How Marketing Environments Change and the Rise of Web 2.0

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Scanning the

3 LEARNING
OBJECTIVES
Marketing
Environment
WEB 2.0 IS ALL ABOUT YOU!
The Web is changing at an extraordinary pace and each new change pro-
vides more customization and convenience for you. If you use Myspace.
After reading this chapter com, Del.icio.us, Secondlife, or any one of hundreds of new products on
you should be able to: the Web you are already part of the new world of the Web!
Not long ago the Web simply provided a modern channel for tra-
Explain how envi-
LO1 ditional businesses. Music led the way with file-sharing services such as
ronmental scanning Napster and eventually online stores such as iTunes. The entire enter-
provides information tainment industry followed by offering books, movies, television, radio,
about social, eco- and photography on the Web. The digital revolution allowed all of
nomic, technological, these businesses to benefit from the technical aspects of the Web.
competitive, and Now the term Web 2.0 is used to describe the changes in the
World Wide Web that reflect the growing interest in collaboration,
regulatory forces.
open sharing of information, and customer control. Many products
Describe how social and services such as podcasts, weblogs, videologs, social networking,
LO2 bookmarking, wikis, folksonomy, and RSS feeds are already available,
forces such as demo-
and many more are in development.
graphics and culture
As the focus moves from providing a new channel for existing busi-
can have an impact on nesses to empowering individual consumers with customized prod-
marketing strategy. ucts, suddenly the Web is all about you! You can create your own
video and post it on YouTube, sell your photos on iStockphoto, build
Discuss how economic
LO3 a social networking site on Ning, and publish your ideas at Blogger.
forces such as macro- How did this happen? The marketing environment changed!
economic conditions First, technologies such as high-speed Internet, high-resolution
and consumer income displays, and file-transfer software were developed. Second, the regu-
affect marketing. latory environment changed to allow the exchange and sale of copy-
righted materials such as songs and movies. Third, competitive forces
Describe how techno- by companies such as Apple, Google, eBay, Microsoft, and Amazon
LO4
logical changes can gave the Web worldwide exposure. Finally, consumers changed. They
affect marketing. are making it clear that they want “a tool for bringing together the
small contributions of millions of people and making them matter.”
Discuss the forms The future promises to be even more exciting. Some experts are al-
LO5
of competition that ready talking about Web 3.0!1
exist in a market and Many businesses operate in environments where important forces
key components of change. Anticipating and responding to changes such as those tak-
ing place on the Web often means the difference between marketing
competition.
success and failure. This chapter describes how the marketing environ-
Explain the major leg- ment has changed in the past and how it is likely to change in the
LO6 future.
islation that ensures
competition and reg-
ulates the elements of
the marketing mix.


ENVIRONMENTAL SCANNING
Changes in the marketing environment are a source of opportunities and threats to
be managed. The process of continually acquiring information on events occurring
LO1 outside the organization to identify and interpret potential trends is called environ-
mental scanning.

Tracking Environmental Trends
Environmental trends typically arise from five sources: social, economic, technological,
competitive, and regulatory forces. As shown in Figure 3–1 and described later in
this chapter, these forces affect the marketing activities of a firm in numerous ways.
To illustrate how environmental scanning is used, consider the following trend:2
Coffee industry marketers have observed that the percentage of adults who drink coffee
declined from 75 percent in 1962 to 49 percent in 2004 and then increased to 57 percent in
2007. Age-specific analysis indicates that the percentage of 18- to 24-year-olds who drink
coffee has risen from 16 percent in 2003 to 37 percent today.
What types of businesses are likely to be influenced by these trends? What future would
you predict for coffee?
You may have concluded that the change from a declining trend to an increase
in coffee consumption is likely to influence coffee manufacturers, coffee shops, and
supermarkets. If so, you are correct—manufacturers have responded by offering new
flavors and seasonal blends, coffee shops are automating to prepare drinks faster,
and supermarkets have added coffee boutiques and gourmet brands. Predicting the
future requires assumptions about the number of years the trends will continue and
the rate of increase or decline in various age groups. Did you consider these issues
in your analysis? Because experts make different assumptions, their forecasts range
from decline, to no growth, to a 7 percent annual increase through 2010, a range
that probably includes your forecast.
Environmental scanning also involves explaining trends. Why did coffee consump-
tion decline for many years and increase recently? One explanation for the decline is
FIGURE 3–1 that consumers switched from coffee to other beverages such as soft drinks, juices, and
Environmental forces affect bottled water. Another explanation is that preferences shifted to more expensive types of
the organization, as well as its
suppliers and customers.

Organization
• Marketing department
Suppliers Customers
• Other departments
• Employees

Environmental forces

Social Economic Technological Competitive Regulatory
• Demographic • Macroeconomic • Changing • Alternative forms • Laws protecting
shifts conditions technology of competition competition
• Cultural • Consumer • Technology’s • Small businesses • Laws affecting
changes income impact on marketing mix
customer value actions
• Electronic • Self-regulation
business
technologies

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ENVIRONMENTAL TREND IDENTIFIED BY AN ENVIRONMENTAL SCAN
FORCE
• Expanding use of social networks and collaborative web services
Social • Increasing mobility and diversity of the population
• Growing concern over global warming and climate change

• Shift to a global economy and the growing importance of China and India
Economic • Baby boomers begin turning sixty and spending retirement funds
• Virtual online communities developing their own economies

• Increasing popularity of Mobile TV
Technological • Advances in biometrics as a security solution
• Growing demand for portable, renewable power sources

• Dramatic increase in customer-generated content about competitive options
Competitive • New metrics for assessment increase performance comparisons
• Development and growth of competitive intelligence departments

SCANNING THE MARKETING ENVIRONMENT
• Increasing legislation requiring digital storage of corporate records
Regulatory • Greater concern for privacy and personal information collection
• New regulations to respond to fear of terrorism

FIGURE 3–2
An environmental scan of coffee, and consumers reduced their use to maintain the same level of expenditure. The
today’s marketplace shows recent increases may be the result of new coffee products distributed in supermarkets
the many important trends and vending machines, and gourmet single-serving products for homes and offices.
that influence marketing. Identifying and interpreting trends such as the decline and increase in coffee consump-
tion, and developing explanations such as those offered in this paragraph, are essential
to successful environmental scanning.3

An Environmental Scan of Today’s Marketplace
What other trends might affect marketing in the future? A firm conducting an en-
vironmental scan of the marketplace might uncover key trends such as those listed
in Figure 3–2 for each of the five environmental forces.4 Although the list of trends
CHAPTER 3

is far from complete, it reveals the breadth of an environmental scan—from the in-
creasing diversity of the U.S. population, to the growing economic impact of China
and India, to the dramatic growth of customer-generated content. These trends affect
consumers and the businesses and organizations that serve them. Trends such as these
are described in the following discussions of the five environmental forces.

SOCIAL FORCES
The social forces of the environment include the demographic characteristics of
the population and its values. Changes in these forces can have a dramatic impact
LO2 on marketing strategy.

Demographics
Describing a population according to selected characteristics such as age, gender, eth-
nicity, income, and occupation is referred to as demographics. Several organizations

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World Population by Region, 1950, 2005 and 2050 World Population by Age Groups, 1950–2050
5.5
7% 9% 9%
5.0 15–59
0–14
4.5 60ϩ
Developing 4.0
52 countries
59 57 Latin America 3.5
Estimates Projections

Billions
Asia/Pacific 3.0
Africa 2.5
9 Developed 2.0
countries 1.5
14
22 Europe,
25 Japan/other 1.0
14 North
7 0.5
7 America
5 5 0.0
1950 2005 2050
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
FIGURE 3–3
The distribution of the world such as the Population Reference Bureau and the United Nations monitor the world
population is changing. Africa population profile, while many other organizations such as the U.S. Census Bureau
is growing and the population provide information about the American population.
is getting older.
The World Population at a Glance The most recent estimates indicate
there are 6.7 billion people in the world today, and the population is likely to grow
to 9.2 billion by 2050. While this growth has led to the term population explosion,
the increases have not occurred worldwide; they are primarily in the developing
countries of Africa, Asia, and Latin America. In fact, India is predicted to have the
world’s largest population in 2050 with 1.6 billion people, and China will be a close
second with 1.4 billion people. Figure 3–3 shows the declining proportion of the
world’s population in North America, Europe, Australia, and Japan.5
Another important global trend is the shifting age structure of the world popula-
tion. The number of people older than 60 is expected to more than triple in the com-
ing decades and reach 2 billion by 2050. Again, the magnitude of this trend varies
by region, and developed countries such as the United States are expected to face
the highest growth rates of the elderly age group. Global income levels and living
standards have also been increasing, although the averages across countries are very
different. Per capita income, for example, ranges from $43,000 in Luxembourg, to
$24,000 in Canada, to $800 in Afghanistan.
For marketers, global trends such as these have many implications. Obviously,
the relative size of countries such as India and China will mean they represent huge
markets for many product categories. Elderly populations in developed countries are
likely to save less and begin spending their funds on health care, travel, and other
retirement-related products and services. Economic progress in developing countries
will lead to growth in entrepreneurship, new markets for infrastructure related to
manufacturing, communication, and distribution, and the growth of exports.6

The U.S. Population Studies of the demographic characteristics of the U.S.
population suggest several important trends. Generally, the population is becoming
larger, older, and more diverse. In 2008, the U.S. population was estimated to be
303 million people. If current trends in life expectancy, birthrates, and immigration
continue, by 2030 the U.S. population will exceed 360 million people. This growth
suggests that niche markets based on age, life stage, family structure, geographic

72


location, and ethnicity will become increasingly important. The global trend toward
an older population is particularly true in the United States. Today, there are approxi-
mately 35 million people 65 and older. By 2030, this age group will include more than
70 million people, or 20 percent of the population. You may have noticed companies
trying to attract older consumers. Mobile phone manufacturer LG, for example, re-
cently introduced a phone with large easy-to-read buttons for seniors. Finally, the term
minority as it is currently used is likely to become obsolete as the size of most ethnic
groups will double during the next two decades.7

Generational Cohorts A major reason for the graying of America is that
the baby boomers—the generation of children born between 1946 and 1964—are
growing older. As the 78 million boomers have aged, their participation in the work-
force and their earnings have increased, making them an important consumer market.
This group accounts for an estimated 56 to 58 percent of the purchases in most
consumer product and service categories. In the future, boomers’ interests will reflect
concern for their children and grandchildren, their own health, and their retirement,
and companies will need to position products to respond to these interests. Generally,
baby boomers are receptive to anything that makes them feel younger. Olay’s Total
Effects product line, for example, includes anti-aging moisturizers, cleansing cloths,

and restoration treatments designed for this age group.
The baby boom cohort is followed by Generation X, which includes the 15
percent of the population born between 1965 and 1976. This period is also known
as the baby bust, because the number of children born each year was declining. This
is a generation of consumers who are self-reliant, supportive of racial and ethnic
diversity, and better educated than any previous generation. They are not prone to ex-
travagance and are likely to pursue lifestyles that are a blend of caution, pragmatism,
and traditionalism. In terms of net worth, Generation X is the first generation to have
less than the previous generation. As baby boomers move toward retirement, how-
ever, Generation X is becoming a dominant force in many markets. Generation X,
for example, is replacing baby boomers as the largest segment of business travelers.
In response, hotel companies are creating new concepts that appeal to the younger
market. Surveys of Generation X travelers indicate they want casual, tech-friendly
lodging with 24-hour access to food and drinks, so Hyatt Corporation is building
400 new Hyatt Place all-suite hotels featuring control panels for MP3 players and
Which generational cohorts
computers, plasma-screen TVs, and a coffee and wine bar.8
are these three advertisers
trying to reach?
CHAPTER 3

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Marketing Matters > > > > entrepreneurship
Generation Y Is Becoming a Generation of Entrepreneurs!
Generation Y is known as a savvy and demanding group company named Mophie that makes cases, armbands, and
of consumers who feel personally responsible for making belt clips as iPod accessories. The success of the company
a difference in the world. They also have an extraordinary has attracted $1.5 million in venture capital, but more im-
optimism about their potential for fame and fortune. Rather portantly for Kaufman, it allows him to have a job that he
than pursue traditional “corporate” jobs, however, many likes. Similarly, Sheena Lindahl used her interest in creating
millennials are becoming entrepreneurs. her own career to start a business called Extreme Entre-
Many Generation Y children grew up in families where their preneurship Education, a business designed to help and
parents found it difficult to create a work–life balance. To avoid inspire college students.
that conflict, this generation is attracted to new ventures where The Bureau of Labor Statistics predicts that the fu-
they can be their own boss. As management consultant Bruce ture will bring many more entrepreneurs like Kaufman.
Tulgan explains, “They want to create a custom life and create There are currently 370,000 entrepreneurs in the 16 to
the kind of career that fits around the kind of life they want.” 24 age category, and the historical growth rate is ex-
Ben Kaufman is a typical example of the Gen Y en- pected to double through 2014. Are you a future Gen Y
trepreneur. As a 20-year-old college student he started a entrepreneur?

The generational cohort labeled Generation Y includes the 72 million Americans
born between 1977 and 1994. This was a period of increasing births, which resulted
from baby boomers having children, and it is often referred to as the echo-boom
or baby boomlet. Generation Y exerts influence on music, sports, computers, video
games, and especially cell phones. Generation Y views wireless communication as
a lifeline to friends and family and has been the first to use Web-enabled mobile
phones to stream video, send and receive text messages, play games, and access
e-mail. This is also a group that is attracted to purposeful work where they have
control. The accompanying Marketing Matters box describes the entrepreneurial
spirit of Generation Y.9 The term millennials is also used, with inconsistent defini-
tions, to refer to younger members of Generation Y and sometimes to Americans
born since 1994.
Because the members of each generation are distinctive in their attitudes and
consumer behavior, marketers have been studying the many groups or cohorts that
make up the marketplace and have developed generational marketing programs for
them. In addition, global marketers have discovered that many of the American
generational differences also exist outside of the United States.10

The American Household As the population age profile has changed, so
has the structure of the American household. In 1960, 75 percent of all households
consisted of married couples. Today, that type of household is just 50 percent of the
population. Only 25 percent of households are married couples with children, and
10 percent are households with working fathers and stay-at-home moms. Some of
the fastest-growing types of households are those with a single person, those with a
single parent, and those with unmarried partners. Businesses are trying to develop
products and services that reflect the changing structure of households. Ocean Vil-
lage, for example, noticed a 26 percent increase in the number of single parents
traveling with children, so it added three-berth cabins on its cruise ships to cater to
the trend.11
The increase in cohabitation (households with unmarried partners) may be one
reason that the divorce rate has declined slightly in recent years. Even so, the
likelihood that a couple will divorce exceeds 40 percent and the total number
of divorced people is 21.6 million. The majority of divorced people eventually

74


remarry, which has given rise to the blended family, one formed by merging
two previously separated units into a single household. Today, one of every three
Americans is a stepparent, stepchild, stepsibling, or some other member of a
blended family. Hallmark Cards, Inc., now has specially designed cards and verses
for blended families.12

Population Shifts A major regional shift in the U.S. population toward west-
ern and southern states is under way. From 2005 to 2006, Arizona, Nevada, Idaho,
Georgia, and Texas grew at the fastest rates. Three states—California, Texas, and
Florida—will account for 45 percent of the population change in the United States
through 2025, gaining more than 6 million people in each state.13
Populations are also shifting within states. In the early 1900s, the population
shifted from rural areas to cities. From the 1930s through the 1980s, the population
shifted from the cities to suburbs. During the 1990s and 2000s, the population began
to shift again, from suburbs to more remote suburbs called exurbs and to smaller
towns called penturbia. Today, 30 percent of all Americans live in central cities, 50
percent live in suburbs, and 20 percent live in rural locations.14
To assist marketers in gathering data on the population, the Census Bureau has
developed a classification system to describe the varying locations of the population.

The system consists of two types of statistical areas:
● A metropolitan statistical area has at least one urbanized area of 50,000 or more
people and adjacent territory that has a high degree of social and economic
integration.
● A micropolitan statistical area has at least one urban cluster of at least 10,000
but less than 50,000 people and adjacent territory that has a high degree of social
and economic integration.
If a metropolitan statistical area contains a population of 2.5 million or more, it may
be subdivided into smaller areas called metropolitan divisions. In addition, adjacent
metropolitan statistical areas and micropolitan statistical areas may be grouped into
combined statistical areas.15
There are currently 362 metropolitan statistical areas, which include 83 percent of the
population, and 573 micropolitan areas, which include 10 percent of the population.

Racial and Ethnic Diversity A notable trend is the changing racial and
ethnic composition of the U.S. population. Approximately one in four U.S. resi-
dents is African American, American Indian, Asian, Pacific Islander, or a represen-
CHAPTER 3

tative of another racial or ethnic group. Diversity is further evident in the variety of
peoples that make up these groups. For example, Asians consist of Asian Indians,
Chinese, Filipinos, Japanese, Koreans, and Vietnamese. For the first time, the 2000
Census allowed respondents to choose more than one of the six race options, and
more than 6 million reported more than one race. Hispanics, who may be from
any race, currently make up 12 percent of the U.S. population and are represented
by Mexicans, Puerto Ricans, Cubans, and others of Central and South American
ancestry. While the United States is becoming more diverse, Figure 3–4 on the next
page suggests that the minority racial and ethnic groups tend to be concentrated
in geographic regions.16
The racial and ethnic composition of the United States is expected to change even
more by 2025. Between 2005 and 2025, the Hispanic population will grow from
42 million to more than 68 million, or almost 20 percent of the total population.
The number of Asian Americans in the United States will also double to 24 mil-
lion, or 7 percent of the population, and the African American population will be
approximately 45 million, or 13 percent of the population. The new Census category,
multiracials, currently makes up 2.4 percent of the population, but because of the
limited information about this group, growth forecasts are difficult to make. Overall,

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Diversity index
Native American/Alaska native
Asian
Black
Hispanic
Two or more

FIGURE 3–4
Racial and ethnic groups
(excluding whites) are
concentrated in geographic the trends in the composition of the population suggest that the U.S. market will no
regions of the United States. longer be dominated by one group and that non-Hispanic whites will be a declining
majority over the next two decades.
While the growing size of these groups has been identified through new Census
data, their economic impact on the marketplace is also very noticeable. By 2010,
Hispanics, African Americans, and Asians will spend $1.09 trillion, $1.02 trillion,
and $578 billion each year, respectively. To adapt to this new marketplace, many
companies are developing multicultural marketing programs, which are combi-
nations of the marketing mix that reflect the unique attitudes, ancestry, communi-
cation preferences, and lifestyles of different races. Because businesses must now
market their products to a consumer base with many racial and ethnic identities,
in-depth marketing research that allows an accurate understanding of each culture
is essential.17
Additional analysis of population demographic data, such as the information shown
in Figure 3–4, suggests that racial and ethnic groups tend to be concentrated in geo-
graphic regions. This information allows companies to combine their multicultural
marketing efforts with regional marketing activities. Consider, for example, that 48
percent of Asian Americans live in Los Angeles, New York City, and San Francisco,
and that two-thirds of Hispanics live in Florida, Texas, and California. Saturn com-
bined multicultural and regional marketing by running a Spanish-language advertis-
ing campaign in geographic areas with Spanish-speaking consumers. Similarly, a
Home Depot TV ad shows a native of Mexico with his Venezuelan wife and their
American-born daughter to reflect some of the differences in the Spanish language.18
In Chapter 9 you will learn more about this approach to the market referred to as
geographic segmentation.

Culture
A second social force, culture, incorporates the set of values, ideas, and attitudes
that are learned and shared among the members of a group. Because many of the

76


Saturn combined ethnic and
regional marketing by using
Spanish-language promotions
like this one in some states.

elements of culture influence consumer buying patterns, monitoring national and
global cultural trends is important for marketing. Cross-cultural analysis needed for
global marketing is discussed in Chapter 7.

The Changing Attitudes and Roles of Men and Women One of the
most notable cultural changes in the United States in the past 30 years has been in
the attitudes and roles of men and women in the marketplace. In fact, some experts
predict that as this trend continues, there will eventually be very few differences in
the buying patterns of men and women.
Your mothers and grandmothers probably remember advertising targeted at them
that focused on the characteristics of household products—like laundry detergent that
got clothes “whiter than white.” In the 1970s and 1980s, ads began to create a bridge
between genders with messages such as Secret’s “strong enough for a man, but made
for a woman.” In the 1990s, marketing to women focused on their challenge of bal-
ancing family and career interests. Since then, women and men have encouraged the
slow movement toward equality in the marketplace. As a result, today’s Generation Y
represents the first generation of women who have no collective memory of the dra-
CHAPTER 3

matic changes we have undergone. As one expert explains, “Feminism today is like
fluoride; we scarcely notice that we have it.”
Several factors have contributed to the shift in attitudes. First, many young women
had career mothers who provided a reference point for lifestyle choices. Second,
increased participation in organized sports eliminated one of the most visible in-
equalities in opportunities for women. And finally, the Internet has provided expo-
sure to the marketplace through a mechanism that makes gender, race, and ethnicity
invisible. Most of the 35 million Generation Y women view themselves as confident,
strong, and feminine. In addition, research suggests that the majority of adults today
believe men and women should equally share most responsibilities.19
Many companies that had a consumer base that was primarily men or primarily
women in the past are preparing for growth from the other gender. Grocery stores,
car dealers, investment services, and many others hope to appeal to both groups in
the future. Ugg Australia, for example, built a strong reputation among women with
its distinctive boots and is now trying to attract men with new products and advertis-
ing. Similarly, Liz Claiborne developed Claiborne for Men, and Cole Haan expanded
its line of shoes to include products for women. Some industries have been slower to
eliminate stereotypes and gender roles in their business and marketing approaches. A

77


recent study reported that 68 percent of women say they “can’t identify with women
used in advertising.” The financial services industry, for example, has focused on
male customers in the past, using campaign messages that worked for men but not
for women. To better serve the specific investment needs of women, Merrill Lynch
created a women-specific marketing department that uses research about women’s
buying process to design its products and marketing activities.20

Changing Values Culture also includes values, which vary with age but tend to
be very similar for men and women. All age groups, for example, rank “protecting
the family” and “honesty” as the most important values. Consumers under 20 years
old rank “friendship” third, while the 20-to-29 and 30-to-39 age groups rank “self-
esteem” and “health and fitness” as their third most important values, respectively.
An increasingly important value for consumers is preserving the environment and
other health issues. These values are reflected in the growth of products that consum-
ers believe are consistent with their values. Dannon Co., for example, has developed
probiotic yogurts such as Light & Fit Crave Control yogurt and immunity-boosting
DanActive for health-conscious consumers. Concern for the environment is one reason
consumers are buying hybrid gas-electric automobiles such as the Toyota Prius and
energy-efficient lightbulbs such as General Electric’s Energy Smart fluorescent bulbs.
Companies are also changing their business practices to respond to trends in consumer
values. Wal-Mart has set ambitious goals to cut energy use, switch to renewable power,
and reduce packaging on the products it carries.21
A change in consumption orientation is also apparent. Today, and for the foreseeable
future, value consciousness—or the concern for obtaining the best quality, features, and
performance of a product or service for a given price—will drive consumption behavior.
For many consumers this means bargaining for better price, not just when they are buy-
ing a car or a house, but in almost any purchasing situation. Innovative marketers have
responded to this new orientation in numerous ways. Some retailers are now authorizing
employees to respond to consumers who bargain by giving discounts off of advertised
rates. Some companies have created new outlets for value-conscious consumers. Holiday
Inn Worldwide, for example, has opened Holiday Inn Express hotels, designed to offer
comfortable accommodations with room rates lower than Holiday Inns. Similarly, Nords-
trom offers 50 to 75 percent discounts through its Nordstrom Rack Stores.22

1. Describe three generational cohorts.
2. Why are many companies developing multicultural marketing programs?
learning review
3. How are important values such as health and fitness reflected in the market-
place today?

ECONOMIC FORCES
The second component of the environmental scan, the economy, pertains to the
income, expenditures, and resources that affect the cost of running a business and
LO3 household. We’ll consider two aspects of these economic forces: a macroeconomic
view of the marketplace and a microeconomic perspective of consumer income.

Macroeconomic Conditions
Of particular concern at the macroeconomic level is the inflationary or recessionary state
of the economy, whether actual or perceived by consumers or businesses. In an infla-
tionary economy, the cost to produce and buy products and services escalates as prices

78


FIGURE 3–5 60 6
The Vehicle Buying Attitudes

Vehicle sales (millions units)
component of the Index of Vehicle buying attitudes

Vehicle buying attitudes
40 4
Consumer Sentiment (ICS) is
a good predictor of vehicle
sales. 20 2

0 0

20 2
Actual sales

40 4
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

increase. From a marketing standpoint, if prices rise faster than consumer incomes, the
number of items consumers can buy decreases. This relationship is evident in the cost of

a college education. The price of attending college has increased 29 percent during the
past 10 years while median family income rose 3 percent during the same period.23
Whereas inflation is a period of price increases, recession is a time of slow eco-
nomic activity. Businesses decrease production, unemployment rises, and many con-
sumers have less money to spend. The U.S. economy experienced recessions in the
early 1970s, early 1980s, and early 1990s. The economy again entered a recessionary
period from 2001 through 2003, and then began a period of growth.24
Consumer expectations of an inflationary and recessionary U.S. economy are an
important element of environmental scanning. Consumer spending, which accounts
for two-thirds of the U.S. economic activity, is affected by expectations of the future.
The two most popular surveys of consumer expectations are the Consumer Confidence
Index, conducted by a nonprofit business research organization called the Conference
Board, and the Index of Consumer Sentiment, conducted by the Survey Research
Center at the University of Michigan. The surveys track the responses of consumers
to specific questions about their expectations, and the results are reported once each
month. For example, the Index of Consumer Sentiment asks, “Looking ahead, do you
think that a year from now you will be better off financially, worse off or just about
the same as now?” The answers to the questions are used to construct an index. The
higher the index, the more favorable are consumer expectations. Figure 3–5 shows the
CHAPTER 3

fluctuation in the Vehicle Buying Attitudes component of the Index of Consumer Sen-
timent and its close relationship to vehicle sales. The consumer expectations surveys
are closely monitored by many companies, particularly manufacturers and retailers of
cars, furniture, and major appliances. Chrysler, for example, uses the surveys to plan
its automobile production and avoid producing too many or too few cars.25

Consumer Income
The microeconomic trends in terms of consumer income are also important issues for
marketers. Having a product that meets the needs of consumers may be of little value
if they are unable to purchase it. A consumer’s ability to buy is related to income,
which consists of gross, disposable, and discretionary components.

Gross Income The total amount of money made in one year by a person, house-
hold, or family unit is referred to as gross income (or “money income” at the Cen-
sus Bureau). While the typical U.S. household earned only about $8,700 of income
in 1970, it earned about $48,201 in 2006. When gross income is adjusted for infla-
tion, however, income of that typical U.S. household was relatively stable. In fact,

79


FIGURE 3–6 Under $10,000:
$100,000 or more:
U.S. households have a large 9%
17%
range of incomes.
$10,000–$14,999:
$75,000–$99,999: 7%
11%
$15,000–$24,999:
12%
$50,000–$74,999:
18%
$25,000–$34,999:
11%

$35,000–$49,999:
15%

inflation-adjusted income has only varied between $40,187 and $49,244 since 1977.
Figure 3–6 shows the distribution of annual income among U.S. households.26 Are
you from a typical household? Read the accompanying Going Online box to learn
how you can determine the median household income in your hometown.

Disposable Income The second income component, disposable income, is
the money a consumer has left after paying taxes to use for food, shelter, clothing,
and transportation. Thus, if taxes rise at a faster rate than does income, consumers
must economize. In recent years, consumers’ allocation of income has shifted. As the
marketplace has become more efficient, producing products that are more durable and
use less energy, consumers have increased their disposable income. Car maintenance
costs, for example, have declined 28 percent since 1985, because automobile quality
has improved. Much of the money is being spent on new categories of “necessities”
such as vitamins and supplements; antibacterial body washes, lotions, and deodorants;
antiwrinkle creams; and children’s shampoos, toothpaste, and bath products.27

As consumers’ discretionary
income increases, so does
the opportunity to indulge
in the luxurious leisure travel
marketed by Cunard.

Cunard
www.cunard.com

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Going Online
How Typical Is Your Hometown?
Marketers collect and use environmental information to
better understand consumers. One way to begin an en-
vironmental scan is to compare economic data about a
particular segment of the population to what is “typical”
or “average” for the entire population. Do you think your
town is typical? To find out, visit ESRI’s website at www.es
ribis.com, look under the heading “Free Tapestry Report”
and type in the zip code of your hometown. ESRI provides
a comparison of your zip code’s population with the aver-
ages for the nation.

Discretionary Income The third component of income is discretionary
income, the money that remains after paying for taxes and necessities. Discretion-
ary income is used for luxury items such as a cruise on the Queen Mary 2. An
obvious problem in defining discretionary versus disposable income is determin-
ing what is a luxury and what is a necessity.
The Department of Labor monitors consumer expenditures through its annual
Consumer Expenditure Survey. In 2005, consumers spent approximately 13 percent
of their income on food, 33 percent on housing, and 4 percent on clothes. While
an additional 35 percent is often spent on transportation, health care, and insurance,
the remainder is generally viewed as discretionary. The percentage of income spent
on food and housing typically declines as income increases, which can provide an
increase in discretionary income. Discretionary expenditures can also be increased
by reducing savings. The Bureau of Labor Statistics has observed that the percentage
of income put into savings has been steadily declining and is expected to be only
2.7 percent in 2012, compared with 3.7 percent today.28
CHAPTER 3

TECHNOLOGICAL FORCES
Our society is in a period of dramatic technological change. Technology, the third envi-
ronmental force, refers to inventions or innovations from applied science or engineering
LO4 research. Each new wave of technological innovation can replace existing products and
companies. Do you recognize the items pictured here and what they may replace?

Technology of Tomorrow
Technological change is the result of research, so it is difficult to predict. Some of the
most dramatic technological changes occurring now, however, include the following:
● Internet TV and mobile TV will become simple and available for most
consumers.
● Advances in nanotechnology, the science of unimaginably small electronics, will
lead to smaller microprocessors, efficient fuel cells, and cancer-detection sensors.
● Touch-screen and gesture-based navigation technology will change how we
interface with computers, phones, and most electronics.

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Technological change leads
to new products. What ● Companies will begin building software databases so that lines of code can be
products might be replaced reused, and open software will allow users to customize products to their specific
by these innovations? interests and applications.
These trends in technology are already seen in today’s marketplace. Samsung has
developed new phones that will utilize the next-generation networks (WiMAX) to
allow users to surf the Web and watch TV. Nintendo uses motion-sensing chips
in its Wii game system, and the social networking site, MySpace, allows users to
change the software code to customize their profile layout. Other technologies such
as high-definition disc players, speech recognition software, and customized music
services are likely to replace or substitute for existing products and services such as
DVD players, keyboards, and radio.29

Technology’s Impact on Customer Value
Advances in technology are having important effects on marketing. First, the cost of
technology is plummeting, causing the customer value assessment of technology-based
products to focus on other dimensions such as quality, service, and relationships. When
Plaxo introduced its address book software, it gave the product away at no charge,
reasoning that satisfied customers would later buy upgrades and related products. A
similar approach is now used by many cellular telephone vendors, who charge little
for the telephone if the purchase leads to a telephone service contract.30
Technology also provides value through the development of new products. Many
automobile manufacturers now offer customers a navigation system that uses satellite
signals to help the driver reach any destination. Under development are radarlike collision
avoidance systems that disengage cruise control, reduce the engine speed, and even apply
the brakes.31 Other new products likely to be available soon include a “smart ski” with
an embedded microprocessor that will adjust the flexibility of the ski to snow conditions;
injectable health monitors that will send glucose, oxygen, and other clinical information
to a wristwatch-like monitor; and electronic books that will allow you to download any
volume and view it on pages coated with electronic “ink” and embedded electrodes.32
Technology can also change existing products and the ways they are produced. Many
companies are using technological developments to allow recycling products through
the manufacturing cycle several times. The National Association for Plastic Container
Recovery, for example, estimates that 50 percent of all plastic bottles are now recycled,
usually to make polyester fibers that are spun into everything from sweaters to upholstery.

82


RePlanet offers recycling In Southern California, Tomra Systems has launched a chain of 250 rePlanet recycling
through its kiosks and kiosks that it hopes to spread across the United States. Consumers receive between
centers, and Wisk precycles 2.5 and 10 cents per recycled container. Another approach is precycling—efforts by
by reducing the size of its manufacturers to reduce waste by decreasing the amount of packaging they use. The
packaging. development of new packaging materials, for example, has allowed DuPont to produce
a collapsible pouch as an alternative to milk cartons in school lunch programs.33

Electronic Business Technologies
The transformative power of technology may be best illustrated by the rapid growth
of the marketspace, an information- and communication-based electronic exchange
environment mostly occupied by sophisticated computer and telecommunication
technologies and digitized offerings. Any activity that uses some form of electronic
communication in the inventory, exchange, advertisement, distribution, and payment
of goods and services is often called electronic commerce. Network technologies
are now used for everything from filing expense reports, to monitoring daily sales,
to sharing information with employees, to communicating instantly with suppliers.
Many companies have adapted Internet-based technology internally to support their
CHAPTER 3

electronic business strategies. An intranet, for example, is an Internet-based network
used within the boundaries of an organization. It is a private network that may or may
not be connected to the public Internet. Extranets, which use Internet-based technolo-
gies, permit communication between a company and its supplier, distributors, and other
partners (such as advertising agencies).

COMPETITIVE FORCES
The fourth component of the environmental scan, competition, refers to the alter-
native firms that could provide a product to satisfy a specific market’s needs. There
are various forms of competition, and each company must consider its present and
potential competitors in designing its marketing strategy.

Alternative Forms of Competition
Four basic forms of competition form a continuum from pure competition to mo-
LO5
nopolistic competition to oligopoly to pure monopoly. Chapter 13 contains further
discussions on pricing practices under these four forms of competition.

83


At one end of the continuum is pure competition, in which every company has a simi-
lar product. Companies that deal in commodities common to agribusiness (for example,
wheat, rice, and grain) often are in a pure competition position in which distribution
(in the sense of shipping products) is important but other elements of marketing have
little impact.
In the second point on the continuum, monopolistic competition, the many sellers
compete with their products on a substitutable basis. For example, if the price of cof-
fee rises too much, consumers may switch to tea. Coupons or sales are frequently used
marketing tactics.
Oligopoly, a common industry structure, occurs when a few companies control the
majority of industry sales. For example, AT&T, MCI, Verizon, and Sprint control ap-
proximately 80 percent of the $16 billion international long-distance telephone service
market. Similarly, the entertainment industry in the United States is dominated by
Viacom, Disney, and Time Warner, and the major firms in the U.S. defense contractor
industry are Boeing, United Technologies, and Lockheed Martin. Critics of oligopolies
suggest that because there are few sellers, price competition among firms is not desir-
able because it leads to reduced profits for all producers.34
The final point on the continuum, pure monopoly, occurs when only one firm sells
the product. Monopolies are common for producers of goods considered essential to a
community: water, electricity, and telephone service. Typically, marketing plays a small
role in a monopolistic setting because it is regulated by the state or federal government.
Government control usually seeks to ensure price protection for the buyer, although
deregulation in recent years has encouraged price competition in the electricity mar-
ket.35 Concern that Microsoft’s 86 percent share of the PC operating system market is
a monopoly has led to lawsuits and consent decrees from the U.S. Justice Department
and fines from the European Union.36

Components of Competition
In developing a marketing program, companies must consider the factors that drive
competition: entry, bargaining power of buyers and suppliers, existing rivalries, and
substitution possibilities.37 Scanning the environment requires a look at all of them.
These factors relate to a firm’s marketing mix decisions and may be used to create a
barrier to entry, increase brand awareness, or intensify a fight for market share. Read
the accompanying Using Marketing Dashboards box for ideas about assessing the
components of competition.38

Entry In considering the competition, a firm must assess the likelihood of new
entrants. Additional producers increase industry capacity and tend to lower prices. A
company scanning its environment must consider the possible barriers to entry for
other firms, which are business practices or conditions that make it difficult for new
firms to enter the market. Barriers to entry can be in the form of capital requirements,
advertising expenditures, product identity, distribution access, or the cost to customers
of switching suppliers. The higher the expense of the barrier, the more likely it will
deter new entrants. For example, Lucent Technologies is one of the major suppliers of
phone network equipment in the world, and its past customers find it less expensive
to upgrade their equipment than switch to another supplier.39

Power of Buyers and Suppliers A competitive analysis must consider the
power of buyers and suppliers. Powerful buyers exist when they are few in number,
there are low switching costs, or the product represents a significant share of the
buyer’s total costs. This last factor leads the buyer to exert significant pressure for
price competition. A supplier gains power when the product is critical to the buyer
and when it has built up the switching costs.

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Using Marketing Dashboards
Assessing Competition Is a Key to Success

To include competition in your marketing dashboard, you crease in price will lead to a 4 percent increase in sales.
need to assess the components of competition. For example, This calculation, however, ignores the likely reaction of
the probability of a new competitor entering a market can be competitors. That is, when a firm lowers its price, com-
assessed on a scale from 0% to 100%. The power or influence petitors may reduce price also, changing the ratio of sales
of a buyer or supplier declines as the number of buyers and increase to price reduction for the product. Based on your
suppliers in the same product category increases. As the num- assessment of the components of competition you esti-
ber of similar firms or substitute prod- mate that competitors will meet half
ucts increases the competitiveness of of your price reduction.
an industry increases. The combina- Your Action The information
tion of these measurements will allow about competition allows you to
you to make an overall assessment of adjust your estimates. Since com-
competitors and their likely actions. petitors will meet half of your price
Your Challenge You are respon- reduction, the increase in sales will
sible for price recommendations for probably be about half of your origi-

an existing product that has been nal estimate. So, the ratio of sales in-
very successful during the past year. crease to price reduction will change
In general, you believe that there is from 4-to-1 to 2-to-1. To achieve the
a strong relationship between price 10 percent increase in sales you es-
and sales, and that a reduction in timate that a 5 percent price reduc-
price would lead to an increase in sales. That is: tion is needed (5% ϫ 2/1).
This use of marketing metrics shows how assessment of
Sales Increase (%) ϭ
competition can allow higher precision in the actions taken
Price Reduction(%) ϫ Ratio of Sales Increase to Price Reduction
by marketing managers.
Your goal is to increase sales by ten percent. Note: The ratio of the unit amount of increase in sales
Your Findings After studying the prices of similar for each unit decrease in price is often referred to as price
products and their sales you estimate that a 1 percent de- elasticity, and is discussed in Chapter 13.

CHAPTER 3

Existing Competitors and Substitutes Competitive pressures among
existing firms depend on the rate of industry growth. In slow-growth settings,
competition is more heated for any possible gains in market share. High fixed
costs also create competitive pressures for firms to fill production capacity. For
example, airlines offer discounts for making early reservations and charge penal-
ties for changes or cancellations in an effort to fill seats, which represent a high
fixed cost.

Small Businesses as Competitors
While large companies provide familiar examples of the forms and components of
competition, small businesses make up the majority of the competitive landscape for
most businesses. Consider that there are approximately 23 million small businesses
in the United States, which employ half of all private sector employees. In addition,
small businesses generate 60 to 80 percent of all new jobs annually and 50 percent
of the gross domestic product (GDP). Research has shown a strong correlation be-
tween national economic growth and the level of new small business activity in the
previous years.40

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