Collins Cambridge IGCSE and Business Studies samples

Chapter 3 . Topic 1

Marketing, competition and the customer The role of marketing

Learning objectives By the end of this section, you should: • Understand the role of marketing in identifying customer needs • Understand the role of marketing in satisfying customer needs • Understand the role of marketing in maintaining customer loyalty and building customer relationships.

Identifying and satisfying customer needs There are many different ways of defining marketing. For example: Marketing is…

❛❛

…the management process responsible for identifying, anticipating and satisfying customer requirements profitably.

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…the right product, in the right place, at the right time, at the right price.

Adcock et al. (1995)

The Chartered Institute of Marketing (1976)

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❜❜

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… about marshalling [organising] the resources of an organisation so that they meet the changing needs of the customer on whom the organisation depends.

From Palmer, A. (2000) Principles of Marketing © By permission of Oxford University Press

❜❜ As these definitions show, marketing is about identifying and satisfying customer needs. The role of marketing is to ensure that a business’s products or services meet the needs of customers better than those of the competition – if they don’t, the business will struggle.

Focusing on the needs of customers is known as ­market orientation. A ­market-​­orientated business starts by asking what consumers need from a product (usually through market research). They then try to develop products that meet and satisfy those needs. For example, McDonald’s responded to changing customer needs by introducing salads, healthier meal options and, to compete with the likes of Starbucks, better quality coffee.

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3.1 The opposite of market orientation is known as product orientation. This is where a firm designs a product independently of known customer needs, and then uses marketing to convince customers to buy the product. We don’t, for example, need (and probably rarely use) all of the features of our smart phones, but companies develop these features and then convince us that upgrading is essential.

Building customer loyalty and relationships Modern marketing is not just about getting new customers; it is also about building relationships with those customers.

Relationship marketing involves communicating with customers regularly and encouraging repeat purchase (brand loyalty). Building relationships means not just selling a product to customers and then forgetting about them. Firms need to engage their customers with (remind them of) the brand regularly.

For example, many firms use Facebook, Snapchat and Twitter to communicate with customers in an attempt to develop trust and loyalty. This kind of ­two-​­way marketing allows firms to listen to customers and respond to their needs quickly. By engaging with customers through websites, live TV t­ ext-​­ins, retail/store loyalty cards and through apps such as Line, WhatsApp and Weibo, firms can build brand image, strengthen relationships with customers and improve brand loyalty.

Case study Snapchat

Building on its early success with tech-savvy teenagers, Snapchat gives brands a cool way to engage with customers (and potential customers), developing brand loyalty. Short videos and links to online articles create a ‘buzz’ about a product, service or event, encouraging users to share with their friends (promoting brand awareness). Fresh daily content and promotions if users ‘snap’ themselves using the firm’s products help establish a relationship between the business and its customers beyond the point of sale.

This ongoing relationship keeps the business and its products ‘front of mind’.

From a simple photo-sharing app Snapchat has turned itself into a creative way to reach a youthful demographic.

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Successfully satisfying customer needs also involves: adding value

Adding value To ‘add value’ is to be able to sell a product for more than it cost to make (see 1.1 Business activity). The business can then sell the product for profit. Marketing is crucial for achieving added value because it creates willingness to pay for a product. In the case of Nike, for example, customers are willing to pay high prices (much higher than the cost of production) because of the brand image created by Nike’s marketing – the added value is the ‘cool factor’ from wearing Nike.

creating ‘unique selling points’ (USPs)

Creating unique selling points (USPs) It is not enough for a business just to meet customer needs. It must meet those needs better than the competition.

Successful marketing involves…

seeking first-mover advantage

In order to achieve competitive advantage, a business should identify its unique selling point (USP) – a feature of either the product, its image, price, promotion or distribution (place) that is superior to the competition.

A successful USP will enable consumers to identify the main reason why they should purchase a specific brand and will encourage them to do so. A USP can therefore help a business add value and achieve profit.

Case study

Pringles

A good example of a USP is the packaging (and shape) of Pringles potato chips (crisps). In essence, Pringles are just the same as any other potato chip. The USP is that they are packaged differently (in a tube) and therefore the shape of each potato chip is unique to Pringles.

Pringles have consistently used the USP as the basis for their marketing (promoting, for example, the opening of the Pringles tube as part of the overall eating experience).

Even if a product is not unique, it is the job of marketing to ensure that it is differentiated from competitors’ products.

Facebook is not the only social networking site. It was also not the first. In the case of Facebook, differentiation is achieved through its simple design (the product) and its features (such as the Timeline and Facebook games). Facebook is also differentiated by its nearly two billion user base; to compete, other social networks need to offer a similar reach – an almost impossible task!

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3.1 Seeking fi ­ rst mover advantage Successful marketing must also identify and satisfy future market trends. It must also enable a business to be the first to meet a new or previously unrealised (not yet met) consumer need. By being first with a new product, a business can achieve much greater success – it is estimated that being the first to enter a new market can double a product’s profitability and is known as ­first mover advantage.

For example, Apple dominates the tablet computer market because it was, arguably, the first to market. The iPad was not only a great product technically, it also anticipated a trend for ­tablet-​­style computers. When the iPad was launched, people didn’t quite know what it was for; but Apple has since sold over 300 million of them.

Analysis

I nvestigate one of the companies listed below.

Using the information in this section, analyse why you think their marketing is successful.

• Adidas (sports clothing) • Uber (taxi service) • MAC Cosmetics • Ducati (motorbikes) • H&M (clothing) • Apple (computers) Present your findings as a poster, using both visual images and words to outline the marketing activities and why you think they are successful.

Top Tip Marketing is about much more than just advertising and sales. When answering questions make sure you analyse and evaluate how a business does (or might) identify and satisfy customer needs, maintain customer loyalty and build customer relationships.

Knowledge check 1 Define marketing and explain how it is used to develop/maintain customer loyalty.

(6)

2

Define, using a suitable example, ­market orientation.

(4)

3

State one example of how marketing adds value.

(2)

4

Define the term unique selling point.

(2)

5

Explain the term ­first ​­mover advantage. Why is being ‘first mover’ considered an advantage?

(3)

Explain how marketing helps a firm to identify customer needs.

(3)

6

Total 20 marks

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Chapter 1 Understanding business activity

Business activity y You must be able to: explain how business activity aims to fulfil the needs and wants of consumers discuss the impact of specialisation on firms and consumers evaluate the importance of adding value.

• • •

Scarcity Not all products and services are freely available. Sometimes, consumers want to buy products that are in short supply. Business managers do not have unlimited space to set up machinery or store raw materials.

When we have limited quantities of resources, they are said to be scarce.

Scarcity can have a number of effects: •

the scarcer a resource becomes, the more expensive it becomes

•

in extreme cases, governments may choose to ration the supply of these resources, limiting the quantity that any individual is allowed to buy.

Consumers and firms do not have unlimited quantities of resources such as time and money. This means that they must choose the best way to allocate these scarce resources: •

managers might have to choose between an advertising campaign or investing in machinery

•

consumers might have to choose between buying a new computer or going on holiday

Whichever option we choose, we have to give up the other option.

The option that we forego is the opportunity cost of the option that we select.

Revision tip Think about how opportunity costs influence your decisions.

What opportunity costs do you face when you spend your pocket money? Linking key concepts from the course to your own life and experiences should help you to remember them.

Specialissation In order to make the most of scarce resources, many businesses choose to specialise in one particular type of activity. This tends to lead to increases in productivity and efficiency meaning that firms can make greater profits for their owners.

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Adding value Businesses exist to transform raw materials into goods and services that consumers want to buy.

When businesses transform raw materials into something more useful to consumers, the finished product is worth more money. The transformation process creates added value.

For example, a baker combines flour, yeast and water to create bread. Each ingredient is relatively inexpensive on its own. When they are combined into a form that is more useful to consumers, people are willing to pay more for them because they are more useful to them.

There are a number of ways that a business can add value: •

Branding – using elements such as logos and slogans to make ordinary goods seem to be worth more.

•

Customer service – by giving the customer help and assistance which makes them feel they are getting more for their money.

•

Adding additional features – making a basic product do something that others will not do.

•

Quality – by producing a product that is superior, for example, aesthetics or ergonomics.

Revision tip Be prepared to give examples of how a business that you are familiar with adds value to very basic ingredients. You might be able to find plenty of interesting examples at your favourite fast food restaurant.

Quick test 1. Explain the meaning of the term scarcity.

2. List five examples of goods and services that might be scarce. For each example, suggest a reason why it might be scarce.

3. Explain an opportunity cost that might be faced by: a) a business owner b) a consumer 4. Discuss one reason why business owners might choose to specialise in producing a specific type of good or service.

5. Analyse three ways that a business might add value to raw materials.

Understanding business activity

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Chapter 1 Understanding business activity

Classificcation off businesss You must be able to: outline different forms of business classification explain how to classify different types of business discuss the significance of changes to the number of primary, secondary and tertiary firms in developed and developing countries.

• • •

The basiss of busin ness classsification n Businesses can be organised into groups according to the type of activities they are involved in. There are three types of classification: primary, secondary and tertiary.

Definitions

Revision tip

Primary industry – businesses that extract raw materials from the ground or the sea.

Secondary industry – Businesses that process raw materials so that they can be used.

Tertiary industry – businesses that provide a service to the public or to other firms.

It is important to learn your definitions thoroughly. AO1 – knowledge and understanding – is worth 40% of your IGCSE grade.

This table shows some examples of businesses that fit into each classification.

Primary sector

Secondary sector

Tertiary sector

farms

oil refineries

supermarkets

fisheries

bakeries

cinemas

coal mines

toy manufacturers

taxi firms

Reasons for the ch hanging importa ance of businesss classifica ation Some developed countries, such as the UK, are said to have developed a knowledge economy where large numbers of jobs are in the tertiary sector such as banking and software development. Government policy has encouraged the growth of these jobs because they are often well paid.

In many developing countries, wages are often very low compared to developing countries. This means that businesses operating in primary industries such as agriculture and mining can employ large numbers of people at low costs, leading to higher profits.

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Public an nd private e sector businessses It is possible to classify companies according to how they are owned.

Some companies are created by, and owned by, governments. These businesses are said to be part of the public sector.

There are a lot of reasons why a government might want to establish a public sector business. It might want to provide merit goods such as healthcare.

Alternatively, it might be to take over essential services that are failing in the private sector, such as banking. Sometimes, the government sets up public sector businesses to develop firms in infant industries – such as renewable energy industry – which might not be profitable enough to be worth the cost of investment for private sector businesses.

Businesses that are owned by private individuals are part of the private sector.

These can include: •

small companies that are owned by one person or a group of partners

•

incorporated firms which are owned by shareholders.

Revision tip Try to demonstrate to the examiner that you know how theory can be applied to your local business context. Can you give examples of public and private sector companies from your country?

In a mixed economy there will be a combination of both public and private sector businesses.

There are two other types of economy: •

free market economies have no businesses owned by the government – all enterprise is privately owned and funded

•

planned economies are entirely owned by the government – all goods and services are produced according to plans set by ministers.

Quick test 1. Write definitions of primary, secondary and tertiary industry.

2. Suggest examples of primary, secondary and tertiary sector activities that might be carried out by a large oil company such as Shell.

3. Outline three differences between developed and developing economies.

4. Explain two reasons why primary industry is becoming less important in developed economies.

5. Define the terms public sector and private sector.

6. Explain two possible reasons why your government might want to create public sector companies.

7. Outline the difference between a mixed economy and a free market economy.

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Chapter 1 Understanding business activity

Enterpriise and entrepre eneurship You must be able to: explain the characteristics of entrepreneurs discuss the importance of business plans to the success of entrepreneurs assess the usefulness of government support for entrepreneurs.

• • •

The charracteristiccs of succcessful entrepre eneurs What are the qualities that make a successful entrepreneur? This is something that varies from person to person, but many of the most successful entrepreneurs have some or all of the following characteristics to some degree: •

charisma – the ability to inspire staff, customers and investors with their magnetic personality

•

determination – the ability to pursue a goal, even if others are not supportive

•

resilience – being able to ‘bounce back’ from failure

•

creativity – using imagination to come up with unique solutions to problems or designs for products.

Revision tip Try to think about examples of entrepreneurship that you have seen on television. How do the people on programmes such as ‘The Apprentice’ or ‘Dragons Den’ demonstrate these characteristics?

Contentss of a bussiness pla an A business plan is a document that an entrepreneur can present to stakeholders in their business such as potential investors. It provides essential details that can be used to judge how likely it is that a business idea will be successful.

A typical business plan will usually include: •

a summary of what the business does

•

details of the aims and objectives of the business

•

a cashflow forecast

•

a forecasted income statement

•

a marketing plan

•

a staffing plan.

Revision tip Imagine that you are a bank manager. What would you want to see in a business plan before you would be willing to lend money to an entrepreneur?

A business plan is a useful document for entrepreneurs. It can help them to remain focused on things that are important to the success of their business idea. It can also help them to monitor their progress – they can use the business plan to set out their goals for the starting-up of their business. Over the course of the year, they can refer back to the plan to see how close they are to achieving it.

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Why and d how gov vernmentts suppo ort busine ess start-upss Many governments choose to provide assistance to entrepreneurs to make sure that their business ideas have a chance of becoming successful.

Governments use a range of support methods including: •

Grants – this is a sum of money that must be used for a specific purpose such as buying equipment, but the entrepreneur does not have to pay it back.

•

Loans – sometimes banks are not willing to loan money to entrepreneurs because they are concerned about losing their money if the business fails. Governments can arrange loans that charge low rates of interest to encourage new businesses.

•

Advice – some entrepreneurs might need specific information about very specialised areas of business such as how to export goods to other countries. Governments can help entrepreneurs speak to experts who can offer them help and assistance.

•

Training schemes – while entrepreneurs might have creative ideas and lots of resilience, they might not have specific skills such as cashflow forecasting. Government training schemes can help provide guidance on certain aspects of running a company.

Why do governments provide help to entrepreneurs? Reasons might include: •

reducing unemployment

•

improving economics growth

•

encouraging new and innovative industries to develop

•

improving international competitiveness.

Quick test 1. State three characteristics of an entrepreneur.

2. Outline five things that might be included in a business plan.

3. Explain why a business plan might be essential for the success of a start-up business.

4. Discuss three ways in which a government could help entrepreneurs set up a small business.

5. Analyse two reasons why governments might want to encourage people to start new businesses.

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Understanding business activity 1

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Exam-sttyle pracctice que estions

(a) Outline the meaning of the term needs.

[2]

(b) State two examples of needs.

[2]

(a) Define the term scarcity.

[2]

(b) Explain how scarcity affects the price of goods and services.

[3]

(a) Outline the meaning of the term entrepreneur.

[2]

(b) State three characteristics of an entrepreneur.

[3]

(c) Explain one example of an opportunity cost that might be faced by an entrepreneur.

[3]

(a) Outline the meaning of the term primary industry.

[2]

(b) State three examples of businesses that operate in the secondary sector.

[3]

(a) Describe two methods that governments use to support new businesses.

[4]

(b) Explain two reasons why governments might support new businesses.

[6]

(a) State three methods of measuring the growth of businesses.

[3]

(b) Analyse one problem faced by a growing business.

[5]

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Test[4]

(a) Outline two characteristics of a sole trader. (b) Explain two drawbacks of running a business as a partnership.

[6]

(c) Assess the benefits of operating a business as an unincorporated company.

[8]

(a) Analyse two benefits of setting up a franchise.

[8]

(b) Evaluate the usefulness of setting up a business as a joint venture.

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(a) Write a SMART objective for a new private sector business.

[10]

[5]

(b) Explain the difference between the objectives of a social enterprise and a private sector business.

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[5]

(c) Assess the importance of setting objectives for a range of firms.

[8]

(a) List three internal stakeholders.

[3]

(b) Evaluate the extent to which the objectives of customers and owners conflict with each other. [10]

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Answers Understanding business activity 1. (a) The basic goods and/or services that a person requires (1) in order to achieve a reasonable standard of living (1) (b) Possible examples might include: food (1) clothing (1) shelter (1) water (1) sanitation (1) 2. (a) The world only has a limited amount of resources (1) but peoples wants are unlimited (1) (b) The more limited the supply of a product is (1) the higher the price will go (1) as long as the amount of demand doesn’t change (1) 3. (a) A person who takes on the risks (1) of running one or more small businesses (1) (b) Decisive (1) Resilient (1) Determined (1) Innovative (1) Inventive (1) (c) An entrepreneur might have to choose between the potential rewards of running their own business (1) and the safety of being an employee for someone else (1) as they might not be able to do both at the same time (1) 4. (a) Businesses such as coal mines (1) that extract raw materials from the ground (1) (b) Oil refineries (1) Abattoirs (1) Bakeries (1) Car manufacturers (1) 5. (a) Grants (1) are money which don’t have to be paid back, to help with start-up costs / are a sum of money that is offered if the business meets certain conditions (1) Help and advice (1) such as the information on the .gov.uk website for new businesses (1) (b) If more new business start up and are successful (1) this will contribute to economic growth (1) potentially leading to greater prosperity (1) If people start businesses, this will reduce unemployment (1) meaning the government will need to spend less money on social security payments (1) meaning more money to spend on important projects such as building infrastructure (1) 6. (a) By revenue (1) by Profits (1) By the number of employees (1) by the number of branches (1) (b) A growing business might have communication problems (1) because the number of branches might grow (1) leading to

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7. (a)

(b)

(c)

8. (a)

(b)

more difficulty sharing messages with staff in different locations (1) and increasing the chances of inconsistency in different locations (1) leading to poor customer service (1) Unlimited liability (1) meaning the business owner is responsible for all debts (1) The owner and the business do not have separate legal identities (1) making the owner liable if the business is sued (1) If one owner incurs debts (1) both partners are liable for the payment of those debts (1) even if they didn’t agree/ know about the debt (1) Partners may not always agree on how to run the business (1) leading to conflict (1) which may lead to business decisions taking longer to make (1) Unincorporated businesses do not have to release information such as accounts (1) meaning that competitors will not be able to find out how well they are performing (1) although this might not be a big benefit as unincorporated businesses tend to be small businesses (1) On the other hand, a bigger benefit might be that the owners can take all of the profits of the business for themselves (1) because they do not have any shareholders (1) and so they do not have to pay any dividends to them (1) but this will only be a big benefit if the business is making big enough profits (1) to provide the owners with a good reward for their efforts (1) You will have the use of an established brand (1) meaning potential customers might already be familiar with the business (1) reducing the amount of time and money needed on promotion (1) in order to build brand recognition (1) You will have support from the franchisor (1) with aspects of running the business such as marketing and Human resource management (1) making it easier to learn how to run the company (1) A joint venture means that two companies will share resources (1) such as research and development expertise (1) meaning that large advances such

9. (a)

(b)

(c)

10. (a)

(b)

as inventing new technologies will happen faster (1) than one company working by itself (1) However, the profits from the venture will have to be shared between the partners in the joint venture (1) meaning that less money is earned from anything that is developed (1) but if the business were to work alone (1) it might be able to create equally good inventions without the input of the joint venture partners (1) keeping all the revenues for themselves (1) and also owning all the patents and copyrights themselves (1) leading to larger profits in the longer term (1) Achieve a 10% increase in revenue earned on all food sales during June and July (5) A private sector business might focus on profit (1) in order to satisfy it’s shareholders (1) wheras a social enterprise exists in order to solve problems (1) such as homelessness (1) and would therefore set targets that prioritise people over money (1) Large firms, such as PLC’s, e.g.

Tesco (1) might find it very important to set objectives because the shareholders will want to know what the managers are planning (1) so that they have confidence that their investment is safe (1) because they can see if the business will be taking any big risks (1) on the other hand, a sole trader might chose not to set objectives because they don’t need to communicate their plans to anyone else (1) as they are the only owner of the business and therefore not accountable to anyone (1) although they would still need to set objectives if they wanted finance from a bank (1) and so it can still be important for them to set objectives. (1) Staff (1) Managers (1) Supervisors (1) Shareholders (1) Directors (1) Owners (1) Customers will want to get the best possible value for their money (1) and they will always want more goods/services for lower prices (1) but a business will always want to make the largest possible profit (1) by keeping their prices as high as possible (1) and their costs

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Answers low (1) but on the other hand, businesses also want to perform better than their competitors (1) and in order to gain market share (1) they might lower prices in order to win more customers (1) and so therefore, a business which is trying to outperform its competitors (1) is likely to have goals that are close to those of its customers (1)

Answers

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