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NATIONAL QUALIFICATIONS CURRICULUM SUPPORT

Business Management

Business Decision Areas I: Marketing and Operations

Revised Student Notes

and Activities

[HIGHER]

The Scottish Qualifications Authority regularly reviews the arrangements for National Qualifications. Users of all NQ support materials, whether published by LT Scotland or others, are reminded that it is their responsibility to check that the support materials correspond to the requirements of the current arrangements.

Acknowledgements

Learning and Teaching Scotland gratefully acknowledge this contribution to the National Qualifications support programme for Business Management. The original resource of this title was written by Christine Murray and issued in 1999. The Revised Notes were updated by Mark Kinnon and the Revised Activities by Sheena Dow.

© Learning and Teaching Scotland 1999 and 2006

This resource may be reproduced in whole or in part for educational purposes by educational establishments in Scotland provided that no profit accrues at any stage.

Contents

Section 1: Marketing

What is a market? 4

What is marketing? 4

The role and importance of marketing in organisations 5

The importance of marketing 6

The marketing function 8

Marketing as a strategic activity 9

Product-oriented organisations 9

Customer-oriented organisations 10

The marketing of products and services 10

The marketing environment 12

The consumer 12

Branding 16

The marketing mix 17

Produce/service 18

Price 22

Place 26

Physical distribution decisions 27

The main channels of distribution 29

Promotional strategies 33

Extending the product life cycle 40

Product portfolios 41

Market segmentation 42

Market research 45

Primary data 47

Secondary data 52

Section 2: Operations

The role and importance of operations in organisations 99

Types of operation 103

Factors affecting quality 105

Stock control 113

Purchase of materials 117

Distribution and delivery 122

Scheduling 124

Section 1: Marketing

What is a market?

A market can be defined as a meeting place for buyers (consumers) and sellers. Markets can be set up in a shop, restaurant, over the telephone/ internet, at a car boot sale, etc.

A market consists of the individuals or organisations who are actual or potential buyers of a product or service. Markets may be classified as consumer markets or industrial markets.

Consumer markets are made up of individuals who purchase goods or services for personal or domestic use. They make most of their purchases from retailers and buy a combination of consumable goods, such as food and durable goods such as cars, televisions, and clothes. Consumable goods are bought more frequently than durable goods.

Industrial markets are made up of organisations that purchase goods or services to use in the production of other goods and services. They buy a combination of consumable goods, such as raw materials and longer-lasting durable goods, such as machinery and equipment.

What is marketing?

Marketing Manager Required

Here is your chance to influence the spending habits of a discerning sector of the population and manage a world-famous cosmetics company. Reporting to Senior Management, you will develop and implement a marketing strategy for a range of brands. You will have responsibility for market research, promotion and advertising, direct mail activity and preparation of publicity material. Additional responsibility will be for new product development and branding in order to expand our market base.

The marketing activities contained in the above job advertisement are italicised in the text.

The Chartered Institute of Marketing defines marketing as ‘the process involved in identifying, anticipating and satisfying consumer requirements profitably’.

The role and importance of marketing in organisations

Identify

Anticipate

Satisfy

1 To identify consumers’ requirements

Businesses must identify what exactly a consumer wants from a product or service. There is little point in providing something that does not meet consumers’ requirements – they simply will not buy it. Marketing departments aim to ensure that consumers buy products or services and that they continue to do so (that is, make repeat purchases).

Firms today face a lot of competition and consumers’ expectations are increasing and becoming more sophisticated. Requirements change frequently and the marketing department must make sure the product or service is developed or altered to meet these requirements. The role of marketing is, therefore, an increasingly important one in today’s business world.

Price and quality have always been important factors in whether or not a consumer will buy, but so too have prompt delivery, attractive packaging and after-sales service. Advertising and promotion play a big part in influencing consumers to buy.

2 To anticipate consumers’ requirements

The role of the marketing department is to find out what consumers want today and will want in the future. Consumer trends must be considered in order to anticipate future needs. This is especially important in markets where trends and fashions change rapidly (e.g. clothing, toys), or where technological changes occur frequently (e.g. computers). It may be necessary to develop new products quickly to stay ahead of competitors.

3 To satisfy consumers’ requirements

The consumer is the most important consideration for most businesses today – businesses are often said to be ‘consumer (or customer) focused’. Without

consumers the business would fail. Good service and quality products that offer value for money are essential.

Prompt delivery and good after-sales service are also important, as are well presented and packaged goods. It is vital that the product is available at the right price and at the right time.

These three aims, for the majority of businesses, must be achieved profitably. There is little point in spending large amounts of money on marketing if costs are greater than revenue. However, organisations do exist where profitability is not an objective. Schools, hospitals and charities also use marketing techniques in order to become more effective in satisfying consumers’ requirements.

The importance of marketing

The importance of marketing can be illustrated by considering the contrasting responses of the American car industry and the Swiss watch industry to changes in market conditions.

The decline of the American car industry

For decades, motor cars manufactured by American companies were built on the principle that the American consumer preferred a long, roomy vehicle with large engine capacity. During the 1960s large heavy vehicles with names like Chevrolet and Buick, produced by American manufacturers, dominated the market. Roads were seldom graced by the sight of a foreign motor car and the American manufacturers tended to ignore trends taking place in the rest of the world where small, economical vehicles with lower engine capacities were capturing an ever-increasing share of the market.

American manufacturers believed that small cars would never sell in the US market. Japanese car manufactures, on the other hand, disagreed and recognised a major opportunity for market growth in the US. Marketing strategies were developed, research and development programmes carried out, factories built, and a workforce was trained in order that Japan could enter the American motor vehicle market.

During the 1970s world oil prices quadrupled, making fuel much more expensive. Increasing labour and raw material costs also combined to make large American cars expensive to buy and to run. American consumers rapidly switched their preference to smaller, economical cars, and sales of Japanese vehicles such as Datsun and Toyota rocketed because American manufacturers offered no alternative.

Even while this process was taking place, American car manufacturers decided against changing to small car production believing that the trend was only temporary and that their market share would recover when world oil prices fell. This never happened, and by the time American manufacturers finally changed to small car production, the Japanese manufacturers had a powerful grip on the market. They also faced severe competition from West Germany, Italy, France and Korea where technological advances in car production enabled competitors such as Volkswagen, Fiat and Renault to secure a market share.

Several American car producers went out of business and thousands of manufacturing jobs were lost. This led to the United States having a large balance of payments deficit with Japan due to the high volume of imported Japanese motor vehicles. The domestic American industry failed to anticipate the changes in consumer needs and never recovered.

The Swatch story

In contrast, the outstanding success of a Swiss watch manufacturer during the 1980s was the result of a careful and well-executed marketing plan, brought on by necessity.

For years the Swiss were world leaders in the watch industry. In 1974 their worldwide market share was 30%. Then the Japanese actively began to produce and market quartz watches, which the Swiss viewed as a passing fashion. Quartz digital watches were, however, no fad and by 1983 the Swiss share of world markets for watches had fallen dramatically to 9%.

The Swiss manufacturer SMH carried out extensive research in its watch markets and carefully analysed patterns of consumer behaviour. Marketing experts advised the company that a turnaround was possible if an inexpensive, good-quality quartz analog watch could be developed, since the market was saturated with digitals. Gradually, a marketing plan was devised and implemented resulting in the introduction of the Swatch in 1984, which has since revolutionised the world watch industry.

Based on their extensive analysis of consumer behaviour and lifestyle, SMH adopted a strategy that completely changed the concept of a wrist watch. Watches were to be a fashion accessory first and a watch second. They would also be analog rather than digital. Product planning developed a distinctive quartz analog watch in a wide range of fashionable colours and designs. New models were introduced rapidly and older ones quickly dropped. Because Swatches were sold as fashion accessories, consumers were encouraged to buy more than one (to match different sets of clothes or lifestyles). The average Swatch customer in Britain today owns three different models.

In Britain, Swatch watches were distributed mainly through department stores and speciality shops. They were not sold in high-street jewellery stores, which the company believed were an inferior point of sale for the product. The marketing strategy was based on carefully controlling distribution to avoid flooding the market, which would have resulted in consumers losing their desire to own a Swatch.

Today, Swatch watches sell for a relatively low price which appeals to a large number of consumers and encourages multiple purchases. The watches are highly distinctive. Extensive product promotion, which includes advertising on TV and in magazines, together with sponsorship of various concerts and sporting events, generates further sales.

Successful marketing has greatly increased market share and enabled the company to introduce new product lines, such as clothing and telephones, using the Swatch name.

The marketing function

In the case of Swatch, the strategic function of marketing was to attract and retain a loyal group of consumers through a unique combination of market research, product design, distribution, promotion and price factors.

Since many markets for goods and services have evolved to the point where the consumer has become of prime importance, businesses have responded by attempting to ensure that their products are produced to an appropriate standard, at an acceptable price, and distributed in a convenient manner. Marketing decisions, therefore, centre on four functional activities:

• product

• pricing

• distribution or place

• promotion (including advertising).

These decision areas, when combined, are known as the marketing mix.

Marketing as a strategic activity

Marketing is concerned with every aspect of an organisation’s product or service, e.g. its design, price, distribution, selling and promotion, from its inception until it finally reaches the hands of the consumer. Even after the sale, marketing still has a job to do: it must ensure consumer satisfaction through the provision of after sales service, such as maintenance, repairs, instruction booklets, spare parts and quality guarantees. Marketing is far more than just selling the product. It is concerned with what is to be sold, how it is to be sold, when it is to be sold and where it is to be sold.

Amongst the most important functions of marketing is the assessment of the market to discover

• where the consumers of the product are to be found

• how many consumers there are

• the attitudes and preferences of the consumer

• the effectiveness of distribution methods

• the strengths and weaknesses of competitors.

The current position must be looked at along with the future position – marketing departments must anticipate what will happen in the future in order to allow adjustments to goods and services to be made and new goods and services to be produced. Profit is important to most organisations, but there may also be a need to improve brands in order to obtain or retain brand leadership or increased market share.

Today, marketing has come to be recognised as the discipline which coordinates and manages the total business function. In a consumer society, marketing decisions are often strategic decisions since they frequently determine the overall direction of the organisation. Other business functions such as production and human resource management are often influenced by marketing considerations.

Product-oriented organisations

These assume that the product or service being offered is the best on the market and will be very easy to sell. It is felt that there is no need for product change or development as there is no real competition. This might be the case with a new invention or a highly technical unique product, or even when a very strong advertising campaign can convince a consumer to purchase the product. Henry Ford in launching his Model T car said ‘customers can have any color they want as long as it is black’.

In today’s competitive business world, this approach may be seen as complacent. Organisations operating like this may fail once competitors enter the market. An example can be shown by the demise of the British Motorcycle industry. BSA, Norton and Triumph, producing heavy, slow-revving, large capacity machines, were superseded by Kawasaki, Honda and Suzuki – they had failed to look at what these foreign competitors were producing and how they met the needs of the consumer more successfully.

Product orientation was predominant in the UK in the 1930s and 1940s when there was less competition, and customers’ expectations were not so sophisticated. Consumers did not have such a large disposable income and their knowledge of products was more limited. Pressure from the media was considerably less.

Customer-oriented organisations

These constantly modify their products or services in response to changes in the market. They will make an effort to find out what customers want and what influences their purchasing decisions. These organisations realise that their profits and/or success depend on meeting the needs of the customer.

During the 1980s and 1990s, customers became increasingly aware of what is available on the market and the amount of competition has greatly increased. This has led to the customer being seen as the main focus of an organisation’s activities.

Marketing ensures that the needs of the customer are considered before production takes place.

The marketing of products and services

Marketing applies to both products and services. Consumer goods (i.e. ones bought by end consumers for their own personal use) are commonly used to give examples to illustrate marketing. It is important to remember, though, that marketing also applies to industrial goods and to services. The main principles of marketing (covered later in this text) apply in all cases, but the ways in which they are used may differ between consumer goods, industrial goods and services. This section considers industrial goods and services.

Industrial goods are distinguished from consumer goods according to the purpose for which they are bought. They are purchased for use in a business, e.g. raw materials and machinery. In some cases, the same goods can be both industrial goods and consumer goods. Cars, for example, may be industrial goods when bought by companies for use by sales representatives, but are consumer goods when bought by private individuals for their own use. From a marketing point of view, the marketing of industrial goods is influenced by several factors:

• Crucial considerations when buying industrial goods include product performance and quality in terms of wider company requirements – the technical specification of industrial goods may then be an important feature of marketing them.

• The link between the seller and the buyer is usually much closer with industrial goods – for this reason, mass advertising is not often used for industrial goods and marketing tools such as branding may be less common.

• Personal selling tends to be more common for industrial goods than for consumer goods.

Services (e.g. hairdressing, car repairs, bank accounts) are distinguished from goods in the following ways:

• They are intangible – as a result, they cannot be displayed like products nor can they be handled, tested etc. before they are bought.

• They are usually sold and consumed at the same time – products can be produced, then stored and consumed at a later date, but the production and consumption of services cannot usually be separated.

• They are perishable and, unlike products, cannot be stored.

• Their quality may be variable – products can be produced in constant conditions so that quality can be closely controlled. Services are often provided on the spot and quality may depend on the person providing the service. Although people can be trained to follow very detailed job procedures (such as those used by McDonald’s in their fast food restaurants), quality control of services is generally more difficult than it is for products.

These factors mean that the marketing of services often concentrates on ensuring that the quality of the service is as consistent as possible so that consumers get the same experience wherever the service is provided.

The marketing environment

Organisations operate in an environment that is constantly changing. It is vitally important that marketing decisions take account of the forces that shape that environment in order to compete more effectively.

The factors that determine and influence the marketing environment can be shown as follows:


They are the same kinds of factors that influence all aspects of the behaviour and activity of an organisation.

The consumer

What influences the consumer to purchase one product instead of another, e.g. why buy Pepsi and not Coke? The main determinants are:

Age distribution of population

The UK is said to have an ageing population, i.e. there is an increasingly larger proportion of middle-aged and elderly people.

Many organisations have responded to this change and have seen new market opportunities, e.g. Saga Holidays provide package holidays exclusively for the over 50s. Conversely, the baby boom of the mid1980s resulted in market opportunities for the manufacturers and sellers of baby clothes and toys.

Gender

Males and females spend in different ways. Females spend more on cosmetics, clothes and jewellery than males, while males spend more on cars, leisure and alcohol.

Disposable income

Real disposable incomes have risen steadily over the past 30 years leading to increased spending on housing, home furnishing, holidays, medical care, recreation and transport. The percentage spent on tobacco, clothing and jewellery has declined substantially. This does not mean that people are spending less on tobacco, clothing and jewellery in absolute terms; only that they are spending a smaller proportion of a larger income.

Household status

An increasing number of households are made up of people living on their own (single, divorced, widowed). This has led to a demand for smaller homes. Products specifically designed for the single household are also on offer, e.g. ready meals in one-size portions.

Social class

One way of understanding how customers will respond to marketing activities is to divide them into socio-economic groupings based upon the types of jobs they do. The underlying assumption is that, as particular jobs tend to have certain life-styles attached and if the market can be divided by job classification, then more appropriate products and services can be targeted towards particular groups.

For the purposes of marketing, socio-economic grouping provides a reliable picture of the relationship between occupation and income. Members of each group have similar priorities, which influence their wants and needs. For example, we would expect those in groups A, B and C1 to spend some of their income on private education, private health care, new car, etc., while those in groups C2, D and E would spend more of their income on necessities.

Socio-economic group

Social ‘class’

Most likely types of occupation

Examples

A

Upper or Upper Middle

Managerial/

Professional

Surgeon/Director

B

Middle

Intermediate

Bank Manager

Managerial/

Professional

C1

Lower Middle

Supervisory

Bank Clerk

C2

Skilled Working

Skilled Manual

Joiner

D

Working

Semi-Skilled

Driver

E

Lowest

Subsistence Level

Low Paid

Casual Worker



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