Business 101. Intro to Business

Read the following below:

Products and Markets

The product question - what to produce and for whom - is a complex issue. If we have an idea for a product, defined as a bundle of physical, service and psychological values aimed to satisfy the wants or needs of the consumer, we must ask if there is a market for the product. The answer is positive when there are enough customers (buying units) willing and able to purchase the product (buying power) to make it profitable. It is obvious that a profitable market, relying as it does on dual components (buying units and buying power) can take on different configurations. There can be large numbers of buying units who each spend a relatively small amount on the product, but collectively they comprise a significant market. Food, which everyone needs, falls into this category, and it is no accident that even small communities can support multiple supermarkets. There may also be cases where there are few buying units but each spends a large amount on the product. Cadillac dealerships are few and far between, but they are profitable because of large expenditures on the part of individual customers. In practice, business attempts to calculate market size. By estimating the total number of buying units and multiplying it buy the amount each is likely to spend, we can come up with a rough idea of the total market for the product. Competition matters though, and a more interesting number is market share, the part of that market a particular business is likely to capture. For the big business, particularly the oligopolies, this is most often expressed as a percentage. For small business, it is likely to be expressed in dollars. (Note: This framework is a hint to working the assignment). Markets are divided into two broad types. First are organizational markets. This includes business to business sales, whether raw materials sold to manufacturer or sales to resellers (wholesalers and retailers), and business to government sales. Considered in all of its manifestations, from local to national, government is a big buyer of just about everything. From toilet paper for restrooms in public buildings to sophisticated components for the space program, the government needs it. In organizational markets, the buying process is formal, that is, it must follow specific procedures. Purchase orders must be submitted and approved before products or services can be obtained. Particularly in government, but sometimes in business as well, purchases above certain fixed values must be bid and sometimes suppliers for certain items are pre-defined. It should also be noted that in organizational markets, the end user does not buy the product. Rather, it is a purchasing agent that selects the vendor and initiates the purchase. Their criteria are limited to quality and price issues and do not involve the psychological factors that play a role in consumer purchases. To sell to business or government, the vendor must know the procedures and be willing to abide by them. This makes the organizationally market significantly different from dealing with the consumer directly. The second type of market is the consumer market. This refers to sales directly to end users. It is an exciting, if challenging, market that offers many opportunities. Considering the United States alone, the population is now estimated at over 300 million people, each of them having different backgrounds and characteristics and different wants and needs. Given relatively high per capita income, they have money to spend. Globalization has multiplied the opportunity many times over, as it is now possible to sell to consumers around the globe. The size and diversity of the consumer market also presents some dilemmas. Few businesses have the resources cover markets of that size. Further, attempting to serve such a diverse population may mean that we cannot serve its individual parts especially well. As a result, business tries to define its market by a process called market segmentation. Market segmentation involves selecting a particular part of the market in which to compete. These parts are identified by analyzing the market along its logical divisions. There are four main types of segmentation. Geographic Segmentation. An enterprise may choose to define its market in terms of geographical scope. It can be a local, regional, national or even international company. The geographical element, though often assumed, is critical to market definition by even the smallest of businesses. If we think about it, the choice of location for, say, a small restaurant, determines the market it serves. No one from Chicago (save visitors there for another purpose) will make the trip to Olympia to patronize the restaurant. Demographic Segmentation. Demographics are statistical characteristics of the population and include age, ethnic background, gender and education, but also things such as car ownership and home ownership. Demographics are a common method of defining the market. We have the Men's Wearhouse (gender), Chuckie Cheese (age), and Les Schwab (car ownership) to name a few. Psychographic Segmentation. This is a method of dividing the market in terms of common needs or attitudes, and, today, it is a very popular approach. Think about Maslow's model of human needs. Business can focus on people who have needs in each category. Home alarm systems target those with safety and security needs. Hummers appeal to status and esteem. Even the U.S. army, with its campaign slogan, - Be all you can be, join the army - is using the psychographic of self-actualization. Product Related Segmentation. Product related segmentation focuses on the population?s relationship to the product. For example, for some industries, there are heavy users, who buy a lot of the product, and light users, who buy it only occasionally. Beer is a good example. Studies show that 20% of the customers actually buy 80% of the beer that is sold. Beer companies may target the heavy users since they will generate the most sales. It ought to be pointed out that segmentation is often multidimensional, that is, we can slice the market into a smaller piece by segmenting it several times. For instance there may be a local (geographic) women's (demographic) dress shop that sells petit sizes (psychographic). We should also be aware that, for every iteration, we are reducing the number of customers who may fall into the category. The danger is that we may define our market so narrowly that there are no longer enough buying units to form a viable market. How then does a business go about finding out about the market? The process is called market research. Market research is divided into two kinds. First is secondary market research. This involves seeking answers to our questions about the market in published materials. Common sources include demographic publications. The U.S. Census is the primary document here, although information specific to particular localities is today published by economic development agencies in each community. For example, there is the Thurston County Profile, which contains a wealth of information about the demographic characteristics of Thurston County. The Profile is available on-line. A second good source of information is trade papers. Trade papers are publications of trade associations. What are trade associations? Trade associations are membership organizations for businesses in the same industry. They function at many levels. They sometimes represent he industry to government (lobbying). They also can provide benefit programs in which members may participate. For example, in industries dominated by small businesses, the trade associations may offer a health insurance program to allow it members to cover themselves or their employees at economical rates (the general rule in insurance is that the larger the number covered by the policy, the lower the cost). Finally, they provide information to the members about what is going on in the industry, trends, regulations, competitive changes and so on. This information, specific to the particular industry, is disseminated in the form of trade papers. General business publications may also have information that has value to us. However, it should be recognized that the newsstand magazines address a broad audience and much of what they report will be general in nature. We always do secondary research first, because it is fast and relatively inexpensive. However, since we are looking at materials developed by others for their own purposes, it may not provide all the answers we seek. In this case, we need to engage in some primary market research. In primary market research, we define the questions to be answered, develop a method for collecting information and analyze results. Methods used can be simple or complex. A simple form may be observation. If, for instance, we want to discover if there is a need for a new bakery in our community, we can visit existing bakeries and observe how busy they are. This gives us some idea of the potential for our idea, although the quality of the information is probably a bit weak. Somewhere in the middle is the survey. Surveying aims to ask a representative sample of the population a common set of questions. Surveying looks easy, but, in fact, is difficult to do well. Problems include getting our targeted respondents to answer the questions and ascertaining that answers that we do get are valid. On the high end, there is test marketing. In this form of research, we produce a limited quantity of the product, promote it, place it on the shelves and see how it sells. This is arguably the best research because it measures what consumers actually do rather than what we think they will do or what they say they will do. Unfortunately, test marketing is very expensive and is within the means of only the biggest of companies.

CASE TEN

SELECTING A MARKET SEGMENT

Well, the Howards opened their own business after all, deciding on a completely new operation. While formulating their business plan, Marcia thought a great deal about the type of products that should be marketed in their store. The field of women's apparel was quite broad, and Marcia felt that one of the key errors of her previous employer (an apparel shop) was to try to sell everything to everybody. To get an edge in the market, it seemed advisable to specialize in one area and offer the best range of products within that category. Marcia was attracted to three specialties. First was to concentrate on apparel for full figure women. Marcia saw this as a definite need, in that there was no such shop in the market area.

A second alternative was to specialize in up-scale high fashion apparel. Marcia thought of this as elegant rather than faddish, and suspected that there were a large number of young working women (21-35 age range, $35,000 average income) who would be willing to spend significant amounts on the right clothing. This suspicion was somewhat confirmed in that the one shop in the area that carried such a line was doing well. Marcia felt there was room for another, more exclusive shop.

Finally, she considered entering the market with low cost, lower quality apparel. It seemed as if more women than ever were price conscious and that offering products to those with average incomes of $15,000 would mean a lot of customers. Six shops catering to this clientele had been observed to have high traffic counts.

Obviously, to make a decision, Marcia would need some more information. After pouring over a number of statistical publications and trade papers, some of the facts she uncovered were very interesting.

She found a very good article in a trade magazine which stated that a full 2% of all women patronized full figure clothing stores. what is more, these women spent on an average of $800 per year on apparel, exceeding the national norm of 2% of income.

Another article focused on local demographics. Out of a regional population of approximately 14,000 (about half women), the following dispersion was apparent with regard to ages and incomes.

Age Group: Under 20 (31% of all women)

Ave Income $20,000 or less - 70%

Ave Income $20,000 to $30,000 - 25%

Ave Income $30,000 and above - 5%

Age Group: 21 - 35 (30% of all women)

Ave Income $20,000 or less - 40%

Ave Income $20,000 to $30,000 - 35%

Ave Income $30,000 and above - 25%

Age Group: Over 35 (39% of all women)

Ave Income $20,000 or less - 40%

Ave Income $20,000 to $30,000 - 30%

Ave Income $30,000 and above - 30%

Age Group: All (100%)

Ave Income $20,000 or less - 45%

Ave Income $20,000 to $30,000 - 30%

Ave Income $30,000 and above - 25%

Question: Armed with this information, Marcia comes to you for advice. What would be her projected market share for each of the ideas that she is considering?

The advice must be addressed everything from the case in details and specific!! (Use the given information from the beginning and the information from the case)