Grade11-ABM

Principles of Marketing
Module 1
1 Quarter (2nd Semester)
Week5-6

CHAPTER 2
LESSON 1: ANALYZING THE ENVIRONMENT
LESSON 2: MARKET RESEARCH METHODS

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of the module. Use a NOTEBOOK
answering the exercises.
2. Read the instruction carefully before doing each task.
3. Observe honesty and integrity in doing the tasks and checking your answers.
4. Finish the task at hand before proceeding to the next.
If you encounter any difficulty in answering the tasks in this module, do not hesitate to consult your teacher or facilitator.
Always bear in mind that you are not alone.

We hope that through this material, you will experience meaningful learning and gain deep understanding of the relevant
competencies. You can do it!
 CHAPTER
THE ENVIRONMENT AND ITS OPPORTUNITIES

LESSON 1: ANALYZING THE ENVIRONMENT

At the end of this topic, the student will:
2
1. know the different layers of the marketing environment; and
2. be able to perform elementary environmental analyses.

PRELIMINARY DISCUSSION
Give an example of a trend that you believe is happening right now. How can an entrepreneur take advantage
of this trend

Give three examples of promising products that could have worked here if only the environment was
different. Explain

THE MARKETING ENVIRONMENT

You cannot just launch a product without first knowing anything about the world at large. In fact, you
need quite a bit of information before you can even begin to roll out your product idea: information about
competitors’ products and strategies, the market and its behaviors, government regulations regarding your
proposed product, alternative options, economic trends, distributors and their behaviors, and much, much more.

In short, the first thing that you must do in marketing is your homework.

The problem, however, is that the world is pretty complex—with so many things to scan and monitor. It
does take time and effort to analyze each and every element in it. How would you know which aspects of the
environment are worthy of your attention? This lesson will be all about how you can simplify the process of
environmental scanning by focusing on the most essential areas for assessment.

We first begin with a breakdown of the primary elements that make up our business environment:
 MICRO Internal MACRO
Environment Environment External Environment Environment

Competitive
Environment

Figure 1

The Components of Business Environment

The internal environment refers to the business itself: what are you selling, how your organization is set
up, what your organization's strengths and weaknesses are, what your resources happen to be, what your
company’s core values and mission are, and essentially anything about your company that matters.

Why would you need to know all of this? It is because you would want to determine what resources you
will have at your disposal in order to properly select a fitting strategy for selling your products. For instance, if
an assessment of your company’s internal environment yields the realization that it has poor working relations
with retail distributors but happens to have a strong workforce, then you may decide to simply sell your
products directly to customers rather than going through retail establishments.

Here is a checklist of things that you may want to assess in your company’s internal environment:

● Company cash flow. How much money does it have and how much does it expect to flow in over time?
● Organizational structure. What personnel are available and who is accountable for marketing
initiatives?
● Assets and other resources. What property and equipment would it have access to?
● Strategic alliances. What organizations (or even influential individuals) does the business currently
have good working relations with?
● Products and services. What are already being offered, if any?

The competitive environment, on the other hand, refers to the immediate industry in which your company
is doing business. If you are running a bank, for instance, then your competitive environment may consists of all
the competing bank branches in your territory and possibly even substitutes such as pawnshops and even
sketchy loan sharks who lend money to small entrepreneurs in your area.

Here is a checklist of what to look out for in your competitive environment:

● Competitors. Who they are and what their respective strengths and weaknesses may be.
● Competing products and services. What these are, what their target markets are, and what their
respective strengths and weaknesses are.
● Substitutes. What alternative products or services your markets might be considering rather than your
core product.

It should be noted that while competitors tend to get the bulk of our attention, history shows that it is often
the substitutes that end up doing the most damage in an industry. Here are some examples:

● It was not competition that decimated the newspaper publishing business but the Internet which became
a preferred source for getting information.
● It was not competition that brought down the demand for beer but rather the mass market’s shift toward
cheaper hard liquors such as gin and whisky.
● The local music publishing industry was ravaged by the shift toward digital formats such as MP3s and
followed by music streaming services.

Michael Porter’s classic 5 Forces Model (Porter 1979) is a popularly used framework for understanding the
competitive structure of an industry.
Threat of
Entrants
New

Bargaining Power of Bargaining Power

Suppliers Rivalry among of Buyers
 Threats of
Substitute

Figure 2

Porter’s Five Forces Framework of Competitive Forces

The above model implies that it is not just rivalry from competitors that threaten a firm’s existence, but
even its suppliers, buyers, new players, and product substitutes. In fact, Porter notes that the buyers and the
suppliers can be potential entrants themselves.
The risk faced by a firm due to its competitors is the most obvious form of operational risk.
Competitors can spend sums of money to steal market share from the firm or even alter the market’s perceptions
about the firm’s products.
A firm also faces risks from new entrants possibly joining the industry, especially if the industry offers
attractive growth prospects.
A firm also faces risks due to substitutes that threaten to steal market share from its industry.
The firm’s own suppliers can pose a threat as well if the firm is too dependent on these suppliers and
the suppliers know it. The suppliers can decide to increase their prices or to even become potential entrants to
the industry as well.
If the firm is too dependent on its buyers, the buyers may sense this. They might band together and
threaten the firm through additional demands. Buyers may also become potential entrants into the industry if
they feel that entering the industry is a simple matter after all.
The internal and the competitive environments form what is often referred to as the micro environment
of a business. But looming even larger would be the macro environment, which is composed of environmental
variables that are typically beyond the control of any organization.
There are far too many elements in the macro environment. That is why there are mnemonics which can
help break down this complexity into more digestible parts. One of the most popular mnemonics is PEST,
which stands for:

● Political. What are the different pieces of legislation, including tax rates that affect the business? How
likely is it for the government to intervene in the industry? How stable is the working environment in
terms of political stability and overall predictability?
● Economic. Is the market growing or shrinking? What is the savings rate of the population, and how is
the employment situation? Is the consumer spending increasing or decreasing? Do people feel that their
quality of life is improving? How volatile is the exchange rate, the interest rate, and other essential
indicators?
● Social. Is the population growing or shrinking? Is it aging or the broad demographic is getting younger?
What are their interests? What are the lifestyles that they lead? How do the markets behave, especially in
terms of assessing and consuming your industry's products?
● Technological. What are the new technologies that are changing the business landscape? What new
ideas are gaining momentum? What new products and practices could threaten to make your current
business obsolete?

Going through the different elements above is what is called a PEST analysis. It manages to cover quite a
lot of what is essential to monitor in the macro environment.
In the end, environmental scanning is all about identifying important trends in the environment. Why
trends? It is because trends become the reality of the near future. Since it also takes time to mobilize a new
product concept, you would want your product concept to be viable in the near future where it belongs.

Sample trends:
 ● The continuing growth of Smartphone penetration.
● The continuing growth in credit card usage.
● The movement toward higher value information-oriented jobs.
● The growing presence of multinational franchises even in non-food industries.

When the do-it-yourself home improvement craze hits the United States, Armstrong World Industries, a
manufacturer of tiles, decided to take advantage of the trend. From simply manufacturing tiles and shipping
these to hardware shops and installers, it created a more retail-friendly product in the form of boxed tiles that
came with friendly instructions and all-in installation kits. (“Armstrong reinvents company, changes distribution
scheme” 1994)

Of course, certain trends may be irrelevant to certain industries. For instance, Smartphone ownership may
not mean much to tree farmers, but it will be a pretty significant indicator for the banking industry that is
concerned with ramping up mobile access to its services.

Knowledge of relevant trends can lead to insights into possible opportunities and threats to a firm’s
operations. What are the trends that your business can take advantage of? What are the trends that can
eventually threaten its operations?

Trends versus Fads: What is the Difference?

Is there a difference between n trend and a fad?

In their book The 22 Immutable Laws of Marketing, Al Ries and Jack Trout explain it this way:

“A fad is a short-term phenomenon that might be profitable, but a fad does not last long enough to do a company
much good. Furthermore, a company often tends to gear up as if a fad were a trend. As a result, the company is often stuck
with a lot of staff, expensive manufacturing facilities, and distribution networks... When the fad “4 disappears, a company
often goes into a deep financial shock.”

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Why has not mouthwash taken off in India? Mouthwash manufacturers, including big brands such as
Listerine, have tried to penetrate the Indian market but to little avail. It turns out that Indians perceive
mouthwash to be a therapeutic product rather than a preventive one—if you used a mouthwash, then maybe it
was because you had some oral health problem. This perception was so pervasive that most sales for
mouthwash were via doctors’ prescriptions while over-the-counter sales languished. To make matters worse,
gel toothpastes and mint candies already owned the “fresh breath” benefit category, thereby making
mouthwash further irrelevant to the average Indian consumer,

This is an example of how a macro-environmental factor, like perceptions about mouthwash and oral
care in general, can severely constrain the workings of an entire industry.

GROUP ASSIGNMENT

Apply the Five Forces

Your group is to describe the competitive environment of the local magazine industry using the
elements of Porter's 5 Forces model. Who are the competitors? What are the substitutes? Say something about
their suppliers (think of their operations and raw materials) and buyers (think about subscribers and casual
buyers). The biggest points go to those who can derive deep and eye-opening insights about the industry
through their analysis.

Presentation time: an estimate of 5 t0 10 minutes per group.

Exercises

I. Discussion
 1. What other elements of a company’s internal environment could you think of that could be
important to analyze?

2. What are the environmental variables that a small corner barbecue stand should be most
interested in?

Environmental Variables Why

3. Why should a company be concerned about substitute and potential substitute?

4. Give examples of products and their potential substitutes.

Product Potential Substitutes

II. Application and Advancement

Knowing what you know by now…
1. Describe what kinds of firms may survive even without having to do much environmental
scanning.

2. What is the difference between an opportunity and a threat? Site examples of these for a
particular industry.

3. Now turn the tables around you: can you cite examples where the opportunities you mentioned
above can become threats, and the threats you mentioned above can become opportunities? What
does this tell you about the nature of opportunities and threats?
LESSON 2: MARKET RESEARCH METHODS
At the end of this topic, the student will:

1. know the components of a marketing information system; and

2. be able to put together a market research plan.

PRELIMINARY DISCUSSION
State an observation about how people behave when they are buying or using a particular
product. Ideally, it should be something that you think not too many people have noticed.

Product:

Observation:

2. You are assigned to gather information about how many total sales your competitor (let
say a manufacturer of beauty soaps that is sold in supermarkets) is making per month. The
problem is that there are no published materials available on this. Come up with three creative
ways by which you may be able to estimate your competitor’s total sales figures.

a.

b.

c.
The Marketing Information System

If you are a micro-sized enterprise, such as a single proprietor who runs a corner barbecue stand with
just one or two employees, then you may not quite have a budget to spare for assessing the environment around
you. You cannot, for instance, afford to hire professional researchers. So how do you set about assessing, for
instance, the performance of a competing barbecue stand across the street? You may have to do it yourself,
perhaps via personally gathering information through observing the store or even through buying from them to
try out their product yourself.
While those are valid methods for gathering information, you may want to avail more sophisticated
methods as your organization becomes larger and more formal. In fact, you will want to institutionalize the
information gathering process so that it becomes a regular duty, responsibility, and protocol for the business.
This is where having a more formal system comes in.

COMPANY

Market Intelligence Internal Records Market Research

News reports Sales histories Primary data gathering
Subscriptions Customer Information Secondary data gathering
Social networks/contacts Sales call reports
Sales networks Sales forecasts
Communities and events

Figure 3

The Market Information System (MIS) is the people, equipment, and procedures used to gather, sort,
A Company’s Market Information System

analyze, evaluate, and distribute needed, timely, and accurate information to marketing decision-makers. The
components of a market information system are:

● Internal Records. This refers to documents in the company’s Order-to-Payments cycle, such as
invoices, shipping orders, etc. It also avails documents and resources that comprise the sales information
system, such as sales forecasts, information from sales personnel, and information culled from
automated sales system.
Many businesses are sitting on gold mines of information without even knowing it. Client
records, for instance, may contain purchase histories that, if properly analyzed, can produce patterns
which can be useful for determining seasonality in buying behavior. In fact, a lot of customer insights
can be generated by analyzing customer records 1n bulk using computer programs to extract these
patterns.
How can you gather a lot of data from your clients? By encouraging them to provide as much
information as possible’ The SM chain of department stores, for instance, offers the SM Advantage Card
that is packaged as a loyalty card for its clients, but it is actually a means of gathering information for
data analysis. SM knows the customers’ age, address, and socio-economic class based on the application
forms submitted. The department store then tracks the customers’ buying histories (because customers
are encouraged to hand the card over during purchases), with records of what they buy, when, and how
much.
In sophisticated data analytics systems, the buying behaviors of huge numbers of people are
processed so that the systems can “learn” new insights about how customers behave. In a celebrated
case, US retailer Target actually knew that a customer was pregnant even before her own family did
based only on the items that she recently bought, none of which were obvious indicators. Their system
was able to study patterns of behavior from its databank of hundreds of thousands of customers. By
comparing her purchases with theirs, the system was able to infer that she just discovered that she was
pregnant! (Hill 2012)
 However, such systems can be very expensive and beyond the reach of small enterprises. But the
next best thing could be simple computer based systems that are sensibly set up such as spreadsheets
that record as much customer information as possible, along with their buying histories. As a rule, it
pays to record as much information as possible the processing can follow later on.

● Marketing Intelligence. The set of procedures and sources used by managers to obtain everyday
information about developments in the marketing environment. This includes newspapers,
intermediaries, social networks, trade conferences, suppliers, ad agencies, the reverse engineering of
competitor products, published reports, purchased information, etc.
In layman’s terms, intelligence is gathered by simply “putting yourself out there.” Having a
network of people and sources of information in the right places, in general, is the easiest way to get
potentially useful knowledge. Being part of the right social network of friends or groups on Facebook,
for instance, can lead to getting a potential useful insider tips faster than your competitors can.
Encouraging also your sales team to do small talk with clients is often a quick way to gather insights
about what their future needs are.
More extreme cases of intelligence involve going through a competitor’s garbage to piece
together a picture of what they are working on (because once the. garbage is outside their premises, it is
no longer considered as private property) or pirating employees from one’s competitor in order to have a
direct access to a first-hand knowledge of how they work.
Because of its nature, however, the value of intelligence cannot be predicted. Sometimes your
network can deliver and produce valuable information, but oftentimes it is more likely to provide
information of questionable value that is more akin to gossip. Nevertheless, you will likely still be better
off having the network in place than not. The only way to manage intelligence, in order to maximize the
probability of getting useful information, is by increasing the reach of your network as much as you
reasonably can.
If your sales force has very good relationships with their distribution partners (supermarkets,
groceries, et al.), then these partners may go so far as to inform them whenever a competitor is about to
do something new—such as a new product or a new promotional gimmick.

When Unilever’s Vaseline 2-in-1 soap was launched in the market with a “three-pid” three-soap
discount pack, they were surprised by the immediate appearance of a similar three-pid pack from chief
competitor Safeguard. Clearly, Safeguard was able to get wind of the Vaseline product launch from its
own extensive intelligence network!

● Market Research. The systematic design, collection, analysis, and reporting of data and findings
relevant to a specific marketing situation facing the company. This includes taking surveys or
conducting exploratory studies of a market.
Market research is scientific in nature, utilizing the scientific method in order to gain insights on
how to solve real world problems. In this case, problems usually involve resolving questions about how
to best provide value to customers or about understanding how consumers behave.

Research Process
Market research is primarily concerned with understanding the nature of a market. Some of the
questions that a market research typically seeks to answer are:

● Who are our typical buyers?

● Where do our buyers come from?
● How big is our market?
● What are our customers’ aspirations?
● How do our customers shop and with whom?
● What do our customers buy?
● Why do customers refuse to buy our products?
The processes involved in conducting market research can be outlined as follows:

● Define the Problem and Research Objectives. The problem should not be defined too broadly nor too
narrowly. In fact, great care should be taken when defining the problem as this will determine the very
nature and direction of the research.
● Develop the Research Plan. The Research plan is composed of the following components:
o Data Sources. Secondary data involves the gathering of prior and related research works since it
is possible that other parties have already developed useful findings on the matter being studied.
Primary data involves actually undertaking the research itself in order to get first-hand
knowledge on the matter.
o Research Approaches. Research can be conducted through observation, focus groups, survey
research, behavioral data, and experimental research.
o Research Instruments. These include questionnaires or mechanical instruments such as video
recorders.
o Sampling Plan. This addresses (1) sampling unit (Who is to be surveyed?), (2) sampling size
(How many people should be surveyed?), and (3) sampling procedure (How should they be
chosen?).
o Contact Methods. Contact with the survey sample could be done via personal or impersonal
means. Methods include the use of mail questionnaires, telephone surveys, personal interviews,
or the internet.

● Collect the information. This involves the actual gathering of the data. For surveys, for instance, this
would involve mobilizing a suitable number of field workers who will then find respondents according
to the sampling plan. For a research that involves the conduct of interviews, field workers will have to
be trained first in order to be responsive enough to properly interact with respondents.
● Analyze the data. Once all the data has come in (whether in the form of surveys, interviews, group
discussions, or through electronic means such as online ballots), the next step involves the actual
processing of the data. Quantitative data can be processed through software such as statistical packages,
while qualitative data (such as interviews) can be processed through data reduction or summarization
techniques.
● Present the findings. Once processed, the data can now become useful information. However, its
usefulness will still be a function of how well it is presented. Quantitative information, for instance, may
best be digested in the form of graphs and charts so that trends can be more easily seen. Qualitative data,
on the other hand, may best be presented in the form of clear examples and case studies.

Research Methods
As a rule, it is generally expensive to collect primary data. That is why firms with smaller budgets generally
resort to accessing secondary data and extrapolating conclusions from them.

Observation is best to use when trying to answer questions involving how a market behaves. Thus,
observation works for situations such as the following:

● identifying which section of a supermarket a shopper typically visits first;

● finding out how much toothpaste a consumer applies to his toothbrush per use; and
● determining how long a type of customer typically stays in a quick-service food outlet.
When questions are pertaining to how consumers actually behave, direct observation can offer deeper
insights about finer behavioral details that the consumers themselves may not be aware of or may not be able to
properly elucidate if they were being subjected to more popular research methods such as in-depth interviews or
surveys.

Market research firm Mustard has put online a number of videos that document its observation research into
shopper behavior. Their method involves having a camera follow a shopper as he or she does grocery shopping,
after which the shoppers then sit down to view the: footage and to directly explain what was going on in their
minds. Among the findings (that would otherwise not be discoverable via other research methods): shoppers
consider loose-leaf vegetables as “fresher” while those in plastic shrink-wrap are not as fresh, shoppers do not
even look at the prices when they are set on purchasing a particular brand, and that colors of packaging can
influence the choice of what products to get. (Mustard 2010)

Survey research is best to use when trying to determine a market’s opinions, perceptions, and basic
demographic data. Surveys are best for situations such as the following:

● identifying discrete factual data such as the person’s age, gender, level of education, place of residence,
occupation, hobbies, etc.;
● knowing a person’s opinions about a particular product; and
● determining a person’s likes and dislikes.

Note that while it is also possible to use a survey to ask questions such a$ “Which section of a supermarket
do you visit' first?”; “How much toothpaste do you apply per use?”; or “How long do you typically stay in a
fast-food outlet?” consumer’ themselves may not really know the actual answers to these questions and may
simply resort to guessing. Therefore, the proof is in their actual behavior. In other words, observation is still
best for these types of issues.

Surveys are the principal vehicle for conducting quantitative studies. In other words, if you are after
statistically significant findings, then a well-designed survey with answers that lend themselves well to data
processing (such as via the use of multiple choice responses or numerical responses) may be the most practical
recourse.

A word of caution: when asking consumers about what their preferences are, take their responses with a
grain of salt. This is because consumers do not often really know what they want or are prone to respond with
the answers that they feel are acceptable rather than how they really feel.

A major ketchup maker kept getting complaints about its bottle, so it made a survey. Most of the people
interviewed said they would prefer another type that the company was considering. When the company went to
the expense of bringing out this other bottle in test markets, it was overwhelmingly rejected in favor of the old
bottle, even by people who had favored it in interviews. (Packard 2007)

Focus groups are useful for gathering strong opinions and beliefs from a given target market. Focus groups
are actually a subset of survey research except that, unlike surveys which tend to be composed of individual
opinions, focus groups are composed of a set of people (belonging to the same target market) who are placed
together in a closed, controlled environment to discuss a product or issue with a moderator. The idea here is that
by getting the group to discuss and critique their own opinions, the resulting answers to questions would more
reliably reflect their reality as compared to answers obtained via surveys or interviews.
The downside, however, is that focus groups tend to reinforce any commonalities in the group’s opinions,
leading to “sensationalized” findings. Moderators of focus groups should therefore be skilled in analyzing the
entire process in order to weed out questionable findings and extract information properly. To this extent, a key
critique about focus group studies is that its output and quality is too dependent on the skills of the moderator.

Experimental research is a means of answering a hypothesis through the use of an experiment. While the
bulk of Philippine market research efforts typically gravitate toward the use of surveys and field interviews,
experiments are an under-appreciated method for validating issues of causality.

Example
 Situation: In the 1950s, Nescafé was struggling to sell instant coffee because the American market refused
to buy and instead preferred to brew their coffee.

Hypothesis: Housewives were afraid that they would be perceived differently if they bought instant coffee.

Experiment: A sampling of housewives was shown two almost identical shopping lists. Among the items
on list #1 was brewed coffee (Control). But on list #2, it was instant coffee (Experiment). The respondents were
then asked to describe the type of person who made each list.

Result: The person who made list #1 was perceived by the respondents to be a typical industrious, loving
housewife. But the person who made list #2 was perceived to be lazy.

Interpretation: Women resisted buying instant coffee because they were afraid that they would be
perceived as being lazy if they did so. This was a particularly poignant insight given that, back in the 1950s,
American women were expected to be dutiful and industrious housewives. (Steinman 2009)

Solution: Nestlé launched an ad campaign emphasizing that housewives should buy instant coffee because
the time saved by not having to brew coffee means more quality time for their family. The subtext of this
message was that it was perfectly acceptable to buy instant coffee because you love your family. It worked.
Instant coffee sales zoomed from then on.

Bias
An important issue to address in market research is the matter of bias. Bias is the tendency of data to
skew toward a particular direction. It is normal for any research to have a certain amount of bias, but it is the job
of researchers to minimize bias to the best of their abilities.
Bias is normal for researches because, by definition, a sample is a small portion of a population that tries
to explain the entire population but this sample may not perfectly represent the population. Aside from this, the
process of research itself can introduce biases as well.

Example

A survey is conducted and the question is “Do you actually think that Brand X is better than
Brand Y?” In such a question, the word actually becomes a “loaded” word that may bias or influence
respondents toward saying “No” due to its subtle intimidation.

Other examples of biases:

● Phone or online interviews. Respondents may not take these interviews too seriously because of the
lack of actual contact.
● Mail or email surveys. Only a particular kind of respondent may be motivated to actually mail the
surveys back.
● Questions regarding income. Respondents may either not actually know what their incomes are or post
a different figure due to fear of divulging such a personal bit of information.

Exercises

I. Discussion
1. What can a survey do that an in-depth interview cannot?
2. Conversely, what can an in-depth interview do that a survey cannot?

3. What are the possible biases that a focus group discussion can be prone to?