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Environmental Scanning
A marketing-oriented firm looks outwards to the environment in which it operates,
adapting to take advantage of emerging opportunities and to minimise potential threats.
In this section we shall examine the marketing environment, and how to monitor it. In
particular, we shall look at some of the major forces acting on companies, such as the
economic, social, legal, physical and technological issues which affect corporate activities.
The marketing environment consists of the actors and forces that affect a company’s
capability to operate effectively in providing products and services to its customers. It is
useful to classify these forces into the micro-environment and the macro-environment.
The micro-environment consists of the actors in the firm’s immediate environment that
affect its capabilities to operate effectively in its chosen markets. The key actors are
suppliers, distributors, customers and competitors.
The macro-environment consists of a number of broader forces that affect not only the
company but also the other actors in the micro-environment. These can be grouped
under economic, social, legal, physical and technological forces. These shape the character
of the opportunities and threats facing a company, and yet are largely uncontrollable.
The process of monitoring and analysing the marketing environment of a company
is called environmental scanning. Two key decisions that management need to make
are what to scan and how to organise the activity. Clearly, in theory every event in the
word has the potential to affect a company’s operations but to establish a scanning
system which covers every conceivable force would be unmanageable. The first task,
then, is to define a feasible range of forces that require monitoring. These are the poten-
tially relevant environmental forces that have the most likelihood of affecting future
business prospects. The second prerequisite for an effective scanning system is to design
a system which provides a fast response to events that are only partially predictable
and emerge as surprises and grow very rapidly. This is essential because of the increasing
turbulence of the marketing environment. Ansoff proposes that environmental scanning
monitors the company’s environment for signals of the development of strategic issues
which can have an influence on company performance.
1 Line management functional managers (e.g. sales, marketing, purchasing) can be required to conduct environmental scanning in addition to their existing duties. This approach can falter because of line management resistance to the imposition of additional duties, and the lack of specialist research and analytical skills required of scanners. 2 Strategic planner environment scanning is made part of the strategic planner’s job. The drawback of this approach is that a head-office planner may not have the depth of understanding of a business unit’s operations to be able to do the job effectively. 3 Separate organisational unit regular and ad hoc scanning is conducted by a separate organisational unit and is responsible for disseminating relevant information to managers. General Electrics use such a system with the unit’s operations funded by the information recipients. The advantage is that there is a dedicated team concentrating their efforts on this important task. The disadvantage is that it is very costly and unlikely to be feasible except for large, profitable companies.
4 Joint line/general management teams a temporary planning team consisting of line and general (corporate) management may be set up to identify trends and issues that may have an impact on the business. Alternatively, an environment tread or issue may have emerged which requires closer scrutiny. A joint team may be set up to study its implications.
The most appropriate organisational arrangement for scanning will depend on the
unique circumstances facing a firm. A judgement needs to be made regarding the costs
and benefits of each alternative. The size and profitability of the company and the per-
ceived degree of environment turbulence will be factors which impinge on this decision:
Brownlie (1987) suggests that a complete environment scanning system would
perform the following:
1 Monitor trends, issues and events and study their implications. 2 Develop forecasts, scenarios and issues analysis as input to strategic decision-making. 3 Provide a focal point for the interpretation and analysis of environmental information identified by other people in the company. 4 Establish a library or database for environmental information. 5 Provide a group of internal experts on environmental affairs. 6 Disseminate information on the business environment through newsletters, reports and lectures. 7 Evaluate and revise the scanning system itself by applying new tools and procedures.
The benefits of formal environmental scanning were researched by Diffenbach
(1983), who found that practitioners believed that it provided the following:
1 Better general awareness of and responsiveness to environment changes. 2 Better strategic planning and decision-making. 3 Greater effectiveness in dealing with government. 4 Improved industry and market analysis. 5 Better foreign investment and international marketing. 6 Improved resource allocation and diversification decisions. 7 Superior energy planning.
Environmental scanning provides the essential informational input to strategic fit
between strategy, organisation and the environment. Marketing strategy should reflect
the environment even if it means a fundamental organisation of operations.
(I) Problem 1.1 Environmental scanning procedure
Introductory comments
Like any other new programme, the scanning activity in a corporation evolves over
time. There is no way to introduce a foolproof system from the beginning. If conditions
are favourable, that is if there is an established system of strategic planning in place
and the CEO is interested in a structured effort at scanning, the evolutionary period
shortens, of course, but the state of the art may not permit the introduction of a fully
developed system at the outset. Besides, behavioural and organisational constraints
require that things be done over a period of time.
The level and type of scanning activity that a corporation undertakes should be
custom designed, and a customised system takes time to emerge into a viable system.
Problems in Marketing
Figure 1.1 shows the process by which environmental scanning is linked to marketing
strategy. Listed below are the procedural steps which explain this relationship.
1 Keep a tab on broad trends appearing in the environment. Once the scope of environmental scanning is determined, broad trends in the chosen areas may be reviewed from time to time. For example, in the area of technology, trends in mastery of energy, material science, transportation capability, mechanisation and automation, communications and information processing, and control over natural life may be studied. 2 Determine the relevance of an environmental trend. Not everything happening in the environment may be relevant for a company. Therefore attempts must be made to select those trends in the environment which have significance for the company. There cannot be any hard-and-fast rules for making a distinction between ‘relevant’ and ‘irrelevant’. Consider, for example, the demise of the steam locomotive industry. Perhaps its constituencies would have been more receptive to changes had these come from within the industry itself. I would hypothesise that if the new threat is very similar to a firm’s traditional way of meeting consumer needs, such as the turbine-powered automobile being similar to the internal combustion-powered automobile, then management often would perceive the new development as threatening. However, if it meets consumer needs in very different ways, it is less likely to be recognised at an early point. For instance, I suspect that one of the major threats to the future growth of commercial airlines is originating not with transportation companies, but rather with communication firms. I am thinking in particular of the US Telephone and Telegraph’s development of the ‘television phone’. As that product is perfected and as the costs of using it are lowered, it may eliminate completely the need for many business flights, and consequently substantially impact upon the future growth of airlines. Management’s creativity and farsightedness would play an important role in a company’s ability to pinpoint the relevant areas of concern. Described below is one way (for a large corporation) of identifying relevant trends in the environment:
- Place a senior person in charge of scanning.
- Identify a core list of about 100 relevant publications worldwide.
- Assign these publications to volunteers within the company, one per person. Selected publications considered extremely important should be scanned by the scanning manager.
- Each scanner reviews stories/articles/news items in the assigned publication that meet predetermined criteria, based on the company’s aims. Scanners might also review books, conference proceedings, lectures and presentations.
- The scanned information is given a predetermined code. For example, a worldwide consumer goods company used the following codes: subject (e.g. politics); geography (e.g. Middle East); function (e.g. marketing); application (e.g. promotion, distribution); and ‘uniterm’ or keyword for organising the information. An abstract is prepared on the story, and so forth, in a few lines.
- The abstract, along with the codes, is submitted to a scanning committee consisting of several managers, to determine the relevance in terms of effect on corporate/ SBU/product market strategy. An additional relevance code is added at this time.
- The codes and the abstract are computerised.
- A newsletter is prepared to disseminate the information company-wide. Managers whose areas are directly affected by the information are encouraged to contact the scanning department for further analysis. 3 Study the impact of an environmental trend on a product/market. An environmental trend can pose either a threat or an opportunity for a company’s product/market; which one it will turn out to be must be studied. The task of determining the impact of a change is the responsibility of the SBU manager. Alternatively, it may by assigned to another executive who is supposedly familiar with the product/market. If the whole subject appears
Problems in Marketing
controversial, it may be safer to have an ad hoc committee look into it, or even consultants, either internal or external, may be approached. There is a good chance that a manager who has been involved with a product or service for a good many years would look at any change as a threat. He or she may therefore avoid the issue by declaring the impact to be irrele- vant at the outset. If such sabotage is feared, perhaps it would be better to rely on the committee or a consultant. 4 Forecast the direction of an environmental trend into the future. If an environmental trend does appear to have significance for a product/market, it is desirable to determine the course that the trend is likely to adopt in the future. In other words, attempts must be made at environmental forecasting. 5 Analyse the momentum of the product/market business with the environmental trend. Assuming the company takes no action, what will be the shape of the product/market performance in the midst of the environmental trend and its direction into the future? The impact of an environmental trend is usually gradual. While it is helpful to be ‘first’ to recognise freedom of action, a serious effort would have to be undertaken to ‘open up’ line managers to new ideas and to encourage innovation in their plans.
CONDUCTING ENVIRONMENTAL SCANNING
Following the steps in Table 1.1 an attempt is made here to illustrate how specific
trends in the environment may be systematically scanned.
A literature search in the area of politics shows the following laws:
1 Eliminating inside directors. 2 Requiring companies to meet the cost of ‘unfriendly’ proxy contests. 3 Barring nominee ownership of stock. 4 Reducing a company’s right to fire workers at will. 5 Guarding worker privacy. 6 Mandating due-process procedures for grievances. 7 Disclosing lobbying efforts in detail. 8 Requiring that all ad claims be substantiated. 9 Publishing corporate actions that endanger workers or the environment.
Environmental Scanning
Table 1.1 Systematic approach to environmental scanning
1 Pick up events in different environments (via literature search) 2 Delineate events of interest to the SBU in one or more of the following areas: production, labour, markets (house- hold, business, government, foreign), finance, R&D. This could be achieved via trend-impact analysis of the events 3 Undertake cross-impact analysis of the events of interest 4 Relate the trends of the noted events to current SBU strategies in different areas 5 Select the trends which appear either to provide new opportunities or to pose threats 6 Undertake trends’ forecasts Wild card prediction Most probable occurrence Conservative estimate 7 Develop three scenarios for each trend based on three types of forecast 8 Pass on the information to strategists 9 Strategists may repeat steps 4–7 and develop more specific scenarios vis-à-vis different products/markets. These scenarios will then be incorporated in SBU strategy
Scenario building. This technique calls for developing a time-ordered sequence of
events bearing a logical cause–effect relationship to one another. The ultimate forecast
is based on multiple contingencies, each with its respective probability of occurrence.
Cross-impact matrices. When two different trends in the environment point
towards conflicting futures, this technique may be used to study these trends simulta-
neously for their effect. As the name implies, this technique uses a two-dimensional
matrix, arraying one trend along the rows and the other along the columns. Some of
the features of cross-impact analyses that make them attractive for strategic planning
are that (1) they can accommodate all types of eventuality (social or technological,
quantitative or qualitative, and binary events or continuous functions); (2) they rapidly
discriminate important from unimportant sequences of developments; and (3) the
underlying rationale is fully retraceable from the analysis.
Morphological analysis. This technique requires identification of all possible ways to
achieve an objective. For example, the technique can be employed to anticipate inno-
vations and to develop the optimum configurations for a particular mission or task.
Network methods. There are two types of network method: contingency trees and
relevance trees. A contingency tree is simply a graphical display of logical relationships
among environmental trends that focuses on branch-points where several alternative
outcomes are possible. A relevance tree is a logical network similar to a contingency
tree, but drawn in a way that assigns degrees of importance to various environmental
trends with reference to an outcome.
Problem – example
The marketing strategist of a consumer goods company may want to determine if these
trends have any relevance for the company. To do so the marketing strategist will
undertake trend-impact analysis. This will require the formation of a Delphi panel to
determine the desirability (0–1) technical feasibility (0–1), probability of occurrence
(0–1) and probable time of occurrence of each event listed above. The panel may also
be asked to suggest the area(s) which may be affected by each event that is production,
labour, markets (household, business, government, foreign), finance, or R&D.
The above information about an event may be studied by managers in areas which,
according to the Delphi panel, are likely to be affected by the event. If their consen-
sus is that the event is indeed important, the scanning may continue (see Table 1.2).
Next, cross-impact analysis may be undertaken. This type of analysis is planned to
study the impact of an event on other events. Where events are mutually exclusive,
such analysis may not be necessary. But where an event seems to reinforce or inhibit
other events, the cross-impact analysis is highly desirable for uncovering the true
strength of an event.
The cross-impact analysis amounts to studying the impact of an event (given its probability of occurrence) upon other events. The impact may be delineated either in qualitative terms (such as critical, major, significant, slight or none) or in quantitative terms in the form of probabilities.
Table 1.3 shows how cross-impact analysis may be undertaken. The cross-impact
ratings or probabilities can best be determined with the help of another Delphi panel.
To sharpen the analysis further, it may also be determined whether the impact of an
event on other events will be felt immediately or after a certain number of years.
Environmental Scanning
Problems in Marketing
Table 1.2 Trend-impact analysis: an example
Event Requiring that all ad Reducing a company’s right claims be substantiated to fire workers at will
Desirability .8. Feasibility .6. Probability of occurrence .5. Probable time of occurrence 2003 2010 Area(s) impacted Household markets Labour Business markets Finance Government markets Finance R&D Production Decision Carry on scanning Drop from further consideration
Note: Two to three rounds of Delphi would be needed to arrive at the above probabilities.
Event Probability of Impact occurrence
(a) Eliminating .6 a b c d e f g h i inside directors
(b) Requiring companies .3 .3* to meet the cost of ‘unfriendly’ proxy contests
(c) Barring nominee. ownership of stock
(d) Reducing a company’s right to fire. workers at will
(e) Guarding worker privacy.
(f) Mandating due- process procedures. for grievances
(g) Disclosing lobbying. efforts in detail
(h) Requiring that all ad. claims be substantiated
(i) Publishing corporate .4 .7** actions that endanger workers or the environment
Notes
- This means that elimination of inside directors has no effect on the probability of event (b). ** This means that if publishing corporate actions that endanger workers or the environment occurs (probability .4), the probability of requiring that all ad claims be substantiated increases from .5 to .7.
Table 1.3 Cross-impact analysis: an example
Thus, it will be desirable to undertake forecasts of trends T 1 and T 2. The forecasts may
predict when the legislation will be passed, what the major provisions of the legislation
will be, and so forth. Three different forecasts may be obtained:
1 Extremely unfavourable legislation. 2 Most probable legislation. 3 Most favourable legislation.
Three different scenarios (using three types of forecast) may be developed, indicating
the impact of each trend. This information may then be passed on to product/market
managers for action. Product/market managers may repeat steps 4–7 (see Table 1.1) to
study the selected trend(s) in depth.
Questions
1 Define both areas and discuss the link between the concepts of environmental scanning and strategic planning. 2 Give and explain some examples of classic market opportunity analyses which have recognised key environmental trends. 3 What are the organisational behaviour implications of environmental scanning, especially when dealing with (1) responsibility; (2) key tasks to be implemented; and (3) staff training and motivation? 4 Describe and comment on the trend impact analysis approach as well as on the Delphi technique.
(I) Problem 1.2 Assessing the social environment
Introductory comments
The ultimate test of a business is its social relevance. This is particularly true in a society
where survival needs are already met. It therefore behoves the strategic planner to
Problems in Marketing
Table 1.4 continued
Scale
8 Critical
6 Major
4 Significant
2 Slight
2 Slight
4 Significant
6 Major
8 Critical
Enhance the implementation
of strategy
Inhibit the implementation
of strategy
be familiar with emerging social trends and concerns. The relevance of the social
environment to a particular business will of course vary depending on the nature of the
business. For a technologically oriented business, the scanning of the social environment
will be limited to aspects of pollution control and environmental safety. For a consumer
products company, however, the impact of the social environment will go much further.
An important aspect of the business environment is the values people hold. In recent
years changes in these values have stimulated massive regulations, deep criticisms, new
demands and challenges of the very foundation on which business rests. For example,
a substantial percentage of people in the USA are less and less willing to accept the
impartial operation of the market mechanism as the best way to allocate resources.
They expect government to intervene on their behalf. Another interesting value shift
is what Daniel Bell calls the Revolution of Rising Entitlements, challenging the tradi-
tional concept of egalitarianism. Equality had meant that conditions should permit
individuals, whatever, their origins, to make a life on the basis of ability and character.
It was believed that everyone should have an equal place at ‘the starting line’. More
recently the emphasis has shifted to the finish line, a guarantee of an equal outcome
for all. A central tenet of the new egalitarianism argues that because people are born
with different natural abilities and are raised under different circumstances, not every-
one approaches the starting line equally. In this light, it is argued, fairness and justice
necessitate equalisation of results.
Observers have noted many other value shifts that directly or indirectly influence
business. For example, people today seek self-gratification now rather than later. They
want the good things of life immediately. They want to lead lives that are continuously
improving in quality. There is a growing attitude of cynicism towards authority. There
seems to be an erosion of that part of the Protestant ethic that motivates people to
high standards of work performance. People seem to want a more comfortable and
less risky life. People are no longer willing to accept traditional rights of property
ownership but want to influence how property is used. Profit is no longer universally
accepted as the end purpose of business. Society is coming more and more to expect
that societal interests be considered, as well as business self-interest, in pursuing profit
objectives. Some observers see in such trends a serious erosion of the fundamental
institutional values of the classical free enterprise system.
Information on social trends may be derived from published sources. The impact
of social trends on a particular business can be studied in-house or with the help of
outside consultants. A number of consulting firms specialise in making this kind of study.
Table 1.5 shows 31 social trends which, according to the firm of Yankelovich, Skelley
and White, Inc., will have a tremendous effect on business in the coming years. One of
these, female careerism (trend 30 in Table 1.5), is of particular interest to the retail
industry. This structural social change leads retailers to ask such questions as: Where
does the working wife like to do most of her shopping? What type of store does she prefer?
How fashion-conscious is she? What sources of information does she use before she makes
a purchase? What kinds of service does she expect retailers to provide?
A proprietary study on the subject (conducted for a major department store) with
which the author was associated brought out interesting findings. It was found that in
general, working wives are better educated, are more experienced metropolitans and
have more sophisticated tastes than wives who do not work outside the home. Their
shopping behaviour is considerably different from that of the traditional woman shopper.
Environmental Scanning
The working-wife market cannot be served by a store that is ‘all things to all customers’.
It is predicted that a new kind of store is on the horizon which may emerge either
within a department store or as a separate institution to cater for this market. The
working wife was found to prefer suburban stores to downtown stores even though she
may be working downtown. She is likely to be interested in the latest fashions and looks
for clothing that is stylish but practical on the job. The above findings bear heavily on
retailers’ strategies in such areas as merchandising, the role of the suburban store, store
positioning, fashion orientation, promotion and store services.
Let us take two additional trends – physical fitness and well-being (trend 3 in Table 1.5)
and meaningful work (trend 7) – and examine their impact on marketing strategy.
Physical fitness and well-being
Salads and fish are replacing the traditional American dinner of meat and potatoes.
Increasing varieties of decaffeinated coffee and tea and substitutes for sugar and salt
are crowding supermarket shelves. Shoppers are reading the small print to check for
artificial ingredients in foods and beverages they once bought without a thought.
Smoking is finally declining. Manufacturers and retailers of natural foods are building
a healthy ‘health industry’ in the midst of a slow economy.
The dramatic new awareness of health is prompting these changes. The desire to
feel better, look younger and live longer exerts a powerful influence on what people
put into their bodies, and this strong force is now moving against a well-entrenched
habit that affects millions and dates back to biblical times – the consumption of too
much alcohol.
Health substitutes for alcoholic beverages, labelled ‘dealcoholised’, are now being
offered to US consumers. For some time, gourmet food shops have stocked champagne-
like bottles of carbonated grape juice and cans containing a not-fully brewed mixture
of water, malt, corn, yeast and hops. Except for the packaging, these alcohol-free
imitations failed to resemble wine and beer, especially in the crucial area of taste. The new
dealcoholised beverages, however, are fully fermented or brewed before their alcohol
is separated out – either by pressure or heat – to below an unnoticeable 0.5 per cent,
which is the federal maximum before classifying a drink as alcoholic. The taste and
body of the beverages match that of their former alcoholised selves.
This 0.5 per cent level is so low that a drinker would need to consume 24 glasses
of dealcoholised wine or eight cans of dealcoholised beer to obtain the same amount
of alcohol as in one 4-ounce glass of regular wine or one 12-ounce can of regular beer.
Thus the drinker avoids not only intoxication but also worthless calories, as a regular
glass of wine or beer has about 150 calories, while their dealcoholised copies contain
about 40–60 calories respectively. And their prices are the same.
Introduced in Europe around 2001, dealcoholised wines are just now entering
the USA.
Meaningful work
The following changes are producing a new challenge at work. First, people want good
jobs, not make-work. Second, workers want their individual rights to be respected.
Third, the concept of the professional appears to be under siege. It is increasingly
Environmental Scanning
difficult for professionals to maintain their special status in a society that is becoming
more knowledge-oriented, more bureaucratic and more participatory. The growth of
the two-income family is also blurring status distinctions, as it has brought a new
degree of affluence to the so-called working class. For example, a secretary and her
labourer husband can have a family income of £30,000 a year, while a family headed
by a sole-earner college professor or attorney can have an income well under that.
Fourth, the oncoming generation has doubts about the ideals of efficiency. They are
unwilling to pay the crushing price of loss of pride, mind-killing monotony, dehuman-
isation and stress diseases in return for the highest wages in history. Fifth, today a
woman’s place can be wherever she wants it to be, and so a greater number of women
are expected to find their place in the labour market.
Problem
LIFESPAN is a new company in the insurance market in Scotland. The company is a
niche player pursuing specific types of segment (i.e. work-related insurance services)
as well as developing a range of new financial services products, such as the ‘housewife
insurance plan’ which takes into account the new life demands (e.g. dual-income families,
the difficulties associated with the fulfilment of housework chores and duties, etc.) and
work/social pressures which affect many layers of the population. Mike O’Leary, the
marketing manager of the company, is considering the implementation of a marketing
scanning study to take into account social trends which will impact directly on his
strategic marketing plans.
Questions
1 What are the strategic implications derived from the main source trends which will impact on LIFESPAN with regard to the job market and working patterns? 2 What is your assessment of the future developments linked with the women’s job market, their employment situation as well as their specific needs for life insurance? 3 What lessons can LIFESPAN learn from the environmental scanning exercise with regard to equal employment opportunities and group coverage?
(M) Problem 1.3 Scanning and forecasting methods
Introductory comments
Market measurement is an activity of critical importance for a wide range of decisions.
Market-potential estimates and industry and company sales forecasts are essential for
the development of corporate marketing strategies and produce objectives. Middle-
management decisions regarding the size and allocation of marketing expenditures
depend heavily on sales forecasts and on the relationship between forecasts and
measures of profitability and productivity. By understanding the purpose and assump-
tions behind a given market measurement, a manager will find it easier to specify
the kind of information needed in a given situation and to understand the degree of
reliability that should be placed on a given market-measurement estimate.
Additionally, managers should be aware of the available data sources that can
be used to develop market-measurement estimates. When environmental changes
Problems in Marketing
enables a manager to determine how sensitive the forecast is to a change in these factors.
When forecasts are highly sensitive, managers should expect greater imprecision and
should closely monitor the environment to find out which model and which assumptions
most closely approximate reality.
THE COSTS OF FORECAST ERRORS
Companies that make or sell products with long lifetimes and steady sales are less
concerned with the costs of forecast errors because the forecasts in these cases are
likely to be close to actual sales. However, when the sales forecast given to manage-
ment has a large standard error, managers need to consider the costs of overestimating
and underestimating sales.
As Table 1.6 indicates, different kinds of consequence are associated with overes-
timating and underestimating company sales. For some firms, the cost of holding
excess inventory may be extremely high (perhaps because the product is perishable),
whereas the amount of sales lost because of delayed shipments is very low (perhaps
because the company has loyal customers). Accordingly, if a firm is in that situation,
management will be more willing to risk underestimation than overestimation. This
willingness to risk underestimation occurs because the cost of excess inventory
resulting from excess production will outweigh the lost revenue from an inadequate
level of production. Because the costs of overestimation are greater for that firm, man-
agers will probably want to base decisions on a forecast that is more conservative than
the sales forecast.
Problems
Consider Table 1.6(a), which presents data on market shares for a leading brand of
biscuits. Notice that market share varies from a low of 46.61 per cent in period 14 to
a high of 61.08 per cent in period 21. The factors used to explain the variation in sales
are relative levels of price, distribution and advertising. The relative levels are the ratio
Problems in Marketing
Table 1.6 Possible results of company sales forecast errors
Results of overestimation Excess capacity leading to layoffs, loss of skilled labour Price cuts or additional marketing expenses to move product Distributor ill-will because of excess distributor inventories Inventory costs Cash flow problems and cost of capital tied up in finished goods, components, raw materials Technical obsolescence or damage Storage or warehousing costs
Results of underestimation Lost sales or customer goodwill Overtime costs Costs of expediting shipments Reduced quality control because of reduced maintenance of machinery at full production capacity Production of bottlenecks because of lack of material and parts
of the company’s level to the industry average. The multiple-regression model based
on the data in Table 1.6(a) is
Market share .61 – 1.11 (relative price) .97 (relative distribution)
.01 (relative advertising)
Although many other factors could explain why market share varies from one
period to another, the model explains greater than 60 per cent of the variation in
market share, based solely on relative levels of price, distribution and advertising.
Additionally, as in any statistical forecast, the company was able to determine the
standard error of the forecast – in this case .025; that is, there is always some imprecision
in terms of past sales and past forecasts. Two-thirds of the time the forecast estimate
of sales will be within one standard error (in this case .025) of actual market share;
95 per cent of the time, forecasted share will be within two standard errors (in this
case .05) of the actual market share.
Multiple-regression models allow managers to predict values of the dependent
variable (e.g. market share) for different levels of the predictor variables (e.g. price,
distribution and advertising). If we set the relative price at .95, relative distribution at
1.06, and relative advertising at 1.0, the estimated level of market share, based on the
multiple-regression model described above, is:
Market share .61 1.11 (.95) .97 (1.06) .01 (1.0)
Environmental Scanning
Table 1.6(a) Leading brand of biscuits
Period Market share Relative price Relative distribution Relative advertising
1 0.518667 0.99596 1.05763 0. 2 0.558001 0.99112 1.03970 0. 3 0.545538 0.98112 1.04589 0. 4 0.493883 1.00633 1.03959 0. 5 0.502510 0.98687 1.03284 1. 6 0.553169 0.97524 1.04448 1. 7 0.561195 0.97223 1.04752 0. 8 0.535317 0.99437 1.05605 0. 9 0.540326 0.99321 1.05296 0. 10 0.522628 0.98322 1.03618 0. 11 0.536117 1.00383 1.04714 0. 12 1.558861 0.99705 1.04960 1. 13 0.524293 1.00225 1.04838 0. 14 0.466122 1.00172 1.04868 0. 15 0.471938 1.00017 1.02406 0. 16 0.497760 0.98295 1.03772 0. 17 0.511327 0.97971 1.06260 0. 18 0.554894 0.98837 1.09686 0. 19 0.590279 0.99098 1.10962 0. 20 0.572970 0.98397 1.06835 1. 21 0.610783 0.97863 1.11071 0.
of scanner technology in their channels of distribution. Some data mining techniques
also arose in response to ‘database marketing’ or ‘direct marketing’ (e.g. by catalogue
vendors or coupon distribution providers) in which a company is trying to form
relationships with its individual customers, as marketing attempts to proceed from
‘mass’ (one media message for all potential buyers) to ‘segments’ (some targeting and
positioning differences) to ‘one-to-one’ marketing. In order to achieve such tailored
market offerings, a company has to know a lot about its customers, hence the data
contain many pieces of information on each of the company’s many customers.
Traditionally, a company’s database would have contained only current business
information, but many now contain historical information as well. These ‘data ware-
houses’ literally dwarf those available even a few years ago. For example, Wal-Mart
has contracted with NCR Corporation to build a data warehouse with 24 terabytes
(1 terabyte 1,000 gigabytes) of data storage, which will make it the world’s largest
data warehouse. The system will provide information about each of Wal-Mart’s 3,
plus stores in multiple countries. Wal-Mart plans to use the information to select
products that need replenishment, analyse seasonal buying patterns, examine customer
buying trends, select markdowns, and react to merchandise volume and movement.
In response to the increasingly massive data sets, firms have been working to create
increasingly sophisticated data mining technologies (hardware and software) to analyse
the data. Data mining uses massively parallel processing (MPP) and symmetric multi-
processing (SMP) supercomputer technologies (during which multiple data points and
sub-routines may be processing simultaneously, compared with old-fashioned ‘serial’
processing, in which one datum is processed after another). These huge machines
support ‘relational’ database programs that can slice massive amounts of data into
dozens of smaller, more manageable pools of information.
Sometimes these intensive approaches are applied to databases that are being
analysed with fairly traditional statistical techniques. For example, regression is still a
premier analytical tool, because many predictors can be used to capture complex
consumer decision-making and market behaviour – forecasting sales as a function of
season, price, promotions, sales force, competitor factors and delivery delays. Other
popular techniques of data mining include cluster analysis for segmentation and neural
networks. Businesses regularly use data mining analytical tools to mathematically
model customers who respond to their promotional campaigns versus those who
do not. The effects of direct mailing efforts, for example, are easily measured and
compared as a function of customer information (demographics such as age, household
size, income) and purchase behaviour (past buying history, cross-sales). Data mining
can also be used to measure incremental business (additional traffic, sales, profits) that
may be directly attributed to a recent promotion by deliberately withholding the
promotional mailing from a ‘control’ group ‘experimental’ techniques.
In addition to standard techniques being applied to these huge data sets, marketing
research methodologists are creating techniques and software especially for data
mining analyses of large data sets. Sales of such customer management software are
currently growing at five times the rate of the overall software market, as managers
struggle to track every encounter with each customer, to facilitate call-centre interac-
tions between customers and customer service representatives, and to manage internal
customers, for example, one’s sales force. Some of these relational database systems
include NCR’s Teradata system or Unix or Windows NT machines, IBM’s Intelligent
Environmental Scanning
Miner and SAS’s Enterprise Miner. Other software companies offer ‘content aggregator’
services that synthesise multiple databases – company financial information, histories,
executive profiles and the like.
As an illustration of a data mining exercise, Farmers Insurance used IBM’s
DecisionEdge software to look at the 200 pieces of information the company
maintained on its database of 10 million automobile insurance policy owners. Think of
a sports car owner and ‘you probably imagine a twenty-something single guy flaming
down the highway in his hot rod’. This profile fit many of its customers, but the data
mining exercise identified another segment of sports car owner – married baby
boomers with kids and more than one car. These customers produced fewer claims, yet
had been paying the same sports-car surcharge. With this information in hand, Farmers
could charge them less, providing greater value and customer satisfaction.
There is no question that the explosion in databases, computer hardware and
software for accessing those databases, and the World Wide Web are all changing the
way marketing intelligence is obtained. Not only are more companies building DSSs,
but those that have them are becoming more sophisticated in using them for general
business and competitive intelligence. This, in turn, has produced some changes in
the organisation of the marketing intelligence function. One change has been the
emergence of the position of chief information officer, or CIO.
The CIO’s major role is to run the company’s information and computer systems
like a business. The CIO serves as the liaison between the firm’s top management and
its information systems department. He or she has the responsibility for planning,
coordinating and controlling the use of the firm’s information resources, and is much
more concerned with the firm’s outlook than with the daily activities of the department.
CIOs typically know more about the business in general than do the managers of the
information systems department, who are often more technically knowledgeable. In
many cases, the managers of the information systems department will report directly
to the CIO. Information systems are not intended to be simply data warehouses – the
management of information is ideally designed as an electronic library that allows all
employees access to the ‘firm’s collective wisdom’.
FROM ACCOUNTS TO CUSTOMERS
The data extracted from the customer information system had one row per account.
This reflects the usual product-centric organisation of a bank where managers are
responsible for the profitability of particular products rather than the profitability of
customers or households. The best next offer project required pivoting the data to
build customer-centric models.
To be useful for cross-selling, the 1.2 million account-level records extracted from
the customer information system had to be transformed into around a quarter of a
million household-level records. This was accomplished using SAS to group all the
accounts for a given tax identification number and then transpose them into a single
customer record with a set of columns for each account type. In cases where the bank
was aware that multiple members of a household had accounts, one of them was
chosen as the primary ID (identifiers) for the household and used to identify all house-
hold members. This allowed each newly created customer record to represent all
accounts belonging to an entire household. The new customer record contains a count
Problems in Marketing
