University of Chester Module Title : BU7202 – Marketing Management in the Global Environment Student number : 1326927 1 Table of Contents List of Figure List of Table Part (A) Introduction In the context of the globally intense competition, many products are not able to lengthen their existence This could happen because of the weakness of the product itself, its marketing campaign and the strong competitors Amongst marketing theories, understanding the concept of the life cycle of product is fundamental to determine product development strategy, which is especially important to fast moving consumer goods (FMCG) companies Although the ideal is closely associated with the core-value of the company survival, its products, the concept of PLC (PLC) has been debated for years to examine the practical use as a successful tool of strategic marketing This paper will critically evaluate the PLC concept from internationally and domestically strategy viewpoint within fast moving consumer goods (FMCG) sector Figure 1: Sale and Profit Life Cycles Source: Kotler (2003) The concept of product life cycle The PLC concept presumes that products are not immoral like any creature From a new product launched to its gradual disappearance, it will pass through distinct stages with different opportunities and difficulties to the manufacturers (Kotler, 2003) Therefore, specific business strategies should be carried out in accordance with each respective period to retain a stronger position of product in the marketplace (Ibid) The Figure exhibits four stages of PLC, which are described in the Table 1: Table 1: Four main stages of PLC Introduction This is when a new product enters the market The sales grow slowly while the business likely makes a loss due to the high cost of marketing campaigns Growth The increasing demand accelerates the profit and sales substantially, which will attract the entry of more competitors In this period, there is a slowdown in sales growth because of increased Maturity Decline competition combined to a relative market saturation The overcapacity from maturity leads to the decrease in sales and profit This stage can end rapidly or can be prolonged for many years This basic concept can be used to analyze a brand, a product form, or a product category It should be noted that not all products follow the S-shape curve There are some different shapes of PLC shown in Figure Figure 2: Different shapes of the product life cycle Sales Sales Sales Source: Lancaster & Reynolds (2004) The concept from an international viewpoint From international prospective, PLC are more complex because products can have their life in different countries (Doole and Lowe, 2012) From the framework for international trade of the product cycle, which was adopted by Vernon (1966), Well (1968) has divided the international PLC into four main stages These stages describe how products of the United States (US) market develop in the local market and then in the world trade US export strength A new product is introduced to meet the local demands, for instance, in the high-income market in the US despite the higher production and labor cost The design and marketing plan must be changed quickly to attract customers The manufacturer has a virtual monopoly not only in US but globally The products get the international appeal and are exported Star of foreign production Although a copy product is introduced and produced in the importing country, during this time, the US producer still is in its dominant position within the global market Compared to the foreign producers, who are closer to the domestic market, the American manufacturer with significantly bigger plans takes more advantage of price However, there will be a slowdown speed in the growth of US export Foreign production competitive in export markets The position is reversed, products made by foreign manufacturers become competitive due to the growth in producing scale and lower labor cost The international market share of foreign manufacturer develops gradually, exceeding that of American’s As a result, a further decline in the growth rate of US export is in progress Import competition begins U.S net export Other advanced net export Less developed net export The foreign producers take much more advantage in their home and abroad market by Source: Ayal (1981) mass production The US firms have to scale down their business, the exporting sales decrease dramatically, virtually reaching the zero point The cycle is complete Figure 3: Net exports of nations and phases over IPLC Time Phase II Phase III Phase IV Net import – + Net export Phase I The early foreign manufacturers, who take over the US firm, will continue the similar cycle, and then are displaced later by the growth of less-developed countries The production is moved from country to country Sales Figure 4: Lancaster's modification to Wells's theory USA producers European producers Less developed country producers Developing producers Time Source: Lancaster, Massingham & Ashford (2002) As can be seen from the Figure when a product are going to be in decline in the home country, it may not only start a new life in the international market, but also are improved in sales over time due to the expanding market after each cycle (Lancaster, Massingham & Ashford, 2002) The validity of the basic PLC concept and criticisms Since the idea about PLC appeared, there have raised many discussions, arguments, analysis about its value of approaching successful business plan In the 1960s, the idea about PLC was familiar as a basis for business proposition about marketing programs, but a very small number of marketing executives could benefit from the PLC concept According to Levitt (1965), this was because the concept had not been exploited extensively He had pointed out the importance of efforts to predict the course of product development before the introduction stage by taking an illustrative example about Nylon’s life He demonstrated the upward movement of Nylon’s sale after each strategic action following an optimum sequence was done in early flattening phases Although Levitt was not certain that all the decisions in order to lengthen the Nylon life had been made deliberately, he assumed that a firm, especially an originator should try to build a long-term marketing plan based on anticipated changes of product life at the outset even whether it is precise or not More specifically, by dividing PLC into three groups: Product class, product form, and brand, and comparing them with each other, Polli and Cook (1969) proved that product form gives a better interpretation of sales behaviour than product class He showed that the possibility of reversal of a general product class is much more than this of product form, in other word, the decline stage of product form should be more considered making appropriate actions In addition, not all products follow the expected sequence of the classic shape, and the length of maturity phase is normally longer, hence managers need to take more attention in Golder and Tellis (2004) conducted a research on 30 product categories and showed that there is a common sales pattern in consumer durables products They concluded that basing their findings, some prediction can be made to help managers avoid not only overreacting to boost demand but also unnecessary expense on product development In contrast, Dhalla and Yuspeh (1976) showed that there was a very little persuasive evidence of the three different categories, particularly in brand Predicting each step of product improvement may be too difficult and inaccurate because PLC is a changeable curve depending on the marketing management They also took the example about Dupont’s nylon and then presumed that the shape and the length of a brand curve can be changed by a marketing strategy without PLC Following the marketing formulation of each stage could lead to a wrong orientation for marketers (Wood, 1990) Therefore, the method is that evaluating the collected data, examining the real picture, taking drastic action before the real decline stage Taking an example about Egg chair, which had an impressive recovery after a complete decline, Christiansen, Varnes, Gasparin, Storm-Nielsen, & Vinther (2010) point out despite taking actions dominated by PLC curve, managers must understand their products to make adaption attract current customers Although assuming the validity of PLC in anticipating sales in an intermediate term, from the finding of 140 categories, Polli and Cook (1969) also argued that life cycle application is limited in certain markets which are influenced by supply condition Moreover, only about a fifth of product class and product form achieved the consistency of the life cycle Regarding to international PLC, Doole and Lowe (2012) also point out the concept demonstrates incompletely international trade Due to the increasing globalization of world trade, product standardization emerges from major market quickly and simultaneously It can be seen obviously that the variability of PLC in different circumstances causes arguments Lancaster and Massingham (2010) accept the limitations of the concept, but admit the usefulness of the PLC concept in marketing management The concept can be used to assist marketing management to set on plan in advance, or understand and find the marketing orientation (Kotler & Keller, 2012) Lancaster, et al (2002) believes taking attention at the criticism is necessary to fulfil the comprehension of manipulating the notion Consequently, apart from the S-shaped curve there have been several possible patterns that can apply for some type of product The PLC concept can help not economists, but marketers understand product and market dynamic, although this concept is less useful to be a predicting tool, it is practically one in product management PLC within the FMCG sector 5.1 Brief characteristic of fast-moving consumer good Consumer goods are products provided to meet the daily demand of every person The phrase “Fast-moving” refers the fact that these items, for example, soft drinks, toiletries, dairy products, are picked up quickly from the shelves of supermarkets Fast-moving consumer goods (FMCG) are normally in low price for a wide range of consumer groups, purchased frequently (fmcg.co.uk, 2007) Therefore the manufacturers always concentrate on extending convenient sales channel, and building image brand with a system of product management (Lancaster & Reynolds, 2004) 5.2 PLC model within FMCG Although some limitation, PLC concept have its own meaning in marketing strategy Therefore, any company can consult some suggestions and opinions that Kotler (2003) has assembled as follows: Table 2: Summary of PLC Objectives and Strategy Introduction Growth Maturity Decline awareness trial Strategies and Offer a product basic Offer product Diversify brands Phase out extensions, and items models products service, warranty weak Price to penetrate Price to match or Cut price market best competitor Distribution Charge cost plus profit Maximize market Reduce expenditure while defending share and milk the brand market share Build Build selective Build intensive intensive distribution distribution distribution more Go selective: Phase out unprofitable outlets Communications Price Product Marketing objectives (2003) Create product Source: Adopted from Kotler Maximize Build product awareness and Build awareness trial among early and interest in the adopters and mass market dealers brand Reduce to minimal and level needed to and retain hard-core brand loyals Stress differences benefit encourage switching As for a FMCG in a competitive international environment, the product may have a more fluctuation in its life with changes in tastes and preferences of consumers, which require marketers to adopt alternative implementation and combine various marketing mix to create the successful marketing strategy Introduction The process of launching the new product take the efforts of the FMCG firm Because the typical characteristic of the FMCG market, that is possibly having many competitors with the same product class, the firm need to spend a relatively high budget for distribution and promotion However, the FMCG firm should “choose a launch strategy that is consistent with the intended product positioning” (Kotler & Armstrong, 2014, p 297) That means this initial expenditure need based on the future income The price policy of an FMCG manufacturer is very important, which can bring to the firm a competitive position in a future However, the firm can follow the penetration strategy involving a high price if the product is distinctive Pepsi is a good example of the introduction stage (Blatchford, 2014) Pepsi is not the market pioneer in the soft - drink industry, setting a cost-plus pricing policy Pepsi create the product awareness by a celebrity endorsement In addition, Pepsi-Cola only launched in Brad’s pharmacies, which is its selective channel With regarding export activity, before introducing products into another market, FMCG firm have to make a research about social and cultural factors influencing the buyers’ behaviour in the imported countries Especially firms which operating in food and drink industry For example, General Food fail when introduced packaged cake to Japan due to a majority household did not have ovens (Kotler, 2003) Growth In this stage, the FMCG should adjust their marketing strategy to prolong this stage at a high rate, for instance, using a marketing communication that focus on the brand image instead of making product awareness In addition, an FMCG firm needs to emphasize extending the distribution scales in this stage To take one example, in the UK market, if a product is available in the stock of all supermarket chain systems, it generates sales incredibly (Lancaster, et al., 2002) Maturity The FMCG firm should adopt a competitive pricing policy, and expand its market by finding new users like Johnson & Johnson baby shampoo is promoted to adult users baby shampoos are promoted to adult users (Kazmi & Batra, 2008) Product modification can be employed in this stage, however, it should be noted that not all improvement reaches customer acceptance For instance, Coca-Cola had to withdraw the New Coke, remaining the old formula due to the customer objection (Kotler, 2003) The relationship between producer and existing retail outlet need to take care and remain, therefore, promotion budget should switch to distributors more than customers Decline At this point, where is the main subject of criticism, some serious marketing decisions need to be made Management needs to prepare for the withdrawal from the market, but try to react to the specific situation The FMCGs can make a price reduction and implement harvesting 10 Part (B) Introduction Under the increasing globalization of world trade as well as the force of fierce competition, marketing has been an indispensable process supporting companies in the promotion of sales to strengthening reputations This in turn forces firms employ a wider perspective of integrated marketing communications (IMC), which seem to be much more effective than the traditional promotion due to its coordination and the oriented interaction with customers As a result, marketers manage to combine each IMC tool to generate the synergy for their promotional program, creating a mix Naturally, all firms always want to plan the IMC mix effectually, but as economically as possible This objective request marketing executives to concentrate more on allocation of communications budget so as to optimize the communications effects This report will discuss and focus on the IMC mix as well as the way of establishing an optimal IMC plan In addition, budgeting strategy will be analyzed to indicate the method for distributing resources to different elements of a mix, reaching cost-effectiveness Integrated marketing communications mix Integrated marketing communications In planning a marketing program, the primary task is to apply effectively the concept of the marketing mix (McCarthy, 1964), which is known as a combination of 4P: Product, Price, Place, and Promotion Then, additional three Ps: People, Physical evidence and Process are added to fulfil the customer satisfaction, especially in the field of service business Among these elements, Promotion, which recently been described as alternative term “marketing communication”, seems to be the most noticeably powerful tool of the marketing mix (Pelsmacker, Geuens, & Bergh, 2001) As integration is a fundamental principles in order to create the synergy of 7Ps, it also is applied into the usage of marketing communications That means multiple communications channels not work separately, but coordinately to provide a consistent and clear message with regard to a company or its products to target market (Reynolds, 2014) Therefore, the integrated marketing communications (IMC) is much more interactive, oriented and the effective than 14 traditional communications that focus on mass media, sending inconsistently general messages to customers “Integrated marketing communications is a way of looking at the whole marketing process from the viewpoint of the customer” (Kotler, 2003, p.563) Integrated marketing communication mix However, “integrated marketing communications not happen automatically” (Pelsmacker, Geuens, & Bergh, 2007, p.9), marketers have to organize all tools of the promotional mix strategically The basic concept of marketing communication mix includes the four platforms The “mix” is used to refer the fact that these parts are combined and function properly to maximize communication impacts (Blythe, 2008) The process described the information transmission of IMC mix is shown in Figure Figure 5: The promotional mix Messages Transmitters Receivers Advertising Consumers Sales promotion Employees Personal selling Pressure groups Public relations Other publics Information about products and brands Information about company Source: Blythe (2008) However, in this technological era, there are many and various instruments of promotion that from classic media to modern media, hence, the basic concept is evolved to apply every possible area of marketing communication Numerous marketing activities constitute the mix to achieve two principal jobs of IMC, which are building the personal relationship with the customer and brand equity: 15 Figure 6: The wheel of integrated marketing communications Source: Pickton & Broderick (2001) Integrated marketing communications budget 3.1 The importance of budgeting Although all elements of marketing communications are well-organized mix, the effectiveness will be overestimated if no consideration of the cost Under the force of global competition, businesses face the challenges of massive cuts in marketing expenditure, but keeping stable revenue This pressure generates concern of administrators about communications budget management An explanation about the meaning of promotional budget in business is the limitation of sales under the effect of IMC An increased spending may obtain a smaller change in sales (from point A) Indeed, when the market reach to the saturation point in which all prospective customers have decided their own demand, even more communication efforts will become 16 useless Thus, estimating the optimal point of the budget will contribute not only a cost-effective promotional plan but also an improvement in sales Figure 7: The S-shaped sale response model Sales A Communications efforts Source: Pelsmacker, Geuens, & Bergh (2007) Another reason for the importance of allocating funds is that the way a firm establishing the IMC budget facilitate its communication objectives 3.2 Budgeting approaches Budgeting seems to be a difficult task, but in fact, some simple approaches still are employed commonly in establishing the promotional budget: Table 3: Some simple budgeting approaches Inertia This method is not really tactical because it is identified by remaining the communication spending constant yearly Arbitrary allocation The budget totally depends on the decision of the director This often is used in a small business when the manager and owner take a solely important role, completely controlling the company activity Affordable method This method is simple as marketing expenditure is calculated on the limitation to the financial circumstance This technique can be unproductive and fruitless because the impact of promotion on sales volume is disregarded Competitiveparity method Marketers try to determine the communication expenditure which is a derivative recipe originating from their competitors Fast-moving consumer good firms often engage this method because marketing communication spending is presumed to affect decidedly competitiveness Source: Kotler & Keller, (2012) 17 In addition, there are two method that seem to be more rational in setting budget than the four ones in the Table 3, such as objective and task, and percentage-of-sale method Percentage-of-sale method The communication budget is planned based on an identified ratio of marketing cost to current or predicted revenues This mode is considered as both positive and negative point of view, which are as follows: Table 4: Pros and cons of the percentage-of-sale method Advantages Disadvantages  This calculation depends on affordable  It does not have the flexibility enough to ability of organizations as well as the take advantage of market opportunity change in sales  The decline in sales could lead to an  It is related with a business plan in an inadequate resources, which is unable to association among price, cost, and profit reverse the trend  A stable marketing plan is remained when  It is heavy considerable in sale therefore it the firm applies the same percentage of makes the marketing communication mix sales annually less valuation in boosting the sales performance Objective and task method By establishing goals and a chain of tasks in order to attain these objectives, marketers make a cost forecast of each part and then build the whole budget for promotion This method is more market-oriented than other methods Marketers have to collect the historical database, evaluating the impact of different tools to target market every year However, the estimated cost for all tasks can take much exertion, therefore, it could be too difficult to predict the final spending Budget allocation to achieve communications objectives As the marketing communications mix is a sub-mix of the overall marketing mix, communications spending takes a portion of the total budget, and then is allocated to different instruments of the IMC mix 18 Figure 8: Marketing communications budget % of marketing communications budget (marketing communications effort) Overall marketing budget IMC budget It should be mentioned that each element of the mix has its own function, costs and features In order to achieve the set of communication objective and effectiveness as well, organizations always are in quest of appropriate budget allocation As a consequence, marketing managers have to take three major factors affecting the budget plan into account Type of product market SALES PROMOTION Higher involvement products Lower involvement products PUBLIC to RELATION The way in which the budget is divided will vary according different market sectors Consumer marketers normally expend a bigger spending on sale promotion and advertising while business marketers focus more on personal selling The Figure and 10 show the difference inADVERTISING the mix between FMCGs and industry product PERSONAL SELLING Figure 9: Marketing communications mix for a FMCG Industrial durable products Consumer convenience products Industrial convenience product Consumer durable products Figure 10: Typical marketing communications mix for an industrial product Source: Lancaster & Reynolds (2004) Pickton & Broderick (2001) also show the impact of different types of products on the tactical marketing decision as follows: Figure 11: Product categories and the marketing communications mix 19 Source: Pickton & Broderick (2001) Product life cycle stage There are different objectives in each stage that a company wants to meet, which is shown in Table The way of management choosing the appropriate elements within the mix to achieve the desired communications effect with regards to the life cycle of product is very difficult Table 5: The PLC and examples of the strategic use of IMC Introduction Category need Brand awareness Brand knowledge Brand attitude Emphasis on advertising, events and experiences, and publicity Personal selling to obtain distribution Growth Maturity Marketing communications objectives Brand attitude Top-of-mind Brand preference Awareness Brand attitude Brand loyalty Customer satisfaction Marketing communication mix plan In addition to advertising, sale promotion, and publicity, word of mouth and interactive marketing will create 20 Emphasis more on advertising, events and experiences, and personal selling Decline Purchase New target group Increase the sales promotion, and diminish other communication elements acceptation positive influence Sale promotion and direct marketing to persuade trial Source: Pickton & Broderick (2001) Buyer-readiness stage In order to take customer attention and later to persuade them to make a purchase, marketers need to set a mix basing on the objectives of each stage of buyer readiness As a result, the budget will perform better The Figure 12 (Reynolds, 2014) shows that a larger budget should be in advertising, especially in the awareness-building stage to reach the customer cognitive status Then advertising budget is reduced gradually and make other priority, reaching the actual purchase of customers Figure 12: Buyer readiness stages and the Promotional Mix 21 Source: Reynolds (2014) Optimizing the performance of the integrated marketing communication mix Although a company has considered as many factors as possible to allocate the communication budget rationally, it does not imply an optimal model As mentioned before, an increase in promotion expenditure might not create a positive result in sales, therefore, investment on communication mix need to be adjusted to maximize the effectiveness 5.1 Optimal advertising expenditure Dorfman and Steiner Theorem Under the condition that demand is only influenced by price and advertising expenditure, Dorfman & Steiner give a formula representing the relationship between the quantity (q), the price (p), and the advertising budget (s) of a firm are as follows: q= f (p,s) If prices are fixed, the marginal value product of advertising The maximal profit can be reached by choosing an advertising budget at which the equilibrium condition is obtained, an additional expenditure on advertising is equal to marginal revenue: The marginal cost is: This method also can apply for overall communication expenditures as well as each instrument in the mix However, although this method estimates the effect of advertising on sales, the consideration not serious enough In the real life, on the one hand, not all advertising action has the result immediately, it can have an affecting time lag in sales On the other hand, some past advertising strategies that have already done in the past still remain its influences on society In addition, apart from price and advertising budget affecting the sales, there are the factors such as consumer income or population growth This model is also limited in the action of a monopolist who can make its own choice of price According to Brook (2005), profit maximization does not assurance by an independent demand in the model of Dorfman and Steiner Nerlove and Arrow Model 22 A = Advertising/promotions expenditure Advertising/promotions ($) A Source: Belch & Belch, 2004 According to Nerlove & Arrow (1962), a firm wants to “maximize the present value of the stream of revenues of both production expenses and advertising costs by appropriate price and advertising policies over time” (p 131), that is: Mf(A) = Gross margin (1) Table Formula explanation f(A) = Sales R p(t) Revenue net of production expenses Z(t) A(t): a A variable representing other factors such as consumer incomes, population Goodwill stock Current advertising outlay (a= A+δA ≥0, with δ is a constant proportional rate at which depreciation occurs Fixed rate of interest α The price charged for the product at time t As can be seen in the Table and Formula (1), Nerlove and Arrow (1962) consider advertising expenditure as an investment in long term assets, evaluating the depreciation and the time value of cash flow They extend the Dorfman-Steiner model in an imperfectly competitive market and prove that it is a special case of their model In other word, they overcome the weaknesses of Dorfman & Steiner theorem Therefore, Nerlove & Arrow model is likely to be more practical one in marketing communication mix strategy To take one example, product endorsement can increase goodwill and also really affect society in a relatively long time period 5.2 Marginal analysis This concept is that marketers should invest resources until extra promotion spending to increase sales are compensated by higher extra profit (Belch & Belch, 2004) The optimal expense level is the point A shown on the graph, where the marginal costs equal to the marginal revenues Sales ($) Figure 13: Marginal Analysis 23 Fixed cost of advertising P = Mf(A)-A = profit Although it appears to be logical using this economic application MR = MC to the budgeting plan, it is employed rarely because of its own weakness Not only communications expenditure affects sales volume, which is also not the only one goal of IMC mix From the ideal of Dorfman-Steiner, and the theory of marginal analysis, Kotler (1994) indicates that the optimal point is at which the marginal marketing expense (MME) equal to marginal marketing response (MMR) In order for an optimization of the mix, all elements not only advertising need to be optimize Optimal condition: This concept, however, is not utility, put pressure on marketer to separate influence of each element from the synergistic effects In addition, in the case marketer has found the optimal point, and budget need to be increased to reach that point, the problem is the costs and efforts to Cost the budget not far beyond initial plan In the other words, managers cannot run a control MME Cost MME marketing strategy that is only for a minor adjustment for communications effects Figure 14 Marginal analysis for each element Z1 A1 Z0 MMR MMR A0 Public relation Z ZZ Sale promotion A AA Cost Cost MME MME X1 Y1 Y0 MMR X0 Advertising X XX MMR 24 YY Sponsorship Y Source: Adopted from Kotler (1994) 5.3 Factorial Analysis of variance (ANOVA) Analysis of variance is a method examining the statistically significant differences between the means of two or more populations (Jaccard, 1998) ANOVA can be exploited to “detect interactions whereby one variable moderates the effects of another variable (Kao & Green, 2006, p.158).” Differing from one way ANOVA, which is the simplest one, testing differences of two or more groups, Factorial ANOVA more concentrates on the interaction between factors Therefore, it can be used to determine the optimal state of communication expenditure For example, a firm makes an experiment on two prices and two kinds of promotional mix such as advertising (on TV) and sale promotion (samples) to find down how its influence to the sales As a result, the firm can know how to adjust its promotion mix strategy or how to choose the mix more effectively The obvious advantage of this method is that it allows marketers can analyze interaction effects between communication effects (dependent variable) and each element of the mix (independent variables) (Jaccard, 1998) Therefore, each instrument will not be discussed separately, all of them will be considered in a connection with each other However, although different tools has its own distinctive function, they operate simultaneously Hen, their own effects on sales are difficult to measure correctly For instance, marketing executives cannot calculate how many percentage of sales originating from advertising or sponsorship Conclusion It has obviously been noticed that planning communication budget is very demanding and challenging job Achieving an optimization model is unrealistic because the allocation decision depending on the impact of each component, while the combination and interaction between 25 various instruments of the mix lead to the impossibility of separation In addition, each marketing plan is not only to push the current sales, but also to reach the long-term communications objectives Thus, it is unmanageable for marketers to adjust a small communications effects However, with the consequences from the IMC mix, this seems to be evolving rapidly, deserving high consideration from advertisers as well as customers In order to run a costeffective strategy, on the one hand, marketers need to consider all factors affecting their objectives in each kind of product, and each phase of product development On the other hand, the marketing department has to combine some methods to reach the optimal expenditure, considering the connection between communication effects with sales References Belch, G.E & Belch, M.A (2004) Advertising and promotion: an integrated marketing communications perspective (6th ed.) 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