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Posts Tagged ‘business’

Exam survival kit: revision posters

In Management, Marketing on May 1, 2013 at 2:24 pm

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Revision is a bore. But knowing where to begin brings you a long way towards exam success. HBR has thrown together 4 examples of how to separate the main themes and topics of a module, while developing your overall view of the marketing and management disciplines.

HBS revision 001

HBS revision 003

HBS revision 002

HBS revision 004

Global pricing: standardisation v. adaptation

In Management on April 18, 2013 at 4:38 pm

currencies

HBR has previously explored the impact of competition, product and demand on the pricing strategies of businesses. In this article, we build on this by looking at the pricing in the global context. Largely, MNEs have to adapt prices to account for local conditions. This includes factors relating to the customers, product and market.

Customer

The golden rule of standardisation extends to pricing. If prices can be extended across regional markets, multinationals reduce the complexity of marketing and their organisational structure.

In the pursuit of standardised prices, psychologists have worked with marketers to establish pricing techniques which are effective in raising sales across cultures. Bundled prices, along with ‘99p’ selling, subscription and discounting models, can make a market offering appear more attractive to buyers. However, pricing is always designed to befit the business – by encouraging rapid or widespread adoption, securing a return on capital expenditure or by positioning the organisation in the market.

Bundling is most often used to justify a higher profit margin while lowering buyers’ willingness to negotiate. For these reasons, EasyJet has become adept at building relationships with local hotels and car hire companies – using holiday packages to maintain competitive flight prices.

The elasticity of demand restricts the price range of a good and can lead businesses to interesting strategies. As the recession set in during the first decade of the 21st century, Starbucks was losing customers. Against conventional advice, the coffee chain benefitted from an 8% price rise. This is because, with the departure of price sensitive customers, Starbucks was left with inelastic demand. Instead of regaining customers, Starbucks extracted more value from their surviving base.

Product

The exclusivity and representational value of a product both impacts and is impacted by its attached price tag. Firms in luxury product segments, from LVMH’s bags to Cartier watches, use fixed prices to added representational value to products which stand for membership of a global elite. On the other side of the spectrum, Ironman marathon runners protested expensive membership schemes as antithetical to the ethos of the sport.

Covering costs is a central objective of pricing strategies, and is established by product specifications. Cost pricing provides the benefits of achieving return on investment, but needs to be set with a determined recovery period. For instance, GlaxoSmithKline’s pharmaceuticals command high premiums so that they might recoup development costs before the drugs become commoditised.

Market

Geocentric strategies have been developed to balance local conditions with the risk of pricing arbitrage. They consider the different levels of wealth and development across global markets. Correspondingly, prices vary even within clustered economies. In terms of consumer prices, Demark is 42% higher than the average EU state, whereas Bulgaria is 49% below the average.

Market pricing relies on market forces to set price levels. This enables companies to maintain their positions through fluctuations in demand, but can result in a lack of differentiation between market offers. Due to this pricing method, the competition between Swedish food retailers was unresolved through the 2000s.

Companies might otherwise be obliged to adapt price because of legal requirements, exchange rate fluctuations or opportunities for counter-trade as in BAE Systems’ arrangement with Saudi Arabia.

Conclusion

International pricing strategies can successfully have standardised features, such as promotional reductions, and be rooted in the same orientation – cost, market or value. However, the level of maturity and currency used in a national market will determine the relative prices at which a product can be expected to be embraced by a local customer base.

Pricing strategy in B2B markets: Demand (1/3)

In Informatics, Management on April 16, 2013 at 3:50 pm

1956_The Price is Right

The price is right

Price is an essential component of marketing and revenue generation which cuts to the heart of the purpose of modern enterprise. Businesses address customer needs through the provision of goods and services. However, this is not an end to itself. Primarily, firms exist to increase the wealth of their owners. To do this they engage in revenue and profit generating activities.

Revenue = price of good x quantity of good sold

Profit = total revenue – total costs

The profitability of a business can be increased by selling more, decreasing costs or raising prices. Although most obviously involved in the latter option, price strategy is an element of all of these methods. Enterprises can alter price to maximise profits, penetrate or skim markets, reduce inventories or encourage up- or cross-selling. Typical objectives include getting a return on investment and increase market share.

Businesses do not operate in a vacuum, however. Only certain pricing decisions will be viable for any one market situation. This article separates the relevant factors into demand, product and competitive conditions.

Demand

In neoclassical economics, lowering prices increases demand and adding to buyer costs reduce the number of potential customers willing to buy. However, more sophisticated models differentiate between inelastic and elastic demand.

Price elasticity refers to the percentage change in the quantity of a good demanded resulting from a 1% price change. If demand is inelastic, price alterations have a rapid effect. On the other hand, customers who are slow to be discouraged from buying as prices increase demonstrate elastic demand. The second scenario occurs when a product cannot be easily substituted or provides value through high quality. Similarly, buyers who are not attentive spenders or find searching for lower prices challenging are flexible in the prices they will pay.

CONTINUED IN PART 2.

Pricing strategy in B2B markets: Product factors (2/3)

In Management on April 16, 2013 at 3:47 pm

Price target

Product

Analysing demand elasticity soon reveals that product and market factors enable or constrict businesses in setting prices. At the most basic level, the cost of producing a market offering usually needs to be covered by its selling price. Businesses aiming to achieve a certain rate of return will price to gain a percentage of profit in addition to covering costs of production.

Cost based prices are easy to administer and use in forecasts, but come with several drawbacks. Firstly, the rationale of this pricing system (price = costs + profit %) means that cost reductions do not increase the profitability of the sale of individual units. Further, companies risk missing opportunities to profit by selling products and services at a level below the maximum customers would be willing to pay.

Evidently, a more satisfying pricing structure would consider both product and demand conditions. Value pricing addresses this desire by considering the buyer side of the buyer-seller relationship. Buyer value (the worth of an object or condition, relative to competing offerings) is measured by weighing the costs incurred and benefits gained through the purchase of a good or service.

Customer perceived value = perceived benefits / perceived costs

According to theory of wealth maximisation, a consumer will choose the good or service which they believe provides the most favourable benefit to costs ratio. Perceived benefits include physical attributes, service attributes, associated prestige and technical support. Costs consist of purchase price, opportunity costs, risk of failure and other sacrifices made in the exchange. Companies create differential advantage based on superior benefits and/or costs.

A value pricing strategy charges in line with customers’ assessments of the benefits and costs promised by a purchase. This has the benefit of balancing considerations of customer goodwill with supplier profitability, and highlighting product lines which do not adequately meet the needs of a market.

Value pricing also considers external changes, such as the product lifecycle. A business producing a new product to address nascent consumer demand might opt for high initial prices to engage in ‘time segmentation’. ‘Time segmentation’ involves tailoring product offers to extract value from each stage of the product life cycle. In pricing this typically means using high initial prices to maximise profits from the inelastic demand in early adopter segments before reducing buyer costs for a more mainstream appeal and finally inventory reduction as the product becomes obsolete.

CONTINUED IN PART 3.

Pricing strategy in B2B markets: competition (3/3)

In Management on April 16, 2013 at 3:43 pm

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Competition

Exclusivity is an element of value. Businesses without competition enjoy markets with inelastic demand conditions and can price accordingly.

Industrial component manufacturer, Parker Hannifin was able to transform its fortunes by establishing five categories of products, priced according to value. These included A items which were bought at high quantities in competitive markets and B items which were differentiated to add value. At the other end of the scale, items which were exclusively sold by Parker in the E category commanded high prices.

One of the most extreme effects of competition on price can be in price wars where firms repeatedly cut their prices in an attempt to win market share. Oftentimes, this is unsustainable and is only advisable if your business is starting from a position with a substantial cost advantage or if market share growth is clearly prioritised regardless of profitability concerns.

Conclusion

Price strategies offer tempting routes to competitive advantage. Not only does pricing clearly affect the profitability of sales, but it its easier and quicker to change than other areas of the marketing mix. However, pricing alterations should be adopted to achieve long term growth, not as a short term fix. This involves considering market conditions, including demand, product and competitive factors. Just as the customer considers the value of their purchase, so should business leaders evaluate pricing options. Costs must be justified by the benefits received in return.

Always Be Closing: the dirty business of direct selling

In Coaching, Management on April 13, 2013 at 9:01 pm

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It is indicative of the strains of direct sales, that the biggest issues facing customer-facing departments are the recruitment and retention of salespeople.

The sales function has an average labour turnover of 100% per annum. Small wonder! Salespeople can expect brusque rejection, high pressure targets, pick up deflected business risk and see skill go unrewarded, while ineffectual effort is recognised.

It’s a difficult job, but somebody needs to do it.

The six million involved in all variations of direct sales in the US are employed with a purpose. Teams of experts in face-to-face selling was conceptualised as a response to the burst of innovation and mass-production in the late 19th century. Firms suddenly had great need for a form of selling which consistently created need for products which the public did not understand, let alone want. The travelling salesman would pound pavements and knock doors, demonstrating why the latest output of Fordist manufacturing was an essential addition to their home.

By the 1920s, the essential characteristics of the profession had been etched. Attracting Attention, fostering Interest, forcing Decisions and driving Action continues to be the preserve of salesmen and saleswomen. Likewise, businesses knew which products benefitted from direct sales channels, namely experience goods which a demonstrable function in markets characterised by strong customer inertia and limited price transparency.

Direct selling was designed to meet the business needs of an era of transformation in manufactured goods. By going to possible customers and engaging them in a face-to-face meeting during which a sales representative hoped to create a urgency to purchase, direct sales pioneers found a way to quickly distribute products in advance of demand, at low costs (saving on promotions) and even passing the risk of failure onto the sales force.

This last point is particularly true of multi-level distribution systems which use independent contractors as salesmen. In this model, the sales force buy stock and the rights to sell in return for commission. The business is relieved of employment costs, but loses control over its sales force, the behaviour of which can establish or destroy a brand.

Recommended practice in direct sales mercilessly pushes for improved results. Managers encourage a vigorous culture of success, built on providing good careers for top salesmen and weeding out those who fail to meet the required number of conversions. Status is based on financial success, enshrined in tiered sellers clubs. Further, ostentatious consumption is institutionalised in schemes such as Eureka Forbes’ ‘Buy Your Own Bike’ incentive.

So, direct sales serve a unique and results-driven role in business. But brutalised and independently-minded salesmen are liable to strive to improve their lot by acting opportunistically. This includes jumping ship for a more attractive role in another business. Salesmen are a necessary part of business, but salesmen may not be tied to their firms until they are seen as a long term investment.

The value of marketing

In Marketing on April 9, 2013 at 2:45 pm

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Marketing is the activity of creating, communicating, delivering or exchanging offerings with customers.  As one of the functional areas of business, the end-goal of marketing must be aligned with the purpose of companies more generally.

Profit (buying low and selling high) is often cited as the purpose of business. While profit is a necessity, profit maximisation is damaging to businesses’ long-term prospects. Iceland posting record results in June by not chasing short-term profit targets (Retail Week, 2012).

Drucker (1986) proposes different priorities: “Businesses exist to supply goods and services to customers, rather than to supply goods to workers and managers, or even dividends to the business enterprise.”

Exxon connects its responsibilities: “Our mission is to provide quality petrochemical products and services in the most efficient and responsible manner to generate outstanding shareholder and customer value.” (Exxon, 2012)

Economic profit validates actions which create customers. Only by meeting customer needs and building customer relationships can an organisation achieve profitable growth (Doyle, 2000). By these means, marketing creates value for customers in order to capture value for the business and its shareholders.

Consequently, the value created by marketing can be considered from the buyer perspective (competitive offer), the seller perspective (customer equity) and the buyer-seller perspective (relationships, partnerships and alliances).

Buyer value (the worth of an object or condition, relative to competing offerings) has been measured in various ways.[1] Today, relativism dominates the discourse on customer value. Marketing’s definition of customer value accounts for this:

Customer perceived value = perceived benefits / perceived costs

According to theory of wealth maximisation, a consumer will choose the good or service which they believe provides the most favourable benefit to costs ratio (Kronman, 1980). Perceived benefits include physical attributes, service attributes, associated prestige and technical support. Costs consist of purchase price, opportunity costs, risk of failure and other sacrifices made in the exchange. Companies create differential advantage based on superior benefits and/or costs.

Conclusion

Marketing has great potential to create value for firms and customers. In contrast to previous business philosophies, the marketing concept focusses on building profitable buyer-seller relationships based on competitively satisfying customer needs. Marketing’s assured philosophical foundations are attractive in the uncertain context of the global integration of markets, rising consumer expectations and transformative technologies.

By managing long-term relationships and responding to customers’ needs, rather than encouraging short-term profit, marketing has become a driver of competitive growth with benefits to all business stakeholders reflected in increases in share value.


[1] Neoclassical economics posits value is determined by the market. In classical economics, value describes the amount of labour saved through the consumption of an object or service. ‘Real value’ measures the utility of market offerings (Peter and Olson, 1993).

Heineken: a history in a bottle

In Uncategorized on February 24, 2013 at 6:43 pm

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Heineken takes brand seriously. In a industry which is dominated by local brands, it has struggled against structural restrictions, national tastes and trading costs to emerge as a global player.

Among the Dutch brewer’s most recent creative projects was a celebration of its 140th anniversary at the end of 2012, focussing on its distinctive bottle. The Heineken Future Bottle Design Challenge 2013 invited fans of the brand to remix Heineken’s bottle by using images of the brand’s past as inspiration. The result is modern, sleek and designed to look at home in trendy clubs and bars.

Product design has a special place in the evolution of the lager. The bottle has been free to change, while the contents have not. Heineken beer has not touched its recipe since 1873. The key to its distinctive taste continues to be yeast-A.

Heineken is noteworthy among European beers for finding success in America. It was the first beer delivered after the Prohibition. On 11 April 1933, a shipment arrived from the Old World and Americans got to taste their first sip in over a decade! Heineken was destined to become the number one imported beer in US.

This was upset when Corona penetrated the states with a distinctive long neck bottle and presentation – a slice of lime was always placed on top. After 1997, Corona easily overtook Heineken in shipments.

Heineken had to come up with some ideas, but the recipe couldn’t be touched. What could be done?

heineken bottle

A slimmer green Heineken bottle with a longer neck arrived in New York City bars and restaurants, ahead of a national rollout by the Amsterdam brewer. The new Heineken bottle is 1.25 inches taller than the old bottle, with a longer, narrower neck the brewer believes makes it look more modern so it can drive in new young drinkers.

A thumb groove is designed to improve the grip and encourages drinkers to hold the bottle lower down, keeping the beer colder. A strong shoulder aims to convey an air of “masculinity and pride,” according to Heineken.

What remains a permanent feature is the green colour. Heineken stuck with this distinctive shade, over alternatives of clear or brown glass – why? The brewer knew that the appearance of the bottle created a lasting impression. Clear bottles look great, showing off the colour and texture of the beer, but green has historically been associated with high quality beer, turning the colour into a status symbol.

When Heineken reached American shores in 1933, it came in squat green bottles. At this time, design was determined by practical considerations. After World War II there was a shortage of brown glass, so European brewers exported their beers in green bottles. Because many of those beers were extremely high quality and others were just priced to seem that way, the green bottle became shorthand for great beer. In addiction research revealed that in USA women likely preferred the green colour.

Heineken knows that it has to stay true to its past while moving to stay relevant to today’s consumers. Its packaging has come to stand for quality, refreshment and a distinctive European brew. The brand has been proactive in making alterations in its product design, to ensure this message is understood by each generation of drinker.

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Tanja Lanza (MSc Marketing and International Management, 2013) is passionate about all aspects of brand development and marketing campaigns. More of her writing can be found at http://ttrends.tumblr.com

Aidan Clfford is HBR’s editor and sometime contributor.

Selling Hitler’s favourite car: VW’s American reinvention

In Marketing on February 7, 2013 at 4:54 pm

vw lemon

Tanja Lanza asks, ‘How could Volkswagen sell Hitler’s favorite car to the American people only a decade and a half after World War II?’

Penetrating the American market after the Second World War proved difficult for the VW Beetle. Not only did its small size and unusual design conflict with trends towards bigger and brasher cars in the US, but the company bore the stigma of connections with the Third Reich, having designed military vehicles for the hated regime. Recognising that it stood out among its competitors, Volkswagen decided to embrace its difference in a series of imaginative ads which reinvented their signature car as distinctive, charismatic and desirable.

The driving force behind the Volkswagen campaign was William Bernbach of DDB. Bernbach is considered the father of the “creative revolution” in the advertisement industry – setting a new standard for ironic, conversational and humorous marketing campaigns.

The ad featured a black and white photo of the Volkswagen Beetle with the word “Lemon” in bold san serif font.  Below the image follows a statement that proclaims that this particular car was rejected by Inspector Kurt Kroner because of some problems in details. Then they conclude with this tag line: “We pluck the lemons; you get the plums.”

What does “Lemon” mean?

Lemon in colloquial English is like saying that something is scrap. It gives the reader a first impression that Volkswagen was as critical of their own car as the majority of Americans.

So, this is the brilliant and risky idea: “don’t worry people this car is Lemon, but next will be better”. It’s a promise. The purpose is to draw the attention on the word “Lemon” in order to shock the customer who will keep reading what comes next on the ad. While he’s reading the article below he realizes that this car is not so bad as it seems. And maybe the next will be even more astonishing!

Additionally, the print campaign drew attention to the perfectionism of Volkswagen’s engineers – capitalising on stereotypes of German efficiency which served to distract from recent, darker manifestations of national character.

The Volkswagen ad campaign was unlike any before it, ushering in an era of modern advertising that truly changed how advertising agencies accomplish their trade.

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Tanja Lanza (MSc Marketing and International Management, 2013) is passionate about all aspects of brand development and marketing campaigns. More of her writing can be found at http://ttrends.tumblr.com

Toys ‘R’ Us: the internationalisation of fun

In Management, Marketing on January 25, 2013 at 1:05 pm

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Group K3 share their insight into the competitive advantages that have allowed Toys ‘R’ Us to dominate the US toy market and the national differences which obstructed their expansion overseas.

Research has shown that Toys ‘R’ Us (TRU) has strong FSAs. A number of examples can prove this. Firstly, the company has pursued a push system that allows store managers to adapt stock to local needs as well as monitoring positive and negative sale trends. This leads to a logistical system that is quickly responsive. It was developed in the United States and later introduced in Japan.

Secondly, TRU has a strong relationship with local manufactures and large toys companies in the USA. This contributes to reduce its cost and maintain low price because TRU directly deals with manufactures. TRU is also capable of handling regulatory issues and adapt strategy into foreign markets.

In addition, the company uses superior technology for effectively monitoring its inventories. Finally, TRU has strong connections to the government in both Japan and Germany. The company can thus be located in the below right tier box (quarter 4) of the FSA-CSA Matrix.

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Even though TRU was able to overcome some issues faced in some countries, the host countries specific advantages (both Japan and Germany) could be considered weak even that it does not affect the firm’s internationalization and profitability. For example, TRU loses part of its profit because of currency exchange rates (Yen is strong currency when compared to USD). Moreover, the government policy and store size regulations in Japan affect the company operation.

Eventually, the company has succeed in adapting different situations in each country that it enters e.g. Japan but it has failed in Sweden because TRU lacked of understanding both the labour and capital markets.

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In terms of positioning in its international activities, by forming a joint venture with McDonalds’s in Japan, TRU has found local partner to overcome barriers, regulations and real estate decisions. The company also has changed the retail format, distribution systems and location strategies to understand local customers. On the other hand, TRU did not form joint ventures in Europe and suffered from lack of adaptation to the European market, including issues to meet local conditions and working relationships.