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Market Research

Market research involves gathering and interpreting data from customers and others in order
to identify and satisfy the needs of customers.
Role: It helps to reduce the risk of failure by helping to make the right marketing decisions.
Marketing decisions cannot be based on hindsight but on research.

Purpose of market research

Market research will provide the business with data that can be used:
To describe the current situation in the market place
To identify new market opportunities
To decide on the appropriate mix of new products
To improve the marketing mix of existing products
To segment the market
To understand the marketing strategies of competitors
To predict what is likely to happen in the future with the marketplace

When

Market research is frequently carried out when a business plans to launch a new product or
to enter a new market
It is also conducted to make changes to existing market strategies

How

Market research data comes in two basic forms: Primary data obtained through field
research and secondary data obtained through desk research.

Secondary Research

This is the collection of second hand data, which has previously been collected by others for
another purpose but which may still be relevant.




The main sources of secondary data can be:

Internal: Profit and loss account, balance sheet, stock records, and sales statistics, database
of customers.
External: Reference books, company reports, government statistics, external publications of
banks, specialist report publishers.

Advantages of desk research

It is easier and quicker to gather and analyze, as the data already exists.
The process is cheaper as it costs less to collect.
There is a huge range of sources making secondary data more accessible.

Disadvantages of desk research

The data collected may become outdated quickly and therefore less reliable.
The data was collected for another purpose and may no longer be relevant
Unlike primary data, secondary data is also available to competitors.

Primary Research

This is research to gather new data directly from the persons concerned by going out on the
field.
Advantages of primary research:
Primary data is up to date and more reliable whereas secondary data is often outdated.
Primary data is more relevant as it is collected for a specific purpose unlike secondary data,
which was collected for another purpose.
The primary data is unique as the research is done first hand and no rivals have access to them.
Disadvantages of primary research:
It is a difficult and time-consuming task, as the process has to be properly designed and
conducted.
Primary research can be more expensive than secondary research as it is a more time consuming
process.
Biases can arise in selecting a wrong sample or from non-response.

Primary data can be gathered in 4 main ways

Surveys through questionnaires
a) Interviews face to face, telephone
b) Self-completed handed in person, through post office, through internet
Observation
Experimentation
Psychological test (consumer panel or focus group)

Personal Interviews: involves an interviewer obtaining information from one person face to face.
Questions can be clarified instantly and it is quick to complete. The questionnaires may contain
many open questions to gather the views of the person.

Telephone interviews: is often used as an alternative to personal interviews. A greater number of
people over a wider area can be reached. However, many people may not be willing to take part.

Self-completed questionnaires

These are questionnaires that are completed by a sample of respondents on their own time.
They can be sent by and returned to the business personally, via the post office or Internet.
When the postal service or Internet is used a greater number of people over a wider area can
be covered.
However, there can be a high rate of non-response.


Advantages of using questionnaires

If well designed, questionnaires can be easy to complete.
Surveys allow a wide coverage of respondents
A wide rage of questions can be set.

Disadvantages of using questionnaires

It is time consuming
Costly to design
If wrongly designed, the survey will provide a wrong conclusion
Respondents can be biased by consciously not giving the correct answer.

Characteristics of a good questionnaire

Directly relevant to the research objective: irrelevant questions should be avoided
Comprehensive: should include both open and closed questions
Simple to understand and easy to answer: The questions should be clear and technical
language should be avoided
Free from bias: In order to collect meaningful data.

Close vs. Open questions

Close questions are those with a yes or no answer or a range of present answers from very
satisfied (ASK OSCAR)

Observation

This involves watching how people behave or respond in different situations. Filming, photo
taking, watching or other electronic devices can carry out observations.
Observations are often used in hotels, restaurants, supermarkets and theme parks.

Advantages of Observation
Observation record peoples actual behavior rather than what they say. A great number of
people can be observed.

Disadvantages of Observation
It does not necessarily reveal why people behave in a certain way. The use of filming or
photo taking can be considered unethical.

Experimentation

Experimentation is the process of introducing marketing activities to a group of people to
measure their reactions. It is often used to test a product in small area before it is launched on a
much larger scale or withdrawn if the response is negative.
For example, an ice cream manufacturer may give samples to customers in a shopping mall
to find out which flavor they prefer.
This can save a lot of time and money to identify errors or areas, which need improvement.
Unsuccessful products can be withdrawn. It also helps reduce risks and uncertainties.

Qualitative vs. Quantitative

Qualitative Research
- Qualitative research is used to obtain information on the motivation behind consumers
behavior, such as:
What are the product qualities that encourage people to buy brand x rather than brand y?
What additional features customers would like in a product?
It is usually carried out by the use of group discussion also knows as consumer panel or
focus group or open questions in a survey.

Quantitative Research
- Quantitative research is used to obtain factual information such as:
What percentage of the population prefers to brand x to brand y?
What percentage of the target market is likely to buy a new product?
Quantitative data concentrate on numbers and they can be statistically analyzed and
represented on graphs etc.
It is usually carried out by the use of close question questionnaires.

Sampling

A sample survey is a survey of less than the population. In marketing research, it will be
impossible to obtain data from everyone in the market. Therefore, a sample representing the
market is used.

To make a sample we need a sample frame and decide on a sample size.

Sample frame: This is a list of all members of the target population.



Using sampling

Advantages: Sampling uses less time than survey the whole population. This leads to
quicker results and analysis.
Costs is reduced as it takes less time
Disadvantages: It may not be a fair representation of the population and therefore do no
reflect the opinion of the population.

Random Sample

A random sample is one, which is chosen in such a way that every member of the population
have an equal chance of being selected.
Random samples an be simple random sample or stratified random sample
An example of a simple random is a draw from a hat. It is a fair representation of the
population may reduce bias.
It is time consuming and difficult to make a sample frame.

Stratified random sample

Under this method, the population is divided into segments or strata, based on previous
knowledge about how the population is divided up. Then a random sample in each strata is
selected for interview. For example, if a manufacturer knows that his sales are 40% from area A,
35% from area B and 25% from area C, then the stratified sample must obtain respondents from
each are in the same proportion.

Non-random sample

-A non-random sample is one where every member of the population does not have a chance of
being selected.
-The sample is based on some characteristics, rather than random, decided by the researcher.
-Non-random sampling includes: quota-sampling, cluster sampling, snowballing.

Quota sampling
-Quota sampling involves setting up a quota (a target number of people) and then interview is
conducted with everyone met up to the quota.
E.g., if we want to know the percentage of people who prefer a certain ice cream, we set a quota
of 50 persons and interview the first 50 coming out of a super-market.

Sometimes, we can divide the target population into segments (e.g. sex), and interview a quota in
each segment (e.g. 20 males and 30 females)

It is easy, quick and cheap to operate.

However, the sample is not a fair representation of the population.

Multi stage or cluster sampling

Cluster sampling is used when the population is too dispersed and getting feedback from
respondents involves too much travelling, time, or money. Therefore a few area or clusters are
chosen (e.g. north and west). A sample of the population in each chosen cluster is selected and
interviewed.

It is quicker, easier and cheaper to use than any other method when the population is widely
dispersed.

By selecting just a few locations, the results may be biased because people living in the same
area may share the same views.

The sample is not a fair representation of the population.

Snowballing

Snowballing refers to surveys or interviews carried out with individuals who then suggest other
names to increase the sample. Hence, there is a snowball effect. This is common in financial
services, insurances and other services where the population is unknown.

It is an easy, quick and cheap way to build a sample.

However, it may lead to bias sample as respondent may refer to their friends with the same
views.

Sampling errors
Sampling errors refer to the difference between the results obtained from the sample and the
actual results. They arise because the sample used is not representative of the population. The
failure is due to a wrong sample, non-response from those chosen or incomplete/outdated
population frame.

Non-sampling errors

Non-sampling errors are caused by problems in the design of the questionnaires and in the
carrying the survey, e.g. wording of the questions, confusion in data collection and in conducting
the survey.

Conduct of market research

Market research can be conducted by the firms own staff. However, More and more research is
contracted out to private agencies.

Advantages of using market research agencies

Agencies have the expertise of selecting an appropriate sample thus reducing the amount of bias
in the results of the research.

Some agencies have the experience and ability to conduct research in certain areas thus
providing more accurate information.

Disadvantages

The cost of hiring an external agency can be very expensive

The use of an external agency may deprive the firms staff from being exposed to the needs of
customers and therefore better understand them.

Setting Direction

Segmentation-Targeting-Positioning

Market segmentation and customer profile

-Market segmentation is the process of dividing an undefined market into smaller groups of
consumers with similar or common needs, characteristics, or profile.

-A market segment is a group of consumers within a market with common characteristics.

-Consumer profiles are the characteristics of consumers such as age, gender, income, and
purchasing habits. Knowledge of consumer profiles will help to identify segments and the needs
of its customers. For example, the consumer profiles of Suzuki bike may be females between 20-
45.

Benefits in segmenting

-By identifying different segments in a market, a business can better understand its customers.
This will allow the firm to vary its products to better serve the needs of the customers.

-It allows a business to sell a wider range of products by targeting different segments with
different products and therefore increases its profits. Going into the most profitable segments can
also maximize profits.

-There is a better allocation of resources. The right products are promoted to the right segments.

-Segmentation allows better identification of opportunities. This can provide guidelines for new
product development.

-Customers may feet that their needs are better targeted and develop loyalty to the business.

Three main ways

-Geographic characteristics, i.e. by where customers live or buy;
-Demographic characteristics, i.e. by their gender, social class, age income, ethnicity or religion;
-Psycho-graphic characteristics, i.e. by their lifestyles and personality; by how they act, for
example some people like high quality products.

Segmentation by geographic characteristics

-Geographical segmentation will consider the different regions in a country in terms of ways of
living, culture, purchasing power, types of houses and roads, laws, etc.

-Many businesses in the global market have different products for different countries or areas.
For example, Maggi soups are adapted to suit tastes by varying the ingredients from country to
country.

-A company may price goods differently in different countries, e.g., Coca-Cola.

-Many businesses segment their market according to climate, e.g. clothes for tropical climate,
cold climate, etc.

Segmentation by demographic characteristics

-Demography is the study of the characteristics of population. Demographic segmentation splits
up people into different groups such as:

-Age group: For example, 12-18, 19-30, 30-50, and above 50. Many businesses target their
products towards certain age groups.

-Gender: Males and females have different spending habits.

-Social class or income: Wealthy people tend to have different spending from the rest of the
population. For example, a Cartier watch is likely to be marketed to a high-income group.

-Race, ethnicity, or religion: different races have different cultures and affect the demand for
certain products. McDonalds targets some of its different products according to race or religion.

-Family status/size: Certain markets can be segmented according to this status, e.g. the housing
market, car market, etc.

Segmentation by psychographic behavior

-Psychographic factors are those that consider the emotions or lifestyles of customers and hence
their behavior.

-Status: Some people are very conscious of social status. They feel good in owning certain assets
such as luxury cars and jewelry. A market segment can be created for them.

-Values: More and more people are value or ethically conscious in their purchases. Some
businesses have started to cater for them, e.g. The Body Shop.

-Hobbies and Interests: An understanding of the different hobbies and interest can create market
opportunities for businesses, e.g. the sports industry.

Targeting

Once a market has been segmented, targeting becomes the next stage marketing planning.
Targeting refers to the choice of the market segments the business wishes to sell and the related
planning of marketing strategies.

There are three board-targeting strategies:

Undifferentiated marketing.
Differentiated marketing.
Niche marketing.

Undifferentiated/Mass market

Undifferentiated marketing also knows as mass marketing or market aggression is the targeting
strategy that ignored individual market segments. The business offers almost the same products
to all consumers and promotes them in the same way. Examples of products that are mass
marketed include Nokia, Coco cola and Microsoft.

Benefits of mass marketing

The products can be sold to large number of consumers. They can also be sold in many different
countries, as process known as global marketing. The result is increased profits.

The business can benefit from economies of scale. A business can this manufactures on a large
scale and reduce the average costs per unit. This means that higher margin can be earned.
There is no need to tailor different marketing mix for different segments/



Disadvantages of mass marketing

Mass marketing can be quite wasteful for certain products
Specific customers are not targeted but are treated as any customer.

Products, which are mass marketed, can face strong competition in markets where producers are
effective in targeting market segments.

Mass marketing is not suitable for certain products, e.g. high valued products.

Differentiated marketing

Differentiated marketing also knows as multi-segment marketing or selective marketing is the
targeting strategy that tailors a marketing mix for each segment in the market.

Advantages Customers in each segment are more satisfied as there are different marketing
mixes for different segments.
Risks re spread by catering for a boom in another segment can compensate several market
segments decline in one segment.

Disadvantages Differentiated marketing is costly, as a separate marketing mix has to be
devised for each segment.
Marketing economies of scale cannot be fully exploited.


Niche marketing

Nice marketing also knows as concentration marketing targets a small well-defined market
segment. Niche market segments usually cater for the high-end luxury or specialty goods such as
Cartier watches, Ferrari cars and Armani suits. It is the opposite of mass marketing.

Advantages

There is a better marketing focus as a small specific market is targeted.
There is less competition in nice markets. Businesses can charge higher prices and obtain higher
margins.



Disadvantages

Most niche markets are very small and hence limits the number of customer. Due to their small
size, businesses in nice markets cannot exploit economies of scale.

Position maps

A position or perception map is a visual tool that shows the position of a product or brand in
relation to others according to the perception of customers.
The map plots customer perceptions using two variables for example price and quality.
Examples:



Jack Trout 1969

Jack Trout originally drew the position map in 1969 to classify different brands based on price
and quality.

Uses

1. Position maps allow a business to identify any gaps in its product portfolio or in the market.
For example, Mercedes introduced its A class cars in 1998 after finding that there was a market
for small luxury cars.
2. They can inform a business of a need to reposition their products. For example Singapore
Airlines created Scoot a new budges airline subsidy.
3. Some businesses analyze the portfolio of its competitors before deciding on developing a
new product. They also allow a business to assess not only its own portfolio but also of its rivals.
As a result a business can then position its products into an appropriate segment especially if the
present segment is over crowded.
4. Some businesses before deciding which product to develop, try to analyses how the new
brand will relate to other brands in the market.

Marketing positions

Market positioning refers to how a business would rank its products according to the views
of the public. It is usually done with the help of position maps.

Time series

A time series is a set of observations of say monthly productions or weekly reales that are
presented in a date (time) order.
A moving average
A moving average is a list of averages od data that moves over time. The average ca be taken for
any set of periods the business wants. For example, 3 points yearly average, 4 points monthly
average. A moving average is a useful tool to identify a trend.
Example:

The following sales figures relate to a business

Week 1 2 3 4 5 6
$210 $240 $250 $270 $300 $330
(a) Calculate 3 weeks moving average sales
(b) Plot the sales figures and the trend line onto a graph
(c) Extrapolate and forecast the sales of Week 9

(a) Calculation of the trend using 3 points moving average

Week Trend: 3 weeks moving average
1 210 > 210 + 240 + 250/3 = 233
2 240 > 240 + 250 + 270/3 = 253
3 250 >
4 270
5 300
6 330
A time series analysis analyses the data in a time series in order to make short term forecasts by
the use of moving averages. There are five elects that a business tries to identify in an analysis:

A trend which is a pattern which emerges from a series of figures usually over a period of time.
The pattern can be increasing, decreasing, stable.
A forecast that can be made by extrapolating (extending) the trend.
Any seasonal variations which are regular and related variation that occurs within a year, e.g.
increased in sales of toys every Christmas time or increase in sales of ice ream during summer.
Any cyclical fluctuations which are repeated variations taking place every several years due to
trade or economic cycles of boom or slumps.
Erratic or random variations are unpredictable fluctuations. For example a sudden boost in sales
of umbrella due to an unusual wet summer.
Chapter 4.3.1

Product Life Cycle

Product life cycle refers to the different stages of a products limited life in terms of sales and
profits/cash flows. Typically, there are 5 stages: development, introduction, growth, maturity and
decline.
The product life cycle chart shows the progress of a product in terms of sales and profits/cash
flows.


Development

During the development stage, the product is being researched, designed, developed and finally
launched into the market. A large number of new products never progress beyond this stage.
During the stage, costs will be incurred by the firm in research and development but no sales will
be made. This means cash flow and profit will be negative.
Introduction Stage
Following its development, a product is introduced onto he market
During this stage, there is low growth in sales as a new product takes time to be accepted by
customers. However there will be expensive promotion in border to make the customers accept
the product.
This means that during this stage there will still be some loss or negative cash flows.
Growth Stage
In the growth stage, sales increase rapidly
Cash flow and profits start to turn positive as sales revenue starts to pay off the costs
However, more money must be spent on product improvement, promotion and distribution to
attract more customers. Therefore profits will not be high.
Maturity
In this phase, the product has reached its peak of sales and is fully established int he market. This
can be a long or short period. The highest point in this rage is the saturation point.
Because the product is well known, there will be less spending on promotion. Therefore, this
stage will be at the most profitable for the firm.
Decline
In the decline stage, sales will begin to go down. This period can be fast or slow. The main
causes of the decline of a product can be:
Changes in taste and fashion, changes in technology, new substitutes, new inventions, etc.
During this period, profits fall and some producers will try to extend the product life by
modifying the product, searching new markets, etc. Because extension strategies may be
expensive, some producers may leave the market.
Extension strategies
Extension strategies refer to any method of extending the life of a product at the maturity stages
and delaying its decline. Common strategies include:-
Price reductions, lowering price will tend to increase demand although temporarily
New market, finding new markets for the current product can extend its life. New markets
include new outlets in different regions countries, new users.
Design, updating a design is another way of extending the life of a product. Car manufacturers
regularly update models. new versions of computer games or soft wares are regularly introduced.
Range, a wider range of a product can increase sales. Examples include creaks for breakfast,
bank accounts for the young, lucozade for sportsmen.
Promotion, New advertising campaigns constantly extends the life of many products.
Appearance, changing the packaging can excite new customers
Different Life Cycles
Some products have short life span (2-3 years). For example: Windows 95, 98, 2000.
Others can be longer (more than 25 years). Examples include: Coca Cola, Kelloggs cornflakes.
Extension strategies are usually used to extend the life of many products.
Not all products will go through every stage of the life cycle and are withdrawn early. Those
with very short life (<1 year) are called fads.
Use of product life cycle model
By assessing the stages of life cycle of each product:
A firm can assess how much longer a product will longer contribute to sales and profits.
A firm can also find out how urgent it needs to develop new products as older ones are in
decline.
A firm will identify points at which extension strategies may be necessary
A firm can assess the balance of its portfolio (range of products). Ideally, a firm must have
products at all stages of the life cycle.
Limitations of product life cycle
Many products cannot be characterised in terms of life cycle, e.g. basic foodstuffs, raw materials,
etc.
The life cycle of a product cannot be predicted in advance.
Variations in marketing effort will affect eh duration of life cycle phases.
Termination of a products life is often a management decision
Extensions strategies can extend the life of a product.
Assignment: Hall Unit 17 Q2. (a)
Before 1984, Rachels had sold organic, milk, followed by cream, and butter. But 1984 saw the
first commercial yogurt which is a new product front he previous ones. Therefore, it can be
argued that the introduction of organic yogurt was an example of _______ product being
brought into the market.
Extension strategies are used by firms as product each maturity or decline stage. They are
designed to increase life by changing aspects of the product, such as design or finding new
markets. In this new case, yogurt was changed so that it contained less fat than the original one.
Market Research

Market research involves gathering and interpreting data from customers and others in order
to identify and satisfy the needs of customers.
Role: It helps to reduce the risk of failure by helping to make the right marketing decisions.
Marketing decisions cannot be based on hindsight but on research.

Purpose of market research

Market research will provide the business with data that can be used:
To describe the current situation in the market place
To identify new market opportunities
To decide on the appropriate mix of new products
To improve the marketing mix of existing products
To segment the market
To understand the marketing strategies of competitors
To predict what is likely to happen in the future with the marketplace

When

Market research is frequently carried out when a business plans to launch a new product or
to enter a new market
It is also conducted to make changes to existing market strategies

How

Market research data comes in two basic forms: Primary data obtained through field
research and secondary data obtained through desk research.

Secondary Research

This is the collection of second hand data, which has previously been collected by others for
another purpose but which may still be relevant.




The main sources of secondary data can be:

Internal: Profit and loss account, balance sheet, stock records, and sales statistics, database
of customers.
External: Reference books, company reports, government statistics, external publications of
banks, specialist report publishers.

Advantages of desk research

It is easier and quicker to gather and analyze, as the data already exists.
The process is cheaper as it costs less to collect.
There is a huge range of sources making secondary data more accessible.

Disadvantages of desk research

The data collected may become outdated quickly and therefore less reliable.
The data was collected for another purpose and may no longer be relevant
Unlike primary data, secondary data is also available to competitors.

Primary Research

This is research to gather new data directly from the persons concerned by going out on the
field.
Advantages of primary research:
Primary data is up to date and more reliable whereas secondary data is often outdated.
Primary data is more relevant as it is collected for a specific purpose unlike secondary data,
which was collected for another purpose.
The primary data is unique as the research is done first hand and no rivals have access to them.
Disadvantages of primary research:
It is a difficult and time-consuming task, as the process has to be properly designed and
conducted.
Primary research can be more expensive than secondary research as it is a more time consuming
process.
Biases can arise in selecting a wrong sample or from non-response.

Primary data can be gathered in 4 main ways

Surveys through questionnaires
a) Interviews face to face, telephone
b) Self-completed handed in person, through post office, through internet
Observation
Experimentation
Psychological test (consumer panel or focus group)

Personal Interviews: involves an interviewer obtaining information from one person face to face.
Questions can be clarified instantly and it is quick to complete. The questionnaires may contain
many open questions to gather the views of the person.

Telephone interviews: is often used as an alternative to personal interviews. A greater number of
people over a wider area can be reached. However, many people may not be willing to take part.

Self-completed questionnaires

These are questionnaires that are completed by a sample of respondents on their own time.
They can be sent by and returned to the business personally, via the post office or Internet.
When the postal service or Internet is used a greater number of people over a wider area can
be covered.
However, there can be a high rate of non-response.

Advantages of using questionnaires

If well designed, questionnaires can be easy to complete.
Surveys allow a wide coverage of respondents
A wide rage of questions can be set.

Disadvantages of using questionnaires

It is time consuming
Costly to design
If wrongly designed, the survey will provide a wrong conclusion
Respondents can be biased by consciously not giving the correct answer.

Characteristics of a good questionnaire

Directly relevant to the research objective: irrelevant questions should be avoided
Comprehensive: should include both open and closed questions
Simple to understand and easy to answer: The questions should be clear and technical
language should be avoided
Free from bias: In order to collect meaningful data.

Close vs. Open questions

Close questions are those with a yes or no answer or a range of present answers from very
satisfied (ASK OSCAR)

Observation

This involves watching how people behave or respond in different situations. Filming, photo
taking, watching or other electronic devices can carry out observations.
Observations are often used in hotels, restaurants, supermarkets and theme parks.

Advantages of Observation
Observation record peoples actual behavior rather than what they say. A great number of
people can be observed.

Disadvantages of Observation
It does not necessarily reveal why people behave in a certain way. The use of filming or
photo taking can be considered unethical.

Experimentation

Experimentation is the process of introducing marketing activities to a group of people to
measure their reactions. It is often used to test a product in small area before it is launched on a
much larger scale or withdrawn if the response is negative.
For example, an ice cream manufacturer may give samples to customers in a shopping mall
to find out which flavor they prefer.
This can save a lot of time and money to identify errors or areas, which need improvement.
Unsuccessful products can be withdrawn. It also helps reduce risks and uncertainties.

Qualitative vs. Quantitative

Qualitative Research
- Qualitative research is used to obtain information on the motivation behind consumers
behavior, such as:
What are the product qualities that encourage people to buy brand x rather than brand y?
What additional features customers would like in a product?
It is usually carried out by the use of group discussion also knows as consumer panel or
focus group or open questions in a survey.

Quantitative Research
- Quantitative research is used to obtain factual information such as:
What percentage of the population prefers to brand x to brand y?
What percentage of the target market is likely to buy a new product?
Quantitative data concentrate on numbers and they can be statistically analyzed and
represented on graphs etc.
It is usually carried out by the use of close question questionnaires.

Sampling

A sample survey is a survey of less than the population. In marketing research, it will be
impossible to obtain data from everyone in the market. Therefore, a sample representing the
market is used.

To make a sample we need a sample frame and decide on a sample size.

Sample frame: This is a list of all members of the target population.



Using sampling

Advantages: Sampling uses less time than survey the whole population. This leads to
quicker results and analysis.
Costs is reduced as it takes less time
Disadvantages: It may not be a fair representation of the population and therefore do no
reflect the opinion of the population.

Random Sample

A random sample is one, which is chosen in such a way that every member of the population
have an equal chance of being selected.
Random samples an be simple random sample or stratified random sample
An example of a simple random is a draw from a hat. It is a fair representation of the
population may reduce bias.
It is time consuming and difficult to make a sample frame.

Stratified random sample

Under this method, the population is divided into segments or strata, based on previous
knowledge about how the population is divided up. Then a random sample in each strata is
selected for interview. For example, if a manufacturer knows that his sales are 40% from area A,
35% from area B and 25% from area C, then the stratified sample must obtain respondents from
each are in the same proportion.

Non-random sample

-A non-random sample is one where every member of the population does not have a chance of
being selected.
-The sample is based on some characteristics, rather than random, decided by the researcher.
-Non-random sampling includes: quota-sampling, cluster sampling, snowballing.

Quota sampling
-Quota sampling involves setting up a quota (a target number of people) and then interview is
conducted with everyone met up to the quota.
E.g., if we want to know the percentage of people who prefer a certain ice cream, we set a quota
of 50 persons and interview the first 50 coming out of a super-market.

Sometimes, we can divide the target population into segments (e.g. sex), and interview a quota in
each segment (e.g. 20 males and 30 females)

It is easy, quick and cheap to operate.

However, the sample is not a fair representation of the population.

Multi stage or cluster sampling

Cluster sampling is used when the population is too dispersed and getting feedback from
respondents involves too much travelling, time, or money. Therefore a few area or clusters are
chosen (e.g. north and west). A sample of the population in each chosen cluster is selected and
interviewed.

It is quicker, easier and cheaper to use than any other method when the population is widely
dispersed.

By selecting just a few locations, the results may be biased because people living in the same
area may share the same views.

The sample is not a fair representation of the population.

Snowballing

Snowballing refers to surveys or interviews carried out with individuals who then suggest other
names to increase the sample. Hence, there is a snowball effect. This is common in financial
services, insurances and other services where the population is unknown.

It is an easy, quick and cheap way to build a sample.

However, it may lead to bias sample as respondent may refer to their friends with the same
views.

Sampling errors
Sampling errors refer to the difference between the results obtained from the sample and the
actual results. They arise because the sample used is not representative of the population. The
failure is due to a wrong sample, non-response from those chosen or incomplete/outdated
population frame.

Non-sampling errors

Non-sampling errors are caused by problems in the design of the questionnaires and in the
carrying the survey, e.g. wording of the questions, confusion in data collection and in conducting
the survey.

Conduct of market research

Market research can be conducted by the firms own staff. However, More and more research is
contracted out to private agencies.

Advantages of using market research agencies

Agencies have the expertise of selecting an appropriate sample thus reducing the amount of bias
in the results of the research.

Some agencies have the experience and ability to conduct research in certain areas thus
providing more accurate information.

Disadvantages

The cost of hiring an external agency can be very expensive

The use of an external agency may deprive the firms staff from being exposed to the needs of
customers and therefore better understand them.

Setting Direction

Segmentation-Targeting-Positioning

Market segmentation and customer profile

-Market segmentation is the process of dividing an undefined market into smaller groups of
consumers with similar or common needs, characteristics, or profile.

-A market segment is a group of consumers within a market with common characteristics.

-Consumer profiles are the characteristics of consumers such as age, gender, income, and
purchasing habits. Knowledge of consumer profiles will help to identify segments and the needs
of its customers. For example, the consumer profiles of Suzuki bike may be females between 20-
45.

Benefits in segmenting

-By identifying different segments in a market, a business can better understand its customers.
This will allow the firm to vary its products to better serve the needs of the customers.

-It allows a business to sell a wider range of products by targeting different segments with
different products and therefore increases its profits. Going into the most profitable segments can
also maximize profits.

-There is a better allocation of resources. The right products are promoted to the right segments.

-Segmentation allows better identification of opportunities. This can provide guidelines for new
product development.

-Customers may feel that their needs are better targeted and develop loyalty to the business.

Three main ways

-Geographic characteristics, i.e. by where customers live or buy;
-Demographic characteristics, i.e. by their gender, social class, age income, ethnicity or religion;
-Psycho-graphic characteristics, i.e. by their lifestyles and personality; by how they act, for
example some people like high quality products.

Segmentation by geographic characteristics

-Geographical segmentation will consider the different regions in a country in terms of ways of
living, culture, purchasing power, types of houses and roads, laws, etc.

-Many businesses in the global market have different products for different countries or areas.
For example, Maggi soups are adapted to suit tastes by varying the ingredients from country to
country.

-A company may price goods differently in different countries, e.g., Coca-Cola.

-Many businesses segment their market according to climate, e.g. clothes for tropical climate,
cold climate, etc.

Segmentation by demographic characteristics

-Demography is the study of the characteristics of population. Demographic segmentation splits
up people into different groups such as:

-Age group: For example, 12-18, 19-30, 30-50, and above 50. Many businesses target their
products towards certain age groups.

-Gender: Males and females have different spending habits.

-Social class or income: Wealthy people tend to have different spending from the rest of the
population. For example, a Cartier watch is likely to be marketed to a high-income group.

-Race, ethnicity, or religion: different races have different cultures and affect the demand for
certain products. McDonalds targets some of its different products according to race or religion.

-Family status/size: Certain markets can be segmented according to this status, e.g. the housing
market, car market, etc.

Segmentation by psychographic behavior

-Psychographic factors are those that consider the emotions or lifestyles of customers and hence
their behavior.

-Status: Some people are very conscious of social status. They feel good in owning certain assets
such as luxury cars and jewelry. A market segment can be created for them.

-Values: More and more people are value or ethically conscious in their purchases. Some
businesses have started to cater for them, e.g. The Body Shop.

-Hobbies and Interests: An understanding of the different hobbies and interest can create market
opportunities for businesses, e.g. the sports industry.

Targeting

Once a market has been segmented, targeting becomes the next stage marketing planning.
Targeting refers to the choice of the market segments the business wishes to sell and the related
planning of marketing strategies.

There are three board-targeting strategies:

Undifferentiated marketing.
Differentiated marketing.
Niche marketing.

Undifferentiated/Mass market

Undifferentiated marketing also known as mass marketing or market aggression is the targeting
strategy that ignored individual market segments. The business offers almost the same products
to all consumers and promotes them in the same way. Examples of products that are mass
marketed include Nokia, Coca cola and Microsoft.

Benefits of mass marketing

The products can be sold to large number of consumers. They can also be sold in many different
countries, as process known as global marketing. The result is increased profits.

The business can benefit from economies of scale. A business can this manufactures on a large
scale and reduce the average costs per unit. This means that higher margin can be earned.
There is no need to tailor different marketing mix for different segments/



Disadvantages of mass marketing

Mass marketing can be quite wasteful for certain products
Specific customers are not targeted but are treated as any customer.

Products, which are mass marketed, can face strong competition in markets where producers are
effective in targeting market segments.

Mass marketing is not suitable for certain products, e.g. high valued products.

Differentiated marketing

Differentiated marketing also knows as multi-segment marketing or selective marketing is the
targeting strategy that tailors a marketing mix for each segment in the market.

Advantages Customers in each segment are more satisfied as there are different marketing
mixes for different segments.
Risks re spread by catering for a boom in another segment can compensate several market
segments decline in one segment.

Disadvantages Differentiated marketing is costly, as a separate marketing mix has to be
devised for each segment.
Marketing economies of scale cannot be fully exploited.


Niche marketing

Nice marketing also knows as concentration marketing targets a small well-defined market
segment. Niche market segments usually cater for the high-end luxury or specialty goods such as
Cartier watches, Ferrari cars and Armani suits. It is the opposite of mass marketing.

Advantages

There is a better marketing focus as a small specific market is targeted.
There is less competition in nicHe markets. Businesses can charge higher prices and obtain
higher margins.



Disadvantages

Most niche markets are very small and hence limits the number of customer. Due to their small
size, businesses in niche markets cannot exploit economies of scale.

Position maps

A position or perception map is a visual tool that shows the position of a product or brand in
relation to others according to the perception of customers.
The map plots customer perceptions using two variables for example price and quality.
Examples:


Jack Trout 1969

Jack Trout originally drew the position map in 1969 to classify different brands based on price
and quality.
Uses

1. Position maps allow a business to identify any gaps in its product portfolio or in the market.
For example, Mercedes introduced its A class cars in 1998 after finding that there was a market
for small luxury cars.

2. They can inform a business of a need to reposition their products. For example Singapore
Airlines created Scoot a new budget airline subsidy.

3. Some businesses analyze the portfolio of its competitors before deciding on developing a
new product. They also allow a business to assess not only its own portfolio but also of its rivals.
As a result a business can then position its products into an appropriate segment especially if the
present segment is over crowded.

4. Some businesses before deciding which product to develop, try to analyse how the new brand
will relate to other brands in the market.

Marketing positions

Market positioning refers to how a business would rank its products according to the views
of the public. It is usually done with the help of position maps.

Time series

A time series is a set of observations of say monthly productions or weekly reales that are
presented in a date (time) order.
A moving average
A moving average is a list of averages odd data that moves over time. The average can be taken
for any set of periods the business wants. For example, 3 points yearly average, 4 points monthly
average. A moving average is a useful tool to identify a trend.
Example:

The following sales figures relate to a business

Week 1 2 3 4 5 6
$210 $240 $250 $270 $300 $330
(a) Calculate 3 weeks moving average sales
(b) Plot the sales figures and the trend line onto a graph
(c) Extrapolate and forecast the sales of Week 9

(a) Calculation of the trend using 3 points moving average

Week Trend: 3 weeks moving average
1 210 > 210 + 240 + 250/3 = 233
2 240 > 240 + 250 + 270/3 = 253
3 250 >
4 270
5 300
6 330
A time series analysis analyses the data in a time series in order to make short term forecasts by
the use of moving averages. There are five elects that a business tries to identify in an analysis:

A trend is a pattern which emerges from a series of figures usually over a period of time. The
pattern can be increasing, decreasing, stable.
A forecast that can be made by extrapolating (extending) the trend.
Any seasonal variations which are regular and related variation that occurs within a year, e.g.
increased in sales of toys every Christmas time or increase in sales of ice cream during summer.
Any cyclical fluctuations which are repeated variations taking place every several years due to
trade or economic cycles of boom or slumps.
Erratic or random variations are unpredictable fluctuations. For example a sudden boost in sales
of umbrella due to an unusual wet summer.
Chapter 4.3.1

Product Life Cycle

Product life cycle refers to the different stages of a products limited life in terms of sales and
profits/cash flows. Typically, there are 5 stages: development, introduction, growth, maturity and
decline.
The product life cycle chart shows the progress of a product in terms of sales and profits/cash
flows.




Development

During the development stage, the product is being researched, designed, developed and finally
launched into the market. A large number of new products never progress beyond this stage.
During the stage, costs will be incurred by the firm in research and development but no sales will
be made. This means cashflow and profit will be negative.

Introduction Stage

Following its development, a product is introduced onto the market
During this stage, there is low growth in sales as a new product takes time to be accepted by
customers. However there will be expensive promotion in border to make the customers accept
the product.
This means that during this stage there will still be some loss or negative cash flows.

Growth Stage

In the growth stage, sales increase rapidly
Cash flow and profits start to turn positive as sales revenue starts to pay off the costs
However, more money must be spent on product improvement, promotion and distribution to
attract more customers. Therefore profits will not be high.

Maturity

In this phase, the product has reached its peak of sales and is fully established in the market. This
can be a long or short period. The highest point in this rage is the saturation point.
Because the product is well known, there will be less spending on promotion. Therefore, this
stage will be at the most profitable for the firm.

Decline

In the decline stage, sales will begin to go down. This period can be fast or slow. The main
causes of the decline of a product can be:
Changes in taste and fashion, changes in technology, new substitutes, new inventions, etc.
During this period, profits fall and some producers will try to extend the product life by
modifying the product, searching new markets, etc. Because extension strategies may be
expensive, some producers may leave the market.



Extension strategies

Extension strategies refer to any method of extending the life of a product at the maturity stages
and delaying its decline. Common strategies include:-

Price reductions, lowering price will tend to increase demand although temporarily

New market, finding new markets for the current product can extend its life. New markets
include new outlets in different regions countries, new users.

Design, updating a design is another way of extending the life of a product. Car manufacturers
regularly update models. new versions of computer games or softwares are regularly introduced.

Range, a wider range of a product can increase sales. Examples include creaks for breakfast,
bank accounts for the young, lucozade for sportsmen.

Promotion, New advertising campaigns constantly extends the life of many products.

Appearance, changing the packaging can excite new customers

Different Life Cycles

Some products have short life span (2-3 years). For example: Windows 95, 98, 2000.
Others can be longer (more than 25 years). Examples include: Coca Cola, Kelloggs cornflakes.
Extension strategies are usually used to extend the life of many products.
Not all products will go through every stage of the life cycle and are withdrawn early. Those
with very short life (<1 year) are called fads.
Use of product life cycle model
By assessing the stages of life cycle of each product:
A firm can assess how much longer a product will longer contribute to sales and profits.
A firm can also find out how urgent it needs to develop new products as older ones are in
decline.
A firm will identify points at which extension strategies may be necessary
A firm can assess the balance of its portfolio (range of products). Ideally, a firm must have
products at all stages of the life cycle.
Limitations of product life cycle
Many products cannot be characterised in terms of life cycle, e.g. basic foodstuffs, raw materials,
etc.
The life cycle of a product cannot be predicted in advance.
Variations in marketing effort will affect eh duration of life cycle phases.
Termination of a products life is often a management decision
Extensions strategies can extend the life of a product.

Assignment: Hall Unit 17 Q2. (a)
Before 1984, Rachels had sold organic, milk, followed by cream, and butter. But 1984 saw the
first commercial yogurt which is a new product front he previous ones. Therefore, it can be
argued that the introduction of organic yogurt was an example of _______ product being
brought into the market.
Extension strategies are used by firms as product each maturity or decline stage. They are
designed to increase life by changing aspects of the product, such as design or finding new
markets. In this new case, yogurt was changed so that it contained less fat than the original one.

Product portfolio analysis

-A product portfolio or product mix is the range of products owned by a business.

-A firms product portfolio can be a range of different products. It can also be a range of similar
products known as a product line, e.g. televisions are a product line including flat screen, HD
screen, portable tv, etc.

Why?

-Most firms produce a portfolio of product in order:

-To increase sales and customers and therefore profits
-To spread risks (profits from one product compensate losses from others) and
-To benefit from economies of scale such as reduced unit cost on advertising, distributing, and
production costs.

The BCG matrix

-The BCG matrix is a useful technique for firms to analyze their product portfolios. The model
was developed by the consultancy firm Boston Consulting Group and is sometimes known as the
Boston matrix.

-Under the BCG matrix products are categorized according to 2 criteria: Market growth
potential- how fast the market for the product is growing?

-Market share-how strong is the product in its market?

-Products are then placed in one of four categories on the Boston matrix: Problem children, stars,
cows, and dogs.

Managing/analyzing the product portfolio

-Product portfolio analysis is looking at the range of products a business offers to ensure that it
has well performing products and also new products to replace declining ones.






BCG matrix




Problem children

-Problem children also known as wild cats or question marks are products with a low market
share and a high potential for growth. They tend to be new products.

-In a fast growing market, a firm needs to investigate its problem children and decides which
ones to drop and which ones to develop. Large amount of investment is needed to turn them into
stars. Therefore cash flow problem children can be zero or negative.

Stars

-Stars are products that have a high market share and a high potential for further growth.

-They are already profitable but will require large investment to support further growth (e.g
advertising) in order to become cash cows. Therefore net cash flow is low.

Cash cows

-Cash cows are products with a high market share but a low potential for growth. They have
reached their maturity stage and are highly profitable.

-Because growth has started to slow down, there will be little spending on promotion. Therefore
cash flow will tend to be high and should be milked.

Dogs

-Dogs are products with low market share and low potential for growth. They may still generate
some cash but have little to offer for the future and need to be terminated soon.


Usefulness of BCG matrix

-BCG matrix can be used to analyze and balance a firms portfolio of products. A business must
not have too many or too few of each type of product.

-It can also measure cash flow, profitability, and sustained growth.

-A large firm can use it to analyze its portfolio of divisions or subsidiaries.

Branding

-Branding is a marketing practice of creating and developing a brand that leads to customer
loyalty. A brand is a well known name, logo, sign, symbol, design, slogan, or a combination of
them that allows consumers to easily identify and differentiate a product from others.

-When a brand is registered, it is known as a brand mark or trademark. This gives legal
protection to the registered firm on the exclusive use of the brand.

Other ways of creating a brand (product differentiation)

-Color: Many products are recognized by their color.

-Size: This can make a product stand out. E.g. Big Mercedes, pocket size mobile phone

-Design A proper design can make a product different. E.g. Apple

-Packaging: Presentation can make a product different. E.g. Pizza Hut box

-Service: Hotels and airlines differentiate themselves by the quality of their services.

Brand loyalty/preference

-Brand loyalty occurs when customers buy the same brand of product repeatedly and even
recommend it to other people. The customers prefer the brand over its rivals.

Brand development

-Brand development is the process of differentiating the name and image of a brand so that it
stands out from others, brand loyalty is achieved and sales increase.

-This is usually done by constantly advertising and promoting the brand.

- Brand development can be very costly.





Role and benefits of brand loyalty

-Differentiation: Enables consumers to easily identify and differentiate a product from others.

-Premium Pricing: Allows a firm to charge a higher price as customers do not find close
substitutes to choose from.

-Distribution: Enables easy placement (distribution) as retailers tend to accept and sell the
product. Supermarkets are more willing to provide space on their shelves for such products.

-Intangibility: Brands have intangible value that customers place on the product. It is the brand
that sells the product and not the other way around.

-Development: A strong brand enables a business to develop other products or markets.

-Timeless: Over time a product can become obsolete but the brand can be used for new product.
E.g. walkman and Sony.

-Legal instrument: Brand creates a legal identity for a product and protects it against imitation. It
makes ir more difficult for others to enter the market.

Problems with branding:

Some products are generic that it is difficult to establish a brand. They are better known by the
name of the product rather than by a brand name. Examples include aluminium foil, apples,
carrots, chips, etc.

Not all markets are suited to brands. Some people buy wine according to the region it is
produced rather than on the brand name. Meat is another example.Brazilian meat, American
meat, Australian meat.

Branding is expensive. Once a brand is introduced in the market, it must continuously be
promoted and maintained or else it is no longer recognized.

Types of brands or branding strategies

There are five main types of brands:
-Individual branding
-Family branding
-Manufacturer branding
-Corporate branding
-Own label branding

Individual product branding

Individual product branding refers to a business giving a brand to each of its an individual
product so as to give it a separate identity.

Examples: Omo, Persil and Ariel are separate brands of products in the same company Unilever.
Lexus is a separate brand within toyota
Advantages and Disadvantages of individual branding

The main advantage of individual branding is that the individual brand can be developed for
separate market segment (e.g. Lexus). Failure by one brand will not affect other products of the
business. It is also easier to sell part of the business.

The main disadvantage is that it is costly to develop individual brand and economies of scale
cannot be achieved as each product has to be promoted separately.

Family, corporate and manufacturer branding

Family branding refers to marketing a range of related products under a single name. Here, a
firm will launch new products under an existing strong brand. It is the opposite of individual
product branding. E.g. Windows softwares, Lu biscuits, etc.

Company or corporate branding is a form of family branding. It uses the name of the business as
the brand name and includes a whole range of related and unrelated products of the business.
E.g.: Virgin, Ikea.

Manufacturers brand

Manufacturers branding is a form of family branding where all the goods manufactured bears
the name of the manufacturer. THe manufacturer is often involved in the production,
distribution, promotion and even pricing of these products. They usually do not produce for other
suppliers.

Examples include Heinz baby food, Kellogg corn flake, Gillette razors, Levis jeans, or Dell
computers.

Benefits of family, corporate or manufacturer branding

Can benefit from marketing economies of scale. This means that a whole range of products can
be promoted using a single advertisement.

A new product in a successful family has a higher chance of success and survival.

A further benefit is that it can help to build customer trust and loyalty.

The brand enables future product development as it is not tied up in a particular product.

Problems with family, manufacturer or corporate branding

The main drawback of family/corporate branding is that bad publicity of one product can lead to
huge problems to all products in the family. For example, poor quality in one product can lead to
a fall in the sales of all other products since customers will relate poor quality to the family
brand.

The individual qualities of each product cannot be fully exploited as promotion focuses on the
family name and does not highlight the characteristics of individual product.



Categories of pricing policies

Competition base pricing is oriented towards the prices charged by competitors.

Price leadership

Price leaders set the price first.
It is often used by a dominant firm who has the best selling brands.
Other firms will follow by setting a price which is usually a bit below the leaders price.
The leaders will also be the first to increase prices.


Predatory or destroyer pricing

It involves reducing prices, sometimes greatly and for a long period of time in an attempt to force
rivals out of the market.
Sometimes this can lead to a price war as competitors can retaliate

Going rate (market) pricing

Here a firm will charge the same price as that charged by direct competitors
The price is the current market price and this strategy avoids price wars.

Market led pricing strategies

Skimming pricing
Penetration pricing
Price discrimination
Loss leader
Psychological pricing
Promotional pricing

Skimming (Creaming) pricing

This involves charging a high price for a new product for a limited period to skim the market and
maximise revenue
Prices can be lowered later when competitors are attracted in the market.
It is often used when a firm is launching a new unique product or a patented product.
It is appropriate for IT products such as mobile phone, as early adopters are more concerned with
technology than the price.

Penetration pricing

It involves selling a product at a low price to encourage consumers to develop a liking for the
product and the price can be raised later.
It used to establish a new product in a market or existing product in a new market.
One potential danger of this strategy is that the market may be perceived the product as of low
quality.


Price discrimination
This occurs when a firm sells the same product at different prices for different customers.
The strategy is appropriate when consumers can be kept separate
It can be time based, e.g. higher rent of holiday flat in December.
It can also be market based, children and adults pay different prices for the same cinema film.

Loss Leaders pricing

This involves selling a product at a low price or loss but making related products expensive.
The firm expects that the losses made by the loss leader will be more than compensated by other
profitable products.
Examples: Cheap playstations but expensive softwares. Cheap burgers but expensive soft drinks.
It is often used by supermarkets to capture customers will then buy other profitable items.

Psychological pricing

This involves using price tags like 9.99 or 19.95 to make customers feel that these price are
below 10 or 20.
Psychologically, customers feel that they are getting a bargain or better price.

Promotional pricing

This involves lowering the price of a product or giving discount in order to increase market share
or to build brand awareness.
It is also used to get rid of excess stock or to boost sales during off peak season.

Cost-plus pricing

Here, the firm adds up a percentage onto its unit cost of production to arrive at the price to be
charged to the customers.
It is a very easy way to decide on the price and is the most common pricing policy adopted by
firms.
However it does not consider competition in the market.

Full costing/Full cost pricing

Full costing is a costing method which allocates all costs to a unit (a product, an order, a job, a
function, an activity, etc.) in order to arrive to the total cost of that unit. If a business is
manufacturing a single product, the full cost of a unit is easy to calculate: total costs/ total
number of units.

When more than one type of product is manufactured, costs are divided between direct costs and
indirect costs (overheads).

Direct costs for a unit can be technically calculated with accuracy. Overheads or indirect costs
are allocated ore recovered or apportioned by a single arbitrary rate. Common rate include rate
per unit and rate per hour.

Example: A factory received an order for 100 shirts during the month of May. Estimated direct
cost for the order: materials $100 and labor $300. Other estimates for the month:

-Total overhead costs: $10,000
-Total units of clothing (shirt, jeans, etc) produced: 5,000 units.
-total labor hours: 2000 hrs.
-Labor hours for the order: 50 hrs.
1. Calculate the costs of the order using an overhead rate base on total number of units produced.

Answer: Overhead rate based on the total units produced: $10,000/5000 units=

Cost of order: Direct costs of materials + labor=100+300=400
Overheads: 100 shirts * rate=200
Total=600

2. Calculate the cost of the order using an overhead rate based on labor hours.

Answer: Overhead rate based on labor hours=$10,000/2000 hrs = $5

Cost of the order: direct costs=100 + 300= 400
Overheads=labor hrs * rate= $5 * 50 hrs= 250
Total=650

Adv: Both methods are easy to calculate.

Problem: A single rate to allocate overheads is arbitrary, too simplistic, and unrealistic.

Absorption cost pricing:
Absorption costting is an extension of full costing. Instead of using a single rate, different
overheads are apportioned to different cost centers or departments (or products) to the proportion
used. Common methods:

Overhead
- Rent rates
- Light and heat
- Insurance, depreciation
- Canteen or personnel costs

Basis of apportionment
- Floor area
- Floor area
- Value of fixed assets
- Number of employees

Then an overhead rate for each department is used to arrive at the total cost per unit.
Example: A factory manufactures shirts, T-shirts and jeans. It is unsure how to apportion
the overheads and has collected the following information.

Rent: $4500
Canteen costs: $2100
Depreciation: $1000
Administration: $3500

Other information: Shirts T-Shirts Jeans

Number of employees 30 20 20
Value of machinery $4000 $3000 $3000
Floor area (sq. ft.) 60 150 90




Prepare an overhead analysis/absorption statement and calculate the price per unit for each
product.


Item of Criteria/basi Total costs Shirts T-shirts Trousers
overhead s
$ $ $ $
Rent Floor area 4500 4500/300x60
=900
4500/300
x150
=2250
4500/300
x90
=1350
Canteen cost No. of
employees
2100 2100/70x30
=900
2100/70
x20
=600
2100/70
x20
=600
Depreciation
cost
Value of
fixed assets
1000 1000/10000
x4000
=400
1000/10000
x3000
=300
1000/10000
x3000
=300
Administration
cost
No. of
employees
3500 3500/70x30
=1500
3500/70x20
=1000
3500/70x20
=1000
Total overhead 11100

$3700 $4150 $3250
Output (units) 100 100 100
Overhead cost
per unit
$3700/100
units
=437
$4150/100
units
=$41.50
$3250/100
units
=$32.50
Direct cost per
unit
$100 $80 $200

Total cost per
unit
$137 $121.50 $232.50
Markup % 10% $13.70 $12.15 $23.25
Price per unit $150.70 $133.65 $255.75


Own label (retailer) branding

-Own label or private label or distributor label branding refers to brands which are manufactured
specifically for distributors mainly supermarkets.

-These products usually cannot compete with branded products and are therefore cheaper. They
are marketed under the distributors name to acquire a form of branding in order to improve
sales. Examples include Wal-Mart wines, Tesco baked beans, Fair Price, etc.

Advantages and disadvantages of own label brands

-The main advantage is that own label products are usually priced lower than well known brands.
this is because they can be bought in large quantities directly from manufacturers at a lower
price. Very little is spent on packaging and promotion but promotes the companys name.

-They are often perceived as better and more reliable than non branded goods.

-A key drawback is that private labels tend to be seen as low quality products that are catered for
budget consumers.

Brand extension and stretching

-Brand extension occurs when an existing brand is used for a new product in a similar market,
e.g. Coca-Cola producing Coca Diet.

-Brand stretching occurs when an existing brand is used for a new product into an unrelated
market, e.g. Virgin brand has been used to enter a variety of businesses such as music, shop,
airlines, and financial services.

Branding in the global market

-Global brands are brands which are recognized and marketed in a large number of countries
around the world. Examples include Coca-Cola, Microsoft, Dell, etc.

-firms with global brands can market their products throughout the world with almost the same
marketing strategy and therefore benefit from economies of scale.

-global brands enable consumers to travel around the world without missing out opportunities to
consume their favourite products

Marginal costing

Marginal costing (variable costing) is a costing method that classifies costs as either variable
costs or fixed costs

Variable costs are costs which vary directly with the level of output. They can be
identified or traced to products, eg/ direct materials, direct labor and direct expenses such
as royalties.
Fixed costs are costs which do not vary with the level of output. They are period costs
(Monthly or annual) e.g. rent, depreciation, managers salary, etc.
Contribution is the difference between selling price and variable costs. The amount is
used to recover fixed costs.

Under marginal costing variables costs are assigned to units of a product. Fixed costs are not
included in the cost of a product but are considered as period costs and charged against total
contribution of the period to arrive at profit.

Example: A firm produces 2 products X and Y. Output is 1000 units each. Selling price: X = 10$
and Y = 20$. Variable costs: X = $5 and Y = $10. Fixed costs: $10000.

Calculate profit using marginal costing

Answer: X Y Total

Sales $10,000 (1000x$10) $20,000 $30,000

Less variable cost $5000 $10,000 $15,000 (minus)

Contribution $5000 $10,000 $15,000

Less fixed costs $10,000(minus)

Net profit =$5000

Uses of marginal costing

Marginal costing is mainly used for breakeven analysis and short-term decision making when
fixed is already covered. These short-term include:

-Accept or do not accept a special order when there is underutilization capacity
-Make or buy a component
-Dropping or not dropping a line of production

Uses of marginal costing

Marginal costing is mainly used for breakeven analysis and short term decision when fixed cost
is already covered.

Example: Accept or do not accept a special order

A company is actually producing at 8000 units and the following information is available:

Answer: Selling price $10 per unit
Raw materials $3 per unit
Direct labor $2 per unit
Average fixed cost $2 per unit
Total cost $7 per unit
An order of 1000 units has been received from a supermarket for its own label at $6 per unit.
Advise.

Answer: Do not accept the order Accept the order
8000 units 8000 units + 100 units

Total

Sales $80000 + $6000 $86,000

Less variable costs $80,000 $40,000+ $5000 $45,000

Contribution $40,000 $40,000 + 1000 $41,000

Less fixed costs $16,000 $16,000

Profit $24,000 $25,000

Advice: Accept the order as this increases the total amount of profit.

Other factors need to be taken into consideration:

Will the normal sales be affected?

Will other retailers press for a reduction in price?

Will this affect the image of the product?

Dropping a line of production

A company is actually producing 1000 units of each of the following: veg pizza, meat pizza, and
fish pizza. The following information is available:


Veg Meat Fish Total
Sales 1000 units
each
$20=20,000 $24=24000 $30=30000
Less variable
costs
$10=10,000 $12=12,000 $15=15,000
Contribution 10000 12,000 15,000
Less fixed costs
$30,000/3
10000 10000 10000

Profit 0 2000 5000 7000


Advice: drop the veg pizza

Dropping a line of production
A company is actually producing 1000 units of each of the following: veg pizza, meat pizza and
fish pizza. The following information is available:

Veg Meat Fish Total
Sales 1000 units
each
$20= 20000 $24=24000 $30=30000
Less variable
costs
$10=(10000) $12=(12000) $15=(15000)
Contribution $10000 12000 15000 37000
Less fixed costs
$30000/3
(10000) (10000) (10000) (30000)
Profit 2000 5000 7000
The company is considering dropping veg pizza, as it is not making a profit. Advise
Meat Fish Total
Sales $24=24000 $30=30000
Less variable costs $12=(12000) $15=(15000)
Contribution 12000 15000 27000
Less fixed costs 30000
Profit 2000 5000 -3000
Based on the above financial consideration, it can be advised not to drop veg pizza. However,
other factors that could be taken into considerations can include:

There is a market for veg pizza and this can grow in the future.

If veg pizza is dropped, maybe the sales of meat and fish pizzas will increase.

Make or buy a component

A TV company is producing its own TV box at the following unit costs: Variable costs= $8 and
average fixed costs $2. It is actually producing 2000 units per month and a supplier is offering to
supply TV box at a price of $9. Advise

Make Buy

Variable costs $8 * 1000=$8000 $9000

Fixed costs $2* 1000=$2000 $2000

Total costs $10,000 $11,000




Advice: do not buy as the total cost will increase

Other factors to be considered:

Whether the TV box supplier will make a better quality box

Whether we will depend on the supplier in the future as by not making the bo, we may gradually
lose the expertise of making boxes.

Can the fixed cost be eliminated if we buy

Demand, supply and demographics

Law of demand

-The law of demand or the theory of demand states that when price increases, quantity demanded
decreases and when price decreases quantity demanded increase.



iPhone

$1000-50 people

$2000-25 people

Price elasticity of demand measures the degree of responsiveness of a change in quantity
demanded to a change in rice.



Brownie iPhone


If the answer is below 1, it is said to be price inelastic, i.e. a % change in price will cause a
smaller change in quantity demanded.

If the answer is above 1, it is said to be price elastic, i.e.. a % ; change in price will cause a
bigger change in quantity demanded.

Importance/Uses of price elasticity of demand

Knowledge of price elasticity of demand can give valuable information to businesses and
government about how the sales revenue of a product is likely to change if its prices are adjusted.
This information can

1) Help firms to decide on their pricing policy. A business with a price elastic product is unlikely
to raise price but can decrease it and vice versa.
2) Determined which product are mostly affected by economic downturn. Luxury goods are price
elastic and will be mostly affected during a recession.
3) Helps to predict the effect of exchange rate on the sales of production.
4) Help government to decide which product to tax heavily. Cigarettes, beer and petrol are
heavily taxed as they are price inelastic. An additional tax will not affect demand significantly.


Factors affecting price elasticity

-Substitutes

-A product tends to be price elastic if it has many close substitutes, e.g. Dell computer. People
will switch to other computers if its price rises.

-A product tends to be inelastic if it does not have close substitutes, e.g. cigarettes. People will
continue to buy cigarettes in almost the same quantity if its price rises.

Other factors affecting price elasticity

-The proportion of income spent on a product, e.g. a match box is price inelastic because people
will continue to buy it even if its price goes by 50%.

-Durability. A durable good will be more price elastic than a perishable good.

-Necessity. Necessities like food are more price inelastic. People do not reduce demand for them
much even if prices go up.

-Fashion. Fashionable goods are more price elastic as people easily switch to hter goods as prices
go up.

Factors affecting income elasticity

-Luxury goods. The demand for luxury goods is income elastic as people with more income will
buy more luxury goods.

-Normal goods: The demand for normal goods is also income elastic as people will buy more of
them as income rises.

-Inferior goods: The demand

Factors affecting cross elasticity

-Substitutes.

-The demand for a product will rise if the price of a substitute rises. The demand for Sony digital
cameras will rise if the price of Samsung digital camera rises as consumers of Samsung will
switch to Sony.

-Complement

-The demand of a product will rise if the price of its complement falls. The demand of computer
software will rise as a result of a fall in the price of computers.

Elasticity and product life cycle

-As a product passes through its product life cycle, its price needs to be changed and adapted to
each stage. A marketing manager must continuously monitor prices over a products life cycle.

-Launch

-At this stage the PED of a product tends to be very inelastic as innovators to do not look at price
to buy the product. So there is no need to set low price.

Growth

-The PED tends to rise but will still be inelastic as there are almost no competitors. Skimming
prices can be set.

Maturity

-At this stage a few substitutes will become available.

Saturation
-At this stage the PED will be very elastic. Price can be lowered down in order to attract late
adopters or laggards.

Decline
-In this stage the product is highly elastic. Bargain hunters will only buy at very low price.

Actual sales= $400,000
Actual price= $10
Price elasticity=0.5
Calculate sales revenue if (a) price is raised to $11 and (b) price is reduced to $9
Answer (a)= % change in quantity/change in price= x/0.1=0.5
Answer (b)= x=0.5*0.1=0.05
% change in quanitity= 5% fo original quantity
=5% of $400,000/10
=5% of 40,000 units
=2000 units

New Quantity=40,000 - 2000=38,000
New sales revenue=38,000 units *$11=$418,000

Example 2

Sales revenue: $400,000
Actual price: $10
Price elasticity: 1.2
Calculate revenue if price is raised to $11

Elasticity

Four main measures of elasticity of demand

Price elasticity of demand (PED)
Income elasticity of demand (YED)


May 09 H2 Q2

Income elasticity of demand

-Income elasticity of demand measures the degree of responsiveness of demand to a change in
income of consumers. It is calculated as:

Cross elasticity of demand

-Cross elasticity of demand measures the degree of responsiveness of demand of one product to a
change in the price of another product. It is calculated as:

-% change in quantity demanded of a product/% change in price of another product


Advertising elasticity of demand

-Advertising elasticity of demand measures the degree of responsiveness of demand to a change
in the advertising expenditure. It is calculated as:

% change in quantity demanded/ % change in advertising expenditure

May 09 H2 Q2

Workings

Price=$10
PED=0.5
AED=1.0

Reduce price by 10%
New advertising expenditure $0.5m (Actual expenditure=$2m) t
Sales revenue
less cost of goods sold
Gross profit
Advertising expenditure

If price elasticity of demand is 0.5, a 10% cut in price will lead to =0.5 of 10%=5% increase in
the quantity

1. $18 to $16

PED= % change in quantity demanded/% percent change in price
% change in quantity demanded= QDemanded(old)/ QDemanded (new)-Q Demanded(old)
= 10,000-14,000/10,000
= -0.4
% change in price= Price (new)-Price (old)/ Price (old)
=18-16/18
=0.11

-0.4/0.11=-3.63

4.5 Promotion

Aims: (AIDA)

Arouse awareness
Generate interest
Inspire desire
Initiate adoption

Of the product

Definition: It refers to the methods used by businesses to make customers aware of a product and
adopt it.

It brings customers from a state of unawareness of the product to a state of adopting it.

Elements of promotion:

Above the line (pull) promotion: Advertising

Above the line/outside the line promotion refers to methods over which a firm has no direct
control and makes use of external agencies or media. It refers mainly to advertising.

It allows the business to reach a wide audience and attract or pull them into buying the product.

Thats why it is also referred to as pull promotion

Below the line (Push) Promotion:

Sales promotion
Publicity
Sponsorship
Personal/direct selling
Exhibitions and trade fairs
Direct mailing
Merchandising/point of sale displays
Public relations

Below the line promotion

This refers to methods over which the firm has direct control and does not use external agencies
or media.

It usually refers to any promotional activity, which is not advertising.

The business pushes the product towards targeted customers push promotion

Advertising

Advertising is a non-personal form of persuading customers to buy a product.

It is traditionally done above the line.

3 objectives:

Informative: i.e make consumers aware of the product especially new ones and give them some
information on the product.

Persuasive: i.e convince consumers to buy a product because it is more desirable than others

Reassuring: i.e reminding consumers that their purchases were correct and they should continue
to buy the product

Main types of advertising

Press:
Television:
Radio:
Outdoor (Billboards, cinemas, buses, etc):
Internet:

The press: newspapers and magazines

The press is the most important medium of advertising in terms of expenditure.

The press consists of daily and Sunday newspapers and magazines which are mainly periodicals
(weekly, monthly, etc.)

Advertising in periodical magazines is normally of a specialist nature to target a market segment,
e.g. cars, musical instruments, etc.

Small businesses often use local newspapers.

Adv. And disadv. Of using the press

Advantages:
It is permanent. The advert can be cut and kept for future reference.
More information can be provided than in TV or radio advertising

Disadvantages:
It suffers from a lack of impact to a TV advert

Television advertising

This is mainly used by big firms who can afford the high price of a TV slot. Sound and moving
pictures can bring powerful message in a very short time to the viewer.

Advantages:
It can have a very powerful impact on the viewers. A very wide and even global audience can be
targeted.

Disadvantages:
It is very costly to produce a television advertisement and also very expensive for businesses to
buy an advertising slot.

Large amount of information cant be conveyed, as the timeslot is very short.

Radio advertising

This refers to advertising using radio time slots. It is the fastest growing advertising medium.
There is an increasing number of people listening to radio. The number of independent radio
stations and internet radios is constantly increasing.

Advantages:

Radio advertising can reach a very large audience and yet significantly cheaper than television.
Listeners can do other things while exposed to the promotions
With internet technology, radio promotions can reach almost anyone in the world.

Disadvantages:

There is no visual impact with the absence of moving images
There is lower attention level than with television.

Outdoor advertising:

Outdoor advertising refers to the use of billboards, posters, banners, etc. to promote a business, a
product or brand name. These appear on a variety of locations (shopping malls, road sides,
vehicles, etc.) where they are visible to large numbers of people. A recent development is the use
of electronic screens with rotating adverts.

They tend to be large with short messages as passerbys or motorists have a few seconds to look
at.

Advantages:

It can be seen repeatedly
There is a high rate of exposure

Disadvantages:

It contains a limited amount of information
Prone to weather damage, vandalism and graffiti
It can be dangerous for drivers

Internet/web/digital advertising

This refers to advertising using (firms) own (below the line) websites, networking websites
(above the line) or other electronic sites.

It is the advertising medium, which is growing at the fastest rate. More and more businesses have
their own websites and are selling online.

Advantage:
Websites can be accessed worldwide by consumers

Disadvantage:
The audience is limited to Internet users.

Sales promotion:

Sales promotions are incentives offered to consumers to encourage them to buy goods and
services. Examples include:

Free samples:
Temporary discounts or discount vouchers
Gifts in exchange of product labels or buy one get one free
Products give rights to enter into competition with major prizes
After sale guarantee
Loyalty cards or loyalty gifts

Advantage
Sales promotion can boost up sales although temporarily with the hope that it will lead to brand
loyalty

Disadvantage
The free samples, gifts, etc. reduce products

Public relations (PR)

This refers to the business communicating with the public to improve its image or products. Such
excercises include:

Price conference where journalists are invited to a presentation and are given information about
the company or products.

Press release, that is, written statement of events, activities or product which may be considered
newsworthy.

Packaging promotion (Below the line promotion)

This refers to the additional information on the product on the protective packaging.

It also refers to promoting the business name on carrier bags provided by many retailers.

Sponsorship

This involves providing funds for the conduct of an event, mostly sporting events.

Coca Cola for the Olympic games in Beijing.
Red bull for Formula One

It also involves supporting teams or individual athlete.

Other forms of sponsorships take place in the community, the cultural and educational world.

Merchandising is an attempt to influence consumers at the point of concluding sales by
proper display of products. The aim is to make consumers buy what they can see at the
point of concluding sales rather than from a sales assistant or from the shelves.

Supermarkets, petrol stations and banks use this method extensively. Whilst customers are
waiting in line, they are exposed to items such as confectionary, magazines, insurance and
other products that are impulse buys.

Other features of merchandising used to attract customers to buy other things they had not
intended to buy include:
Giant posters, taste the product, soft music, announcement, etc.

Publicity is the process of promoting a business or product by getting media coverage without
directly paying for it.

Although the publicity is free, it is the result of a patronage of sports, arts or learning. For
example giving a Ferrari to a celebrity may result in a wide coverage of the car.

Advantage:
Publicity generates favorable coverage for a product or business

Disadvantage:
Publicity is the result of patronage which involves costs.

Direct marketing or personal selling

Direct marketing occurs when a firms salesmen promotes a product through personal contact:

Over the phone

Sending e-mails

Knocking at the doors.

It is often used for industrial goods (airplanes, machines), properties, insurance, financial
planning etc.

Fairs and exhibitions

These are mainly used where there is a need to demonstrate a product or to discuss the technical
aspects of the product with customers.

Advantage:
They give a chance to show how a product actually works

They allow customers to discuss about a product

Disadvantage:

Staffs have to be removed from work to be available on spot.

Direct mail

This is a bit different from direct selling. Here, information is sent to the customers through the
post, door mailshots or e-mail inbox, with the option of placing an order.

It is used by mail order businesses, local food outlets, bookshops, etc.

Advantage

A wide audience can be reached and it is relatively cheap

Disadvantage

Many people disregard the materials posted or block such e-mails as it is considered as junk
mail.

Word of mouth

Word of mouth promotion refers to the spreading of information about a product from one
person to another through oral communication. When the message is transferred electronically it
is known as peer to peer.

Advantages

It is the cheapest form of promotion as there is no cost to the firm.

Disadvantage

It can be damaging if the wrong information is spread.

Promotional mix

Promotional mix refers to the range of promotional methods used by a business to promote its
products. Usually, a business does not use only one method in order to be effective.

There are a number of factors that will influence the mix and these include:

-The type of the product: What is the best medium? Is visual impact important?
-The market segment being targeted: Is it a niche market
- The cost of the promotion activity: How much finance is available?
-The promotional mix of competitors: do we need to follow the same strategy?
-The product life cycle: Is the product at introductory or maturity stage?






Place

Place is one element of the four Ps in the marketing mix. It refers to where, when and how the
firm decides to sell their products. It involves deciding on channels of distribution, location of
retail outlets, quantities, transportation, warehousing and logistics.

Channels of distribution refers to how the manufacturer ensures that its products reach the final
consumer. This can be done by directly selling to the final consumer or by using intermediaries.
Therefore distribution channels can have several levels.

a) Two levels (2 middlemen/intermediate)

b)

c) Zero level (no middleman/intermediary)

Wholesalers

Wholesalers are businesses that purchase large quantities of products from a manufacturer.They
then sell in smaller units to small retailers who cannot buy in large quantities. They act as the
intermediary between manufacturers and retailers. Using wholesalers has many benefits for
manufacturers:

- Wholesalers break the bulk purchase and therefore, small retailers dont have to buy in large
quantities from manufacturers.

-Wholesalers store the products for manufacturers.

-Wholesalers distribute the goods to retailers and even promote the products.

Retailers

Retailers are the sellers to the final consumers. They are often referred as shps. There are several
types of retailers.

-Independent retailers are the small local shops.

-Multiple retailers, also known as chain stores, are retailers with several outlets, such as
McDonalds, Guardian, 7-11, etc.

-Supermarkets are retailers that sell a wide range of goods mainly foodstuff, e.g. Fair Price.

-Hypermarkets are huge retail outlets selling a large range of consumers goods. Because of their
large size, they are usually located town areas.

Distributors

Distributors are independent specialist businesses that trade in the products of only a few
manufacturers, e.g. car distributors, mobile phone distributors, etc. Some distributors sell the
product of only one manufacturer, e.g. Honda distributor or Dell distributor.

Agents

Agents are negotiators who act between sellers and buyers, e.g. estate agent, insurance agents.
They are experts in their markets and charge a commission for their services. The commission is
a percentage of the sales made.

The two levels channel of distribution

Under a two level channel of distribution, there are two middle persons or intermediaries
between the manufacturer and the final consumer: the wholesaler and the retailer. This is the
traditional and most common channel of distribution, as most products are not sold directly from
the manufacturer to the consumers. The wholesaler buys and stores large quantities of several
manufacturers goods and then sell to retailers who in turn sell to consumers.

One level chain of distribution (Manufacturers to retailer/distributors/agents, then to
consumers)

Under one channel of distribution, manufacturers tend to eliminate the wholesaler in order to
save cost. With the spread of supermarkets, which can buy in large quantities, it is becoming
uneccessary to use wholesalers. Big retailers like supermarkets buy directly from the
manufacturers to sell to consumers.

Zero Level channel of distribution (Manufacturers to Consumers)- direct marketing

1. In the hotel industry, customers can book their own accommodations directly from the hotel

2. In restaurants, services are provided directly to the customers

3. In E-commerce, goods are distributed directly from the business to the customers

4. Professionals such as doctors and lawyers sell their services directly to the customers

5. Telesales or telemarketing involves the use of telephone system to sell the products.

6. Direct mail involves sending promotional materials to make customers to buy their products

7. Vending machines are specialist machines that stock and sell products such as cigarettes,
drinks and snacks.

NOV 07 S1 3a: Identify the two main channels of distribution used by Gladrags Ltd.

Channel mix

In practice, many firms use a mix of different channels. They may use a direct-sales force with
larger customers (e.g. a big hotel) and use retailers for the remaining small customers.

4.7 International marketing

It refers to the marketing of goods and services in more than one overseas country.

Global marketing, is an extension of international marketing. It refers to the marketing of the
same product globally and usually using the same marketing approach. Examples include
McDonalds, Coca-cola, etc.

Reasons for a firm to market its goods and services internationally:

1. To increase sales volume if home market is declining.

2. To take opportunity of a foreign market.

3. To enhance firms image overseas.
4. A strategy for a growth.
5. Profit margin may be higher in the foreign market.
6. Intense competition in home market.
7. Technological factor may be such that a large volume of products is needed.
8. To take advantage of incentives offered by the government of other countries.
9. To benefit from economies of scale.

How to enter foreign market?

It is about the element Place in the marketing mix of international marketing

1. Export -a. direct export
b. indirect export
c. e-commerce

2. Overseas Manufacture:
- A. Licensing/franchise
- B. Joint venture
- C. Foreign Direct Investment - (FDI) (Own production.distribution) unit.

Export:

Export is the first way of entering a foreign market.

It is a safe way of entering a foreign market as initial costs are relatively low compared to costs
involved in opening a manufacturing unit.

The main disadvantage of export is that it involves huge transportation costs and also there can
be trade barriers imposed by foreign governments.

Export can be direct or indirect.

Direct Export:

It occurs when the manufacturer sells directly to overseas customers without using an agent. The
sales can be made to overseas wholesalers or large retailers.

In the case of direct export, It is fast and manufacturers retain complete control of the
transactions. They also save money, which should have been paid to agents as commission.

The main drawback is that setting up costs of opening an export department is generally very
high..

Indirect export:

It takes place when goods are sold by other local agents, say an expert firm, to overseas markets.

The manufacturers benefit from the agents knowledge of foreign market and are relieved from
the need to finance export transactions and documentation work.

However, the manufacturer has little control over the overseas market and is at the mercy of the
agents. A fee has to be paid.

E-commerce

The use of e-commerce in international is growing. It is also an effective way of reducing costs
and risks in exporting goods.

Amazon.com and ebay

Overseas manufacture

This can be done in 3 main ways:

1. Setting up an own overseas production unit.

2. Enter in a joint venture with an overseas business.

3. Give license/franchise to an overseas manufacturer.

Setting up own manufacturing unit overseas (direct investment)

This can be done by

1. From scratch
2. Buying an existing unit

Setting up a factory from scratch

1. Creating new unit enables the use of latest production technology and new forms of
management.
2. However, a substantial amount of investment is required and suitable managers may be
difficult to find.

Buying an existing unit overseas

1. Acquisition allows a rapid entry into the foreign entry into the foreign market. It also offers
the benefits of an existing management team, existing outlets and other advantages of a going
concern.

Joint venture

It is an arrangement when two firms join forces for a business operation. It enables entry in a
foreign market where the government discourages wholly owned foreign firms.

Risk is reduced in terms of capital and government intervention. The local firm can provide
knowledge of the local market.

Licensing or franchise

-A licensing/franchise agreement is a contract whereby the owner gives the right to others to
produce and sell the products of the business against certain payments called royalties.

Advantages of licensing/franchising

1. It requires little investment
2. It enables quick and easy entry in the foreign market.
3. The licensor can take advantage of low cost of raw material and labor.

Disadvantages

1. The income from the licensee can be very low
2. The licensee may eventually become a competitor
3. Government can impose restrictions on payment of royalties.


Product in the international market

-The fundamental decisions for firms operating internationally is whether to supply its existing
product or to modify it to suit the needs of each foreign market. In other words, the firm should
decide between product standardization or product differentiation.

Product differentiation

-It is appropriate where there exists:

1. Significant difference in local consumer tastes and preferences.
2. Intense competition in the foreign market, therefore there is a need to differentiate the firms
product with its rival.
3. Special local requirements, for e.g. due to law or technical standards, climate, etc.

Product standardization

-Standardization is appropriate in markets where:

1. Cultural difference has little effect in the product, for e.g. pens, computers.

2. For products which have a strong brand image, for e.g. Coca-Cola

Price in international marketing

-The main issue is whether to sell it or a uniform price or at a different prices in different foreign
markets.

-Price discrimination is most common for firms selling internationally. The main reason are the
level of income of the local population, competition, inflation, etc.

Promotion in international marketing

-The firm should decide whether to standardize or differentiate way of advertising.

-A standard advert would reduce the cost of promotion. A strong global brand can have a huge
impact on consumers.

-Standard advert may not be relevant in many countries.

Other issues

-Cultural
-Language
-Legal and political
-Social and demographic
-Ethics
-Time

Cultural issues in international marketing

-Understanding the local culture may have an impact on the sales of the product. Examples:

-A product name may be suitable in one country and not in another.
-Colours may have different meaning in different countries.
-Local preferences should be considered.

Language issues

-Numbers: In western countries, 13 is the unlucky number; in China it is 4.

-Words: British use the word trainers whereas Australians use runners.
-Greetings
-Body language

Legal and political issues

-Entry into a foreign market should consider the different legal and political systems.

-Barriers to trade
-Copyright and patent
-Consumer protection laws
-Tax rates
-Consumer protection law

Ethical issues

-Ethics are the moral values that determine what is right or wrong.

-What is acceptable as morally right in one country may not be the same in another country. For
example, the attitude towards smoking is not the same in different countries.

Time

Capital

- Additional capital will definitely be required when moving into international marketing. The
amount will depend on the choice of entry into the foreign market

4.8 E-commerce

E-commerce is the trading of goods and services using electronic system. This is on line trading
takes place mainly by the use of computers via the Internet. But smartphones can alo be used.
Ecommernce is not only about buying and selling of goods. Many organizatoin also use it for
pasing of information and advertsising on their websites.

Ecommerce can be calssified in two types: Business to business and business to consumer

Business2Business

B2B refers to ecommerce which caters for the needs of other businesses. It is well established
and a lot of purchase orders and payments are now made electronically. Example of B2B also
include banking services, supplies of spare parts, insurance, advertising agency services, etc.

Business2Consumer

Refers to the ecommerce which catewrs directly for the needs of the final consumer. More and
more businesses are not set up to sell directly to the final consumers. Examples of specialized
B2C include Amazon, Ebay, but many retaliers are now involved in ecommerence in addition
brick and motor selling.
Benefits of ecommerce to firms

Availability. A website offering goods and services enables a business to reach a global market
to conduct business 24x7x365 andthere is no need to be physically near the customer.

Speed. Electronic communications allow messages to travel almost instantaneously. Payments
are also quicker. Transactions are ocondicted at any time convenient to the customers.

Reduced costs: Online makes it cheaper and more effective to conduct and settle transactions.
There is no need to go through wholesalers or retailers.


Disadvantages of ecommerce to firms
Cost of technology to set up e-commerce can be expensive.
Staff has to be trained.
Problems of security of data website has to constantly be updated.

Benefits to consumers
Easier access to a wider variety of products
accessible at any time
Easier to compare products and price

Disadvantages to consumers
E-businesses must have a computer network and their staff must have IT skills
E-business is accessible only to e-customers
Overspending by customers.
Customers need online payment devices, such as a credit card or PayPal, to purchase
goods or services online.

Effects of e-commerce on the marketing mix
The emergence of e-commerce has major influence on a firms marketing mix. These are:
Price: E-business have to price their products competitively in relation to other e-
commerce rivals as customers can quickly make price comparisons on websites.
Prices can be adjusted and updated regularly. Prices can be reduced because the
internet allows businesses to cut out the wholesalers and retailers and sell directly
to customer or to provide for transport costs to be incurred by customers. Prices
can also go down because of economies of scale.
Place: there is no need for e-business to be located near the customers. Customers
can make online purchasing. The head office of an e-business can be anywhere
because the point of contact is the internet. However, there is still the logistic of
ensuring that the goods reach the customers. Also, there is no need of
intermediaries such as wholesalers to distribute the goods. However, customers
cannot examine or test the products.
Product: A wider product range can be displayed online than in a physical outlet.
More information can be provided on the products. Picture of each product can be
shown. However, customers cannot examine or test the products.
Promotion: Promotional activities for e-business are more likely to revolve
around the Internet. More information can be communicated via Internet
advertisements. Customers can take their time when browsing information about a
product which is not possible in conventional advertising. Internet adverts now
include video clips, audios, and, photos. E-commerce has also enable viral
marketing, which make use of email spam to spread the message about a product.
Promotional costs can be cheaper.


Investment Appraisal
3.2

Capital investment appraisal is the analysis and evaluation of capital expenditure to determine
whether it is worthwhile. Capital expenditure can be investment on one fixed asset or in a
project. Examples:
Buying a plant to expand production capacity.
Research and development of new products.
Development of distribution channels.
Cost reduction through modernization.

Possible consequences of making poor capital investments:
Not having up-to-date products.
Having the wrong type of products.
Having poor distribution facilities.
Having too little a production capacity.

Methods of appraising capital investment:
1. Payback
2. ARR - Accounting rate of return also known as ROCE - Return on capital employed. 3

Payback period
This method measures the amount of time *number of years)taken for the expected net cash
flows (money in less running costs) to equal (i.e payback) the initial expenditure.

The decision criterion is to select
1. The project with the shortest payback period where several competing projects are being
reviewed.
2. Anyway project which meets a benchmark (a standard level) payback set by senior
management.

Example:
Store plc is considering investing $1,000 in two competing projects. Details are as follows:


A (taxi car) B (Motor van)
Initial outlay: $1000 $1000
Expected cash flow: Year 1:
Year 2:
Year 3:
Year 4:
Total:
450
550
250
150
1400
200
500
600
300
1600

Calculate payback period for both projects and advice.


Answer: Project A: Project B:
Cost $1000 $1000
Cash flows 450 + 550 200 + 500 + 300
Payback period 2 years 2.5 years
Payback period:
Using the payback method, Project A would be preferred as it initial investment is recovered in a
shorter time period (2 years) than that of Project B, which takes 2 and a half years.

Why payback is still used: (benefits)
1. It is easy to use and understand
2. It acts as a crude measure of liquidity by preferring projects which pay quickly.
3. It is appropriate in risky sectors where technology changes quickly by preferring projects
whose returns arrive earlier than later.
4. It avoids account problems such as depreciation, accruals, and prepayments.

Disadvantages of using the payback method zu
1. It does not take into account money received after payback period.
2. It ignore the profitability of the project and looks only at the speed of repayment.
3. It does not take into account time-value of money.


ARR (Average Rate of Return) or ROCE (Return on capital Employed)
This method measures the average annual profit as a percentage on the capital invested to
generate that profit. ARR = Average annual profit/ initial investment x 100

Note:
1. Annual profit = Total profit over lifetime divided by life of the project.
2. Total profit = Total cash flows minus cost of investment (also known as total depreciation)
3. Sometimes instead of using initial investment, average investment is used which is its value at
the mid-point of the project life.

The decision criterion is to select
1. The project with highest ROCE where there are several competing projects.
2. Any project which exceeds benchmark ROCE set by senior management.







Example
Using the same example as for Payback, calculate the ARR for both projects and advice.

Answer: Project A Project B
Total profit: Total cash flows minus initial investment $1600-$1000 = $600
$1400 - $1000 = $400

Average profit: $400/4 = $100 $600/4 = $%150


ARR: $100/$1000x 100 = 10% 150/1000 x 100 = 15%

Using the Accounting rate return (ARR) method project B will be chosen.

Payback and ROCE compared

1. ROCE uses accounting profits as measure whereas payback uses cash flow.
2. ROCE evaluates all the returns arising from the investment whereas payback ignores cash
returns which fall outside the payback period
3. ROCE can be compared against ROCE of other firms
4.It also ignores the time-value of money

Net present value (NPV) or discounted cash flow (DCF)

This method measures the net present value of projects by calculating what cash flows earn in
the future are worth today less the initial investment.

The decision criterion is to select:

1. The project with the highest NPV where several competing projects are reviewed.
2. The project with positive NPV if there is no competition between projects.

Example:

Using the same example as for payback, calculate the NPV for each project and advice.


Year Discount
factor
Project A
(cashflow)
Present value Project B-
Cash flow
Present value
0 1.000 (1000) (1000) (1000) (1000)
1 0.909 450 409 200 182
2 0.826 550 454 500 413
3 0.751 250 188 600 451
4 0.623 150 102 300 205
NPV 153 NPV 251


Using the net present value method, project B is to be chosen because it gives higher NPV.

Advantages:

1. It takes into consideration all cash flows unlike payback.
2. It takes into consideration the time value of money unlike payback and ARR.

Limitations:

1. It is difficult to estimate future cash flow accurately (This limitation also applies to other
methods)

2. It is difficult to make accurate discount rate which depends on future interest rate and
inflation. An inappropriate discount rate can lead to the wrong investment decision being taken.

3. It does not take non-financial factors (e.g. environmental) in consideration.

Other factors to be taken into consideration before making a final decision:

Environmental issues and pressure groups; The mission and objectives of the firm; The
availability of finance; The need of training in implementing new project; Ethical consideration;
Government laws; etc.



2.5

What is Motivation?
Motivation refers to the desire, internal need, effort and passion to achieve something. In
organization, motivation refers to getting someone to complete a task.

Benefits of increased motivation of workers
Motivation is important in an organization as:
The more motivated an employee is, the more productive he is, leading to
increase revenue
It improves corporate image helping to attract customers and employees
It brings better relationships between management and employees
It results in lower absenteeism and turnover of staff
Poor motivation can result in:
Disciplinary problems
High rate of absenteeism
Low productivity and low quality of output

Intrinsic / Extrinsic motivation
Intrinsic motivation occurs when a person engages into an activity out of his own
desire because he finds the activity challenging or satisfying for the person
Entrinsic motivation occurs when a person particitpates in an activity because of the
benefits associated with the activity. These rewards can be tangible or intangible such
as recognition or praise. Extrinsic motivation can also come in the form of threats such
as avoiding punishment.

Theories of Motivation
Motivation theories can be classified as:
Content Theories
Process Theories
Content Theories
Content theories of motivation explain the factors that motivate people. They answer
the question: What makes people to behave in a certain way? The theories include:
Maslow Hierarchy of Needs
McGregor Theory X and Theory Y
Herzberg Two Factor Theory
Taylors scientific Management theory
Mayos human Relations Theory
McCelland Needs Theory

Process Theories
Process theories explain the thinking processes that influence behaviour. They answer
the question: why people behave in a certain way
They include:
Vroom Expectancy theory
Adams equity theory

Maslow Hierarchy of Needs
Abraham Maslow, in 1943, put forward the theory that people are motivated by certain needs.
These needs consist of five types and levels which calls the hierarchy of needs

Maslow argued that people tend to satisfy their needs systematically, i.e. higher level needs
cannot be addressed before lower level needs are satisfied

Physiological needs refer to the basic needs for survival such as food, clothing and shelter. At
work, it refers to the amount of money a person earns to need these basic needs.

Security of safefy needs refer to the feeling of safety, order and freedom from threats. In a work
situation, these needs will refer to job security, such as contract of work, sick leave, maternity
leave, pension and protection from arbitrary actions.

Social needs also known as love and belonging needs refer to the human need to be accepted by
others, e.g. as part of a social group or family. At work, these needs include opportunities for
interaction, teamwork, absence of discrimination, a sense of belonging to the organization, social
events, etc.

Esteem needs refer to the desires for recognition or esteem from others and self respect leading
to a feeling of confidence. At organization level, employees have a need to have their efforts
recognized. Promotion, job title (head of department), trainign and development, opportunities to
participate in decision making are ways to satisy employees

Self Actualization is the highest level of Maslows hierarchy of needs. It refers to the needs of
fulfillment of personal potential, i.e. the best of oneself. Businesses can encourage this by
providing opportunities for personal development.

The theory is important to managers because
Firstly it helps managers to clearly identify, in a simple context, the variety of workers
needs that must be satisfied if employees are to motivated
Secondly, workers would not be motivated by higher level needs if lower ones are not
satisfied. If a worker paid starvation wages is unlikely to be motivated by praise from
managers

Critics of Maslow Theory
Levels of needs are difficult to measure
It is not a consistent form of behaviour especially for many people. Freelance artist,
professionals like doctors, self employed do not fit this model of hierarchy.
There is no explanation of what motivates people once they have achieved self-
realization

Practice Unit 66.pdf

(a)i: An employee with a lack of motivation means that he does not have the drive to contribute
as fully as he could or does not fulfill his duties/role at work

(a)ii: According to Maslows Hierarchy of needs physiological needs refer to the needs of food,
clothing and shelter of a person. At work they refer to salary

It is suggested that they are the most basic needs of employees which must be satisfied before
other higher needs are such as security in order to motivate them to contribute fully to the
organization.

C: Using Maslow Hierarchy of needs examine reasons

Using Maslows Hierarchy of needs, it may be possible to examine Lees needs which are not
satisfied leading to his demotivation


Firstly it appears that his physiological needs are being met. Lee is not complaining about his
salary. It can also be suggested that his security needs are ment as there are not physical threats
at work.

However, it might be argued that his real difficulties lie on meeting his esteem, belonging and
self actualism needs. For example, Lee talked about other members of his meetings were not
listening to his views. In addition, Lee said that he was not allowed to to make any decisions,
which suggests a lack of trust. Lastly, Lee was complaining about low-level tasks that were
given to him, which meant that he is not reaching his full potential.


Herzbergs Two Factor Theory

According to Frederick Herzbergs theory (1959), there are two groups of factors
which are important to workers motivation
Hygiene factors
Motivating factors

Hygiene Factors (mainly physical aspects)
Hygiene or maintenance factors contribute very little to motivate workers but prevent
dissatisifaction. Workers can be de-motivated, if hygiene factos are absent or
inadequate. These include
Adequate Salary
Security such as job contacts pension, leaves
Safe working conditions
Proper policies and procedures
Quality of supervision
Relations with colleagues, suborbinates and supervisors
They are the basic requisites for the workers to work but more of these factors would
not make them work any harder
For Example, higher wages may not lead to higher performance but workers
performance would deteriorate if they feel that they are underpaid
The above can be compared to hygienic food. It is the ffod that promotes good health
and hygiene alone does not, but the absence of hygiene can lead to ill-health


Motivators (mainly psychological aspects)

Motivating factors or satisfiers encourage personal development and pride. When they exist,
motivating factors create job satisfaction and high performance. They include:

Challenging work
Responsibility
Opportunities for promotion and advancement
Recognition for good work
Sense of achievement

Motivators, therefore, increase job satisfaction and motivate workers to higher performance.
They are concerned with improving the nature and content of the job.

Importance of Herzbergs theory

Herzbergs theory allows managers to see clearly two simple categories of factors. They can,
thus, motivate workers by making the work rewarding and also ensure that hygiene factors are
present so that workers are not de-motivated.

Mc Gregors Theory X and Theory Y
Douglas Mc Gregor (1960) outlined two opposing management attitudes towards
workers and their effect these have on their motivation. He referred to managers
as either Theory X or Theory Y managers.




Theory X managers assume that workers:

Are lazy and will try to avoid work as far as possible
Lack ambition, dislike responsibility and prefer to be led
Want security above all and would work mainly for money
Must be forced, controlled and threatened with punishment to get them to work
effectively
A theory X manager is basically authoritarian and sees his job as to direct and control the
workers.


Theory & Managers assume that worker:

Enjoy work and in fact consider work as natural as play
Are ambitious, will not only accept but also seek responsibility
Can gain job satisfaction and would work not just for money
Are capable of working independently and are capable of imagination to solve problems.
A theory y manager sees his functions as to organize work and to create the right conditions so
that all workers can achieve their goals and organizational goals.

McGregor also suggest that there are possible behaviors between the two extremes.


Homework:
It can be argued that, to a certain extent, Mr Hayward is a Theory X manager. HE promised to
operate the subsidaries in a more centralized management style. He said that the subsidaries
must be commanded and controlled from above. He also said that the subsidaries will no longer
operate as completely independent functional units, meaning that there will be a lot of control on
them.

Hoever, Theory Y managers are of the view that :
Workers enjoy work are capable of working independently. We can say that Hayward
shows some aspects of a Theory manager. He said that BP is at working towards a
completely functional operation only looking to strengthen boundaries thus showing that
Hayward still trusts his employees to work somewhat independently.

2.5 MOTIVATION continue
Content theories of motivation explain the factors that motivate people. They answer the
question: What makes people to behave in a certain way? The theories include:
1. Maslow Hierarchy of Needs
2. McGregor Theory X and Theory Y
3. Herzberg Two Factor Theory
4. Taylors scientific Management theory
5. Mayo s human Relations theory(HL)
6. McClelland Needs theory(HL)
Process Theories:
Process theories explain the thinking processes that influence behavior. They answer the
question: why people behave in a certain way? They include:
1. Vroom Expectancy Theory (HL)
2. Adams Equity Theory (HL)

Taylors Scientific Management (1911) content theory
Taylor developed his theory of scientific management as he worked from a laborer to a
works manager. He observed that workers, when left on their own, will work at a much
slower pace than their capabilities (soldiering effect). He argued that:
1. A managers job is to plan the tasks of workers and tell them what to do.
2. An employees job is to do what is being told and get paid
3. An employee is an individual and is mainly concerned with maximizing his economic
gain.
4. A managers duty is to design incentives to motivate workers.
Taylor , therefore, suggested that:
Proper job design will increase productivity. This can be done by simplifying jobs into
specialized sequence of motion (division of labor or specialization). This can be determined by
scientific study.
Worker can be motivated by paying them more if they work hard and therefore pay should be
linked to output through a system of piece rate.
Workers should be selected and assigned individual task based on their abilities.
Influences of Taylors ideas:
They were first adopted by Ford Motor Co. by using conveyor belt in the mass production of
cars
Most factories are using the principles of scientific management.
Many non- manufacturing businesses, like Mc Donald, are now using a system of scientific
management: same cooking temperatures, times, etc. throughout the world.
Weaknesses in Taylors approach
I t ignores the non-financial factors that motivate workers. Money is an important factor but
many people work for reasons other than money, e.g to achieve something.
I t ignores the differences between people. While the output of factory workers can be
measured, it is not easy to measure the output of professionals such as doctors, teachers, etc.
Scientific management can lead to repetitive and monotonous tasks, thereby leading to job
dissatisfaction rather than motivation

Mayo and the Hawthorne Studies (HL) content theory
Elton Mayo (1927-1932) disputed Taylors ideas that productivity is influenced purely on
scientific method. He argued that a strong level of interaction is the key factor in
motivating workers and hence established the Human Relations school of thought on
motivation.
Mayo conducted his experiments on motivation at Hawthorne, USA and his findings,
referred as the Hawthorne effects were:
An I ndividual is a social person and cannot be treated in isolation. There is a need to belong
to a group
Working together is more important than financial incentives or working conditions to
improve productivity.
Motivation and productivity increase when management takes an interest in workers social
needs and allows them to be part of decision making.
Workers work better when there is scope for discretion, creativity and teamwork.
Influence of Mayos findings
The Human Relations school of thought has led organizations to look beyond financial
rewards and to adopt methods of motivation based on better relations at work. Businesses
are more and more interested in establishing teamwork, setting up social events for staff,
welcoming workers views, allowing them to take be part of decision making process,
encouraging interaction and communication.
Problems
Many workers particularly those who lack experience and skills actually want and welcome
direction and control from management.

McCllelands theory of needs (HL) content theory
McClelland (1961) argued that what motivates people are certain needs developed since
childhood. These are present in every person although each need varies in intensity from
one person to another. They are:
The need for achievement (N-ach)
The need for affiliation (N-aff)
The need for power (N-pow)
The need for achievement
People who have high achievement needs like to take responsibility and risks and want
quick feedback on how they have performed. They like setting their own goals and try to
achieve them on their own. They do not work well in groups.
The need for affiliation
Those with high affiliation needs like working and relate with others superiors and
colleagues. They want to belong to a group and would submit to ideas generated by the rest
of the group. They dont like high risks.
The need for power
Those with a high for power seek leadership to influence and control others. They seek
power to be able to pass orders to others and/or bring out the best in their staff
Importance of McClleland theory.
It is important for a business to identify the high needs of different persons and then
motivated them differently. N-ach people should be given challenging but achievable tasks.
N-power people should be given opportunities to manage and lead a team. N-aff should be
provided with a collaborative environment to produce their best performance.
Since needs are developed, it is also possible to provide relevant training to increase certain
motive. For example, to train workers into high achievers by gradually increasing
responsibility and making task more challenging.
Criticisms of McClellland theory
The need for achievement is not the main influence to manage a business. The significance
of achievement is subjective to different cultures.


Process theories of motivation
Vrooms Expectancy theory (HL) process theory
Vrooms theory (1964) states that:
Each individual has different goals depending on his skills and knowledge, job design, job
environment, etc. People react differently in different situations.
People act to achieve their goals if only there is a chance of success and there will be a
reward (expectancy).
How much effort an individual will put into a task will depend on the value of the reward
(valence).
The theory might help managers in the design of tasks and reward (pay and benefits)
system to enable people to satisfy their expectations. They must take into accounts that
people have different needs, expect different rewards and value them differently.

Adams Equity theory (HL) process theory
Adams Equity theory (1963)suggests that workers are motivated if there is fairness in the
remuneration packages. In return for an input (effort and skills) an employee receives a
reward (pay, status and benefits). Workers will naturally compare their efforts and
rewards to others in the workplace (peers, subordinates and superiors). They will be de-
motivated if there is a feeling of unfairness,
Therefore, managers should ensure that their employees perceive fairness in the
workplace. Proper job analysis and job evaluation should be conducted so that a fair
remuneration package is given to each one according to his effort and skills. If staff feel
underpaid, this will lead to de-motivation, reduced effort, absenteeism and eventually
resignation.





Motivation in practice in the workplace: Financial and Non-financial
The main methods of financial payments
Wages:Piece rate
Under piece rate system, workers are paid for each item produced or sold, and is
commonly used to pay factory workers.
Employees have the incentive to work hard in order to maximize their income. However,
quality may suffer. Hence, there is a need for supervision and quality control. Workers
may be de-motivated due to external factors such as machinery breakdowns, bad weather,
etc.
Time based payment system: wages and salaries
Wages rate per hour are usually expressed as the hourly rate of labor and the vast
majority of unskilled labor is paid hourly wages. Wages can be paid on a daily or weekly
rate. Those who earn time-based wages are likely to be paid overtime for extra hours
worked over contracted time.
The advantage of using a wage system is that the workers easily understand it. However
workers are not compensated for their efforts and this may affect quality.
Salaries are set at a fixed annual rate but paid on a monthly basis. These are used where
output or productivity is not easy to measure. Most skilled workers above production level
(technical, administrative and management levels) are paid salaries. Salaried workers are
not paid for extra hours.
Salaries help to improve a firms cash flow in that it is paid once in a month. However, it
does not reward those who are more efficient and productive.
Commission
Commission pays workers on a percentage of sales or output. It is often paid in addition to
a low basic salary. It is commonly used to pay salespeople and insurance agents.
It helps to meet the physiological needs of the employee in that the employee still gets a
basic amount even if he has not sold anything. Commission acts as a good incentive for
employees to increase output.
However, it can lead to aggressive selling with little customer care. There is a lack of
security in that total remuneration of the employee fluctuates according to sales.
Profit related pay or profit sharing
This is calculated as a percentage (e.g. 1%) of annual profit and is paid as an annual bonus
at the end of the year. It is usually paid to managers but more firms are paying it to all staff
(Wall-Mart).
It strengthens employee loyalty, foster team working, increase labor productivity and
reduce conflicts.
However, the share of profits given to employees is often seen as very small. Also,
individual effort is not recognized as profit is usually shared equally.
Employee share ownership scheme is a form of profit related pay. Instead of paying cash to
employees are given shares in the company. Alternatively shares can be offered to
employees at a discounted price.
Performance-related pay
This system rewards employees who meet certain goals or targets. It is common that the
goals are evaluated in appraisal meetings. There are a variety of ways of payment under
this system.
Loyalty bonus. This is paid to workers who have stayed with the firm for a certain length
of time, usually at the end of each year.
Pay rise. This is an increment in a persons salary after reaching a target.
Contract gratuity. This is a payment to staff having completed their employment contract
(e.g. 10% of annual salary).
Performance related pay create incentives for people to perform better. However,
sometimes targets can hard to achieve and it may cause stress,
Employee share ownership scheme
This involves paying a part of monthly salary in the form of shares at a discounted price.
Workers are motivated to work hard so as to raise the price of the shares which they can
sell later.
Fringe benefits or perks
These are benefits to employees in addition to his salary. Examples include subsidized
meals, free uniforms, housing allowance, private health insurance, staff discount, company
cars.
Fringe benefits can increase employee loyalty and a sense of security. However, they can be
expensive to the firm..

Non- financial motivators or non monetary factors
These factors motivate people by offering psychological and intangible benefits and can be
achieved by:
J ob enlargement (giving workers more variety in what they do)
J ob rotation
J ob enrichment (giving more complex and challenging task)
J ob empowerment (delegating decision-making power to workers)
Team working
J ob enlargement or horizontal loading
This involves giving an employee more work of a similar nature (variety) in order to
motivate him. For example, instead of a worker putting just putting wheels in a bicycle, he
could be allowed to put the entire product together. Job enlargement prevents boredom
with one repetitive task. However, it reduces efficiency associated with specialization.
J ob rotation
This involves motivating by giving people different task of the same level from time to time.
For example, a gardener can be asked to do the task of a cleaner. A variety of tasks can
reduce boredom, but efficiency can be reduced as a worker has to learn new skills.
J ob enrichment
Job enrichment or vertical loading motivate workers by making a job more interesting or
challenging and with more responsibilities. For example, an employee, after performing a
task for a certain time, may be given the responsibility of planning the task, quality control
or supervision. Workers may also be given extra task when a colleague is absent.
Job enrichment enables to develop more skills and to become more productive. These extra
responsibilities may lead to future promotion. However, this may not suit unskilled
workers.
J ob empowerment
This involves granting workers the authority to be in charge of their own jobs, to make
decisions and to execute their own ideas. For example, a salesman is allowed to deal with
customers in his own way.
Workers will feel trusted and this will increase productivity. However, workers may not
have adequate skills and this may lead to expensive mistakes.
Team working
This involves giving staff working together. Examples include cell production and quality
circle.
With cell production, a group of workers work together on a production process. The team
decides between itself how work is to be distributed to complete the job.
In a quality circle, a small group of workers in the same area of production meet regularly
to discuss solutions to problems of quality within the production process.