
This F-test assumes that the group variances are approximately equal and that the observations are independent. It also assumes normally distributed data; however, since this is a test on means the Central Limit Theorem holds as long as the sample size is not too small.
ANOVA is efficient for analyzing data using relatively few observations and can be used with categorical variables. Note that regression can perform a similar analysis to that of ANOVA.
Discriminant Analysis
Analysis of the difference in means between groups provides information about individual variables, it is not useful for determine their individual impacts when the variables are used in combination. Since some variables will not be independent from one another, one needs a test that can consider them simultaneously in order to take into account their interrelationship. One such test is to construct a linear combination, essentially a weighted sum of the variables. To determine which variables discriminate between two or more naturally occurring groups, discriminant analysis is used. Discriminant analysis can determine which variables are the best predictors of group membership. It determines which groups differ with respect to the mean of a variable, and then uses that variable to predict new cases of group membership. Essentially, the discriminant function problem is a one-way ANOVA problem in that one can determine whether multiple groups are significantly different from one another with respect to the mean of a particular variable.
A discriminant analysis consists of the following steps:
1. Formulate the problem.
2. Determine the discriminant function coefficients that result in the highest ratio of between-group variation to within-group variation.
3. Test the significance of the discriminant function.
4. Interpret the results.
5. Determine the validity of the analysis.
Discriminant analysis analyzes the dependency relationship, whereas factor analysis and cluster analysis address the interdependency among variables.
Factor Analysis
Factor analysis is a very popular technique to analyze interdependence. Factor analysis studies the entire set of interrelationships without defining variables to be dependent or independent. Factor analysis combines variables to create a smaller set of factors. Mathematically, a factor is a linear combination of variables. A factor is not directly observable; it is inferred from the variables. The technique identifies underlying structure among the variables, reducing the number of variables to a more manageable set. Factor analysis groups variables according to their correlation.
The factor loading can be defined as the correlations between the factors and their underlying variables. A factor loading matrix is a key output of the factor analysis. An example matrix is shown below.
Factor 1 Factor 2 Factor 3
Variable 1
Variable 2
Variable 3
Column's Sum of Squares:
Each cell in the matrix represents correlation between the variable and the factor associated with that cell. The square of this correlation represents the proportion of the variation in the variable explained by the factor. The sum of the squares of the factor loadings in each column is called an eigenvalue. An eigenvalue represents the amount of variance in the original variables that is associated with that factor. The communality is the amount of the variable variance explained by common factors.
A rule of thumb for deciding on the number of factors is that each included factor must explain at least as much variance as does an average variable. In other words, only factors for which the eigenvalue is greater than one are used. Other criteria for determining the number of factors include the Scree plot criteria and the percentage of variance criteria.
To facilitate interpretation, the axis can be rotated. Rotation of the axis is equivalent to forming linear combinations of the factors. A commonly used rotation strategy is the varimax rotation. Varimax attempts to force the column entries to be either close to zero or one.
Cluster Analysis
Market segmentation usually is based not on one factor but on multiple factors. Initially, each variable represents its own cluster. The challenge is to find a way to combine variables so that relatively homogenous clusters can be formed. Such clusters should be internally homogenous and externally heterogeneous. Cluster analysis is one way to accomplish this goal. Rather than being a statistical test, it is more of a collection of algorithms for grouping objects, or in the case of marketing research, grouping people. Cluster analysis is useful in the exploratory phase of research when there are no a-priori hypotheses.
Cluster analysis steps:
1. Formulate the problem, collecting data and choosing the variables to analyze.
2. Choose a distance measure. The most common is the Euclidean distance. Other possibilities include the squared Euclidean distance, city-block (Manhattan) distance, Chebychev distance, power distance, and percent disagreement.
3. Choose a clustering procedure (linkage, nodal, or factor procedures).
4. Determine the number of clusters. They should be well separated and ideally they should be distinct enough to give them descriptive names such as professionals, buffs, etc.
5. Profile the clusters.
6. Assess the validity of the clustering.
Marketing Research Report
The format of the marketing research report varies with the needs of the organization. The report often contains the following sections:
• Authorization letter for the research
• Table of Contents
• List of illustrations
• Executive summary
• Research objectives
• Methodology
• Results
• Limitations
• Conclusions and recommendations
• Appendices containing copies of the questionnaires, etc.
Concluding Thoughts
Marketing research by itself does not arrive at marketing decisions, nor does it guarantee that the organization will be successful in marketing its products. However, when conducted in a systematic, analytical, and objective manner, marketing research can reduce the uncertainty in the decision-making process and increase the probability and magnitude of success.
Questionnaire Design
The questionnaire is a structured technique for collecting primary data in a marketing survey. It is a series of written or verbal questions for which the respondent provides answers. A well-designed questionnaire motivates the respondent to provide complete and accurate information.
The survey questionnaire should not be viewed as a stand-alone tool. Along with the questionnaire there is field work, rewards for the respondents, and communication aids, all of which are important components of the questionnaire process.
Steps to Developing a Questionnaire
The following are steps to developing a questionnaire - the exact order may vary somewhat.
• Determine which information is being sought.
• Choose a question type (structure and amount of disguise) and method of administration (for example, written form, email or web form, telephone interview, verbal interview).
• Determine the general question content needed to obtain the desired information.
• Determine the form of response.
• Choose the exact question wording.
• Arrange the questions into an effective sequence.
• Specify the physical characteristics of the questionnaire (paper type, number of questions per page, etc.)
• Test the questionnaire and revise it as needed.
Required Information
To determine exactly which information is needed, it is useful to construct tables into which the data will be placed once it is collected. The tables will help to define what data is needed and what is not needed.
Question Type and Administration Method
Some question types include fixed alternative, open ended, and projective:
• Fixed-alternative questions provide multiple-choice answers. These types of questions are good when the possible replies are few and clear-cut, such as age, car ownership, etc.
• Open-ended questions allow the respondent to better express his/her answer, but are more difficult to administer and analyze. Often, open-ended questions are administered in a depth interview. This technique is most appropriate for exploratory research.
• Projective methods use a vague question or stimulus and attempt to project a person's attitudes from the response. The questionnaire could use techniques such as word associations and fill-in-the-blank sentences. Projective methods are difficult to analyze and are better suited for exploratory research than for descriptive or causal research.
There are three commonly used rating scales: graphic, itemized, and comparative.
• Graphic - simply a line on which one marks an X anywhere between the extremes with an infinite number of places where the X can be placed.
• Itemized - similar to graphic except there are a limited number of categories that can be marked.
• Comparative - the respondent compares one attribute to others. Examples include the Q-sort technique and the constant sum method, which requires one to divide a fixed number of points among the alternatives.
Questionnaires typically are administered via a personal or telephone interview or via a mail questionnaire. Newer methods include e-mail and the Web.
Question Content
Each question should have a specific purpose or should not be included in the questionnaire. The goal of the questions is to obtain the required information. This is not to say that all questions directly must ask for the desired data. In some cases questions can be used to establish rapport with the respondent, especially when sensitive information is being sought.
Sensitive questions can be posed in ways to increase response likelihood and to facilitate more honest responses. Some techniques are:
• Place the question in a series of less personal questions.
• State that the behavior or attitude is not so unusual.
• Phrase the question in terms of other people, not the respondent.
• Provide response choices that specify ranges, not exact numbers.
• Use a randomized response model giving the respondent pairs of questions with a randomly assigned one to answer. The interviewer does not know which question the person is answering, but the overall percentage of people assigned to the sensitive question is known and statistics can be calculated.
Form of Question Response
Questions can be designed for open-ended, dichotomous, or multichotomous responses.
• Open-ended responses are difficult to evaluate, but are useful early in the research process for determining the possible range of responses.
• Dichotomous questions have two possible opposing responses, for example, "Yes" and "No".
• Multichotomous questions have a range of responses as in a multiple choice test.
The questionnaire designer should consider that respondents may not be able to answer some questions accurately. Two types of error are telescoping error and recall loss.
• Telescoping error is an error resulting from the tendency of people to remember events as occurring more recently than they actually did.
• Recall loss occurs when people forget that an event even occurred. For recent events, telescoping error dominates; for events that happened in the distant past, recall loss dominates.
Question Wording
The questions should be worded so that they are unambiguous and easily understood. The wording should consider the full context of the respondent's situation. In particular, consider the who, what, when, where, why, and how dimensions of the question.
For example, the question,
"Which brand of toothpaste do you use?"
might seem clear at first. However, the respondent may consider "you" to be the family as a whole rather than he or she personally. If the respondent recently changed brands, the "when" dimension of the question may be relevant. If the respondent uses a different, more compact tube of toothpaste when traveling, the "where" aspect of the question will matter.
A better wording of the question might be,
"Which brand of toothpaste have you used personally at home during the past 6 months? If you have used more than one brand, please list each of them."
When asking about the frequency of use, the questions should avoid ambiguous words such as "sometimes", "occasionally", or "regularly". Rather, more specific terms such as "once per day" and "2-3 times per week" should be used.
Sequence the Questions
Some neutral questions should be placed at the beginning of the questionnaire in order to establish rapport and put the respondent at ease. Effective opening questions are simple and non-threatening.
When sequencing the questions, keep in mind that their order can affect the response. One way to correct for this effect is to distribute half of the questionnaires with one order, and the other half with another order.
Physical Characteristics of the Questionnaire
Physical aspects such as the page layout, font type and size, question spacing, and type of paper should be considered. In order to eliminate the need to flip back and forth between pages, the layout should be designed so that a question at the bottom of the page does not need to be continued onto the next page. The font should be readable by respondents who have less-than-perfect visual acuity. The paper stock should be good quality to project the image that the questionnaire is important enough to warrant the respondents' time. Each questionnaire should have a unique number in order to better account for it and to know if any have been lost.
Test and Revise the Questionnaire
The questionnaire should be pre-tested in two stages before distributing. In the first stage, it should be administered using personal interviews in order to get better feedback on problems such as ambiguous questions. Then, it should be tested in the same way it will be administered. The data from the test should be analyzed the same way the administered data is to be analyzed in order to uncover any unanticipated shortcomings.
Different respondents will answer the same questionnaire differently. One hopes that the differences are due to real differences in the measured characteristics, but that often is not the case. Some sources of the differences between scores of different respondents are:
• True differences in the characteristic being measured.
• Differences in other characteristics such as response styles.
• Differences in transient personal factors such as fatigue, etc.
• Differences in situation, such as whether spouse is present.
• Differences in the administration, such as interviewer tone of voice.
• Differences resulting from sampling of items relevant toward the characteristic being measured.
• Differences resulting from lack of clarity of the question - may mean different things to different people.
• Differences caused by mechanical factors such as space to answer, inadvertent check marks, etc.
Conjoint Analysis
When asked to do so outright, many consumers are unable to accurately determine the relative importance that they place on product attributes. For example, when asked which attributes are the more important ones, the response may be that they all are important. Furthermore, individual attributes in isolation are perceived differently than in the combinations found in a product. It is difficult for a survey respondent to take a list of attributes and mentally construct the preferred combinations of them. The task is easier if the respondent is presented with combinations of attributes that can be visualized as different product offerings. However, such a survey becomes impractical when there are several attributes that result in a very large number of possible combinations.
Fortunately, conjoint analysis can facilitate the process. Conjoint analysis is a tool that allows a subset of the possible combinations of product features to be used to determine the relative importance of each feature in the purchasing decision. Conjoint analysis is based on the fact that the relative values of attributes considered jointly can better be measured than when considered in isolation.
In a conjoint analysis, the respondent may be asked to arrange a list of combinations of product attributes in decreasing order of preference. Once this ranking is obtained, a computer is used to find the utilities of different values of each attribute that would result in the respondent's order of preference. This method is efficient in the sense that the survey does not need to be conducted using every possible combination of attributes. The utilities can be determined using a subset of possible attribute combinations. From these results one can predict the desirability of the combinations that were not tested.
Steps in Developing a Conjoint Analysis
Developing a conjoint analysis involves the following steps:
1. Choose product attributes, for example, appearance, size, or price.
2. Choose the values or options for each attribute. For example, for the attribute of size, one may choose the levels of 5", 10", or 20". The higher the number of options used for each attribute, the more burden that is placed on the respondents.
3. Define products as a combination of attribute options. The set of combinations of attributes that will be used will be a subset of the possible universe of products.
4. Choose the form in which the combinations of attributes are to be presented to the respondents. Options include verbal presentation, paragraph description, and pictorial presentation.
5. Decide how responses will be aggregated. There are three choices - use individual responses, pool all responses into a single utility function, or define segments of respondents who have similar preferences.
6. Select the technique to be used to analyze the collected data. The part-worth model is one of the simpler models used to express the utilities of the various attributes. There also are vector (linear) models and ideal-point (quadratic) models.
The data is processed by statistical software written specifically for conjoint analysis.
Conjoint analysis was first used in the early 1970's and has become an important marketing research tool. It is well-suited for defining a new product or improving an existing one.
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