http://www.ngfl-cymru.org.uk/vtc-home/vtc-aas-home/vtc-as_a-bus_studies/vtc-as_a-bus_studies-wjec.htm Lesson MaterialsUnit BS1 : The Business Framework Unit 1 of 4 for the 2008-2010 specificationUnit BS2 : Business Functions Unit 2 of 4 for the 2008-2010 specification Unit BS3 : Business Decision Making Unit 3 of 4 for the 2008-2010 specification Unit BS4 : Business Strategy and Practice Unit 4 of 4 for the 2008-2010 specificationA level Biz A resource base for the WJEC A level syllabus

Module BS1 : The Business Framework This is the first MODULE out of 4 covering BS1 - The Business Framework covering:

Marketing Producing goods and services Type of business organisation External influences

Marketing What is marketing?

Product orientation, market orientation and asset led marketing

Identifying and Anticipating Customer Needs and Wants

What is market research? The nature, purpose and

importance/benefits of market research.

Desk and field research. (primary/secondary).

Distinguish between quantitative and qualitative research.

Market Segmentation The methods of market

segmentation

The reasons for market segmentation.

Market Share and Market Growth

Measurement and importance of market share and market growth.

Mass versus niche marketing.

What is Marketing?Marketing is one of the most important factors in creating a successful business. The amount of marketing that we see around us in our everyday lives demonstrates that getting the message across to potential and existing customers is a constant and never-ending task. All this marketing is try-ing to attract the consumer to products that satisfy their needs. Even so, nowadays satisfying customers may not be enough, most other firms are doing this as well. Much better is to delight the customer, with the adverts, the promotions the price, the product! And it is not just the posters, the TV ads, the radio ads, the sponsorship, the logos and the brands, that make up marketing. For many businesses it is part of every employees job to 'sell' in whatever way that is appropriate to their role. So smile at your customer, provide good service, help sort out problems, or design a good product. All parts of effective marketing.

But how to define marketing, and explain what marketing is?The purpose of marketing is to create a process that matches the abilities and strengths of the firm to the needs of the market. A business aims to supply goods and services that customers want, place these goods in front of the customer and establish a need, all in a way which will generate suitable rewards for the organisation. So how is this achieved? Firstly and most importantly marketing aims to identify and anticipate customer needs. This is the start-ing point. And just to make things a little more difficult it is not always enough to just identify customer needs: the customers may not know themselves what they want. In some markets such as fashion and film, firms have to anticipate what customers will want in the future. They have to predict trends even before most customers know what these trends will be. Secondly, marketing is a two way exchange process. The business offers the consumer goods or a service and in return receives a payment. Also marketing can be seen as mutually beneficial because both sides should gain from the exchange. Customers should be satisfied as they are gaining utility from consuming the good or service and firms should make a profit. Both sides win.

Marketing involves (R O A M S) Market Research – This involves gathering and analysing information on consumers, the market-place and competition. Marketing Objectives—setting of marketing goals linked to the firms overall objectives. Market Analysis – This is an examination of market conditions to identify new opportunities. The marketing Mix, the 4Ps of marketing – This covers the decisions all businesses have to make regarding selling prices, how and where the product is sold, the image of the product and the precise nature of the product itself. Marketing Strategy – This involves developing a plan detailing how the marketing objectives can be achieved.

We see then that marketing involves a whole range of activities, starting with researching the market, and setting objectives, it also includes developing new products, designing packaging, establishing the right marketing mix and so on. All these activities are aimed at providing goods and services which will satisfy the customer (so he or she will buy it), and at making a profit for the firm. The better the marketing, the more desirable (or desired) the product or service which is provided for the customer and the more money the business should be able to make.

Markets When we examine marketing we must also be aware of the type of market a firm operates in. The strict definition of a market is ‘a place where buyers and sellers meet’. This meeting does not have to be physical; it can be on the phone or over the internet. The actual market place of a firm can be small, local markets with a specific location. Other markets are national or international with no single location. For ex-ample, the world market for oil is a global market in which buyers and sellers are linked by telephones, faxes and the internet, and trading takes place in many locations. Other differences in markets are based on numbers and types of competitors and how governments regulate these markets.

Conclusion Every type of contact a firm has with its customers or potential customers is part of marketing. Effective marketing means that the organisation understands its customers and provides them with what they want, when they want it. At the same time it ensures the firm itself benefits from this transaction. This benefit may not be immediate profits, it may be the achievement of some other marketing objective such as building brand image or gaining market share.

Exam Questions on Marketing:

Kellogg’s – the breakfast brand Quantitative market research tells us that over 40% of UK households are likely to have a packet of Kellogg’s Corn Flakes. It is the country’s number one breakfast cereal, holding 11% by volume of the market, with its closest rival, Weetabix, holding 9%.From the outset W.W. Kellogg, the founder of the company, fully realised the importance of promoting his products and today, 100 years later, the company still sees marketing as vital to its continued success.The company is always looking to launch innovative products onto the market: eleven of the top twenty brands in the UK breakfast cereal market are Kellogg’s products! When launching new products, the company has found that a penetration pricing strategy has often been the most effective.

Adapted: Superbrands, Editor Marcel Knobil

1. What is the meaning of: (a) quantitative market research; [2](b) Penetration pricing? [2]

2. Why might penetration pricing be an appropriate strategy for Kellogg’s to use when launching a new breakfast cereal? [4]

3. Explain ways in which Kellogg’s could effectively promote a new breakfast cereal. [6]

4. Discuss the view that marketing is as beneficial to consumers as it is to businesses. [6]

PERSONAL DEBT IN THE UK REACHES RECORD LEVELSIf people were to limit their spending mainly to things that they really need and were to spend less on things that they want, there would not be such a problem in the UK of rising personal debt.

1. With the use of examples, explain the difference between needs and wants. [4]

MORE POST OFFICE CLOSURESThe Post Office, which is part of the public sector, recently announced plans to close 2 500 of its branches because it was losing £4m a week. After these closures, the Government is still going to pump a £150m annual subsidy into a network in which only 4 000 of the remaining 12 000 branches will be profitable.1. In what ways do the aims and objectives of the public sector differ from those of

the private sector? [4]

Product orientation; Market orientation and Asset-led marketing.When a business bases it's marketing mix on what the business sees as it's internal strengths, the business's marketing is said to be 'product orientated'. When a business bases its marketing mix on it's perception of what the market wants, the business's marketing is said to be 'market led', or 'market orientated'. Asset led marketing uses product strengths such as the name and brand image to market both new and exist-ing products. With asset led marketing, Marketing decisions are based on the needs of the consumer and the assets of the product.As a starting point all businesses must base their products on their internal strengths but also they must relate the knowledge they have of the market to these strengths. This means adapting and using the business's assets such as labour skills, available capital, and reputation, to meet market demand. As the firm grows it might find that it wishes to go further than this and actually structure the future use of all factors so that the way the business operates and what it produces exactly meets changing market demand patterns. When this is done the business is truly market orientated.

Product orientationWhen a business is product orientated, it will base its products or services on what it perceives as its internal organisational strengths. Firms with a product orientated approach to selling, try to sell whatever they can make, without trying to find out if it's what the customers want. Sony grew hugely successful using this policy, and became famous for this approach. The clearest example was the Walkman, launched in the late 70’s; marketing professionals said it would not sell because it had no recording facility a generation of teenagers proved them wrong. A more up to date example is Apple, the iPhone being the latest in a long line of product led launches.

Being product orientated brings a number of advantages Firms can focus on internal quality Technological investment can be applied to a wide range of products Economies of scale can more easily occur Allows outsourcing of production—the firm is essentially a design house But of course there are disadvantages as well. These disadvantages include: Changes in market structure will not be responded to Fashion and taste are not accounted for in product mix Technology applied can be left behind

Market orientated- market led When a business is market led, the business's activities will be dictated by the market, it will at all times attempt to meet the needs of the market with little if any reference to internal strengths of the business. An organisation with a market orientation thinks that its most important asset are its customers. The firm believes that, as long as it is able to identify potential customers, find out what they want, and then produce that for them, it will remain successful This market orientation does have advantages The business should be flexible to changes in demand patterns the business, through market research, will have a strong understanding of the needs of the customer New products should have a greater chance of success. But there can be disadvantages to being market led. These disadvantages include: High cost of market research to understand the market Constant internal change as needs of the market are met Unpredictability of future, especially from point of view of staff Abandonment of earlier product investment

Asset Led Marketing—Balancing being product orientated with being market orientated.

The perfect situation is of course for a business to relate customer taste to the business's own strengths. So a business should find out what the market wants, and then ask the question, ' how using our skills, knowledge and assets, brands, can we meet these customer needs?' Asset led marketing tries to achieve this; the key word here is ‘led’. Assets such as labour force skills, management skills, patents, recognised brands or capital, should be used to help satisfy consumer demand. Identify what you are good at, and relate this to customer need. This relating of internal strengths to market needs should be one of the basic rules of any firm's marketing strategy as this approach focuses on the most appropriate opportunities, given the firm’s assets. Mars Ice Cream an example of …?

How to effectively combine these two factors (internal strength and market needs) can be demonstrated by examining the use of data base marketing. The growth of store loyalty cards has allowed the development of data base marketing. Using this form of marketing, firms develop a data base of their customer’s activities, shopping habits and tastes. They then use this data base to target sectors of their market with different offers, promotions etc. This targeted marketing improves the effectiveness of marketing spend. A simple example of this would Tesco’s sending details of their back-to-school children clothes promotions to customers on their data base who spend money on fish fingers and burgers, (these customers are likely to have young children). The firm has targeted a market segment that is most likely to buy the promoted product. In this example we see that the internal strength of the business is the effective application of IT, and this is then related to seasonal market demand, increasing product sales. When a firm applies asset led marketing it will benefit from several advantages Quality of output should be assured Change will be progressive, not in unpredictable leaps The future activities of the business are predictable Firm is maximising return from assets Employees will be settled, know their roles

Exam Question

Quiksilver - a surfing success storyIn the late 1960s, Australian surfers Alan Greene and John Law designed a pair of board shorts that were durable, lightweight and dried rapidly. The shorts had all the features that surfing customers wanted – a wax pocket, Velcro fastenings, a wide supportive waistband and, most importantly of all, they were comfortable. They were a huge success and as a result Quiksilver has always ensured that it has adopted a market orientated approach to its product development.Today, Quiksilver is a truly global brand and offers a diverse range of products including a complete clothing collection, accessories, eyewear, watches and wetsuits. The company has diversified into the snowboarding and skateboarding markets. It provides a range of products targeted at 25-40 years olds, 8-14 year old boys and even toddlers. Girls’ lines now include well established brand names such as Roxy, Raisins and Leilani swimwear. The company still ensures that the staffs who manage its extensive product portfolio know what their customers want and need; many of its employees are former world and national champions in surfing, snowboarding and skate boarding.

1. What is meant by the term market orientated? [2]

2. Briefly explain two advantages to a business, such as Quiksilver, of being market orientated. [4]

3. With reference to the passage, explain what is meant by market segmentation. [2]

4. Explain two reasons why Quiksilver would wish to identify different marketsegments. [4]

5. Consider the usefulness and limitations of the Boston Matrix to businesses, such as Quiksilver, when managing an extensive product portfolio. [8]

Market Research

What is market research? Market Research is the process of collecting information and data about a firms customers, the market place the firm operates within (sells to), and the activities of competitors within that marketplace. Market research involves study of:

the size of the market in terms of numbers of customers and value of sales the niches or segments that exist within the market how competitor firms behave the demographic make-up of the consumers i.e. how old they are, sex mix, incomes etc. the emotional and rational ties that customers have with the firms’ products and competitor products.

Market research is big business. Because of the expense of launching new products, the cost of maintaining market share and the profile of existing products and brands; firms regard having an understand-ing of the market place as a major corporate priority. After all, with firms like Lever Bros. (producers of soap powders), spending over $300m a year on marketing, when it comes to designing new products and marketing campaigns, firms do not particularly like taking a jump in the dark. The objective of market research is therefore, to gain detailed knowledge about the market that exists for the firms current or future products, so that the firm can be as confident as possible that each marketing and product development £ spent, has been a £ well spent.

3 Main Themes of market research: The market The product Activities of competition.

The MarketThe objective here is to gain an under-standing of the make up of the market. Firms will aim to discover: The nature of the market - who are these customers, why do they purchase the product? Is the market sub-divided or segmented - can the market be separated by geographical, socioeconomic, or other differences. Rate of growth of the market - how quickly is the market growing? Or on the other hand is the market shrinking? Barriers to entry to the market - is it easy for competition to enter the market? Does effective participation in the market depends on high levels of investment or existing expertise?

The ProductHere the objective is to gain an under-standing of the sales and profit potential of the product, and its likely future success. Market research will attempt to discover: At what stage is the product in its life cycle - is it near maturity, or in decline? Is it worth investing in extending the life cycle of the product - should we use extension strategies? For new products, the objective is to test consumer response, and so aid product development. Is promotion of the product achieving its in-tended aims - does the target market know of the product and its uses and purpose? The competitionHere the firm attempts to understand the nature of and activities of major existing and potential new competitors. Market research will attempt to discover: The form of the market - is it highly competitive, or is it an oligopoly with just a hand full of major competitors? Who exactly are the competition – what are their financial and other strengths? In what ways are the competition different from or the same as us - what pricing strategies do they use, is their marketing mix different?These then are the objectives of market research, but it is worth noting that most market research carried out will look at just one or two of the above, aiming to gain specific information, not generalised information.

Types of Market ResearchOne way of categorizing market research is to divide it into one of two types: Field Research -Primary researchDesk Research -Secondary research

Field – Primary research gathers first hand information. This means that the data gathered is new, and should also be directly relevant to the needs of the company. Field research is carried out when there is a need to collect information for company or product specific purposes or objectives. For example, a firm carrying out or funding research, may want to know who buys which competitor products and the reasons for the purchases. Alternatively a new product may be tried out on potential consumers to judge responses. Field research is often called primary research as it results in the collection of primary data. Within field re-search various methods can be used to collect the information required. Field-Primary Research methods include:

Test marketing – a trial release of the product in a restricted area, to gather customer responses and make changes based on these responses, before final launch

Focus groups - these are groups who meet regularly to have chaired discussions, on themes set by a market researcher. Political parties often use these so that they can understand the issues that are of greatest concern to different groups within a population.

Questionnaires - these are designed to gain specific information, based on a series of questions. Can be carried out face-to-face, but increasingly information is gathered through postal surveys.

Consumer Panels - similar to focus groups, but are more product orientated, and are made up of consumers of products. The objective here is to gain opinions on different aspects of a product, such as taste, packaging, shape etc.

Desk-Secondary research involves the use of previously collected information. So with desk (or secondary) research, the information used has not been gathered specifically for the firm, but is instead adapted for its use. Desk research data is more easily available and accessible at a lower cost than field research.

Desk-Secondary Research methods include: Use of internal information- such as sales and customer data figures Database profiles - by the use of loyalty cards, retailers are able to build up detailed

profiles of their customers and their spending habits. Official publications - a huge variety available, the most popular for desk research

are census reports and Social Trends Surveys. Trade Press – virtually every industry has its own ‘in house magazine’, these provide

a wealth of information on specific retail and product areas, for example The Grocer is a must read for all food retail marketing professionals.

The Internet - IT competent firms can gather user and customer profiles, by the process of registration and customer comments on web sites.

Local Sources - Yellow Pages, chambers of commerce, ITECs, and TECs.

Because field research is an expensive and time-consuming business, firms are more and more turning to market research companies. These market research companies are continually gathering data from questionnaires, census reports, trade information sheets, sales figures etc. From the information gathered they develop a comprehensive database on the spending patterns of consumers. This data can be interpreted in a way that meets the research needs of the customer firm. My own favourite example of market research was the 'toilet flush' research carried out by a US radio station. The night before an election for State Governor, a local radio station carried out a poll, by inviting its listeners to flush the toilet at specific times. If they flushed at say 9.00, they were going to vote for candidate A. If they flushed at 9.15, they were going to vote for candidate B. The water usage was measured by the local water company, and the results of the poll accurately predicted the outcome of the election.

Sampling MethodsBefore field research is carried out and information and data gathered the method of choosing a sample of the population, from which the information is to be collected, must be chosen. (The population means the total user group, or target market, the sample is a set from within this group). Sampling is needed because gathering information from the whole population is likely to be too expensive, time consuming, or just impossible. Sampling should provide a representative selection of users, so a cross section of views and opinion is gained.

Methods of sampling Random Sampling. Using this method every member of a population or group has an

equal chance of being selected for the sample. To achieve the quality of information required, a random sample often has to be quite large, as a small sample may entirely miss subsections of the population.

Quota Sampling. This refines the random sampling method. In this case before a sample is selected, the population is divided into sub-groups. So for example it may be divided on age, sex and employment. Then within each sub-group a random sample is taken. It is important to note that for this method to work there must be an understanding of the nature and make-up of the population. This is because the sample size from each sub-group must reflect the size of that sub-group. So if you know that 10% of your customers are students, then the sample from the student sub-group should make up 10% of the whole sample.

Cluster Sampling. In this case the population is bro-ken up into clusters, normally geographically. A random sample is then taken from each cluster. Useful in opinion polls.

Every sample, by its nature, cannot be totally reliable – after all not everyone has been questioned, this will mean that the results gathered from market research cannot be treated with absolute certainty. The reliability of the results is indicated by the degree of certainty given to the results. The larger the sample, and the more reflective it is of the whole population, the greater the degree of certainty about the results. You may see opinion poll figures showing Conservative Party support of 43%, +/- 2%. This +/- 2% reflects the degree of uncertainty that exists about the accuracy of the result from the sample that has been taken. The words 'confidence level', reflect this degree of certainty. Most market researchers aim for a confidence level of 95%. A confidence level of 95% indicates that the information gathered will allow them to be wrong only 5% of the time, but right 95% of the time.

Problems with sampling methodsMethods used to gather market research information try to avoid bias in the results gathered. That is ovoid creation of built in errors. But even so errors do still occur. Some of the most common reasons for these errors which lead to a bias in results are: Poorly framed or set questions. Consider the follow-ing two questions and the different responses that they would create. a) Do you think New Labour is doing a good job of running the country?b) Given unemployment is at 4% and inflation is at 3%, do you think New Labour is doing a good job of running the country?Use of poor or inaccurate sampling techniques – this can happen when size and make-up of the population is unknown. Those questioned are often biased towards giving the answers that they think the questioner wants to hear, or which sound better. For example when questioned people indicate that they put effort into recycling products when other evidence indicates this is not true.

Quantitative / Qualitative Research Quantitative research aims to gather information based on facts that can be tested. So for example what is the average income of our customers? What is their weekly spending on food? How often do they take foreign holidays? Qualitative research seeks to gather opinions and views. So for example, Why exactly do you like Gordon Brown? What makes the shopping experience at Tesco different from that at Sainsbury? Do you find this packaging attractive and attention grabbing? Quantitative research produces data that can be tested—i.e. is statistically valid, therefore it must be in a mathematical form, or it can be interpreted using figures. The data is collected using sampling methods.

Advantages of Quantitative Research The requirements of the market research can be stated in very specific and set terms. The original research goals can be followed, so research will lead to objective conclusions, and hypothesis can be tested. Subjectivity of judgements can be eliminated. Disadvantages Fails to encourage continuous investigation – quantitative research set paths of research with little potential for following developing findings. Limited outcomes due to closed type questions and the structured format

Advantages of Qualitative Research This type of research tries to discover attitudes and motivations of consumers and consumer groups. Focus groups (as described above) are one of the major methods of gathering qualitative research information. It helps a more realistic feel of the world of the consumer, their true feelings, that is difficult to interpret from the numerical data and statistical analysis gathered from quantitative research It gives the researcher the ability to interact with the research subjects and discussions are not limited to set questions.Disadvantages Difficult to analyse data gathered, so it can be presented as clear findings Costly to carry out Difficulties in obtaining representative sample in a focus group Can lack consistency as different techniques and questioning methods can be used

Exam Questions

The Welsh Rugby Union signs £10m deal for new kitThe Welsh Rugby Union (WRU) has unveiled a new 4yr kit deal believed to be worth more than £10 million. American company Under Armour will replace Reebok as the new kit supplier, for all the Welsh rugby international teams and support staff, under the deal which will begin in the autumn of 2008. The WRU said the company’s new kit will be based on technology used to produce new kit for top American football teams. It will be used for Wale’s internationals in November. The WRU said the company’s design and manufacture teams had been studying Welsh rugby and its history and heritage as part of its market research.

Adapted frm news.bbc.co.uk 14/2/08

1. Consider the view that the primary market research carried out by Under Armour is of much greater value to the business than its secondary market research. [6]

WHAT TO WEARTrinny and Susannah give style advice to customers on Littlewoods’ websiteLittlewoods, the popular catalogue business, is set to hit internet sales of £500 million this coming year, spurred on by a new online campaign fronted by TV style-queens Trinny and Susannah. According to a company source, the business is forecasting total sales of £2 billion for the 2007-8 financial years, with internet sales worth a quarter of this total.Littlewoods signed an agreement with Trinny and Susannah last autumn and it has added features to the website in which the fashion divas offer style advice to women. Its target market is women under the age of 45, who currently represent some 85% of Littlewoods’ customers. The growth in internet sales also reflects a move up-market for Littlewoods. Last year, following the collection of primary data through extensive market research, Littlewoods poured £30 million into an effort to change its image from an outdated mail order business into a fashionable online retailer. Recently, Littlewoods hired former Next chairman David Jones to lead the business, working alongside chief executive Mark Newton-Jones, who previously ran Next Directory. The pair had been given responsibility for selling more clothing and electrical items to customers who would normally shop at Next, Debenhams and Marks & Spencer.

Adapted frm Sunday Express 03/06/07

1. Identify two methods of market research that Littlewoods may have employed to collect its primary data. [2]

2. Explain the advantages to a retail business, such as Littlewoods, of using primaryData. [4]

3. How will Littlewoods’ decision to target women under the age 45 influence the marketing mix for the new Trinny and Susannah range? [6]

4. Discuss the view that businesses which do not offer their goods for sale on the Internet are likely to fail. [8]

Chewing gum wars in the UK marketChewing gum is at the centre of a retail battle between Wrigley, the dominant player in the UK market for decades, and Cadbury Schweppes, the world’s biggest confectionery company. Six years ago, Cadbury bought an American gum company called Adams. The attraction to Cadbury was that global gum sales were growing at three times the rate of chocolate, and sales forecasters indicated that this trend was likely to continue. One of the products in the Adams’ portfolio Trident – had grown by 20% in 2005. Cadbury’s own market forecasting suggests that such growth could happen in the UK gum market, where minimal innovation had taken place for many years.With ‘Trident Splash’ (a flavoured, liquid-centre pellet gum) and ‘Trident Soft’ (a soft-chew gum with longer-lasting flavour) Cadbury had two highly innovative products. Following extensive qualitative market research in the UK, the brand was launched and they appeared on newsagents’ shelves alongside the 32 gum products sold by Wrigley. The launch was accompanied by a £10 million multi-media advertising campaign calling upon consumers to ‘join the gum revolution’. The launch has proved to be a great success with in-roads being made into Wrigley’s dominant market position. Wrigley has responded to the threat of Trident by setting up a research programme under the title of ‘The Wrigley Science Institute’, looking to promote the health benefits of its chewing gum products.

1. Calculate the value of Cadbury’s share of the chewing gum market in the UK in 2006. [2]

2. What is qualitative market research? [2]

3. Explain one benefit and one drawback of using qualitative market research. [4]

4. Explain why accurate sales forecasting is important to firms such as Cadbury Schweppes and Wrigley. [4]

5. Consider the view that Cadbury Schweppes’ £10 million multi-media advertising campaign is the most important element of its marketing mix in the ‘chewing gum war’ with Wrigley.[8]

Market SegmentationIn any market, no two customers are exactly a like; they will have different incomes, different desires, different outlooks on life, etc. So in theory each market could be broken down - segmented, into individuals. But doing this creates a problem – how can firms design and produce differing products for each of these individuals? The answer is of course that they cannot. So given that firms cannot produce individually tailored products (except in rare and specific cases – job production), what can they do to ensure that products are best suited to the market? The solution is to divide the market into segments (sub-groups) that have common features, or are made up of individuals that make purchasing decisions based on common factors and then when this is done, produce and market products aimed at each of these segments. But there is still a problem, even if firms can identify separate market segments, the segments have to be structured so that selling to them is profitable. For example, there is no point in identifying and then targeting a sub-group within the car market that expects to spend around £10,000 on a new car, needs 7 seats, air conditioning, and satellite navigation and makes purchasing decisions based on brand. After all it is very unlikely that this segment of the car market will be profitable.

So what rules must be applied to market segmentation, to make targeting segments worthwhile? Segments must be recognisable. They must be different enough from other segments, to make producing for that segment worthwhile. For example housing is built for: single flats, young couple two bedroom houses and starter homes, families 3 or 4 bed houses, retired people bungalows.

Segments must have critical mass. This means that they must be big enough or produce enough sales value to make production of products or services targeted at the segment worthwhile. The market for 2 seater sports cars has grown rapidly in recent years making the segment attractive, not only to niche market firms such as Lotus or TVR, but also mass market firms like, Toyota, Honda, Nissan etc.

Segments must be targetable. Having their own identity means that they can be promoted to, and have marketing directed towards them. On day-time TV, there are many adverts for Retirement Plans, or Funeral Expenses plans, often sold in a reassuring but concerned manner. They are targeted at a segment which is aware of the potential problems of costly funeral expenses, or leaving a loved one without financial support. We see then that segments must have three features to make targeting them worthwhile. They must be recognisable, have critical mass, and be targetable. But how do we divide the market into potentially profit-able segments?

Methods of Market Segmentation

Potentially markets can be segmented in any number of ways, but to keep things relatively simple we will examine four broad methods that establish for a firms marketing department the most important differences between customer groups.

Geographic segmentation—where do customers live, where do they purchase goods and services? Also considers population density and how fast population is growing.

Demographic segmentation—here groups are based on age, sex, ethnic background, occupation, and in-come.

Behavioural segmentation—less obvious than the two methods above, this method is based on recognising groups with different usage patterns, levels of brand loyalty, and differing levels of price and advertising elasticity of demand

Psychographic segmentation—lifestyle groups, personal values, and attitudes. We now know the basic rules of segmentation, segments must; be recognisable, have critical mass, and be targetable, and we know how to segment through the Geographic, Demographic, Behavioural, and Psychographic Segmentation. Once the market is examined in this way, firms are able to start thinking of how best to market their products. Segmentation is then the start of the marketing process. But like all elements of marketing, market segmentation is not static, segments grow and shrink, they become profitable, the profitability may diminish. Firms must ensure that they maintain an understanding of the needs and desires of the customers in each segment, and learn how to target each segment effectively.

Reasons for market segmentationA segment-orientated marketing approach generally offers a range of advantages for both businesses and customers.

Targeted Marketing allows the firm stress those product features that are most relevant for each particular segment (e.g. price vs. quality vs. brand identity), through its marketing. This targeting will occur even if the product being sold to different segments is identical.

Better serving customers needs and wants it is possible to satisfy a variety of different customer needs with a limited product range by using variations in product forms, bundles, incentives and promotional activities.

For example Dell organises it’s website by customer groups (individuals, small businesses, large businesses, government organisations), and not through product groups such as laptops, desktops servers etc. They offer the same products to all customer groups. Nevertheless, they suggest product bundles and sup-porting services that are individually tailored for the needs of each particular group. As an example, Dell offers to take on all IT-administration for companies. This service provides a huge potential for savings for corporate customers. Segment-specific product bundles increase chances for cross selling.

Higher Profits it is often difficult to increase prices for the whole market. But it is possible to develop premium segments in which customers accept a higher price level. Such segments could be distinguished from the mass market by features like additional services, exclusive points of sale, product variations and the like. A typical segment-based price variation is by region. The generally higher price level in big cities charged by firms such as Starbucks and McDonalds is clear evidence of this.

Opportunities for Growth Targeted marketing plans for particular segments allows firms to individually approach customer groups that otherwise would look out for specialised niche marketing firms. By segmenting markets, businesses can create their own ‘niche products’ and thus attract additional customer groups.

Sustainable customer relationships in all phases of customer life cycle. Customers change their preferences and patterns of behaviour over time (the customer life cycle). Firms that serve different segments along a customer’s life cycle can lead their customers from stage to stage by always offering them a special solution for their particular needs.

For example, most car manufacturers offer a product range that caters for the needs of all phases of a customer life cycle: first car for students/ young workers, fun-car for young professionals, family car for young families, SUV for growing families etc. Skin care cosmetics brands often offer a branded series of products for babies, teens, young adults, mums, and more mature skin. Stimulating Innovation Segmentation provides information about small groups in

the total market that share particular needs. The identification of these needs enables a planned development of new or improved products that better meet the wishes of these customer groups. Recognising new, growing markets that are developing from small segments can drive innovation within firms.

Higher Market Share By targeting segments through the use of niche strategies, the total share of the market held by the firm will increase. The segment orientated strategy also strengthens the brand and ensures profitability.

Exam Question

Heinz Tomato Ketchup - A classic brandTomato Ketchup has been a part of Heinz’s product portfolio since 1876; just seven years after Henry J Heinz started the company. The famous Heinz label is instantly recognisable the world over and product quality is central to the continued success of the company. The sales revenue of Heinz Tomato Ketchup is huge: the Heinz website tells us that “we use enough tomatoes to fill an Olympic-size swimming pool everyday to make enough ketchup for all our fans.” Nonetheless, it is constantly seeking ways to maintain its prominent position through market research and market segmentation, always looking to add a new ketchup product to the range listed below.

Products Available in UK in 2006 SizeHeinz Ketchup Top Down 460g, 570g, 700g, 910g, 1.2kgTomato Ketchup Glass Bottle 342gOrganic Tomato Ketchup 460gChilli Flavoured Ketchup 570gCurry Flavoured Ketchup 570gHot ‘n’ Sizzling BBQ Flavoured Ketchup 570gOriginal BBQ Flavoured Ketchup 570g

Packaging has always been an important part of the marketing mix and the now famous glass ketchup bottle was patented in 1882. In 1987 the ground-breaking, highly convenient plastic Heinz Tomato Ketchup bottle was launched and in 2003 Heinz decided to turn the Heinz Tomato Ketchup on its head - revolutionizing the way sauce was served. The latest development to Heinz Tomato Ketchup Top Down bottle is the new design, which has the classic glass bottle shape, but with a cleaner cap and better pouring control. To satisfy what Heinz call “saucy traditionalists”, the classic glass bottle still remains on sale.

Adapted from www.heinz.co.uk

1. Explain what is meant by market segmentation. [2]

2. Why might Heinz attempt to identify different market segments? [4]

3. Explain the importance to Heinz of long established and successful brands such

as Tomato Ketchup and Baked Beans. [6]

4. Evaluate the view that, in a fast moving consumer goods (FMCG) market,

packaging has become the most important element in a firm’s marketing mix. [8]

Market Share and Market GrowthTo calculate market share divide a firms sales by total market sales. Sales can be measured on a value basis (£s), or on a quantity basis, the number of units sold. A firm with sales of £10,000 in a market of £200,000 will have a market share of 5%. Market Share, as a measure of success, is important to firms since the greater the share, the more likely the stability of the brand's performance in a market-place. A product with 65% market share is a force with which to be reckoned. A product with 3% share is vulnerable to a variety of market factors such as aggressive pricing policies by competitors, promotions by competitor firms, loyalty to stronger brands etc.

Reasons to Increase Market ShareMarket share often is linked to profitability and so firms will attempt to increase their sales relative to competitors – that is take a larger market share, or if you prefer a bigger slice of the pie. Reasons that a firm may seek to increase market share include: Sales growth in a stagnant industry - when sales for an entire market or industry are not growing, the firm still can grow its sales by taking sales from competitors and in so doing increase its market share. Increased bargaining power - a larger player has an advantage in negotiations with suppliers pushing down prices paid. We have seen plenty of evidence of this in the UK with the big supermarket chains forcing down prices paid to farmers. Economies of scale - higher volume leads to lower average costs Reputation – the largest of the market leaders have political and economic power that they can use to their advantage.

Reasons Not to Increase Market ShareAn increase in market share is not always desirable. For example: If the firm is near its production capacity, an increase in market share might create the need for additional capital investment, bring costs and risks.. Overall profits may decline if market share is gained by increasing advertising spend or by reducing 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 competitor may decide to enter the niche, recognising profits are to be made, or to destroy potential future competition. Competition issues such as action by the Com-petition Commission, may arise if a firm in-creases share and starts to dominate a market.

Ways to Increase Market ShareProduct - the product can be altered to provide more value to the customer, for example, by improving added value aspects or product quality. Price - if the price elasticity of demand is elastic, a decrease in price will lead to a more than proportional increase in sales quantity and increase sales revenue. But this tactic may lead to a price war. Place/Distribution - add new distribution channels. Promotion - increasing advertising expenditures can increase market share, unless competitors respond with similar increases. It can even be true that firms may wish to decrease market share. For example, if a firm is able to identify any customers that are unprofitable, it may drop these customers and lose market share while improving overall profitability and profit margins.

Market GrowthMarket growth measures the increase in value of a whole market, not just the sales of any individual firm within the market. Market growth is usually measured in % terms. A fast growing market may have the total sales value increasing by 10% a year. A slow growing or stagnant market may be increasing total sales value by 1 or 2% a year. There are of course some markets where sales values are shrinking—video recorders is just one example. Market growth can be driven by a number of factors. These include; Increased Real Incomes Fashion New Technology Health Concerns Effective Marketing It is important for firms to have successful products in fast growing markets (Cash Cows), as these will help ensure future profitability.

Mass Vs Niche MarketingMass marketing was one of the success stories of the 20th century. Starting of with products like the Model T Ford, we are now surrounded in our every-day lives by mass market firms, multinationals aim-ing to maximise profits, market share and economies of scale by producing and selling huge quantities of similar goods and services to as many customers as possible. These mass market firms provide the bulk of the goods and services that we consume. Companies like Ford, Toyota, Microsoft, Proctor and Gamble (soap powders), Sony, and Cadburys, produce ranges of products aimed at target-ing as large a proportion of the total market as possible. They achieve this market saturation, by using two methods.

The first method used is developing product width. This means selling a range of similar but differentiated products. So Proctor and Gamble will market several brands of soap powder, each targeted at a different segment of the mass market. By doing this they cut costs, though economies of scale, and through the use of advertising, establish a range of brands each with different values in the mind of the consumer.

The second method of appealing to as much of the market as possible is to add product depth to each of the products. Adding product depth means making each product available in a range of sizes, packs etc. So we have 3 sizes of soap powder pack, targeting for example, singles, couples and large families. Mars will sell Mars Bars as a single bar, king size bars, 5 packs, snack size packs etc., again covering a wide as possible market spread with little extra cost.

Advantages of Mass Marketing Maximises income If one sector declines this is likely to be compensated for by growth in other sectors. Allows reduction in average costs through economies of scale. Allows Brands to be used to their full valueDisadvantages of Mass Marketing Heavy advertising costs, to establish brands and keep them in public eye. High development costs of products. Competition is often fierce. Companies must be market orientated — this brings high innovation and market research costs.

COST OF MARKETING R & D COSTS

COSTS OF MARKET RESEARCH

INCREASED COMPETITION

ECONOMIES OF SCALE SPREADING OF RISK

BRAND AWARENESS & VALUE

Niche MarketingOften for smaller businesses mass marketing is not an option, after all appealing to and developing products for a mass market is an expensive business. There are huge product development costs, massive expenditures on promotion, constant competition etc. Smaller firms will therefore have to accept that aiming for specific niches may be their only option. With niche marketing a firm will target a single segment or part of the market, ignoring the rest of the marketplace. The idea of niche marketing made a strong come-back in the 1990’s and any quick glance at a baby or women’s magazine, or the classified pages of a national newspaper, will show how many firms are targeting niches that they have recognised as existing within a market. Recent examples have shown how successful this type of firm can be. Mothercare, mass marketing children’s clothes announced the closure of many of their stores, (May 1999), their market has been lost to specialists and niche market companies such as Baby Gap and Next for Kids. C & A, mass market-ing, sensible, if slightly down market clothes have found their customers deserting them for mail order companies like Cotton Traders or shopping for their leisure wear in the new breed of sports shops, result-ing in the closure of the entire UK operation.The best niche marketing is based on designing goods or services specifically tailored for the needs of the customer. Therefore there must be a full understanding of the desires and needs of the niche. This understanding can be gained through market re-search, but is as often as not at least initially based on more of a gut feeling and an understanding that comes through personal experience.

A Niche Marketing Success StoriesBEN & JERRY'S

Ben and Jerry’s, recently taken over, was a quirky, politically correct ice cream maker founded in a Vermont petrol station 27 years ago by two former hip-pies with a $12,000 investment (£7,500). After they took a $5 correspondence course in ice cream-making, the company is now worth $200m. The company has grown from one outlet to 170 "scoop shops" selling brands including Phish Food, Cherry Garcia, Cool Britannia and Bovinity Divinity. Its initial growth was threatened by ‘unfair’ competition from Pilsbury, a mass marketing food corporation, but Ben and Jerry fought back, establishing one of the most successful niche brands of the 80’s and 90’s. Compare this approach to the mass marketing methods of Walls, or Mars.

Body ShopThe first shop opened in Brighton in 1976, and the chain rose to prominence during the 1980s as the first major retail chain to emphasise its belief in ethical business methods. Its range of herbal toiletries, then new and different proved highly popular with a grow-ing niche of ethical consumers. After a rocky time in the 90’s as traditional perfume retailers

started to copy cat its products, the chain was sold to L’Oreal in 2006 and at that time had over 2,000 stores globally.

Advantages of Niche Marketing Lower initial cost especially in relation to advertising. Able to concentrate on company strengths – product can be developed from what the business is good at, and then a niche targeted. Competition may ignore the niche, either be-cause of lack of awareness or because it is too small for large firms to focus on. Firms can gain expert knowledge of the niche giving them a real advantage over potential competitors.

Disadvantages of Niche Marketing Market niches can disappear as a result of changes in economic conditions, fashion or taste – having all your eggs in one basket. Mass market firms can target the niche if it grows in value or size – small firms may find this competition impossible to deal with. Niches are not always neat little market sectors, they may be spread geographically or otherwise, making targeting and promotion difficult or expensive.

Conclusion There is a belief current amongst marketing professionals that the mass market is starting to break down, and instead of an easy to target homogenous consumer groups in a mass market, the market for many products is dividing into large number of niches that could make mass market products redundant. A good example of this is the holiday market. Ten or fifteen years ago the package holiday sold in the millions to undiscriminating British holiday makers. Now the market is quite different, more and more customers want some-thing individualised, the internet allows holiday makers to create their own packages, and cheap flights pro-vide low cost options. This gives serious problems to large holiday companies. As a result there has been consolidation in the market, with a number of take-overs occurring. This has the effect of reducing costs, and reducing price competition within the market. Also the way these holidays are marketed has changed, with much more focus on individuality, and choice. Even with these changes it will be interesting to see if the traditional package holiday company survives the next ten years.

Exam Question

Concrete drainage systems constitute a niche market worth about £80million a year in the UK, but operations are concentrated in the hands of the three large players, the largest of which is CPM, which is based in Mells in Somerset. CPM manufactures concrete drains as well as laying them; earlier this month the firm bought Hughes Concrete, a firm specialising in supplying high quality concrete to firms manufacturing concrete products, creating an overall business with a turnover of £26million. Recently CPM firm has diversified into areas

such as landscaping and flood protection, with the help of a £3.5million funding package from Bank of Scotland.

Adapted from The Daily Telegraph 15/10/2008

a) With reference to the passage, explain the meaning of niche market. [4]