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Economic, political, legal, social and technological environment.
The Marketing Environment
TEACHER: Hi, Student. We will begin this Module (and some upcoming ones) with a basic description of a successful global company with a strong marketing activity. We shall begin with Unilever, the British/Dutch conglomerate. I am sure you are familiar with one or more of their brands, no matter what part of the world you live in.
At Unilever employees are dedicated to meeting the everyday needs of people everywhere. The company provides washing powder, shampoo and toothpaste, teas, ice cream, convenience foods, oils and spreads for consumers all over the world. Unilever is one of the world’s leading suppliers of fast-moving consumer goods.Needs of People
Meeting the Everyday
Everywhere
Unilever’s portfolio of leading brands includes Magnum ice cream, Dove, Omo, Flora, Hellmann's mayonnaise, Lipton tea and Knorr – brands which are known and trusted by millions of consumers around the world.
As traditional structures and lifestyles around the world are being rapidly transformed, Unilever not only responds to consumers’ needs but anticipates future demands. Here are some highlights from the two differentiated types of products - Foods, and Home & Personal Care.
Foods
Unilever Bestfoods' strength lies in its ability to tailor products to different markets and anticipate consumer demands. This requires an in-depth understanding of the countries in which Unilever operates; to this end the company has a policy of listening to its customers.
The acquisition of Bestfoods in 2000 brought Unilever leadership in the culinary category. Knorr is now the firm’s biggest brand, with €2.3 billion sales in over 100 countries and a product range covering soups, bouillons, sauces, noodles and complete meals.
Unilever is the number one producer of frozen foods in Europe, under the Findus brand in Italy, Bird’s Eye brand in the UK, and Iglo brand in other European countries.
Home and Personal Care
In much of the world, Unilever leads the Home Care market, which includes cleansing and hygiene products. Many of the firm’s products are market leaders and include Ala, Brilhante, Cif, Comfort, Domestos, Omo, Skip and Snuggle.
Within the Personal Care market, the company is a global leader in products for skin cleansing, deodorants and antiperspirants. Global core brands include Axe, Dove, Lux, Pond's, Rexona and Sunsilk.
Innovation is paramount within the Home and Personal Care markets in order to maintain Unilever’s strong market position.
STUDENT: That is a good idea, Teacher. It is interesting to hear about the world’s leading marketers. I guess you will tell me something about the challenges encountered by this type of companies in developing and implementing their global strategy.
The Marketing Environment
TEACHER: Certainly. At Unilever, as in most other companies, managers have had to plan for and contend with a variety of laws, changing economic conditions, and strong competition. These and other external forces are important to marketing in all kinds of organizations. Together, they constitute the marketing environment: the economic, political, legal, social, institutional, technological, and competitive factors that affect an organization's marketing effort.
STUDENT: Is there some logical classification of the elements of the marketing environment?
TEACHER: Indeed. We could say that the main elements can be categorized as follows:
* The economic environment
* The political and legal environment
* The social environment
* The institutional environment, and
* The competitive environment
Environmental Scanning
Environmental Scanning consists in keeping track of external changes that can affect markets. Can you think of some examples?
STUDENT: I guess economic, legal and technological conditions, as well as aggregate demand are important factors to be watched.
TEACHER: Right. Among many others, of course. Through environmental scanning, marketers identify ways to act promptly on new opportunities and cope with new challenges. They learn more about their customers' needs and their competitors' strengths and weaknesses. Therefore, before marketers can create a plan, they need to know about the marketing environment.
Contents Of Environmental Scanning
Environmental scanning seeks to identify trends that offer opportunities or can change the market for goods and services. It answers questions about specific markets, such as:
What does the average family look like?
How often does this average family eat out?
What laws are likely to affect the firm's choice of packaging?
STUDENT: I noticed you said "specific markets". Why the emphasis?
TEACHER: Few organizations today can afford to limit their view of the marketing environment to the country in which they are based. Many organizations have customers in at least a few other parts of the world other than their home countries. Even organizations that market only in their home countries are likely to have foreign competitors. Thus, modern marketers need to take a global view of the marketing environment.
The economic environment
In general, the economic environment for marketing comprises the overall economy, including business cycles, consumer income, and spending patterns.
Business Cycles And Spending Patterns - Simply put, marketers want to know whether their target markets will be willing and able to spend money. Spending patterns are linked to the business cycle, the level of business activity that moves from prosperity to recession to recovery.
Prosperity - During times of prosperity, production and employment are high. Consumers demand more goods and services, and they spend freely not only on basics but on luxuries such as vacations, designer clothing, and entertainment. In addition, they may upgrade big-ticket items such as housing and cars. They are also more likely to travel overseas (except in times of foreign political unrest).
Can you guess how marketers react when there is prosperity in one of their target markets?
STUDENT: I know that consumers in prosperous times often want the "best" of everything and are willing to pay for it. I have experienced a bit of prosperity myself in the past, and I guess I am a typical consumer. And I noticed that marketers introduced new products, increased their promotional efforts, and raised prices in order to increase profits.
TEACHER: I guess you didn’t like the latter, but it’s a fact of life; if marketers notice that you have more money, they want some of it and usually get it. Competition permitting, that is.
Inflation - A rise in the overall price level can occur at any stage in the business cycle, but it is typically most pronounced during periods of prosperity. During inflation, rising prices reduce the amount of goods and services that can be purchased with each dollar, euro, or whatever the local currency is. This is a problem for consumers and organizational buyers if their income does not keep pace with the rate of inflation. In addition, inflation can affect marketing strategy. For example, it can make purchasing on credit more appealing because customers will make payments in a currency that is worth less than it was at the time of purchase. Also, pricing strategies must be developed with care to avoid alienating customers with repeated price hikes to cover rising production costs.
Recession - During a recession, production decreases and unemployment generally rises; consumers fold their wallets and snap their purses closed. Reduced production and decreased consumer demand lead organizational buyers to reduce their consumption as well. Both types of buyers stick to purchasing the basics and look for the best value for their money.
STUDENT: Is everyone affected negatively by a recession?
TEACHER: Not everyone. Marketers of private-label (store brand) and generic goods may find they have an edge by offering brand-name quality at less than brand-name prices. Resourceful and creative marketers can prosper during a recession; if more people carry their own meals to work instead of eating at restaurants, grocery companies may offer ready-made, easy-to-carry lunch and dinner foods, such as these "Pasta Cups".
Recovery - While the economy is in the recovery stage, progressing from recession to prosperity, the level of production increases and unemployment decreases. Consumers and organizational buyers have more money to spend but may still be reluctant to increase their purchases. They recall the recent recession and are wary of another slump. Consumers may try harder to save and buy few items on credit. As the economy becomes stronger, buyers begin to relax and spend more freely.
The perception of economic recovery can have just as much influence on spending patterns as the reality.
Resources - Spending patterns are tied not only to business cycles; they may also be related to the availability of certain resources. Resources may be in short supply because demand for a product exceeds a manufacturer's capacity to produce it.
When the supply is limited in these and other ways, marketers may engage in demarketing, an effort to reduce demand for a product. A common use of demarketing is the effort by many electric utilities to provide their customers with tips on how to save energy: insulate their home, use fans instead of air conditioners, install more efficient lighting. Not only do these demarketing efforts help bring demand under control, they may enhance the utility's public image as an organization concerned about the environment.
Consumer Income - Although business cycles reflect the overall health of the economy, the income of individual households determines whether or not consumers can -and will- buy products.
Marketers are interested in three measures of consumer income:
* gross income,
* disposable income, and
* discretionary income.
Gross Income - The total amount of money earned in one year by an individual or household is that person's or household's gross income.
Besides showing trends over time, measures of gross income help marketers divide the market into various income groups. Organizations may be interested in targeting consumers at certain income levels.
Disposable Income Disposable income is the money an individual or household has left after paying taxes. Obviously, tax rates directly affect disposable income: lower taxes mean more disposable income.
When some expenses rise or fall, people shift the way they spend their remaining disposable income. For example, as energy prices rise, people must spend more of their disposable income on gasoline, heating fuel, electricity, and so forth. This leaves less income for other expenses.
STUDENT: I have also noticed that when purchasing certain high priced goods becomes easier, the demand for many consumer goods falls. As an example, if there is a fall in interest rates to finance new homes, more people will commit a substantial part of their income to monthly mortgage payments, leaving less disposable income to purchase say designer clothing, restaurant meals, etc.
TEACHER: Right, as you will see right now, the process you describe has to do with a reduction in "discretionary income".
Discretionary Income - The money consumers have left to spend after paying taxes and living expenses is called discretionary income. The distinction between disposable and discretionary income is somewhat arbitrary because what one person views as a luxury may be a necessity to another. The transition from needs to desires comes into play here: a consumer may need transportation, but the marketer must convince the consumer that he or she wants a car -and a certain make and model at that.
Or you may need a vacation, but Carnival’s marketers will try to convince you that what you want is a Caribbean cruise.
In general, discretionary income pays for vacations, hobbies, entertainment, designer clothing, jewelry, television and music, home decorations and furnishings, gifts, and the like. In other words, discretionary income pays for all the extras.
The political and legal environment
Business doesn't function strictly by its own set of rules. It has to answer not only to its customers but also to the federal, state, and local governments, which set the rules in the political-legal environment. This dimension of the marketing environment includes laws, regulations, and social pressures affecting marketers. Typically these require organizations to compete fairly and in a manner that doesn't hurt consumers.
Laws and regulations cover many areas relevant to marketers, including packaging, pricing, advertising, and sales to minors. The extensiveness of laws and regulations can make marketing complex.
Self-Regulation - In many industries, organizations have recognized that they have more control over their operations if they regulate themselves well enough that voters and legislators will not step in and set limits. To regulate themselves, organizations use industry groups to set and enforce standards.
Influences On Laws And Regulations - Of course, the legislators and regulators who develop laws and regulations are influenced by outside forces. Primary sources of influence in the political/legal sphere include lobbyists and consumer interest groups.
Political And Legal Factors In The Global Environment - International marketers are affected by agreements between countries and by the laws in every country in which they operate. Perhaps the most vital political and legal factors in the global environment are international trade agreements. For example, the North American Free Trade Agreement is designed to drop trade barriers among Canada, the United States, and Mexico through such means as the elimination of tariffs, or taxes paid on goods imported from the nations participating in the agreement. Similar objectives were behind the establishment of free trade within the European nations that formed the European Community.
The social environment
The social environment of marketing is made up of potential or existing customers of the organization. Marketers describe this environment in terms of who the people are (their ages, incomes, hometowns, and so forth) and what values they hold. Changes in the social environment, whether subtle or dramatic, can present marketers with new opportunities and challenges.
Demographic Trends - To describe the social environment, marketers begin with basic demographic data. Demographics is the study of the characteristics of a human population. These characteristics include age, birth rate, death rate, marital status, education, religious affiliation, ethnic background, immigration, geographical distribution, and so forth.
Marketers use demographics to analyze their markets, learn about customers, and satisfy those customers. Pinpointing changes or trends in the population is vital to marketing strategy.
Culture: Values And Language - Of course, demographic data alone do not tell marketers enough about potential customers. For example, it is not enough to know how many retirees are in an area. A marketer for a museum would also want information such as what these people like to do with their time and whether they like to learn new things. One way marketers get more information is to study the values of cultures and subcultures. Cultural values are the principles, qualities, or beliefs that members of a culture consider desirable.
It is known that many people are against the generation of electricity by nuclear reactors. Marketers of the Nuclear Energy Institute, an industry group, published this add to convince members of the public that nuclear energy is desirable.
While cultural values may seem abstract, they have a direct relationship to marketing.
When serving foreign markets, marketers must be aware that every society has its own values.
Language - In communicating across national borders, the language barrier is a cultural factor that poses a great challenge. Mistakes when developing product names or advertisements can be downright embarrassing. A classic example is the marketing in Latin America of GM's Nova, which in Spanish means "doesn’t go.'
STUDENT: This happened many years ago and I have heard this example many times.
TEACHER: In spite of the frequency with which this example is cited, marketers are still making mistakes. For instance, a company marketing tomato paste in the Middle East discovered that in Arabic, "tomato paste" translated to the not-so-appealing "tomato glue," and in Spain Chrysler translated the advertising slogan "Dart Is Power" into a phrase that implied buyers were seeking but lacking in sexual vigor.
The institutional environment
Many organizations that produce goods and services rely on other organizations to help make those products available to customers. For example, automakers need a network of dealers to sell their cars to consumers, and they need trucks and ships to carry the cars to the dealers. They also may work with a variety of other outside experts who handle such marketing activities as advertising and marketing research. Organizations that handle these activities are broadly defined as "marketing intermediaries,' and they and their activities make up the institutional environment. The major players in the institutional environment are resellers, physical distribution firms, marketing services agencies, and financial intermediaries.
Resellers - Stores such as supermarkets or department stores are one type of resellers. Marketers also use resellers to make goods and services available to organizational buyers and independent distributors who will purchase the goods in bulk and sell them to many other resellers..
In scanning the environment, marketers seek to learn about the resellers already operating. Marketers are interested in which resellers will distribute their products most effectively, be willing to carry their products, and be able to work with their suppliers.
Marketing Services Agencies - The organizations that provide marketing services include marketing research firms, advertising agencies, media firms, and marketing consulting firms. These organizations can help the marketer select target markets and implement an effective marketing strategy. The marketer needs to keep track of what services are available and which agencies are best skilled in providing the services needed. Thus, part of environmental scanning includes periodic performance reviews of marketing services agencies.
Financial Intermediaries - Carrying out marketing activities requires money. Therefore, the organization's success may depend in part on the availability of funding from such financial intermediaries as banks, credit companies, and insurance companies. For businesses, the major lenders in the United States used to be banks. Today, however, over three-quarters of business loans come from other institutions, including life insurers, brokerage firms, and finance companies . If the cost of credit goes up or its availability shrinks, the marketer's plans may be in jeopardy. Thus, even if handling financing is not the marketer's direct responsibility, marketers must be aware of financial conditions.
The technological environment - Scientific knowledge, research, inventions, and innovations that result in new or improved goods and services all make up the technological environment of marketing. Technological developments provide important opportunities to organizations that can use them to meet customer needs. For example, advances in manufacturing technology have enabled businesses to adopt "flexible manufacturing," meeting precise needs with short production runs. As a result, small manufacturers can now enter markets, that were once too expensive to serve .
STUDENT: Let me add "printing on demand" as a good example. You can now order a hardcopy book and the publisher will print a single copy for you and send it by mail within 24 hours.
TEACHER: Correct. No need to print thousands of copies and store them until readers buy them.
When the organization fails to keep up with technological change, technology becomes a threat. IBM's dominance of the market for large mainframe computers did not spare the company from posting a huge loss when customers found they could get all the computing power they needed from smaller computers . To succeed in an industry so volatile, computer makers try to innovate continually.
STUDENT: When their products incorporate new technology, marketers must try to create demand for them.
TEACHER: Yes. In the mid-1980s, marketers had to, convince record buyers to switch over to CDs. The superior quality of the products themselves -better sound, greater longevity- helped bring consumers around. Also, as fewer records were manufactured, consumers had to make a change. Technological developments continued, and manufacturers introduced minidisks and digital compact cassettes. Again they needed to build demand for their new products.
Keeping up with technological developments is especially important for marketers who serve business customers. These buyers may rely on technological innovations for their very survival in a competitive marketplace. Familiarity with modern technology helps marketers develop products that meet new needs or meet the old needs better.
The Competitive Environment
It is extremely rare for an organization to be the sole supplier of a particular good or service. Therefore, marketers must find out what their competitors are doing and predict what they might do in the future. These activities concern the competitive environment the organizations that could potentially satisfy the needs and desires of the organization's target markets. In scanning the competitive environment, marketers must remember to consider existing or potential competition from foreign as well as local organizations.
Types Of Competition - The nature of the competitive environment depends in part on the type of competition that occurs there. Economists describe four main types of competition: pure competition, imperfect competition, oligopoly, and monopoly.
Pure competition (also called perfect competition) occurs when similar products are offered, buyers and sellers are familiar with the market, and both buyers and sellers can easily enter the market.
Examples include the markets for farm goods and forestry products.
STUDENT: There isn’t a lot of room here for what is normally called "marketing", is there? Like advertising and promotion.
TEACHER: Partially true. In this form of competition, marketers compete almost entirely on the basis of price.
The most common form of competition is "imperfect competition", which occurs when there are many sellers of a product and each has a relatively small market share. Marketers must find ways to distinguish their products from the similar ones offered by competitors.
Oligopoly occurs when products are similar and a few sellers control most of the market. Examples are air travel and long-distance telephone service, but also many branded consumer goods are marketed in an oligopoly environment.
STUDENT: The reason for this type of situation is that the industries you mentioned have high start-up costs, I suppose. Let me add Intel and AMD, the computer chips manufacturers, to your list of typical oligopolies. In the case of branded consumer goods, the reason must be the very high cost of making a brand popular enough to command a large portion of the market.
TEACHER: Correct. And in some cases, a single entity maintains a monopoly on a product; that is, it is the only organization selling the good or service. A monopoly organization has great control over the prices it charges. However, monopolies are rare in advanced economies except when run by the state itself.
Until the government ordered its breakup into smaller units, AT&T had a monopoly on the telephone communications market in the United States. Likewise, electric utilities once held monopolies in the regions they served, but now a federal law permits independent power producers to send electricity over the big utilities' transmission lines. This allows the (often cheaper) independents to break the monopolies. Some products enjoy temporary monopolies (as in the case of a drug with patent protection) or most of the market share (as has Gatorade for years, recently holding 90 percent of the market for sports drinks).
Competitive Forces - Given that most organizations have at least a few competitors, marketers must consider how these competitors can affect the organization. For example, perhaps a new company will begin marketing a competing product, as in the case of a new maker of personal computers based on Intel chips. Or perhaps an organization will begin marketing new goods or services that take away sales from an existing product, as CD players drove down sales of record turntables. One way to evaluate the competitive forces affecting organizations is to categorize them into five types: rivalry among existing competitors, threat of new entrants, threat of substitute products, bargaining power of suppliers, and bargaining power of buyers .
Rivalry Among Existing Competitors - To develop a successful marketing strategy for a product, a marketer needs to be aware of existing competitors. Who are the major competitors? What are their annual sales? How much of the market do they
control? What are their strengths and weaknesses? What are their marketing strategies? With answers to such questions, a marketer can draw customers away from competitors through superior strategies for pricing, advertising, sales promotion, customer service, and other activities.
Threat Of New Entrants - Unless the government forbids it, there is always a possibility that a new competitor will enter the market for a product. The threat of new entrants is especially great when an earlier companies success signals a demand for its product.
Some markets are easier to enter than others. Barriers to entry might include a need for heavy financial investment or years of experience to reduce the cost of production. For instance, the start-up cost for a new automobile manufacturer would be a lot higher than that for a restaurant. Industries with low entry barriers are more likely to have new entrants and, thus, more competitors.
Threat Of Substitute Products - Broadly speaking, all sellers in an industry are competing with sellers who offer substitute products. Some substitutes are very similar, like tee vs. coffee or orange vs. apple juice. In other cases the substitutes are not so similar but can still take away sales from a given product.
Bargaining Power Of Suppliers - Suppliers are a key competitive force because they can determine the price or quality of parts or raw materials. When a few suppliers control a large share of the market, as in an oligopoly, buyers may have to accept a high price.
However, more and more organizations today are looking for suppliers willing to work closely with them, in a form of partnership, to improve quality and reduce production costs.
Bargaining Power Of Buyers - Buyers can force prices down, bargain for higher quality or more services, and set competitors against each other. Whereas a small buyer may have to live with a price increase from a supplier, a large buyer may have
the clout to request a lower price. Buyers also can purchase a firm that supplies them or purchase another firm within the supplier's industry.
Competition In The Global Environment - Like Unilever, many large companies have striven to enter the global market. While American firms are aggressively entering foreign markets, so foreign companies provide stiff competition in the United States. The most notable example is the competition that Japanese cars have given to the American auto industry. Since the 1970s, well-to-do consumers have steered their car purchases toward Japanese makes. And nearly half of Americans interviewed in a 1991 Gallup Poll said Japanese auto manufacturers were "the most likely to come out with technological innovations. However, thanks in part to a quality focus and the efficiencies of cross-functional teams. American cars are on the road to a comeback. General Motors' introduction of the Saturn, with its emphasis on quality in product, process, and people, signaled a turnaround for the American auto industry, or at least for GM.
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