SQA CfE Hihger Business Management Unit 2: Management of Marketing and Operations

SCHOLAR Study Guide SQA CfE Hihger Business Management Unit 2: Management of Marketing and Operations Authored by: Julie Sanderson (West Calder High School) Alan Hamilton (Stirling High School) Reviewed by: Frances McCrudden (The Mary Erskine School) Previously authored by: Alistair Wylie Rhona Sivewright John Murray Peter Hagan Heriot-Watt University Edinburgh EH14 4AS, United Kingdom.

First published 2014 by Heriot-Watt University. This edition published in 2014 by Heriot-Watt University SCHOLAR. Copyright 2014 Heriot-Watt University. Members of the SCHOLAR Forum may reproduce this publication in whole or in part for educational purposes within their establishment providing that no profit accrues at any stage, Any other use of the materials is governed by the general copyright statement that follows. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, without written permission from the publisher. Heriot-Watt University accepts no responsibility or liability whatsoever with regard to the information contained in this study guide. Distributed by Heriot-Watt University. SCHOLAR Study Guide Unit 2: SQA CfE Hihger Business Management 1. SQA CfE Hihger Business Management ISBN 978-1-909633-35-3 Printed and bound in Great Britain by Graphic and Printing Services, Heriot-Watt University, Edinburgh.

Acknowledgements Thanks are due to the members of Heriot-Watt University's SCHOLAR team who planned and created these materials, and to the many colleagues who reviewed the content. We would like to acknowledge the assistance of the education authorities, colleges, teachers and students who contributed to the SCHOLAR programme and who evaluated these materials. Grateful acknowledgement is made for permission to use the following material in the SCHOLAR programme: The Scottish Qualifications Authority for permission to use Past Papers assessments. The Scottish Government for financial support. All brand names, product names, logos and related devices are used for identification purposes only and are trademarks, registered trademarks or service marks of their respective holders.

i Contents 1 Customers 1 1.1 Marketing as a strategic activity...................... 2 1.2 Product v customer led organisations................... 2 1.3 Consumer behaviour............................ 5 1.4 Summary questions............................. 6 1.5 End of topic tests.............................. 7 2 Market research 9 2.1 Types of market research.......................... 10 2.2 Methods of field research.......................... 12 2.3 Methods of desk research......................... 18 2.4 Sampling................................... 21 2.5 Summary questions............................. 22 2.6 End of topic tests.............................. 23 3 Marketing mix - product 25 3.1 Products and augmented products.................... 26 3.2 Product life cycle.............................. 27 3.3 Extending the product life cycle...................... 30 3.4 Product line portfolios............................ 32 3.5 Product portfolios and the Boston Matrix................. 33 3.6 Summary questions............................. 36 3.7 End of topic tests.............................. 38 4 Marketing mix - pricing 41 4.1 Price..................................... 42 4.2 Summary questions............................. 44 4.3 End of topic tests.............................. 45 5 Marketing mix - place 47 5.1 Place..................................... 48 5.2 Choosing a channel of distribution..................... 48 5.3 The role of the wholesaler......................... 49 5.4 The role of the retailer........................... 51 5.5 Direct selling................................. 53 5.6 E-commerce................................. 54 5.7 Summary questions............................. 55 5.8 End of topic tests.............................. 56 6 Marketing mix - promotion 57

ii CONTENTS 6.1 Promotion.................................. 58 6.2 Into and out of the pipeline promotion................... 60 6.3 Summary questions............................. 62 6.4 End of topic tests.............................. 62 7 Extended marketing mix - people, process & physical evidence 65 7.1 People.................................... 66 7.2 Process & physical evidence........................ 66 7.3 Summary questions............................. 67 7.4 End of topic tests.............................. 67 8 Stock management 69 8.1 Setting appropriate stock levels...................... 70 8.2 Just In Time stock control......................... 72 8.3 Storage and warehousing......................... 72 8.4 Physical distribution of goods....................... 74 8.5 Summary questions............................. 76 8.6 End of topic tests.............................. 77 9 Methods of production 79 9.1 Methods of production........................... 80 9.2 Methods of production: Exercises..................... 84 9.3 Labour and capital intensive production.................. 85 9.4 Summary questions............................. 86 9.5 End of topic tests.............................. 87 10 Quality 89 10.1 Why is quality important?.......................... 90 10.2 Types of quality standard.......................... 91 10.3 Impact of training and motivation on quality................ 92 10.4 Summary questions............................. 92 10.5 End of topic tests.............................. 93 11 Ethical and environmental 95 11.1 What are "ethical" and "environmental" concerns for business..... 96 11.2 Ways to become environmentally friendly................. 96 11.3 Ethical trading................................ 99 11.4 Summary questions............................. 100 11.5 End of topic tests.............................. 101 12 Technology in marketing and operations 103 12.1 Technology in the marketing department................. 104 12.2 Technology in the operations department................. 106 12.3 Summary questions............................. 107 12.4 End of topic tests.............................. 108 13 End of unit tests 111 Glossary 117 Answers to questions and activities 121

CONTENTS iii 1 Customers................................. 121 2 Market research.............................. 124 3 Marketing mix - product.......................... 127 4 Marketing mix - pricing........................... 130 5 Marketing mix - place........................... 132 6 Marketing mix - promotion......................... 134 7 Extended marketing mix - people, process & physical evidence.... 136 8 Stock management............................. 137 9 Methods of production........................... 140 10 Quality.................................... 143 11 Ethical and environmental......................... 145 12 Technology in marketing and operations................. 147 13 End of unit tests.............................. 149

1 Topic 1 Customers Contents 1.1 Marketing as a strategic activity.......................... 2 1.2 Product v customer led organisations....................... 2 1.3 Consumer behaviour................................ 5 1.4 Summary questions................................. 6 1.5 End of topic tests.................................. 7 Learning objectives After studying this topic, you should be able to: compare a product-led organisation with a customer-led organisation; define the term "consumer behaviour"; describe why it is important for a business to understand and consider consumer behaviour; discuss the role of marketing in a business and its role in the achievement of business objectives.

2 TOPIC 1. CUSTOMERS 1.1 Marketing as a strategic activity Marketing is one of the main functional areas of an organisation, and is important in all sectors of industry. Although the level of marketing activity depends on the size of the organisation, it is one of the main strategic areas and can directly influence the success of the business. Marketing is the way in which an organisation communicates with the consumer - communication between the producers and the consumers who under normal circumstances would not meet face-to-face. It can be defined as "the process involved in identifying, anticipating and satisfying consumer requirements profitably." Marketing decisions are often strategic as they can determine the overall direction of the organisation. Using marketing, organisations hope to achieve a number of objectives: To increase sales revenue and profitability. To increase or maintain market share. To maintain or improve the image of the business, its brand or its product. To target a new market or a new segment of the market. To develop new and improved products. 1.2 Product v customer led organisations Businesses can be product or customer orientated (led). There are also a number of organisations which operate somewhere in the middle of this spectrum! A product-orientated organisation is one that concentrates solely on the production process and the product rather than what the customer wants. In other words, it designs a product and then tries to sell it to the customer. High quality research and development are vital to the success of these organisations. Often, research is conducted with no actual specific end product in mind. Organisations which operate in this way are often pharmaceutical or technology based. A customer-orientated organisation is one which identifies what the consumer wants (through carrying out extensive market research) and tries to provide it. These organisations have to be very responsive to changes in the market. The products made are usually low-cost and high volume. Organisations producing clothes, make-up and other low cost "consumer goods" are most likely to operate in this way. Q1: Which phrase describes a business which chooses to concentrate on the product itself rather than trying to establish what the consumer wants? a) Product-orientated b) Customer-oriented

TOPIC 1. CUSTOMERS 3 Q2: Which phrase describes a business which identifies what the consumer wants and seeks to provide it? a) Product-orientated b) Customer-oriented Product v customer led organisations For each question identify the organisation as either product or customer-oriented. Q3: GlaxoSmithKline (Pharmaceutical company) a) Product-orientated b) Customer-oriented Q4: Maybelline (Make-up manufacturer) a) Product-orientated b) Customer-oriented Q5: Primark (Clothing manufacturer) a) Product-orientated b) Customer-oriented Q6: Apple (Technology company) a) Product-orientated b) Customer-oriented Q7: McDonalds (Fast food) a) Product-orientated b) Customer-oriented Q8: Ferrari (Prestige cars) a) Product-orientated b) Customer-oriented

4 TOPIC 1. CUSTOMERS Nabaztag marketing A product called a Nabaztag has been invented. The inventor was unsure as to whether it was too much of a gadget for toy companies and too much like a toy for computer manufacturers. It is a wifi plastic rabbit which connects to your broadband to read your messages to you and tell you the latest news and weather. It moves its ears and its tummy lights up in different colours when you receive different emails. It can also play MP3s. www.bbc.co.uk The key questions are: 1. Where should the product be sold? 2. What is the price? 3. Who is the customer? For each question decide on the question that relates best to the comment made. Q9: A decision has to be made as to whether this is a toy or a gadget. Q10: Novel computer gadgets are likely to command a relatively high price. There is as yet no market competition so high prices can be charged. Q11: If consumers use all the functions then it is likely to appeal to computer users. Q12: Retailers such as PC World and John Lewis. Q13: Online selling would be appropriate (perhaps direct from manufacturer to consumer).

TOPIC 1. CUSTOMERS 5 1.3 Consumer behaviour Key point Consumer behaviour can be defined as "the study of individuals, groups, or organizations and the processes they use to select, secure and dispose of products, services, experiences, or ideas to satisfy needs and the impacts that these processes have on the consumer and society". So put simply, consumer behaviour is about studying how individuals behave when making purchases and how this behaviour can impact on other individuals and wider society. These studies are used to explain why customers buy one product and not another. It tries to understand the decision-making processes of buyers and what influences purchasing decisions - for example, demographics, family pressures and emotions. This is linked to the satisfaction of needs and wants as consumers look for products that can provide them personally with maximum satisfaction - different products will achieve this for different customers. Consumer behaviour is used by the marketing department to create an appropriate marketing strategy; targeting each consumer effectively once they understand their needs and wants through the research of consumer behaviour. There are different types of buying behaviour. All consumers will make these types of purchases at different moments in time. Habitual (routine) purchases - these require little involvement by the buyer, are bought frequently and generally fulfil a basic want eg. milk or bread. Limited decision making purchases - these will require some consideration by the buyer. They are still relatively regular purchases, but require greater participation in the buying process eg. clothes. Extensive decision making purchases - usually expensive, one-off long term purchases, which will involve detailed consideration by the buyer eg. a car, house or holiday. Impulse purchases - items bought without prior thought eg. magazines, chocolate or crisps. It should be noted that items bought on impulse may include more expensive items - the disposable income of the consumer will have an impact on the type of item likely to be bought on a whim. Research has shown that consumer behaviour is difficult to predict but it is agreed that marketing activities, individual character and external influences can all influence the purchasing process and eventual buying decisions. So for example, increased publicity about an organisation (either positive or negative) will impact on sales for that company accordingly. As fashions change, tastes and demand for a product will increase or decrease. An individual operating on a very tight budget may be more likely to purchase according to whichever brand is offering the best sales promotion, whereas an individual who is very image conscious may be more likely to buy products which offer an exclusive image.

6 TOPIC 1. CUSTOMERS 1.4 Summary questions Summary questions Q14: Which of the following is not part of the marketing process? a) Identifying b) Anticipating c) Satisfying d) None of the above Q15: Product led organisations are most likely to be involved in which industry? a) Cosmetics b) Technology c) Publishing Q16: The difference between product and customer led organisations can be best summed up as follows. a) Customer led allows customers to design products whereas product led relies on designers. b) Customer led changes product frequently whereas product led doesn t. c) Customer led carries out extensive market research whereas product led relies on sophisticated product development. Q17: Consumer behaviour: a) Tries to explain why customers buy one product instead of another. b) Is about observing customers in supermarkets. c) Identifies the market segments of consumers. Q18: What are impulse buys? a) Major purchases requiring a lot of thought. b) Purchases which are made on a very regular basis. c) Items bought without any prior thought.

TOPIC 1. CUSTOMERS 7 1.5 End of topic tests Revise this topic before trying the end of topic tests. End of topic 1 test Q19: Product led organisations make a heavy investment in research and development. a) True b) False Q20: Product led organisations may develop a product that was not the original purpose of the research being carried out. a) True b) False Q21: Product led organisations carry out extensive market research. a) True b) False Q22: Customer led organisations seek to fulfil consumer wants. a) True b) False Q23: Customer led organisations look to sell small quantities of an expensive product. a) True b) False Q24: Customer led organisations often produce highly fashionable products. a) True b) False

8 TOPIC 1. CUSTOMERS Q25: Match the definition (a-d) to the title (1-4). 1. Habitual (routine) purchases 2. Limited decision making purchases 3. Extensive decision making purchases 4. Impulse purchases a) are expensive, one-off long term purchases. b) require little involvement by the buyer and are bought frequently. c) are relatively regular purchases, but require greater participation in the buying process. d) are bought without prior thought. SQA style questions Q26: Describe why marketing can be seen as a strategic activity. (3 Marks) Q27: Define the term "product orientation". (1 Mark) Q28: Define the term "market orientation". (1 Mark) Q29: Describe what is meant by the term "consumer behaviour". (2 Marks) Q30: Explain 2 factors that can influence consumer behaviour. (2 Marks)

9 Topic 2 Market research Contents 2.1 Types of market research.............................. 10 2.2 Methods of field research.............................. 12 2.3 Methods of desk research............................. 18 2.4 Sampling....................................... 21 2.5 Summary questions................................. 22 2.6 End of topic tests.................................. 23 Learning objectives After studying this topic, you should be able to: explain the uses and importance of market research to organisations; compare the types of market research; describe the different methods of field research and explain the costs and benefits of each; describe the different methods of desk research and explain the costs and benefits of each; discuss the use of sampling in market research.

10 TOPIC 2. MARKET RESEARCH 2.1 Types of market research Market research is the means by which an organisation finds out if their products will sell or not. Market research techniques allow firms to find out: Who buys the product What the consumer thinks of the product How much consumers are willing to pay What competition exists in the market What type of packaging and promotion are appropriate Where the product would sell best Which channel of distribution would work best Whether any legislation applies to the product The effectiveness of advertising and promotions Market research can be split into two types: 1. Field: where a researcher obtains information first-hand e.g. by interviewing people or issuing questionnaires. This provides primary information which is up-todate, collected for the specific purpose required and is not available to competitors. 2. Desk: where a researcher uses secondary information which can be gathered from a wide range of sources - for example, from the internet, published research or the media. Secondary information is much cheaper to collect as it already exists, but because it has been collected for another purpose it may not be relevant to your needs. It may also contain bias, which could invalidate any conclusions drawn from the data. Within the two types of research (field and desk) there are a number of methods of research which can be carried out. It is important to be clear about the distinction between the types of market research and the methods which we will look at in more detail. Primary or secondary research You decide to set up in business as a mobile hairdresser. You realise that you will need to carry out some market research before you start. Here are statements listing all the information you think you need to know before entering this market.

TOPIC 2. MARKET RESEARCH 11 Decide whether you consider each item would be best found by using primary research or secondary research. Q1: The age of the consumer. a) Primary b) Secondary Q2: How much the consumer is willing to pay. a) Primary b) Secondary Q3: Typical income of people in the area. a) Primary b) Secondary Q4: Typical age of people in the area. a) Primary b) Secondary Q5: The number of competitors in the area. a) Primary b) Secondary Q6: If consumers would be willing to use a new business, giving up their existing hairdresser. a) Primary b) Secondary Q7: How often people visit the hairdresser. a) Primary b) Secondary Q8: Gender of potential customers. a) Primary b) Secondary

12 TOPIC 2. MARKET RESEARCH Q9: Race of potential customers. a) Primary b) Secondary Q10: How businesses perceive the business which is about to open. a) Primary b) Secondary Q11: Is the promotion used effective. a) Primary b) Secondary 2.2 Methods of field research There are a number of different ways of carrying out field research. Each company will select a method (or combination of methods) best suited to their particular product or service and the customers they hope to sell to. Personal interview This involves stopping people in the street or visiting them at home and asking them questions. Advantages This allows two-way communication where the researcher can encourage the person to answer or clear up any mistakes or misunderstandings. Complex questions can be asked as the interviewer can explain exactly what the question means. Disadvantages Care must be taken by the interviewer not to influence the respondent especially when the interviewer may be biased. This is an expensive method of research as it takes a long time to interview an appropriate sample and interviewers must be highly trained. Many people are reluctant to answer questions in the street or to allow strangers into their homes.

TOPIC 2. MARKET RESEARCH 13 Postal survey This is where questionnaires are sent out to people to complete and return. There is often an incentive like a prize draw to encourage return of the survey. Advantages Relatively cheap way of surveying a large volume of potential respondents. People in a large geographical area can be questioned or alternatively respondents can be targeted by postcode. Disadvantages Response rate for this method of research is very low, even with incentives offered. This is a relatively slow way of conducting research as it takes time to post out and receive back the questionnaires, which then have to be analysed. Telephone survey People receive telephone calls asking their opinion. Advantages This is a relatively cheap form of survey and a wide geographical area can be questioned easily. A large number of respondents can be questioned in a relatively short period of time and the information is obtained straight away. Disadvantages Many people dislike being disturbed at home and will therefore refuse to answer questions or will give inaccurate answers in order to end the call. Online surveys Increasingly used by a wide range of organisations, online surveys are sent out by email or via a link or pop-up on a company website. They can be used to ask a wide variety of questions. Advantages They are relatively cheap to set up and results are usually analysed by the survey tool (eg. Survey Monkey). They are user friendly and can be completed very quickly. Disadvantages Questions need to be relatively straightforward to ensure that the recipients clearly understand the question they are being asked.

14 TOPIC 2. MARKET RESEARCH Requires internet connection and not all methods of online survey tool are compatible with smart phones or tablets. EPoS (Electronic Point of Sale) This is the system used by the vast majority of retailers to keep track of their sales information. Every time an item is scanned at a till, the information is recorded. Detailed reports about consumer buying habits can be produced - for example, information about the impact of sales promotions can be analysed. Many retailers link loyalty cards to their EPoS systems to gather even more specific information about their customers. Advantages This method of research can be completed without any requirement for the consumer to respond or interact with the data collection. Extremely detailed and accurate information can be collected on an ongoing basis. Allows the retailer to offer promotions tailored to the customer. Disadvantages The cost of installing the hardware and software needed for EpoS is extremely high. It is very time consuming to analyse the data being gathered. Hall tests This involves inviting consumers to look at and possibly try different products and then give their reactions to them. This technique is often used in supermarkets where new food products are being trialled. Advantages This can gather immediate qualitative information regarding a new product which can be used to make any changes needed. Disadvantages Comments gathered may not be accurate as customers may feel obliged to be polite and say they like a product that they actually dislike. Observation A person watches the activities of the consumer and records their actions. Examples include counting how many people stop and look at a specific promotional display, or how many red cars pass through a set of traffic lights. Advantages Up to date quantitative information can be gathered.

TOPIC 2. MARKET RESEARCH 15 Disadvantages It is not possible to question the people being observed - so for example if counting the number of people who stop to look at a promotional display, you can t ask them why they did/didn t purchase the promotion in question. Focus groups A group of potential consumers are gathered together to answer questions about a product or service. The group is led by an experienced chairperson who will ask questions to prompt debate and ensure that discussion remains relevant. Advantages A wide range of opinions can be gathered in a short space of time. It may help to identify previously unforeseen problems or opportunities. It may help the organisation identify instances where peer pressure or social expectations influence consumers. Disadvantages Information gathered may be difficult to analyse due to the nature of the comments and opinions being offered. It may be difficult to get an appropriate group of available consumers to participate. Methods of field research Q12: All field research involves questioning consumers. a) True b) False Q13: As a personal interview allows two way communication, mistakes and misunderstandings can be cleared up. a) True b) False Q14: Interviewing people requires training which is an additional cost for a business. a) True b) False

16 TOPIC 2. MARKET RESEARCH Q15: A mixture of qualitative and quantitative information can be gathered by using a variety of market research techniques. a) True b) False Q16: Qualitative information is difficult to use as it is not easy to analyse people's feelings and opinions. a) True b) False Q17: Telephone surveys allows a wide geographical range of people to be questioned cheaply. a) True b) False Q18: Postal surveys have a poor rate of response. a) True b) False Q19: EPoS provides a lot of information about the buying habits of customers. a) True b) False Q20: Customers taking part in hall tests will always be honest about the product they have tried. a) True b) False Q21: Some methods of field research are more expensive than others. a) True b) False

TOPIC 2. MARKET RESEARCH 17 Methods of field research - advantages Q22: Match the methods of field research (1-6) with their advantages (a-f). 1. Postal survey 2. Hall test 3. Personal interview 4. EPoS 5. Observation 6. Telephone survey a) Allows for two-way communication meaning that more complex questions can be asked. b) Allows extensive information to be gathered without bothering the customer. c) Can cover a large geographical area relatively cheaply. d) Allows quantitative information to be gathered. e) A relatively quick method of gathering a large number of responses. f) Can gather qualitative information about a new product. Methods of field research - disadvantages Q23: Match the methods of field research (1-6) with their disadvantages (a-f). 1. Postal survey 2. Hall test 3. Personal interview 4. EPoS 5. Observation 6. Telephone survey a) Staff need to be trained to successfully analyse the large volume of data collected. b) Customers may feel obliged to be polite about the product sampled. c) No customer interaction takes place, meaning it is not possible to understand why customers make purchasing decisions. d) People can find this a nuisance and intrusive. e) Response rates tend to be very low. f) This is an expensive form of research.

18 TOPIC 2. MARKET RESEARCH 2.3 Methods of desk research Desk research is available from a wide range of sources. The method of desk research used will depend on the purpose of the research. Internet The internet can be used to find a huge amount of information - from newspapers, blogs, competitor websites and comparison websites, to name just a few possible sources. Advantages Very easy to access and the use of a search engine can help identify possible sources quickly. Vast amount of information available at little or no cost beyond the cost of the ISP. It may help the organisation identify instances where peer pressure or social expectations influence consumers. Disadvantages Websites can become out of date very quickly so it is important to check for the date of last update/edit. Some websites are more reliable than others - a company s own website is likely to be more reliable and accurate than Wikipedia, for example. Any information gathered on the internet is also freely available to your competitors. Trade associations A trade association is a body which acts in the interests of member companies who are all from the same industry. Examples include the British Dental Trade Association, the Automatic Vending Association, the Chartered Institute of Building and the Local College of Nursing. These organisations gather information from and about their members and also the business conducted by their members. Advantages Information is usually collated annually, meaning it is likely to be relatively up-todate. The information gathered is likely to be in great depth and very accurate. Disadvantages Information is very industry specific so only of real use to organisations operating within that industry. Information may be freely available to members but is likely to be expensive to access for non-members.

TOPIC 2. MARKET RESEARCH 19 Market research companies These companies (for example, AC Nielsen or Mintel) exist to collect and publish statistics and data for a wide range of topics. This information will either be commissioned by a specific company (and then made available at a later date to competitors), or will be general research which is then sold to any interested party. Advantages Information is likely to be highly detailed and informative. Information is likely to be available on a wide range of topics. Disadvantages It can be extremely expensive to purchase this information from the research companies. Information will be either quite general and broad based, or focussed on the research requirements of another company - none of which may be totally relevant. Government reports/statistics These are compiled by the government for a wide rage of purposes and contain a huge amount of general information about the population. Advantages Government publications can generally be regarded as reliable and complete sources of information. These reports will be free to access, minimising costs for the company. Disadvantages Information contained within government reports tends to be more general - for example, statistics recording the number of people in full time employment in an area. Government reports are only updated at certain points - for example, some may be updated annually, others only every 5 years - so information may not be up-to-date. Books/periodicals Published texts and reference books can be used by an organisation to research some information. The use of books and periodicals are becoming less popular however due to the increasing use of the internet, which provides much more up-to-date information quickly and easily. In addition, many periodicals can be obtained online. Advantages Can be used without the risk of technology issues (for example lost internet connection).

20 TOPIC 2. MARKET RESEARCH Can be seen as more reliable than some internet sources. Disadvantages Not as up-to-date as the internet. Less convenient to use than the internet, as books/periodicals are likely to be stored in a central location rather than at the employee's desk. Methods of desk research Q24: Which of the following is not a disadvantage of using information from a trade association? a) Information is very industry specific so only of real use to organisations operating within that industry. b) Some websites are more reliable than others - a company s own website is likely to be more reliable and accurate than Wikipedia, for example. c) Information may be freely available to members but is likely to be expensive to access for non-members. Q25: Which of the following is most likely to be an expensive form of desk research? a) The internet b) Trade associations c) Market research organisations d) Government reports/statistics Q26: Which of the following relates most closely to information gathered from the internet? a) There is a huge amount of information freely available. b) You need to pay a membership fee to access the information. c) The information gained is extremely reliable. Q27: Which of the following would be true of desk research? a) Because information has been gathered for another purpose it may not be relevant. b) Information gathered can be seen as reliable. c) Desk research will always be free to access.

TOPIC 2. MARKET RESEARCH 21 2.4 Sampling When carrying out market research, it is impossible to question every single person in the country. Therefore a sample of people is chosen. Different methods of sampling will be used depending on the preference and requirements of the company involved. Random: people are preselected at random from a list. The people selected must be interviewed and if they are not in when the researcher calls, further attempts must be made. Using this method of sampling reduces the risk of bias as people are chosen totally at random and are not selected from one particular market segment. Quota: a number of people who meet specific characteristics are chosen, for example, according to age, gender, income group. The researcher must find people to interview who fit these categories. Stratified Random Sampling: The sample is divided up into segments based on how the population as a whole is divided up. This makes a random sample more representative of the population as a whole. For example, income groupings will be divided up closely to match the national percentages of each income group. In other words, if 30% of the population earn over 50,000 per year, the population will be divided into income groups then 30% of the random sample will be drawn from this segment. Sampling Explain and justify which method of sampling would best suit an organisation researching: Opinions on a new magazine Opinions on a new chocolate bar Compare your answer with that given.

22 TOPIC 2. MARKET RESEARCH 2.5 Summary questions Summary questions Q28: Which of the following is a type of market research? a) Desk b) Hall test c) Using government statistics Q29: Which of the following best describes the reason for using a sample in market research? a) It would cost the company too much money to interview more than 100 people. b) An organisation isn t allowed to ask too many people questions. c) It s physically impossible to interview every single potential customer for an organisation. Q30: Desk research uses secondary information. a) True b) False Q31: Which of the following statements about field research is not accurate? a) It s more expensive than most desk research. b) It will generate primary information. c) Customers will always provide truthful responses making the research accurate. Q32: Which of the following descriptions applies to stratified random sampling? a) Choosing a certain number of people who meet a specific criteria. b) A random sample of a number of market segments. c) People are randomly chosen from a list (for example, the electoral roll).

TOPIC 2. MARKET RESEARCH 23 2.6 End of topic tests Revise this topic before trying the end of topic tests. End of topic 2 test Q33: Match the market research methods (1-10) with the descriptions (a-j). 1. Focus group 2. Field research 3. Online survey 4. Quota sampling 5. Desk research 6. Internet research 7. Trade association 8. Personal interview 9. Postal survey 10. Observation a) Where a researcher must interview people who fit into specific categories e.g. age, gender, occupation. b) A group of consumers brought together to discuss a product. c) Where a person is asked a number of questions by a trained interviewer. d) Secondary information which has been gathered by another company or for another purpose. e) Market research carried out by an organisation which may include personal interviews or online surveys. f) Where the buying habits of consumers are watched but not questioned. g) Created by an organisation using a tool such as Survey Monkey to gather primary information. h) An organisation which exists to represent the interests of the organisations within a particular industry. i) A questionnaire is sent out to respondents, possibly over a large geographical area. j) Provides vast amounts of information relatively quickly and cheaply. SQA style questions Q34: Describe and justify three methods of market research which could be used by an organisation. (3 Marks) Q35: Distinguish between quota sampling and random sampling. (2 Marks) Q36: Compare the use of desk research with field research. (3 Marks)

24 TOPIC 2. MARKET RESEARCH

25 Topic 3 Marketing mix - product Contents 3.1 Products and augmented products........................ 26 3.2 Product life cycle.................................. 27 3.3 Extending the product life cycle.......................... 30 3.4 Product line portfolios................................ 32 3.5 Product portfolios and the Boston Matrix..................... 33 3.6 Summary questions................................. 36 3.7 End of topic tests.................................. 38 Learning objectives After studying this topic, you should be able to: describe the role that "product" plays in the marketing mix; outline the level of sales and profitability that can be expected at each stage of the product life cycle; describe how the product life cycle can be extended to prolong the life of a product; explain the importance of creating a product portfolio.

26 TOPIC 3. MARKETING MIX - PRODUCT 3.1 Products and augmented products At National 5, the role of product within the marketing mix is discussed. important because it is: Product is The goods or services the business is trying to sell. The goods or services demanded by the customer. The goods or services the customer is willing and able to buy. However, at Higher level it is important to understand the difference between a core product and an augmented product. A core product will satisfy the basic needs of the consumer, but to make the product more competitive and attractive, additional features are often added. This is known as an augmented product. Today's customer looks for more in a product than the basic function it fulfils. For example, shampoo comes in a wide range of variants. All shampoo cleans hair (Tesco Everyday Value shampoo will do this for a low cost). However, there are many designer brands available which have been developed by well known stylists and these shampoos offer additional benefits - for coloured hair, for greasy hair, for dry hair and so on. These augmented products allow the customer greater choice and command a higher price. Car features and different customers At this stage there is an online activity. If however you do not have access to the internet you may try the question which follows. Q1: There are three customers. 1. An 18-year old student 2. A couple with two children 3. A 35-year old successful business person For each customer decide, from the list of factors given, which two are likely to be most influential. a) Design features b) Safety c) Status d) Value for money e) Good quality f) Reliability

TOPIC 3. MARKETING MIX - PRODUCT 27 3.2 Product life cycle At National 5 the product life cycle looks at the stages of development, introduction, growth, maturity and decline. The length of the product life cycle depends on the product itself: in some cases it will last only weeks, in other cases a product can survive for many years. At Higher level, it is necessary to be aware of additional stages in the life of a product. In addition, it is necessary to understand how the life of a product can be extended, sometimes indefinitely. Stage Description Sales Profit Development Introduction Growth Maturity This is where a product is researched, designed and a prototype will be made. A large percentage of products will never progress beyond this stage. This is the launch stage of a new product. Where consumers are becoming more aware of the product and competitors may start to enter the market. The product has become commonplace on the market and competition will be increasing and established. Zero. Remember: consumers don t know about products that are at this stage - it s impossible to buy something you don t know exists! Initially low, as few consumers know about the product at this stage. However, some products will have little or no competition at this stage so high prices can be charged. Sales begin to increase due to increased consumer awareness. Sales of the product will be high. Zero. There are very high costs associated with the development of any new product - some of which may never be recouped. Zero. There will be high advertising costs associated with this stage, as well as the development costs which need to be recouped. Low. The outstanding development costs will be reducing, however there will still be high advertising costs against still modest sales levels. Good levels of profit can be made at this point in the life cycle, as there will be little advertising required.

28 TOPIC 3. MARKETING MIX - PRODUCT Stage Description Sales Profit Saturation Decline There will be a large number of competitors and not all products will survive. Consumer tastes may change and demand falls. The product is no longer desirable and is likely to have been replaced by a newer version or technology. Sales will level out. Prices may need to be revised and lowered to ensure survival in a highly competitive market place. Sales will fall until the product is withdrawn. Profits will remain high, however the company will need to invest in additional advertising to remind consumers that the product exists. Profits will decrease rapidly until the product is withdrawn. Stages of the life cycle Q2: Match the numbers on the image (1-6) with the stages of a product life cycle (a-f). a) Decline b) Saturation c) Development d) Maturity e) Growth f) Introduction Q3: At the development stage of the product life cycle: a) costs are high and sales non existent. b) costs are low and sales low. c) costs are high and sales are high.

TOPIC 3. MARKETING MIX - PRODUCT 29 Q4: At the introduction stage: a) sales are low and advertising costs are high. b) sales are high and costs are low. c) sales start to take off but costs are still quite high. Q5: At the growth stage: a) sales and costs level off. b) costs increase and sales level off. c) sales grow rapidly and the product is profitable. Q6: At the maturity stage: a) costs continue to rise but profits are made. b) sales peak and advertising costs fall. c) customers become bored with the product and sales fall. Q7: At the decline stage: a) sales continue to rise but costs are less. b) costs continue to increase. c) sales and profits fall. Q8: An example of an extension strategy is: a) launching a new product. b) a manufacturer of a chocolate bar launching a new flavour. c) decreasing the amount of promotional tactics.

30 TOPIC 3. MARKETING MIX - PRODUCT 3.3 Extending the product life cycle Some products may never enter the decline stage of the cycle. By use of effective extension strategies it is possible to create a very prolonged period of maturity/saturation despite strong competition in the market place. Some products have a very strong brand loyalty which prevents close competition - these products have achieved high status in the market and have become unique in the minds of consumers eg. Coca-Cola, Mars Bars, Smarties, Heinz Baked Beans and Tomato Ketchup. There are a variety of ways of extending the life of a product and a business may choose to use different methods at different times, or a combination of methods for increased impact. Examples of Extension Methods: Changing the product to keep ahead of competitors - developing/introducing a slightly different product (football strip for the new season) Promote frequent use - often achieved by lowering the price of a product (low cost airlines) Changing promotional methods - to maintain consumer awareness (free gifts, advertising campaigns) Developing new markets for existing products - or creating new uses for technologies originally developed for other uses (microwave ovens are the result of research by NASA) Finding new uses for the product - which in turn leads to new markets (Lucozade was originally marketed as a health drink, but is now sold as an energy/sports drink) Develop a wider range of products - new versions or varieties of the same product (Coke in bottles and cans, Cherry Coke and Vanilla Coke) Altering the packaging - to appeal to different market segments (the introduction of sports caps on soft drinks and water bottles) Changing the channels of distribution - make the product available in different ways (launch of online sales of a product)

TOPIC 3. MARKETING MIX - PRODUCT 31 Change of name - often to bring a product in line with versions of the product sold abroad. Examples include Starburst (previously called Opal Fruits), Snickers (originally called Marathon in the UK) or Cif (formerly known as Jif) Extending product life cycle Q9: Match each strategy from the first list with the most appropriate description from the second list. a) Promoting more frequent use of the product b) Developing a new market c) Finding new uses for existing products d) Developing a wider range of products e) Modifying the product f) Changing the packaging g) Changing the price h) Changing the promotion i) Altering the channel of distribution j) Changing the name of the product k) Bringing in product line extensions 1. Where similar products are launched to increase sales. 2. Where a product is developed with a particular use in mind and then further developed for another. 3. Advertising and promotion may encourage customers to use the product more often. 4. The recipe is changed or the shape. 5. Where organisations attempt to enter a new market, or target a new market segment. 6. The colour or writing may be changed. The type of the packaging may be altered, i.e. bottles to tins. 7. Price may be lowered to attract more customers. 8. The product line is extended. 9. Further advertising takes place or special offers such as BOGOF are introduced. 10. The name by which the product is known to customers is altered. 11. Product may be sold in a different type of shop or internet selling may be introduced.

32 TOPIC 3. MARKETING MIX - PRODUCT 3.4 Product line portfolios A product line is a range of products which are similar e.g. shampoo, conditioner and hair gel, or a range of confectionary products. A product mix is a range of different types of products. Many large companies will have a combination of product lines and mixes, which are collectively known as a product line portfolio. Unilever Most of us have heard of products like Domestos, Pot Noodle and Cornetto, but it might be a surprise to know that these brands are all produced by Unilever. Unilever have a very wide range of brands which fall into a number of different categories. Visit http://www.unilever.co.uk/brands-in-action/ and use the information there to answer the following questions.

TOPIC 3. MARKETING MIX - PRODUCT 33 1. How many brand names does Unilever sell worldwide? 2. Read the information available to you about personal care products available from Unilever. Look at the pictures reflecting the packaging used for Brut. Who (age group/gender) do you think would be most likely to buy this product? 3. Can you find a product which would appeal to a different age group of the same gender? 4. Still looking at personal care products, Unilever sells both Timotei and TRESemmé shampoos. What are the key selling points of each of these products? 5. Choose any three products from the food and drink category. Read the available information and look at images for the brand. Create a rich poster for display in your classroom, highlighting the similarities and differences between these products and explaining why you think Unilever may have chosen to sell them all. 3.5 Product portfolios and the Boston Matrix The product portfolio means that an organisation can benefit in several ways: Having a range of products in different stages of their life cycles means that there will always be profitable products to help support the other products which are developing and growing. A range of products can help overcome seasonal fluctuations in demand for certain products. Launching a new product is less of a risk because established products within the organisation can be used to help support the unprofitable launch period. A wider range of potential customers will exist as the portfolio should have products to appeal to a broad range of tastes. However, there are also disadvantages to consider: Staff may need to develop knowledge of a very wide range of products, meaning that specialist knowledge is difficult to acquire. The manufacturing for such a wide range of products is likely to require investment in a variety of machinery which could prove very expensive. There will be a requirement for completely unrelated areas of research and development, which will also be expensive.

34 TOPIC 3. MARKETING MIX - PRODUCT The Boston Matrix is a method of categorising products within the organisation s product portfolio. Products are categorised according to two criteria: 1. Market growth How fast is the market for the product growing? The market may be declining or it may be expanding. Sales of a product in a fast expanding market have a better chance of growing than a product in a stagnant or declining market. 2. Relative market share How strong is the product within the market? Is it a market leader that other products follow or is it a product that is 12th in terms of sales? It is usually illustrated like this: A star is a product with a high market growth and a relatively high market share. A business wants to have stars in a product portfolio as it is likely to be profitable due to the high market share. However, a business will need to invest in the product to cope with a growing market and growing sales. This could mean investing in new production facilities or promotion to fend off competition. Organisations hope to have as many star products as possible and it is hoped that a star will mature into a cash cow. A Cash Cow is a product with a relatively high market share, although it has stopped growing. It is therefore well positioned in the market and likely to be profitable, but there will be little chance of increasing sales and profits in the future. There will be little need for investment - with slow growth in sales there should be little need for new premises for example. Money coming into the business from profits will not need to be used for

TOPIC 3. MARKETING MIX - PRODUCT 35 investment, but can be used to support the growth of other products if needed. These products are important for the long term prospects of an organisation. Problem Children - also known as question marks - are products with relatively low market share in a fast growing market. This can be a problem for a business as it is unclear what should be done with these products. It isn t likely that there will be any profit from this product and in fact it will need investment to help increase sales of the product. Eventually, these products can develop into stars or even cash cows. However, if sales do not improve, they will eventually turn into dogs. Dogs are products with a relatively low market share in a market with low growth. Dogs have poor prospects for future sales and profits. They may generate some cash flow because they will need little investment but may earn some profit. It is likely that these products will be withdrawn from the market place before they start creating a loss for the business. A business must ensure that their product portfolios do not contain too many items within each category. Naturally they do not want lots of "dogs" but they should also avoid having too many "stars" and "problem children". Products on the top of the Boston Matrix are in the early stages of the product life cycle and are in growing markets., but the cost of developing and promoting them will not yet be recovered. This will drain resources. Balancing these with "cash cows" will mean that the revenue from the "cash cows" can be used to support products in a growing market. The development costs for "cash cows" are likely to have already been recovered and promotional costs should be low relative to sales. This does not mean though that a business would want lots of "cash cows" and few "problem children" and "stars". This is because many of the "stars" and perhaps some "problem children" might become the "cash cows" of the future.

36 TOPIC 3. MARKETING MIX - PRODUCT Boston matrix For each of the elements of the Boston matrix, select the appropriate stage of the product life cycle. Multiple answers available. a) Development b) Introduction c) Growth d) Maturity e) Saturation f) Decline Q10: Problem Child Q11: Star Q12: Dog Q13: Cash cow 3.6 Summary questions Summary questions Q14: Every product will enjoy a sustained period of maturity. a) True b) False Q15: A product will begin selling in the development stage. a) True b) False

TOPIC 3. MARKETING MIX - PRODUCT 37 Q16: An organisation will wish to have a number of "star" products. a) True b) False Q17: Organisations will use a product portfolio to increase the chances of overall success for an organisation. a) True b) False Q18: All products within a product portfolio will be at the same stage of the product life cycle. a) True b) False Q19: Profits are likely to be highest during the maturity and saturation phases of the product life cycle. a) True b) False Q20: An augmented product is one which has been enhanced in some way from the basic core product. a) True b) False Q21: All products in the market place are augmented. a) True b) False

38 TOPIC 3. MARKETING MIX - PRODUCT 3.7 End of topic tests Revise this topic before trying the end of topic tests. End of topic 3 test Q22: Match the numbers on the image (1-6) with the stages of a product life cycle (a-f). a) Decline b) Saturation c) Development d) Maturity e) Growth f) Introduction Q23: Match the stages (1-6) with their descriptions (a-f). 1. Decline 2. Saturation 3. Development 4. Maturity 5. Growth 6. Introduction a) This is where a product is researched, designed and a prototype will be made. A large percentage of products will never progress beyond this stage. b) The product has become commonplace on the market and competition will be increasing and established. c) There will be a large number of competitors and not all products will survive. Consumer tastes may change and demand falls. d) This is the launch stage of a new product.

TOPIC 3. MARKETING MIX - PRODUCT 39 e) The product is no longer desirable and is likely to have been replaced by a newer version or technology. f) This is where consumers are becoming more aware of the product and competitors may start to enter the market. Q24: Which of the Boston Matrix groups is a product in decline likely to fall into? a) Star b) Problem child c) Cash cow d) Dog Q25: Which of the following is not an advantage of holding a product portfolio? a) A range of products can help overcome seasonal fluctuations in demand for certain products. b) Launching a new product is less of a risk because established products within the organisation can be used to help support the unprofitable launch period. c) An extension strategy allows an organisation to continue to sell a product which may have otherwise entered decline. d) A wider range of potential customers will exist as the portfolio should have products to appeal to a broad range of tastes. Q26: Which of the following pairs of products both enjoy a large market share? a) Cash cow and star b) Problem child and star c) Problem child and dog d) Dog and star e) Cash cow and problem child Q27: Which extension strategy describes "developing/introducing a slightly different product"? a) Promoting frequent use b) Changing the product c) Changing the packaging d) Changing promotional strategies Q28: Which of the following best meets the description of a "core product"? a) A product which satisfies the basic needs of the consumer b) A cheap product c) A product which has a variety of options

40 TOPIC 3. MARKETING MIX - PRODUCT SQA style questions Q29: Explain how various methods of extending a product's life cycle can increase sales. (6 Marks)

41 Topic 4 Marketing mix - pricing Contents 4.1 Price......................................... 42 4.2 Summary questions................................. 44 4.3 End of topic tests.................................. 45 Learning objectives After studying this topic, you should be able to: describe the role that "price" plays in the marketing mix; describe different pricing strategies available to an organisation and suggest when they may be used.

42 TOPIC 4. MARKETING MIX - PRICING 4.1 Price At National 5, the role of price within the marketing mix is discussed. Price is defined as the amount a customer is prepared to pay (and actually pays) for a product. At Higher level a deeper understanding of the methods used to set prices by organisations is required. When setting a price, a producer has to take the following into account. The cost of production How much profit the producer wishes to make The quality of the product The amount the consumer is willing to pay The amount being charged by competitors The target market for the product The organisation will need to take into account the cost of making a product before setting any pricing strategy in place. The organisation can work this out in the following ways: 1. Cost plus pricing This involves setting a price by calculating the average cost of producing goods and adding a mark-up for profit. Eg If a business produces 10,000 goods, costing 50,000, the average cost would be 5.00 (50,000/10,000). A mark-up of 20% would mean goods would cost an extra 1.00 and the price would be 6.00 per product. This method of pricing is a quick and simple way of setting a selling price. It makes sure that the money generated from a sale will cover all costs and generate a profit; however it does not take market needs into account. 2. Contribution pricing This method takes into account that different products within a company might need to be priced using different criteria. For each product, a price is set in relation to the direct costs of producing that product and any contribution that the business wants to make towards covering its indirect cost and towards profit. Successful products can be priced to make a larger contribution than less successful or new products. For example, the direct costs of producing a small TV are 150. Contribution to indirect costs and profit is 50. Therefore the selling price is 200. There are various pricing strategies which can be used. Low price A price which is lower than that of similar products on the market. This is often seen in shops like Aldi, who claim a "no-frills" approach.

TOPIC 4. MARKETING MIX - PRICING 43 Skimming Where a high price is set initially probably for a unique, technologically advanced product. This strategy is likely to be used only in the introductory or growth stages of the product life cycle. The high price allows the company to recoup the initial investment in the product and become profitable relatively quickly. As competitors enter the market, the price will gradually fall. Promotional Prices are lowered for a short period of time - this can be either on specific products sold within a store for a limited period of time, or a general "sale" where the majority (or all) the products within a store are reduced - as seen in the Next sale for example. High price/premium pricing A price which is higher than that of similar products on the market. Used to project an image of quality or exclusivity by premium and designer brands. Penetration Where a low price is initially set to enter a market where there are a lot of competitors. Once the product is established, prices can be raised to match those of the competitors. This is another strategy seen only in the early stages of the product life cycle. Demand-orientated The higher the demand for the product, the higher the price. Limited supply and high demand enable the price to be increased. This is to an extent how low cost airlines/hotels like EasyJet and Travelodge operate - the first tickets/rooms are sold at a very low price but as availability decreases and demand increases, the price will rise. Market price/competitive pricing Where prices are broadly in line with those of your competitors. This is usually seen with very price sensitive products/services such as fuel. Organisations use other methods of competition - for example, offering loyalty points for purchase. Destroyer An artificially low price is set to force competitors out of the market. Once they have stopped trading, prices can be raised to a normal level. This is only viable for larger companies who have reserves of capital to support the loss-making activity. Loss leaders This is where an organisation chooses a product to sell at a loss to encourage customers to use their shop/service. The idea is that once the customer has entered the premises they will spend money on other things, allowing the organisation to make an overall profit. This is a tactic used by companies who offer Groupon deals - for example, a restaurant offering a deal on 2 main courses hopes that the customers will order additional courses and drinks. Discriminatory pricing This is where an organisation charges different prices for the same product, using the time of day or year to set their price. This is seen extensively in the travel industry, where the same holiday will cost substantially more during school holidays than during

44 TOPIC 4. MARKETING MIX - PRICING May or September. Telephone calls are also priced using this strategy, with evening calls costing less than calls placed during the business day. Examples of pricing tactics Write down an example of an organisation or product where the following pricing tactics are used, then compare your answer with some suggestions. Low price High price Competitive price Skimming Promotional pricing Penetration pricing Destroyer Loss leader 4.2 Summary questions Summary questions Q1: Which of the following would not be taken into account when setting the price of a product? a) The cost of a product b) The quality of a product c) The appearance of a product Q2: Which of the following would be an appropriate pricing strategy for a new premium product being launched? a) Loss leader b) Skimming c) Low price Q3: Setting an inappropriate pricing strategy can lead to the failure of a new product. a) True b) False

TOPIC 4. MARKETING MIX - PRICING 45 4.3 End of topic tests Revise this topic before trying the end of topic tests. End of topic 4 test Categorise each question as: Demand orientated Destroyer pricing High price Low price Market price Loss leader Penetration pricing Promotional pricing Skimming Q4: When an initial high price is set for a new product. Consumers are willing to pay a high price for the novelty factor. Price lowered once competition enters the market. Q5: When a high price established when demand for the product is high. Q6: Where a price is set below that of the competitors. Customers will buy from the supplier who charges the least. Q7: Where a premium price is set. Often used with high quality products. Q8: A low price is used to introduce a product to an established market. Once the product is established in the market, the price can be raised. Q9: Where the price is set in line with that of other suppliers. Q10: Lowering prices in the short term in order to boost sales. Q11: A price is set artificially low and below that of competitors in order to force them out of the market. Once the competitors leave the market, the price is increased.

46 TOPIC 4. MARKETING MIX - PRICING Q12: When a very low price is set for a specific item to attract sales of other items. SQA style questions Q13: Describe what is meant by the following pricing tactics below: (2 Marks) 1. Penetration 2. Skimming Q14: Define what is meant by the term price. (1 Mark) Q15: Describe the advantages of using loss leaders as a pricing tactic. (4 Marks)

47 Topic 5 Marketing mix - place Contents 5.1 Place......................................... 48 5.2 Choosing a channel of distribution......................... 48 5.3 The role of the wholesaler............................. 49 5.4 The role of the retailer............................... 51 5.5 Direct selling..................................... 53 5.6 E-commerce..................................... 54 5.7 Summary questions................................. 55 5.8 End of topic tests.................................. 56 Learning objectives After studying this topic, you should be able to: describe the role that "place" plays in the marketing mix; describe the different channels of distribution available to a manufacturer; discuss the role of the retailer; discuss the role of the wholesaler; discuss the advantages and disadvantages of direct selling; the role of e-commerce in the market place.

48 TOPIC 5. MARKETING MIX - PLACE 5.1 Place An organisation must consider how a product reaches the intended consumer. The word "place" within the marketing mix is used to describe this process of getting a product from the manufacturer to the customer. At National 5, the physical methods of distributing a product (e.g. rail, air, road and sea) were considered. At Higher level the focus is on the different routes that a product may take. This can be visualised as follows: 5.2 Choosing a channel of distribution There are many factors that can influence a business decision regarding the channel of distribution used. In particular, the product itself and legal restrictions can have an impact on this decision. In the current marketplace, where technology is becoming increasingly important and customers expect increased ease of access to products, most organisations are using a mixture of channels of distribution. The product The nature of the product itself will influence the type of distribution channel chosen. The following factors must be considered: Perishable or fragile goods, such as fresh fruit, must be distributed as quickly as possible to minimise transit time. Technically complex goods may have problems which arise from installation which

TOPIC 5. MARKETING MIX - PLACE 49 need to be quickly dealt with. Goods or services which are made to specific customer requirements (i.e. job production) need direct contact with the customer. For goods which are heavy and expensive a producer will want to minimise the charges for handling such products. Industrial products - business to business goods are more likely to be sold directly or via a wholesaler and are unlikely to use a retailer. Convenience goods such as canned drinks and food need to be widely available through retailers. Producers wishing to sell large quantities of low value goods are likely to use wholesalers so they can sell in bulk. Legal restrictions Some products are governed by legislation limiting the outlets in which they can be sold. Examples include: Certain types of drugs which can only be sold by pharmacists through a prescription. Alcohol cannot be sold without a license and can only be sold at certain times of day (after 10am). Fireworks are also licensed and can only be sold at certain times and to certain customers (those over the age of 18). 5.3 The role of the wholesaler A wholesaler can be described as a middle man, capable of dealing with goods in much larger quantities than either a retailer or consumer can handle. Some wholesalers are happy to allow members of the public to buy directly from their warehouses - for example, Costco allows members of the public to obtain membership and take advantage of their bulk buying deals. Other wholesalers require proof that the customer is operating as a business - for example, Booker Cash & Carry require this. Manufacturers sell to wholesalers for a number of reasons: Good distribution links and relationships with retailers. By breaking up bulk and taking care of distribution problems they free the manufacturer to concentrate on production. The wholesaler can bear the cost of storage - which in part is passed on to the retailer.

50 TOPIC 5. MARKETING MIX - PLACE Wholesalers also help retailers: Wholesalers offer choice of products from a variety of manufacturers. Wholesalers offer credit facilities and other services for the retailer. The wholesaler is likely to be in a convenient location to be visited by or to deliver to smaller retailers. Problems with wholesalers: The wholesaler needs to make profit, so the retailer will pay more for the goods than they would by buying directly from the manufacturer. The wholesaler is often described as the "middle man" and many retailers would prefer to buy directly from the manufacturer if possible - however they cannot buy in large enough quantities to make this possible, hence the added cost of using a wholesaler. The role of the wholesaler Q1: A wholesaler is often described as a "middle man". a) True b) False Q2: Some wholesalers are only open to other businesses. a) True b) False Q3: A manufacturer pays a wholesaler to store their products. a) True b) False Q4: Having a wholesaler within a distribution chain means that the end consumer is likely to end up paying more for their product. a) True b) False

TOPIC 5. MARKETING MIX - PLACE 51 Q5: All manufacturers use wholesalers to distribute their products. a) True b) False Q6: A wholesaler buys in huge quantities from a range of manufacturers. a) True b) False 5.4 The role of the retailer A retailer is the term used to describe an outlet where customers visit to purchase goods. There are a number of functions performed by the retailer which can prove advantageous to the manufacturer: Offering a range of complementary products to the public. For example, a convenience store will sell tea, coffee, milk and sugar - everything the customer is likely to need for their making a hot drink. Providing information to consumers about products via displays, signs and trained staff. Storage and display of goods. Physically selling the goods to the public. Types of retailers Supermarkets Modern supermarkets sell not only food and drink but also a wide range of non food and household products - everything from kettles and toasters to clothes and other household necessities. In the UK, supermarkets now are massive organisations and use their size to achieve cheap prices from suppliers and other economies of scale. This allows low prices to be charged. Supermarket brands are also now expanding into a rage of format - for example, Tesco has Tesco Extra (massive superstores), Tesco Express (small convenience stores) and Tesco Metro - found in city centres offering a food range tailored to local customers. The benefits of shopping in a supermarket are the wide range of food and non-food products available, all under the one roof, combined with convenient locations and low prices. However, although there is a wide range of goods available, more specialist food and drink products are less likely to be available. In addition, the quality of some supermarket products (especially clothing and home goods) can be seen to be of inferior quality to those offered by specialist retailers.

52 TOPIC 5. MARKETING MIX - PLACE Discount Stores Discount retailers such as Poundland or B & M are growing in popularity in the UK and are attracting consumers due to their no-frills and low pricing approach. Selling a mixture of branded and unbranded goods, these stores are often cheaper than leading supermarkets for similar products. This has led to the major supermarkets having to further cut their prices. The main benefits of shopping in this type of store are the very low prices and wide range of goods available. However, they often work on the basis of "when it's gone it's gone" meaning that you cannot rely on a particular product being in stock. Department Stores These high street shops offer consumers a variety of (mainly) non-food products (although a few, such as Harrods, also have a food hall selling gourmet products). These stores offer a wide range of clothing, personal care and household goods. Often, the store will feature branded goods bearing the store name, in addition to a mixture of other designers and concessions of high street stores. For example, Debenhams sells Debenhams branded clothes, as well as exclusive ranges by designers such as Matthew Williamson and John Rocha. In addition, Wallis and Miss Selfridge concessions can often be found. This allows the concession access to a particular area without the overhead of a store. Convenience Store Often referred to as "the corner shop" or similar. These stores are normally found within local shopping precincts or within housing estates. They provide for very local customers and sell a basic range of newspapers, alcohol, groceries and household cleaning products. Prices are usually more expensive than those charged by supermarkets, as customers are literally paying for the convenience of having a store on the doorstep, instead of having to travel to a larger outlet. Retailing Retailing has changed significantly over the last 10 years, with a particular increase in discount stores. Use the internet to form a deeper understanding of these changes. The websites below may give you a start, but try and find some other sources of information as well. http://www.bbc.co.uk/news/business-14540624 http://www.economicshelp.org/blog/10091/business/economics-pound-shop/ Present your findings to your teacher as a presentation of no longer than 5 minutes.

TOPIC 5. MARKETING MIX - PLACE 53 5.5 Direct selling Direct selling happens where a product is sold directly by the manufacturer to the end consumer. For some manufacturers, direct contact with the final consumer is very important, either due to the nature of the product, or the nature of the target market. There are a number of ways for direct selling to occur: Mail order Goods are sold via catalogues. Customers who are unable to visit retail outlets, or who would prefer to select items in the privacy of their own home often find this method of purchasing convenient. Mail order companies often offer credit facilities. In some cases, mail order can be exclusive and only way to purchase certain products. The company will save on expensive High Street locations. However, although this method of selling attracts some customers, others may not like the lack of personal service and many goods require to be returned. It involves high advertising costs. In addition, high levels of bad debts occur. Direct mail Companies send letters/leaflets advertising their products for sale directly to homes of possible consumers. This means that consumers within specific market segments can then be targeted directly and the company can reach wide geographical areas. However, generally consumers do not respond well to vast amounts of junk mail. Personal selling Products are sold door-to-door or by telesales. This allows for detailed descriptions or demonstrations of products to be given by trained employees. Double glazing is a common example of a product sold in this way. Some organisations which sell extremely technical products will also choose to operate this way to allow the detailed explanations required - this includes many business-to-business products. The downside of this method is that it can be seen as intrusive by customers who often dislike calls at home. TV shopping This can take the form of detailed commercials known as "infomercials" or through specialist channels such as QVC. Again this allows consumers the opportunity to shop at their own convenience within the privacy of their own home and the medium of TV allows for movement and sound to portray the product. Farmers Markets and Craft Fayres These are increasingly popular and allow small scale "cottage industry" businesses to sell their goods directly to the public. Farmers from smaller farms can sell their eggs, meat and vegetable produce whilst craft fayres allow the producers of a wide range of jewellery, paper products, knitted and hand sewn items to sell to customers without having to try and persuade a retail outlet to stock their products. For these small producers, a market is the ideal place to sell their goods as often they produce very small quantities which are not enough to sell via a retailer, and because these types of events attract customers who are looking for quality products. It also allows for personal contact with customers. However, these events are often held at long or irregular intervals, meaning that the producer needs to find another outlet for their products at other times.

54 TOPIC 5. MARKETING MIX - PLACE 5.6 E-commerce E-commerce is buying and selling over the internet, or using mobile technology such as apps. Internet selling falls into two categories: E-tailing and direct selling. Companies can use either or both of these methods to make their products available to consumers. E-tailing is the term used to refer to online retailers such as Amazon, who sell goods from a wide range of suppliers. Direct selling via the internet is where organisations sell directly from their own website, using no third party. Advantages of using e-commerce 24/7 availability which fits the needs of modern society. World wide audience reached, meaning greater number of potential customers. Information can be unobtrusively gathered about potential and actual customers who leave their details having entered website. A website is relatively cheap and easy to set up and is significantly cheaper than retail space. A wider range of products can be offered as there are no space constraints on storing stock - products will usually be despatched from a warehouse. It is possible to allow customers to compare products and read customer reviews to encourage purchase. Special online only offers can be created. Disadvantages of e-commerce Products cannot be touched or actually seen prior to purchase, which can put customers off buying certain types of item where colour and texture are important. Many customers dislike sharing personal information like credit/debit card details online. It is vital to have strong security procedures in place to allow customers to buy in confidence, which can be expensive. Customers have to wait for delivery of their item and this means that the organisation often has to rely on the quality of delivery service provided by a third party, for example Royal Mail. Relies on technology, so should the website have problems (or the customer have problems with their PC/tablet etc) the sale may not be completed. E-commerce - research Use the internet to find 10 different websites. 5 should be examples of e-tailing and 5 should be direct selling. Do any sites do both? Compare your lists with your partner. Did you pick any of the same sites?

TOPIC 5. MARKETING MIX - PLACE 55 5.7 Summary questions Summary questions Q7: Which of the following is not a recognised channel of distribution? a) Manufacturer - Retailer - Consumer b) Manufacturer - Wholesaler - Retailer - Consumer c) Manufacturer - Retailer - Wholesaler - Consumer d) Manufacturer - Wholesaler - Consumer Q8: Which category of retailer would a store like Poundstretcher fit into? a) Supermarket b) Department store c) Discount retailer d) Convenience store Q9: A wholesaler can be described as the "middle man". a) True b) False Q10: A wholesaler can provide help and support to a retailer. a) True b) False Q11: Amazon.com is an e-tailer. a) True b) False

56 TOPIC 5. MARKETING MIX - PLACE 5.8 End of topic tests Revise this topic before trying the end of topic tests. End of topic 5 test Q12: Match the type of store (1-4) with the definitions (a-d). 1. Supermarket 2. Convenience store 3. Discount store 4. Departmental store a) Sells limited range of goods to local area. b) Sells clothing and household goods from a variety of brands. c) Sells huge range of food, non-food and household goods. d) Sells a variety of goods at very low prices. Q13: Complete the paragraph using following words. customers protection market security worldwide E-commerce is of growing importance to all businesses. The use of e-commerce means that products are available to a much wider, allowing even smaller organisations to sell. Cookies can be used to collect information about without causing any inconvenience. Some customers may be concerned about the of their personal information and for this reason it is important to ensure of these details. SQA style questions Q14: Discuss different forms of direct selling available to organisations. (6 Marks) Q15: Describe the factors an organisation would take into account before choosing a channel of distribution. (5 Marks)

57 Topic 6 Marketing mix - promotion Contents 6.1 Promotion...................................... 58 6.1.1 Above and below the line promotional techniques............. 58 6.2 Into and out of the pipeline promotion....................... 60 6.3 Summary questions................................. 62 6.4 End of topic tests.................................. 62 Learning objectives After studying this topic, you should be able to: describe the role that "promotion" plays in the marketing mix; describe the role of "into" and "out of" the pipeline promotional activity; discuss the role of "above the line" and "below the line" promotional activity; describe the role of ethics in marketing.

58 TOPIC 6. MARKETING MIX - PROMOTION 6.1 Promotion Key point There s no point in having a product that no-one knows about. Promotion is the way in which the consumer is made aware of the product and is persuaded to buy it. Promotion is a huge part of the marketing of a business and is the element that consumers are most aware of. Above the line and below the line promotion Above the line promotion refers to mass media marketing. This is marketing which is designed to appeal to a very wide range of people and to be seen by a large number of people. This type of marketing includes TV advertising, cinema advertising and billboards, as well as techniques like celebrity endorsement. Below the line promotion is far more targeted and takes place through public relations, sales promotions and direct selling. This includes a wide variety of promotions through social media. 6.1.1 Above and below the line promotional techniques At National 5, a number of promotional techniques were looked at in detail, including sponsorship, social media offers and special offers. These are summarised here, but it would be useful to ensure you have thoroughly revised the previous content. Above the line Advertising Organisations can choose to advertise in a number of ways. Traditionally TV and newspaper marketing, as well as the use of billboards, have been the main methods of mass media marketing. TV advertising was seen as especially important due to the use of moving images and sound, despite the high costs associated with this form of advertising. More recently, online advertising has proven increasingly important. Adverts are placed as banners on websites, or as sponsored pages/advertisements

TOPIC 6. MARKETING MIX - PROMOTION 59 on social media. In addition, some organisations have made use of videos on You Tube. Celebrity/product endorsement Where a celebrity agrees to promote an organisation or product. This is usually seen through the appearance of the celebrity in television adverts, promoting the product (think Cheryl Cole and L'Oreal) or in magazine and internet advertising, where the celebrity is pictured using or modelling the product - for example, Andy Murray appears in print media advertising Adidas. This can have great benefits where a currently popular celebrity is used, however should any scandal or negative publicity occur then there can be a negative impact on the product. Product placement This is where an organisation pays to have a product featured within a film or TV programme. Examples include BMW and Sony being featured heavily in James Bond movies, or Fiji water appearing in The Big Bang Theory. This is a very expensive method of promotion (and can contribute up to 75% towards the cost of making a movie) but it is a highly effective method of subliminal advertising. Below the line Consumer offers Many organisations now use companies such as Groupon, Voucher Codes, Itison and many others to make special offers available to their customers. These offers are usually time limited but offer great savings on the product or service offered. Companies use these offers as loss leaders to entice customers into their store/restaurant with the basic offer in the hope that they will spend more money - for example, a restaurant may offer a "2 main courses for the price of 1" deal, in the hope that the customer will then order additional courses and drinks at full price (and full profit). Another form of sales promotion occurs in-store, where offers such as "buy one get one free" or on pack labels such as "50% extra free" are designed to encourage shoppers at the point of sale. Offers to consumers are extremely varied and often have conditions attached - for example, introductory offers for new customers only, or for customers who are upgrading a package (think Sky or BT). They can also take the form of a reward for purchase - for example, the Meerkat available from Comparethemarket.com is only available to those who purchase insurance. Public relations Public relations is a wide ranging set of activities with the aim of ensuring that relationships between a company and customers/the public remain positive and strong. Social media Although some social media promotion is mass market, the majority is extremely focussed and targeted based on the user profiles which are generated by Facebook, Twitter etc. Based on the activity and comments made by the individual, companies can then ensure that appropriate individuals see adverts which might appeal to them. For example, if a user makes lots of comments or posts statuses/photos relating to running or going to the gym, they are likely to see adverts about sports equipment and drinks.

60 TOPIC 6. MARKETING MIX - PROMOTION Sponsorship Used in connection with a certain event or sports team. A company will pay a substantial sum to "brand" an event or club - for example, the Bank of Scotland sponsors the Edinburgh Festival Fireworks each year. Direct selling This is where an organisation targets specific individuals with leaflets/flyers/phone calls/emails to promote a specific product or service. Although this has the advantage of being relatively cheap and very targeted, many customers see this as "nuisance" calls or junk mail, and ignore. Above and below the line promotional techniques - research Visit the Groupon website - www.groupon.co.uk and select offers for your local area. Select an offer relating to a restaurant meal and make sure you read the small print carefully. Then investigate the website for the restaurant and calculate how much more you would be likely to spend whilst in the restaurant - for example, by ordering a starter or dessert. Do you think the offer is good value for money? Share your findings with a partner. 6.2 Into and out of the pipeline promotion Manufacturers will use into the pipeline promotion in order to persuade wholesalers and retailers to stock their products. These promotions are tailored to the needs of the retailer/wholesaler and the end customer will not be aware that they exist. Out of the pipeline promotion refers to the types of promotion you see every day, to entice you to buy products in a shop/online. These are the sales promotions/special offers/vouchers described above as "below the line". Into the pipeline promotions There are a wide variety of promotions available to a manufacturer to encourage a wholesaler/retailer to stock their products. Dealer loaders These are the wholesaler version of "buy one get one free" or "3 for the price of 2". They are often to encourage bulk buying - for example, 6 cases for 5. Point-of-sale displays These are to help the retailer draw attention to the product within their store. Examples of this are the posters displaying offers and shelf-talkers (standout labels on shelves) that can be seen throughout most retail outlets.

TOPIC 6. MARKETING MIX - PROMOTION 61 Dealer competitions These are to encourage retailers to make a feature of a product and will often feature a prize - perhaps for the best display in store, or biggest increase in sales. Staff training Often offered for specialist products to allow retailers to deal more effectively with customers. Camelot are a well-known example of this - they offer extensive training for retailers who sell lottery tickets. Sale or return Used for items which may have unpredictable sales levels. The items (for example, newspapers or sandwiches) are supplied to the retailer, unsold items are returned at the end of the sales period and the retailer pays only for those items they have actually sold. This allows a retailer to stock the item with minimal risk of wastage, although they will make less profit on these items. Ethics in marketing Advertising is tightly controlled in the UK. Companies must adhere to a strict set of guidelines which are in place to ensure that adverts do not mislead consumers, potentially harm consumers or offend consumers. In today's marketplace, consumers are increasingly likely to express their opinion if they are unhappy about any advertising that they see. If a company is seen to use promotions which are unethical or offensive, they are likely to attract negative publicity for themselves. This can mean losing sales instead of gaining them! The Advertising Standards Authority is a body set up to monitor all forms of advertising within the UK and will take action where it is felt that an advertisement breaches the strict code of ethics. Only one complaint needs to be received for an advertisement to be investigated. The investigation can lead to the advertisement being changed or removed totally. Rulings - research Visit the ASA website - www.asa.org.uk The ASA website allows consumers to investigate adverts to see if there have been complaints made about them, and if so, to see whether these complaints have been upheld - in other words, to see if the ASA has said that an advert needs to be changed or withdrawn. They will explain in the Rulings section of their website what decisions have been made and why. The ASA website also contains detailed information about HOW to make a complaint. Select the "Rulings" tab and have a read through some of the recent rulings. Discuss with a partner - have you seen any of these advertisements? Do you agree with the rulings? Complete a short report (200 words) on one of the rulings that you are familiar with and submit to your teacher. Make sure you outline whether you agree or disagree with the ruling.

62 TOPIC 6. MARKETING MIX - PROMOTION 6.3 Summary questions Summary questions Q1: Which of the following can be described as "mass media marketing"? a) Above the line promotion b) Below the line promotion c) Into the pipeline promotion d) Out of the pipeline promotion Q2: Which of the following types of promotion will the end customer be unaware of? a) Above the line promotion b) Below the line promotion c) Into the pipeline promotion d) Out of the pipeline promotion Q3: Why does the Advertising Standards Agency exist? a) To monitor all forms of advertising within the UK b) To prevent adverts with bad jokes appearing c) To encourage organisations to spend a lot of money on advertising Q4: Below the line and out of the pipeline promotions can be the same thing. a) True b) False 6.4 End of topic tests Revise this topic before trying the end of topic tests. End of topic 6 test Q5: How would an in-store buy one get one free" offer be categorised? Choose all that apply. a) Above the line b) Below the line c) Into the pipeline d) Out of the pipeline

TOPIC 6. MARKETING MIX - PROMOTION 63 Q6: Select those offers which would be identified as out of the pipeline. Choose all that apply. a) Dealer loader b) 50% extra free c) Sale on return d) Staff training e) Money off voucher Q7: Advertising is a form of "above the line" promotion. Which of the following is NOT a form of advertising? a) Public relations b) TV c) Internet d) Newspapers Q8: Which of the following could be described as both below the line and out of the pipeline? a) Dealer loader b) Buy one get one free c) Celebrity endorsement d) Money off voucher e) Social media offers SQA style questions Q9: Compare above the line with below the line promotion. (2 Marks) Q10: Describe the purpose of the Advertising Standards Authority. (2 Marks) Q11: Manufacturers use short term promotional measures to boost sales of products or services to retailers (into the pipeline promotions). Describe 4 of these measures. (4 Marks)

64 TOPIC 6. MARKETING MIX - PROMOTION

65 Topic 7 Extended marketing mix - people, process & physical evidence Contents 7.1 People........................................ 66 7.2 Process & physical evidence............................ 66 7.3 Summary questions................................. 67 7.4 End of topic tests.................................. 67 Learning objectives After studying this topic, you should be able to: describe each element of the extended marketing mix (people, process and physical evidence); describe examples of how these can be used by an organisation to enhance the marketing strategy.

66 TOPIC 7. EXTENDED MARKETING MIX - PEOPLE, PROCESS & PHYSICAL EVIDENCE 7.1 People "People" within the extended marketing mix refers to those employees of an organisation who are actually in contact with the customer. Obviously, a business operating in the service industry is more likely to have a focus on this element of their organisation, however all organisations will have some contact with their customers, so it is important that ensuring that the people who are the "face" of the organisation create a good impression! The role of people covers both customer service and also personal/direct selling. Employees should be highly trained in the customer service policies of the organisation if their role will involve any contact with customers and any employees involved in the actual selling of products should also receive extensive training on building positive customer relations. Customer service Customer service within an organisation can take many different forms. Each organisation will develop a customer service policy which suits the needs of the organisation and the organisations customers. The exact contents of the customer service policy will differ according to the needs of the individual organisation but can include: Pre sales service After sales service Customer service level agreement Customer complaints policy 7.2 Process & physical evidence Process Process refers to the processes involved in implementing marketing strategy - for example, the processes related to customer care as discussed above. Processes must be planned to ensure that customer needs are met - for example, a customer wants to receive efficient and friendly service - all processes must be designed with this in mind. Process can also apply to HOW a service is delivered - the helpfulness of the staff, or the quality of information provided, for example. Physical evidence Physical evidence relates to the actual store or service experience provided for customers - the facilities and infrastructure of a business. This includes store layout and atmosphere - taking into account lighting, music and even smell! Customers expect the experience inside a store to reflect their expectation of a brand. This also applies to virtual/on-line stores - the layout of a website is crucial to encourage customers to buy.

TOPIC 7. EXTENDED MARKETING MIX - PEOPLE, PROCESS & PHYSICAL EVIDENCE 67 Physical evidence can also relate to the evidence produced through the customer service strategy - for example, feedback obtained through focus groups, completed customer comment cards or emails regarding customer queries. For example, some companies publish customer reviews on their website, demonstrating this evidence to future customers. 7.3 Summary questions Summary questions Q1: Which of the following should be taken into account when planning a customer service policy? a) Needs of the organisation b) Needs of the customer c) Both Q2: Physical evidence can be related to feedback gathered as part of the customer service strategy. a) True b) False Q3: Process refers to the method of producing a product or service. a) True b) False 7.4 End of topic tests Revise this topic before trying the end of topic tests. End of topic 7 test For each example select the correct element of marketing mix. Q4: Highly trained sales staff. a) People b) Process c) Physical evidence

68 TOPIC 7. EXTENDED MARKETING MIX - PEOPLE, PROCESS & PHYSICAL EVIDENCE Q5: Published customer reviews. a) People b) Process c) Physical evidence Q6: Completed customer comment cards. a) People b) Process c) Physical evidence Q7: Newspapers and magazines in reception area of hairdressers. a) People b) Process c) Physical evidence Q8: High quality sales information. a) People b) Process c) Physical evidence Q9: Effectively designed customer complaints policy. a) People b) Process c) Physical evidence Q10: Enthusiastic customer advisers. a) People b) Process c) Physical evidence SQA style questions Q11: Describe the role of people, process and physical evidence within the extended marketing mix. (3 Marks)

69 Topic 8 Stock management Contents 8.1 Setting appropriate stock levels.......................... 70 8.2 Just In Time stock control............................. 72 8.3 Storage and warehousing............................. 72 8.4 Physical distribution of goods........................... 74 8.5 Summary questions................................. 76 8.6 End of topic tests.................................. 77 Learning objectives After studying this topic, you should be able to: discuss methods used to set an appropriate stock level for an organisation; describe the Just-in-Time stock control method and state the advantages and disadvantages of using this method; discuss appropriate methods of storing and warehousing stock; describe the logistics of moving stock around.

70 TOPIC 8. STOCK MANAGEMENT 8.1 Setting appropriate stock levels An organisation will hold stocks of raw materials, work in progress and the finished product.. It is important that there are correct levels of stocks for the process to take place and to meet the needs of customers. Factors impacting the level of stock held will include: The storage facilities available. There must be sufficient space to hold the stock. Stock has to be safe and secure to prevent theft. Some materials require refrigeration or heat; others have to be protected from the weather and cannot be stored outside. Some products will last longer than others - for example, fresh meat, fruit and dairy products have a very short shelf life and cannot be stored for long. Insurance and security costs may be incurred and these will vary depending on the type of product being stored. An appropriate stock level must be decided based on the factors above and considering the sales/level of use of each product by the company. Economic (maximum) stock level This is the highest quantity of stock that should be held at any time and should be the lowest possible level to allow activities to continue without interruption. This means that the organisation is not holding so much stock that unnecessary costs are incurred. Minimum stock level The minimum stock level is the stock level that ensures that there will always be stock available for production, allowing for ordering and delivery times (lead time). The minimum stock level should be calculated to ensure that there is always a small "buffer" of stock which can be used should a delivery be delayed. Re-order level This is the level at which new stock should be ordered. This is calculated using the daily usage plus the delivery time needed for new stock to arrive. Re-order quantity This is the amount of stock required to return stock levels to the economic stock level. Lead time This is the time between placing an order and the order being delivered - in other words how long it takes the supplier to fulfil the order.

TOPIC 8. STOCK MANAGEMENT 71 Stock control can be illustrated like this: Stock control Complete the following sentences by inserting the appropriate term from: Economic (Maximum) Stock Level Minimum Stock Level Re-order Level Re-order Quantity Q1: The level of stock above which an organisation should not allows its stock to rise as too much cash and space is committed to holding the stock is known as... Q2: The amount of stock which an organisation orders at one time is known as... Q3: The point at which stock should be reordered is known as... Q4: The level of stock below which stock should not fall as the production line may have to stop is known as...

72 TOPIC 8. STOCK MANAGEMENT 8.2 Just In Time stock control This is a method of stock control where stocks arrive just before they are needed in the production process. Production does not take place until a firm order is received for the goods. Money is not tied up in stock and this improves cash flow. Warehousing costs are reduced. Stock does not deteriorate. The method depends on the reliability of the suppliers. Late deliveries can hold up the production process. It is possible that the organisation will find it hard to cope with unexpected increases in demand. JIT - advantages and disadvantages For each question decide whether it is an advantage or disadvantage of Just In Time stock control. Q5: Cash can be used for other things in the business Q6: Less waste than traditional methods Q7: Reduces chance of accidental damage, deterioration and theft Q8: Less time available for checking raw materials Q9: Depends heavily on the suppliers Q10: Costs may increase if number of deliveries increase Q11: No stock holding costs 8.3 Storage and warehousing Once the goods are manufactured they must be delivered to wholesalers and retailers. However goods may have to be stored in warehouses as output and demand do not match exactly. Warehousing involves costs as the property may have been purchased, which involves maintenance costs or it may be rented. Some organisations have warehouses which are located a distance away from the manufacturing process, which means that transport will be required between the two buildings. Having stock in a warehouse enables an organisation to meet an unexpected change in demand.

TOPIC 8. STOCK MANAGEMENT 73 Good warehousing There are a number of measures that an organisation can put in place to ensure that their warehouse is providing the best possible atmosphere for storing goods: A warehouse must protect the goods from being stolen or damaged due to damp or high temperatures. A system of stock rotation should be in operation to avoid deterioration of stock quality. A storage area should be on the ground floor for easy access. Goods moved most frequently should be easily accessible. Use of specialist equipment (e.g. forklifts) can mean stock is moved efficiently. Centralised storage This is where all stock for an organisation is held in one (central) location and departments are issued with stock as required. Advantages Security is improved, as stock is held and inventoried centrally. Space required for storing stock is reduced as there is no requirement for a space in each area. Can reduce costs as bulk purchasing uses economies of scale. Fewer small purchases are necessary. Reduces duplication of stock held throughout the organisation. Specialist staff are used to control ordering, issuing and purchasing of stock, making the process more efficient. Agreed procedures can be set up for the whole organisation. Disadvantages Can be time consuming to receive stock when needed in departments - the stock is handled twice: once by the stock holding area and then again by the department. If large amounts are held there is an increased likelihood of wastage. Specialised requirements of departments are harder to maintain and provide for. Decentralised storage This is where each department is responsible for ordering and holding stock as required. The advantages of this method are the disadvantages of the centralised area!

74 TOPIC 8. STOCK MANAGEMENT 8.4 Physical distribution of goods Road Refrigerated vehicles can be used to transport perishable items. Is an easy way to get direct to a customer s location. As road networks improve it is a quick method. Is relatively cheap although cost of fuel rising makes the overall cost more expensive. Can have problems with delays, road works and weather. Legislation restricts the number of hours that a driver can be on the road for. Rail Ideal for very heavy products. Fewer restrictions on how long the goods can be on the move. Is more environmentally friendly than road. Requires specialised freight terminals to load products, so there will usually have to be an alternative method of transport used to get the product to the customer. Not suitable in rural areas with no rail network. Air Is perfect for long distances or more remote areas. Is a faster method for overseas distribution - ideal for urgent or perishable goods. Can be more expensive than road, sea or rail. Often still requires road transport to/from airport. Sea Ideal when heavy or bulky goods are transported. More environmentally friendly than air transport. Is good for items that are not time bound. Is a slower method than the others. Is a relatively inexpensive method of transport.

TOPIC 8. STOCK MANAGEMENT 75 Physical distribution of goods In each question, look at the advantage and disadvantage described and decide on the method of transportation as either: Sea Air Rail Road Q12: Allows goods to be transported internationally quickly: Expensive Q13: Allows goods to be transported to most destinations relatively quickly and cheaply: Cost of tax and fuel. Traffic jams and poor quality routes. Q14: Makes transportation of bulky goods possible. Reliability. Costly. Q15: Bulky products can be shipped abroad. Lengthy delivery times. The distribution mix The method of distribution selected by an organisation will be dependent on the following factors: Availability and quality of distribution firms available. Legal restrictions on the distribution of certain products - for example, hazardous substances can only be transported in approved containers which display appropriate warning signs. The cost associated with the distribution method - for example, a company may wish to invest in its own fleet of vehicles, but cannot finance this so will have to use an outside contractor. The image of the product can have an impact on how it is distributed - for example, premium products will be expected to be delivered quickly. Use of just-in-time stock management means that distribution is a key part of the operations of the organisation and must be considered as part of the production process. Reliable distribution methods must be selected to ensure stock is not delayed in transit.

76 TOPIC 8. STOCK MANAGEMENT Some organisations will also take the ethical and environmental impact of a distribution method into account. For example, organisations like the Co-operative choose suppliers and partners based on their ethical credentials, whilst Tesco use rail distribution as far as possible to reduce the environmental impact of their business. 8.5 Summary questions Summary questions Q16: Which of the following best matches the description of the economic stock level? a) When the warehouse is full. b) The quantity of stock received in an order. c) The lowest level of stock which can be held whilst continuing to fulfil all orders. Q17: Minimum stock level should be zero. a) True b) False Q18: Legal restrictions can impact on how certain goods are transported. a) True b) False Q19: Which of the following has the biggest impact on the environment? a) Road b) Rail c) Air d) Sea Q20: Just in time relies heavily on positive relationships with suppliers. a) True b) False

TOPIC 8. STOCK MANAGEMENT 77 8.6 End of topic tests Revise this topic before trying the end of topic tests. End of topic 8 test Q21: Complete the chart by filling the empty boxes with following terms. Re-order level Maximum stock level Re-order quantity Minimum stock level Re-order point Stock level Time Decide if following statements are true or false. Q22: Centralised stock control can help reduce theft. a) True b) False Q23: Air transport is the most expensive method of distribution. a) True b) False

78 TOPIC 8. STOCK MANAGEMENT Q24: Just In Time stock control can help reduce waste. a) True b) False Q25: Products cannot be transported in refrigerated conditions. a) True b) False Q26: Minimum stock level is when there is no stock left in the warehouse. a) True b) False Q27: Storing stock can lead to insurance costs. a) True b) False Q28: A company must have strong relationships with suppliers to successfully manage Just In Time production. a) True b) False Q29: Legal restrictions apply to the distribution of all products. a) True b) False SQA style questions Q30: Describe four different stages involved in setting an appropriate stock level. (4 Marks) Q31: Discuss the use of Just In Time stock control. (5 Marks) Q32: Discuss the factors an organisation would take into account before choosing a physical method of distribution. (5 Marks)

79 Topic 9 Methods of production Contents 9.1 Methods of production............................... 80 9.1.1 Job production................................ 80 9.1.2 Batch production............................... 81 9.1.3 Flow (line) production............................ 82 9.2 Methods of production: Exercises......................... 84 9.3 Labour and capital intensive production...................... 85 9.4 Summary questions................................. 86 9.5 End of topic tests.................................. 87 Learning objectives After studying this topic, you should be able to: describe the methods of production available to an organisation (job, batch, flow) and the advantages/disadvantages of each; justify the choice of production method for an organisation; compare capital intensive production with labour intensive production.

80 TOPIC 9. METHODS OF PRODUCTION 9.1 Methods of production A company manufacturing products needs to give careful consideration to the method of production chosen. There are a number of factors to be considered: The actual product being made - does it have to be unique, is it of high value? A customer looking for a wedding dress is unlikely to want a dress which is produced in huge quantities and widely available on the high street. The size of the market - how many people will actually want to buy the product? An item which is likely to appeal to a massive range of people will need to be produced in large volumes. The size of the business - a small business is more likely to create products to customer specification as they have more contact with their customers. The finance available - machinery costs a lot of money to buy and set up - a business must have finance available for this if they wish to use automation. If there is not adequate finance available a less capital intensive production method will need to be used. The technology available - for some products, there may not be appropriate technology available to manufacture the product using machinery, meaning that labour intensive methods remain more appropriate. The workforce available - if there is a pool of highly skilled workers available this may mean that using traditional labour intensive methods may be appropriate. 9.1.1 Job production Job production is where a single product is made to customer's specification e.g. the new Forth bridge (the Queensferry Crossing), a wedding cake or designer dress. For the customer this method has the advantage that specifications can be changed even if production has started and the end product will meet their exact requirements. The manufacturer has the advantage of being able to charge a high price for the product and using this method workers are likely to be more motivated as the work is varied. However, it can take a long time to create each product, some specialist tools may be required which are expensive to buy and skilled workers command a much higher level of wages.

TOPIC 9. METHODS OF PRODUCTION 81 9.1.2 Batch production Another method is batch production. This involves the production of groups of similar products. No one item in the batch goes on to the next stage until all are ready. Small bakery firms might use this method producing breakfast rolls, then bread and finally cakes. It also is used for producing goods like wallpaper. This method reduces the

82 TOPIC 9. METHODS OF PRODUCTION need for highly skilled, costly staff. Standard machinery can also be used for much of the production which again reduces costs - for example in the bakery, the same mixing equipment and ovens. Manufacturers may make batches of goods for difference retailers and meet the different requirements of each retailer by tweaking the recipe and packaging, meaning that high levels of customer satisfaction are achieved. This method allows for cheaper production than through job production as some bulk buying can occur and through the use of some standardised equipment. Although some skill is required from workers, this is less than in job production, therefore wage costs are reduced. However, time can be lost through the cleaning and resetting of machinery between batches and any mistake within a batch results in the entire batch being wasted. Furthermore, employees and machinery may be idle between stages, which lowers productivity. Also, as workers complete more repetitive tasks, motivation can be lower than in job production. 9.1.3 Flow (line) production The final method of production is known as flow (or line) production. This is where items move continuously along a production line from one operation to the next. At each stage of the operation a new part is added to the product. Large, standard specification items like cars, televisions and washing machines are produced using this method. Costs are spread over a large number of goods and therefore the unit cost falls. As large quantities of goods are produced discounts are obtained for purchasing raw materials in bulk. The process is heavily mechanised or automated and saves labour costs. This means that the quality of output is very consistent. However, the employees involved in this process carry out monotonous, low or unskilled tasks meaning that their motivation is poor. The machinery and robots required for this method of production is extremely expensive to install and if the machinery/robots break down, production will completely halt, meaning productivity is lowered. Also, it is not possible to meet the exact requirements of a consumer, meaning that customer satisfaction will not be as high as for job or batch produced items.

TOPIC 9. METHODS OF PRODUCTION Cars in production lines over the years The earliest production line A production line in the 1960s A modern robot line H ERIOT-WATT U NIVERSITY 83

84 TOPIC 9. METHODS OF PRODUCTION 9.2 Methods of production: Exercises Methods of production For each question decide if it is an example of job, batch or flow production. Q1: An oil painting Q2: A freezer Q3: A housing estate Q4: A fitted kitchen Q5: An iphone Advantages and disadvantages of production methods Discuss the advantages and disadvantages of the following production methods: Job Batch Flow Types of production The following two websites contain examples of the 3 different types of production. Read each article and identify each production type. Prepare a short summary of each case justifying the type of production used in each case. Submit your findings to your teacher. Alternatively you may wish to discuss this as a class group. http://news.bbc.co.uk/1/hi/programmes/working_lunch/2786921.stm - bed manufacturer http://news.bbc.co.uk/1/hi/programmes/working_lunch/2996487.stm - suit manufacturer

TOPIC 9. METHODS OF PRODUCTION 85 9.3 Labour and capital intensive production Capital intensive production is where the majority of the work is carried out by machinery or robots. Flow production is capital intensive. This can be further categorised as automation and mechanisation: Automation is where the production of products is carried out mainly by robots and machinery and much of the control is by computer. Human input is limited in this process. Mechanisation also relies on machinery to carry out much of the work, however there is a greater level of human input to control the workflow. Advantages of capital intensive production: Machinery can work 24/7 without breaks, holidays or illness. The standard of consistency and accuracy is much higher than can be produced by humans. Disadvantages of capital intensive production: Restricted output from machinery - changes cannot be made to accommodate individual customer demands. The installation and maintenance costs of the machinery are extremely high. Should the machinery break down, production is halted until repairs can be made. Any employees involved in the production process are likely to be low skilled and poorly motivated. Labour intensive production relies on humans rather than machines to create products. It applies most often to job production. Advantages of labour intensive production: Highly skilled and motivated employees are likely to care about the products they are making leading to high quality. Employees are more flexible than machines and can make last minute changes or adaptations to a product. Much smaller capital outlay on expensive machinery. Disadvantages of labour intensive production: Skilled employees demand higher wages and it is expensive to recruit and train these employees. The quality of output is only as good as the quality of employees, so the work produced may not be consistent.

86 TOPIC 9. METHODS OF PRODUCTION 9.4 Summary questions Summary questions Q6: Which of the following relies most heavily on the use of machinery and robots within the production process? a) Mechanisation b) Automation Q7: Which of the methods of production is most likely to be labour intensive? a) Job production b) Batch production c) Flow production Q8: Which method of production would be used to ensure a constant flow of identical products? a) Job production b) Batch production c) Flow production Q9: The availability of finance may restrict the choice of method of production for an organisation. a) True b) Fase Q10: Because a small company has closer contact with customers, it is more likely to employ job production. a) True b) False Q11: The use of batch production requires highly skilled employees. a) True b) False

TOPIC 9. METHODS OF PRODUCTION 87 9.5 End of topic tests Revise this topic before trying the end of topic tests. End of topic 9 test Q12: Categorise each item into correct column. Portrait Hair dryer BluRay player Packet of crisps Jeans Hot cross buns False teeth Cruise ship Tattoo Iron Computer Tin of paint Job production Batch production Flow production SQA style questions Q13: Describe each of the three production methods available to organisations. (3 Marks) Q14: Describe the factors which affect an organisation's choice of method. (4 Marks) Q15: Compare capital intensive and labour intensive production. (3 Marks)

88 TOPIC 9. METHODS OF PRODUCTION

89 Topic 10 Quality Contents 10.1 Why is quality important?.............................. 90 10.2 Types of quality standard.............................. 91 10.3 Impact of training and motivation on quality.................... 92 10.4 Summary questions................................. 92 10.5 End of topic tests.................................. 93 Learning objectives After studying this topic, you should be able to: explain the importance of quality to the organisation and the customer; describe the costs and benefits of a range of methods of ensuring quality; discuss the distinction between quality control methods (inspection) and quality assurance methods (prevention); describe the inter-relationship between quality and motivation and training.

90 TOPIC 10. QUALITY 10.1 Why is quality important? Key point Quality is an important factor to the consumer and when buying a product the consumer expects it to be of an appropriate standard - although different people view "quality" differently. The quality of the finish, reliability, appearance, safety, availability, value for money, consumer support and the overall reputation of the product and the company, features and appearance of a product may be considered as making a product or service a quality one. In a competitive market, producers want to have no customer complaints and focussing on their quality procedures is one way to minimise the chances of complaints being made. Quality measures Quality control This is where the raw materials for the product are checked at the start of the process and then the end product is checked at the end of the process. Rejected products are reworked or discarded. Quality control is purely about inspecting the product - it does not help prevent problems. This can lead to high levels of wastage as mistakes made at early stages of production are not identified until the end of the process, meaning that materials used after the point of the fault developing have been wasted. However, by checking at the end of the process, the company is ensuring that no substandard products are reaching the end consumer. Quality assurance This is where products are checked at points throughout the production process and are discarded/reworked as soon as a fault is identified, bringing in an element of prevention of faults occurring. This reduces levels of wastage due to the early identification of faults but takes longer to complete than quality control, as tests are carried out throughout production. Quality circles An organisation can set up quality circles both as a quality technique and also to empower and motivate employees. A quality circle is made up of employees from all parts of the production process and at all levels - from shop floor to senior management. This group meets on a regular basis to discuss production and quality procedures and any issues which have occurred with a view to finding practical solutions. Benchmarking This is where a company compares their product or processes with those of another in the same industry - usually the market leader or a close competitor. They will then model their own product/processes on these to ensure that they are matching up to or exceeding those of competitors. Mystery shoppers Used in the service industry to monitor the quality of service provided. Most commonly found in retail and hospitality, a mystery shopper will visit a shop/restaurant and then make a report to head office on their experience. They may also be asked to rate or score their experience. The idea is that the staff serving the mystery customer have

TOPIC 10. QUALITY 91 no idea that they are doing so, to give as accurate a reflection as possible of normal standards. This is a relatively cheap method to use for services to be measured. Quality standards & symbols There are a number of different standards that can be awarded to an organisation, depending on the product or service that they provide. Although for some products (eg a baby car seat) a quality standard is compulsory, for the majority of organisations, applying for the award of a quality standard is voluntary. Obtaining a quality standard can be a very time consuming and expensive process, as it will require an extensive review of the organisation s policies and procedures and the gathering of evidence to ensure that the quality standard has been met. However, there are a number of benefits to be achieved. Due to the more stringent quality procedures in place, there should be less wastage within the production process. Customers will buy the product with confidence, as the company can prove that they have met specific standards. This improves the image and reputation of the product and therefore can lead to higher prices being charged. It also allows the company to use the quality standard as a marketing tool. 10.2 Types of quality standard British Standards A system for setting quality targets and monitor performance targets. There is no guarantee of quality and critics argue that it is a triumph of paper over performance. Indeed, a firm may hold a BS 5750 certificate for setting and achieving a low quality target! Investor in people (IIP) A government standard for employee consultation and training that establishes a procedure for relating training to your business plan. In order to achieve the standard, assessors from IIP will ask: Have goals been set for the business? Have these been explained to the workers? Have workers the right skills to meet those targets? ISO 9000 ISO is a network of the national standards institutes of 148 countries, on the basis of one member per country, with a Central Secretariat in Geneva, Switzerland, that coordinates the system.

92 TOPIC 10. QUALITY 10.3 Impact of training and motivation on quality An organisation relies on employees to produce goods and services to the highest possible standard. If the employees fail to do this, then quality can be compromised. In Unit 3, there are topics on motivation and training of employees. You should be able to use your knowledge of these topics to link to the topic of quality. Why will motivated employees help contribute to high quality production? Why will training employees improve the quality of output? Impact of training and motivation on quality Q1: Match the statements (1-5) with (a-e). 1. Training employees will mean they are better at their job. 2. Training employees often means that they can carry out more than one task. 3. Motivated employees will be keen to take pride in their work. 4. Training employees is a form of motivation. 5. Motivated employees may be looking for ways to help the business. a) Having an understanding of the entire production process will help ensure that each stage of production feeds smoothly into the next. b) This means that they may be looking for ways to improve the quality of the products. c) This will help ensure they make fewer mistakes, making quality consistent. d) This means that they are more likely to ensure that every product they produce is of the highest standard. e) This means that training also leads to the benefits of having motivated employees. 10.4 Summary questions Summary questions Q2: Which of the following gives an accurate definition of the term "quality"? a) A luxury product. b) A product which is of a standard appropriate for the purpose of the product and the price paid. c) A product bearing the "kitemark".

TOPIC 10. QUALITY 93 Q3: Which of the following best describes "Quality Control"? a) Where raw materials and the final product are checked. b) Where the final product is checked. c) Where the product is checked throughout production. Q4: Quality assurance is designed to: a) inspect products. b) prevent problems. Q5: Motivated and trained employees can help ensure quality products. a) True b) False Q6: Which of the following is a recognised quality symbol? a) The Kitemark b) A smiley face. c) A sticky label with a number inside a garment. 10.5 End of topic tests Revise this topic before trying the end of topic tests. End of topic 10 test Q7: Match the quality measures (1-4) with the descriptions (a-d). 1. Quality control 2. Quality assurance 3. Quality circles 4. Mystery shoppers a) Where a retail outlet is visited by a customer who provides feedback on their experience. b) Where a group of employees from every level of the organisation meet to discuss quality. c) Where raw materials and the final product are checked. d) Where products are checked throughout the production process.

94 TOPIC 10. QUALITY Q8: Complete the paragraph using following words. complaints an appropriate consumer appearance a competitive procedures availability quality Quality is an important factor to the and when buying a product the consumer expects it to be of standard - although different people view "quality" differently. The of the finish, reliability, appearance, safety,, value for money, consumer support and the overall reputation of the product and the company, features and of a product may be considered as making a product or service a quality one. In a market, producers want to have no customer and focussing on their quality is one way to minimise the chances of complaints being made. SQA style questions Q9: Explain what measures organisations can take to ensure they produce a quality product or service. (5 Marks) Q10: Discuss the use of quality standards for an organisation. (6 Marks)

95 Topic 11 Ethical and environmental Contents 11.1 What are "ethical" and "environmental" concerns for business......... 96 11.2 Ways to become environmentally friendly..................... 96 11.3 Ethical trading.................................... 99 11.4 Summary questions................................. 100 11.5 End of topic tests.................................. 101 Learning objectives After studying this topic, you should be able to: describe why it is important for an organisation to display concern for environmental and ethical issues; discuss ways in which an organisation can ensure that it is both ethical and environmentally aware.

96 TOPIC 11. ETHICAL AND ENVIRONMENTAL 11.1 What are "ethical" and "environmental" concerns for business Business awareness of ethical and environmental issues has increased considerably in recent years. This is due to the increased pressure from consumers who value this type of awareness in a company, along with the rise in national and European legislation which has to be complied with - for example, the new legislation in Scotland which means that all organisations must charge 5p for carrier or paper bags. We use the term "ethical" to describe practices which display thought for the treatment of humans and animals in the production process. We use the term "environmental" to refer to issues relating to how an organisation helps to take care of the planet - these issues can range from using recycled materials and the recycling of materials to monitoring emissions from factories and vehicles. There are costs and benefits to an organisation of taking into consideration the environmental and ethical impact of their actions. Generally, it will cost more for an organisation to implement environmentally friendly and ethical procedures - especially as there are usually initial start up costs involved. However, many of these measures will have longer-term financial savings attached. There is also the intangible benefit of the good publicity and reputation which comes along with taking these steps. 11.2 Ways to become environmentally friendly Minimising waste Reducing the amount of waste produced by an organisation benefits the environment as it ultimately means less rubbish ends up in landfill. It can also be argued that contributing to food waste is socially irresponsible when there are so many food shortages elsewhere in the world. There is also a positive benefit to the business in terms of costs saved - wastage means that the organisation is literally throwing money away! Minimising wastage in the business can be achieved in a number of ways: Training employees - this means that employees will be better at their jobs. As a result, fewer mistakes should be made and therefore there should be less scrap/spoiled product to be thrown away. However, training employees is expensive and time consuming for a business. Maintenance of machinery and equipment - this ensures that products are produced to the highest level and are not damaged by faulty equipment. Setting appropriate stock levels - if a business holds too much stock it is possible that it will become obsolete (not needed or wanted any more eg video recorders in a TV/Electrical goods store) or in the case of a perishable good, it may spoil and become unusable (for example food or fresh flowers). However, no matter how hard a business tries, there is still likely to be some waste generated. Some of this can be recycled (see below for further details) however a business will need to make decisions about how to deal with the rest of the waste.

TOPIC 11. ETHICAL AND ENVIRONMENTAL 97 Waste can be sent to landfill (where waste is buried in the ground) or a land-raising site (where the waste is built up in a massive pile). This incurs a cost for the business as they are charged for the volume of waste dumped. There is also a negative environmental impact as landfill/raise sites emit noxious fumes and toxic liquid. An alternative to landfill/raise is the use of incinerators (either at the site of the company or elsewhere) which can be used to burn waste. This method is often used for hazardous waste like medical waste. This is more expensive than landfill as the incinerator is costly to build and maintain, and requires a constant flow of waste to run at an economically viable level. However, the energy produced can be converted into electricity. Recycling This is a relatively easy way for a business to improve environmental credentials. It is also important because there are national targets for the levels of waste being recycled, which local councils are taking steps to meet. It is likely that companies who do not make sufficient effort to recycle will ultimately be hit by fines. Encouraging recycling is straightforward: Introduce appropriately coloured bins - this will make recycling easier for employees and there are a variety of companies who will install these and offer uplift services. There will be a cost involved in setting up a recycling scheme, however businesses also have to pay for the uplift landfill waste. Therefore, once recycling has started, it is likely that the reduction in landfill waste uplift costs will offset the cost of setting up a recycling programme. Reuse materials - in some cases, it may be possible to reuse materials within the production process. This has the benefit of reducing spoilt goods as well as recycling goods. Re-evaluating packaging The packaging used for goods can be far more extensive than actually needed. In addition, the materials used to create the packaging can be difficult or impossible to recycle. By re-evaluating the packing used for their products, there is vast scope for a company to be seen as environmentally friendly - and in some cases cut costs. Use environmentally friendly packaging - there are various alternative types of packaging available which are more environmentally friendly than traditional alternatives. For example, cardboard padding within a box (which can be recycled) can be used instead of foam chips (which can t). Use recycled materials in packaging - for example bottles made of recycled glass. This is environmentally friendly as it reduces the consumption of natural resources (eg trees for paper, sand for glass). Minimise packaging - often packaging appears to be excessive for the product inside. It is usually possible to find a different way of packaging or to change the materials used to allow more product to be enclosed. This can be a promotional point for a company - for example, Kenco coffee have run a massive advertising campaign highlighting their eco-friendly refill packs of coffee, designed for topping up glass jars or canisters in the home.

98 TOPIC 11. ETHICAL AND ENVIRONMENTAL Preventing pollution Pollution is a major issue for all developed countries. Certain cities (for example London and Beijing) have a very poor atmosphere due to "smog" - mainly caused by vehicle emissions, but also due to the smoke and steam emitted by factories. In addition, companies can cause pollution due to poor management of their production and waste disposal systems. Steps organisations can take to reduce pollution include: Responsible waste disposal - by ensuring that dangerous or toxic waste is disposed of carefully, a company can ensure that they are not causing damage - to local wildlife or water supplies for example. This may involve filtering waste water before it is allowed to join a nearby river, or arranging special waste uplifts for certain materials. Reduce road traffic - one of the major causes of pollution is exhaust fumes from lorries. By investigating alternative methods of transport (eg rail or sea) or by sourcing products from near by, the amount of road traffic can be reduced, having a positive impact on pollution levels. Be sustainable Many organisations now try to ensure that they use products from "sustainable" sources. This can be applied to a wide range of natural resources, where companies have committed to replacing whatever resource they have used. An example of this is Kleenex, who ensure that all trees used to create their tissues and kitchen roll are from forests where a new tree is planted to replace every tree that is cut down. Energy policies An organisation may have policies in place to prompt the use of renewable energy sources. There are a number of forms of renewable energy available to an organisation to choose from, including water (hydro power), the wind and the sun (solar power). Many organisations have installed wind turbines or solar panels within their properties. Although these are expensive to purchase and maintain, they will save the organisation money in the long term due to their reduced fuel bills. They also help improve the environmental credentials of the organisation. In addition, the energy policy of an organisation may cover everyday procedures like lighting - lights can be set to come on when movement is sensed, or there can be a policy stating that lights must be switched off when a room is empty. There may be maximum heat settings for central heating as well to avoid wasting energy. Marks and Spencer Marks and Spencer have a well publicised environmental policy called "Plan A". Their website states that "Plan A is our way to help protect the planet - by sourcing responsibly, reducing waste and helping communities". Marks and Spencer have worked hard to become "carbon neutral" as part of this policy. They have also worked to ensure that their fish products are drawn from sustainable sources. Visit http://corporate.marksandspencer.com/plan-a/about-plan-a and use the information there to answer the following questions.

TOPIC 11. ETHICAL AND ENVIRONMENTAL 99 1. "Plan A" has been running for 5 years. What has happened to the carbon footprint of the company in that time? 2. By what percentage has Marks and Spencer increased the energy efficiency of stores? 3. One element of the "cutting carbon" activities has been the "Wash at 3" campaign - where customers have been encouraged to wash clothes at 30. Clothes have been designed to wash well at this temperature. How will this impact on cutting carbon? 4. Identify 3 measures that Marks and Spencer have taken to help reduce their carbon footprint. 5. Identify the three objectives of the "forever fish" programme. 6. Marks and Spencer charge 5p per plastic carrier bag. Where do the proceeds from this go? 7. How many varieties of fish are included in the programme? 8. Does Marks and Spencer s "Plan A" make you more likely to buy from their stores? Justify your answer. 11.3 Ethical trading Like dealing with environmental issues, ethical trading has become a real focal point for many organisations in recent years. This can cover a wide range of issues and increased consumer awareness has left no place to hide for firms who have previously ignored their responsibilities. Some ethical issues (such as animal welfare) have been important to consumers for many years, but a growing range of other causes have become more important. Each individual will make decisions about a company based on their own personal beliefs about what is most important and areas that organisations have had to focus on include the following: Animal welfare Historically, consumers have lobbied against and refused to buy cosmetic and other products which had been tested on animals. This is now not allowed within the EU, however in recent years the focus has moved towards food products. Celebrity chefs like Jamie Oliver have carried out big campaigns to improve animal welfare and strongly recommend the use of free range and higher welfare eggs and meat. This has meant that supermarkets have had to review their product offering and ensure that they have met customer demand for these products.

100 TOPIC 11. ETHICAL AND ENVIRONMENTAL Fairtrade Fairtrade products are increasingly common and exist to ensure that a fair wage is paid to farmers in poor countries. Examples of Fairtrade products include bananas, coffee, chocolate and cotton. Some organisations (for example the Co-operative) have made the decision to stock only Fairtrade products where possible. Although Fairtrade is generally seen as a positive business practice (because of the way it ensures that farmers are paid a fair wage, the prohibition of child labour and the link to sustainable practices) there are also concerns that Fairtrade only works with farmers in relatively developed countries, not those working in the poorest. The increase of Fairtrade in certain products (for example coffee) has also had a negative impact on the price of these goods, resulting in less being paid to the suppliers. Employment policies Some large manufacturing firms have come under scrutiny in recent times for paying low wages to children and other workers abroad. This is in order to keep the cost of their products as low as possible. Although this is often legal, the negative publicity which this can generate has meant that most organisations are now ensuring that they pay workers what is known as a "living wage". This has already been discussed in the Understanding Business unit, when looking at multinational organisations. 11.4 Summary questions Summary questions Q1: Ethical treatment of workers is always set out in legislation. a) True b) False Q2: Environmental issues apply to all types of organisation. a) True b) False Q3: Animal welfare issues are confined to testing products on animals. a) True b) False Q4: It is possible to buy coffee which is not fairtrade. a) True b) False

TOPIC 11. ETHICAL AND ENVIRONMENTAL 101 Q5: Investing in solar power can save an organisation money. a) True b) False 11.5 End of topic tests Revise this topic before trying the end of topic tests. End of topic 11 test For each statement, decide if it's an ethical or environmental issue. Q6: A fleet of old lorries which are failing to pass emissions tests. a) Ethical b) Environmental Q7: Receiving complaints from customers that there is excessive packaging on their products. a) Ethical b) Environmental Q8: Workers being killed due to poor health and safety in a factory in China. a) Ethical b) Environmental Q9: Increasing waste sent to landfill. a) Ethical b) Environmental Q10: Customers demanding products which are made using free range and higher welfare meat products. a) Ethical b) Environmental

102 TOPIC 11. ETHICAL AND ENVIRONMENTAL Q11: Being unable to answer questions on the source of coffee and chocolate sold in store. a) Ethical b) Environmental Q12: Using a type of fish which is reducing in population due to over fishing. a) Ethical b) Environmental Q13: Buying in cheap cosmetic products from outwith the EU which may have been tested on animals. a) Ethical b) Environmental SQA style questions Q14: Describe three environmental issues that a company may need to address. (3 Marks) Q15: Discuss advantages of focussing on the environmental and ethical policies of a business. (5 Marks)

103 Topic 12 Technology in marketing and operations Contents 12.1 Technology in the marketing department..................... 104 12.2 Technology in the operations department..................... 106 12.3 Summary questions................................. 107 12.4 End of topic tests.................................. 108 Learning objectives After studying this topic, you should be able to: describe technologies used by the marketing department; describe technologies used by the operations department.

104 TOPIC 12. TECHNOLOGY IN MARKETING AND OPERATIONS 12.1 Technology in the marketing department Along with every department in a business, the introduction of new technology has had a massive impact on the marketing opportunities available to a business. Organisations can use technology to interact with customers in a variety of ways and social media and apps in particular have become a vital part of the marketing strategy for many companies. Social media Social media has revolutionised the way that organisations communicate with customers. Relatively cheap and with a massive potential audience, a social media presence is now vital to remain competitive. It also has the unique feature of providing an easy method for customers to interact with the company - although this can allow customer complaints to be viewed by a wide audience. Social media can take a number of forms: Twitter Companies set up their own twitter account and then tweet to their followers. This is a relatively cheap method of advertising as the only cost is that of the employee responsible for updating the twitter feed, however it relies on potential customers following the feed and retweeting for maximum impact. Facebook Organisations pay Facebook to feature their advert to a specific audience. This can be an expensive form of advertising and users often ignore the adverts, however Facebook claims that their market segmentation is excellent and is likely to reach the ideal group of consumers. Also, it's impossible to delete the adverts from your news feed! YouTube Prior to merging with Orange to become EE, T-Mobile were a prolific user of YouTube, uploading videos of flash mobs which quickly went viral. Many organisations maintain a YouTube channel where adverts and celebrity interviews can been viewed. Due to the fast changing nature of social media (who remembers MySpace and Bebo?), it is likely that within a few years of today (2014) there will be alternatives to these sites which are more popular and companies must ensure that they are monitoring trends to take advantage of the new opportunities which present themselves. Internet As well as social media, the internet offers a wide range of advertising and promotional opportunities for most organisations. As well as allowing for e-commerce, many organisations offer "online only" promotions and incentives. There is also the opportunity to use "banner" ads (where the advert scrolls at the top of the browser window) and full page adverts - think of logging into email, for example. Additionally, buying online allows the company to gain your personal details quickly and easily, allowing for future targeted marketing emails and/or text messages. These emails can contain links to other website and provide detailed information about the organisation, although customers tend to find them annoying. Your buying and browsing history is also stored using cookies, which allows for tailored

TOPIC 12. TECHNOLOGY IN MARKETING AND OPERATIONS 105 suggestions of items you may be interested in - Amazon frequently do this. Smart phones The increasing number of smart phones available to consumers has meant a wide range of applications (apps) being made available for customers and potential customers. Organisations have made use of these apps (which are small pieces of software or links to internet pages) to communicate and engage with customers. They have been of particular interest to retailers, who have set up apps allowing customers to buy directly from the app without having to browse a full internet site. EPoS Electronic Point of Sale is used by both the marketing and operations departments. An EPOS system is a huge database that can contain records about not only the products stocked by an organisation, but about their customers and suppliers, giving it a wide range of uses. Within the marketing department, the main function of EPoS is to provide highly detailed and quantitative market research and is designed to work alongside retailer loyalty cards like the Tesco Clubcard or Boots Advantage Card. The till records the details of every transaction, providing detailed information about exactly which product was bought in combination with others. Linked to a loyalty card, this information can then be combined with the personal details of the shopper (age, gender, postcode, etc.) to develop a fuller picture of the buying habits of customers. Using EPoS provides a retailer with accurate customer profiles, monitors brand loyalty and makes it easy to offer promotions linked to customer needs. It is also unobtrusive - the customer doesn t have to actively answer questions and is not inconvenienced in any way by the process. However, the equipment is expensive to purchase and maintain and it is time consuming to analyse the data effectively. Tesco clubcard Visit http://www.tesco.com/clubcard/ and investigate the benefits to the customer of using a Tesco clubcard. Write a short report for your teacher outlining the following: What is the Tesco Clubcard? When do customers use the card? What benefits/perks are there for the consumer? benefits in your report. Include at least 5 of these Why do you think Tesco give rewards to customers for using the clubcard? Do you think the benefits to the company are worth more than the cost of the rewards?