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Module 2 - Background

New York Society of Certified Public Accountants (2017) Accounting Terminology Guide - Over 1,000 Accounting and Finance Terms. Retrieved from:  http://www.nysscpa.org/professional-resources/accounting-terminology-guide#sthash.UMS3kGjf.dpbs

For a glossary of general business terms:

Berry, T. (n.d.) Business terms glossary. BPlans. Retrieved from http://articles.bplans.com/business-term-glossary/

The Annual Report

The annual report is the way a firm summarizes its performance over the past year and where it sets a vision for the future. Publicly held companies (traded on the stock exchange) must prepare annual reports, and annual reports are usually public documents. Investors and the general public use annual reports as sources of information about the financial health of a company. We will be learning about reading annual reports to learn general accounting principles in the context of learning about a company and the industry in which it operates. Although we will not discuss all sections of an annual report, we will touch on the sections that have the most relevance to providing the HRM professional with the most helpful insights into the operations of the firm.

Front matter

This is largely text material that sets the stage for the quantitative data that follows.

The Opening letter to the Shareholders

The opening letter is generally the first section of the annual report and is a statement by the chairman of the board. The letter sets the stage for how the firm’s management wants you to view the report and the previous year’s performance, and so in this sense sets the “strategic intent” of the report. A careful reading of the letter can give context to the numbers that follow by giving you clues of what to look for in terms of goals met – or problems that prevented goal attainment. The firm may be on the verge of explosive growth, or a meltdown.

Sales and Marketing

This section covers the company’s product/service line. Typically, it also contains descriptions of key departments or groups and the work they do. By reading this section, you can deduce what products or services are most important to the firm and which divisions are seen as most critical to its success. This section can also give you clues as to what the future may hold.

The Auditor’s Letter

You might be tempted to skip this section, because it probably seems superfluous (like the terms and conditions acknowledgment on software updates. You know you don’t read those!). However, you should know that by law, a publicly traded firm needs to be independently audited every year. This is to protect the investor, and the auditors will state whether or not the data the company presents is accurate and if they have sufficient controls in place to prevent fraud. Auditors are required to point out any uncertainties or qualifications regarding the preparation of financial statements. The majority of auditors’ opinions are positive, but anything less than a positive report should alert the reader that there may be a major problem and the data may not be reliable.

The Financial Statements

Financial statements are the heart of the annual report and present the performance data for the past year. Look for trends or patterns in profitability, growth, and dividend performance.

The Income Statement

The first report you are likely to come across is the income statement. Simply stated, the income statement lets you know if the business made any money. This report summarizes all sales activities, costs of making or acquiring the goods or services sold, and other expenses involved in running the business. Income statements capture performance over time, such as a three-month period for a “monthly” statement, three quarters for a “quarterly” statement, and three years for a “yearly” statement. This allows you to see trends in performance over a period of time.

Key data displayed in the income statement:

· Sales or Revenue: The total amount of money received by the company for goods sold or services provided during a certain time period.

· Cost of Goods Sold (COGS): How much money was spent producing the products/services. (Sometimes called “Cost of Revenue.”)

· Gross Profit: How much money was earned when subtracting COGS from the total revenue. (Also called “Gross Margin.”)

· Operating Profit: How much was made after subtracting money spent on running the business itself (e.g., salaries, facilities, advertising, R&D, administrative costs, etc.). This is also called “EBIT or EBITDA”: Earnings before interest, taxes, depreciation, and amortization.

· Interest, Taxes, Depreciation, Amortization Expense: Self-explanatory.

· Net Income or Loss: This number tells you if the company made or lost money. It is calculated by subtracting all expenses from Gross Profit.

Here is a simple example of an income statement (Imagine you or a young person you know are running a lemonade stand):

The income statement answers the following questions:

1. Is the company making or losing money?

2. What are the trends? Are the company profits increasing or decreasing over time? Is this due to changes in sales, expenses, or both?

3. Is the change in profits due to changes in ordinary operating expenses, or are they due to one-time or extraordinary events unlikely to recur?

The following video offers a good overview of the income statement, using Walmart as the example:

The Finance Storyteller (2017) How to analyze an income statement. Retrieved from  https://www.youtube.com/watch?v=jovKWaUxdmU

For a written overview of the income statement read:

Fields, E. (2016) Chapter Two – The Income Statement. The Essentials of Finance and Accounting for Nonfinancial Managers, Third Edition. AMACOM. Available in the Skillsoft database in the Trident University Library.

Additionally, the following reading offers an example of an income statement and suggests how to go about reading and interpreting one:

Liston, H. (2015). How to read and analyze an income statement. Bplans. Retrieved from  http://articles.bplans.com/how-to-read-an-income-statement/

The Balance Sheet

The balance sheet looks more complicated than the income statement, but its premise is simple. The balance sheet is a snapshot of what the business owns and what it owes at a specific point in time. The difference between what a firm owns and what it owes is called equity. Just as the company wants to increase profit, it also wants to increase equity. Profits and equity are related. If the firm gains profit in any period, it gains in equity. If it loses money, the equity will decrease.

The balance sheet reports the following:

· Assets: These are the items of value that are owned by the company.

· Liabilities: These are the amounts the business owes other people, other businesses, or the government.

· Capital: This is the money that the owners and/or shareholders have invested or reinvested in the business. (Also called owner’s equity.)

The relationship between these elements is simple. The assets must equal the sum of the liabilities plus the owner’s equity. They must balance. This relationship is called the Accounting Equation.

Here is a video that explains the accounting equation in easy-to-follow terms:

  AccountingWITT. (2010). The accounting equation – Conceptual analogy. [Video file]. Retrieved from https://www.youtube.com/watch?v=YK4FJ7QrFY0

Note that balance sheets come in two basic formats. The traditional format shows assets on the left side of a table and liabilities and owner’s equity on the right. This is the format you will see in the reading. The other format lists the assets at the top of the table, the liabilities in the middle and the owner’s equity at the bottom. Here is a really simple balance sheet to illustrate. Again, imagine that you or a young friend are running a lemonade stand. The balance sheet might look like this:

Notice how the cash and inventory of supplies (assets) equals the amount owed on the Visa bill to buy supplies, plus the money reinvested from previous sales and cash kicked in by Mom and Dad as seed money (Liabilities + Owner’s Equity).

In a business, the balance sheet is much more complex. Assets can include not only Cash and Inventory, but also Accounts Receivables, Property, Plant and Equipment, and Intangible Assets. Liabilities can be classified as current (Accounts Payable or Taxes Payable) or Long-term debt.

The balance sheet can help answer the following questions:

1. Does the company have sufficient assets to meet its liabilities? In other words, is the firm able to pay its bills over the long term? In financial terms, is it solvent?

2. Does the firm have sufficient cash to pay immediate bills such as payroll? Accountants would call this liquidity, or the ability to quickly turn assets into cash.

3. Has the owner’s equity been increasing over time? (This requires comparing balance sheets over a specified time period.)

4. What is the mix of assets? For example, too much cash may signal a lack of investment in assets that will help the business grow. Too many assets in speculative ventures can also be a reason for concern. Another red flag might be that there were assets on the balance sheet that appeared to have no relationship to the business.

5. Is the mix of financing healthy? There should be some debt, but too little or too much can be a cause for concern. Odd categories of capital (excessive personal loans, convertible subordinate notes) may warrant further investigation.

The following video offers an introduction to the balance sheet:

Tutor2u. (2017) Introduction to the Balance Sheet. Retrieved from  https://www.youtube.com/watch?v=Syu2sKv05rQ

For a written introduction to balance sheets:

Fields, E. (2016) Chapter One - The Balance Sheet. The Essentials of Finance and Accounting for Nonfinancial Managers, Third Edition. AMACOM. Available in the Skillsoft data in the Trident University Library.

Additionally, the following reading goes over these concepts in a little more detail and gives some examples of how when one side of the balance sheet changes, the other must change as well to compensate.

Youderian, A. (2013). How to read a Balance Sheet (The non-boring version). Retrieved from http://www.ecommercefuel.com/how-to-read-a-balance-sheet/

The Statement of Cash Flows

Along with the balance sheet and income statement, the Statement of Cash Flows is a required financial report. It shows where the cash is coming from and how it is being spent. It is different from the income statement and balance sheet in that this report only accounts for current cash on hand – not future income from sales on credit. Thus, cash is not the same as “net income.”

View this video for an overview of the cash flow statement:

Small business basics: How to understand a cash flow statement. (2009). eHow. Retrieved from https://www.youtube.com/watch?v=4xfcNNAMcNk

Sources of Cash

There are three ways that cash can enter and leave a company:

Operations. This measures the cash in and cash out from sales of products or services. Included are actual cash, accounts receivable, depreciation, inventory, and accounts payable.

Investing. This is normally a “cash out” item as the firm invests in new equipment, facilities, or other assets. However, it can be a “cash in” item if the firm sells or divests assets.

Financing. “Cash in” items in this category might include loans or other changes in debt. “Cash out” might be when the company pays dividends on stock or interest on bonds. The cash flow statement can help answer the following questions:

1. What is the health of the business? A consistently healthy operating cash flow indicates that the company is probably being successful at turning its profits into cash. What does this mean to HR? If HR is responsible for staffing the accounting department, a positive value for cash from operations would indicate that the company is doing a good job of collecting on its accounts receivable. It would also indicate that production and sales are also going well. In addition, cash from operations indicates whether or not the firm can finance growth out of its own operations (internally), rather than having to go outside and borrow from banks or sell stock/bonds to raise money.

2. Does the company anticipate growth? The report also shows how much money the company is spending on the future. If the company is not investing in new equipment or facilities, it could be treating the business as a “cash cow” and milking it for current cash, but not investing in future growth. Is the company making increasing investments? This could indicate that the firm expects those investments to pay off in increased sales. On the other hand, is the company selling off assets to raise the cash to fund losses in operations? The answers to these questions has implications for HRM because different decisions would be made about recruiting and training new staff than if the company was a cash cow, gearing up for high growth, or struggling to turn operations around.

3. How dependent is the firm on outside financing? Does it have to borrow heavily just to stay alive? Is the company borrowing more than it is paying off? Are they raising money by selling new stock to investors, or are they using cash to buy back their own stock (so each shareholder owns a larger piece of the company)?

The following reading gives an overview of the cash flow statement:

Fields, E. (2016) Chapter Three - The Statement of Cash Flows". The Essentials of Finance and Accounting for Nonfinancial Managers, Third Edition. AMACOM. Available in the Skillsoft database in the Trident University Library.

The following article is a blog post on how to analyze cash flow statements from an investor’s point of view. However, I think it is helpful for our purposes because you won’t get bogged down in determining what numbers go where, but rather in how to read the “story” that the cash flow statement is telling you:

Jun, J. (2008). How to master analyzing the cash flow statement. Old School Value. Retrieved from  http://www.oldschoolvalue.com/blog/valuation-methods/analysing-financial-statements-and-aerogrow/

Footnotes to the Financial Statements

The final part of the annual report that you should know about are the footnotes. These notes contain important information concerning specific methodologies used to prepare the financial statements that might make the statements themselves too crowded and difficult to read. Footnotes may be of particular interest to HR professionals w hen they contain information about pensions or compensation plans.

Putting it all together

Here is the “so what?” question. Now that you know what the main financial statements are and what information they contain – SO WHAT? What does one have to do with the other? How do they fit together?

In order to make sense out of what seems to be a jumble of numbers, go back to the fundamental accounting equation: Assets = Liabilities + Owners Equity. Always remember this relationship. This ties together the three financial statements.

1. The statement of cash flows tracks how changes in the firm’s cash balance are the result of changes in assets, liabilities, and owner’s equity.

2. The balance sheet shows the changes in assets and liabilities.

3. The income statement demonstrates changes in owner’s equity resulting from changes in net income.

Thus, any changes in one part of the firm’s accounting picture can be explained by changes to the other parts. This is the essence of accounting.

Analyzing the Financial Health of the Firm: Ratios

While learning to read financial statements is one of the best ways to learn accounting principles, the best way to assess the financial health of a firm is by comparing key financial ratios. These ratios help us attain a deeper understanding of the company’s performance, particularly when viewed in terms of changes over time or in relation to other firms in the same industry. There are many ratios, some of which are specialized for a type of organization, or function within an organization. Because this is a course designed to acquaint non-MBAs with financial ratios, we will review a set of ratios that are most commonly used by management in the majority of organizations. These ratios fall into four categories measuring different areas of strategic interest:

Profitability ratios

Just looking at net income does not tell you very much about how well the company is doing at generating a profit given the level of sales or amount of assets owned by the firm. The higher the profitability ratio, the better job the company is doing at generating a profit from their assets. Examples of profitability ratios include Profit Margin and any of the “return” ratios (e.g., Return on Assets or ROA; Return on Equity or ROE). The following site explains in plain language some of the key profitability ratios you will run across, how they are calculated, and how they are used.

Profitability Ratios. (2015). My Accounting Course. Retrieved from http://www.myaccountingcourse.com/financial-ratios/profitability-ratios

Liquidity Ratios

It is essential for an organization to know if it can pay its bills comfortably. Liquidity ratios let you know how much the company has on hand that can be quickly converted to cash. From this same plain-language site, here is some reference material on liquidity ratios you are likely to see and need to understand:

Liquidity Ratios. (2015). My Accounting Course. Retrieved from http://www.myaccountingcourse.com/financial-ratios/liquidity-ratios

Leverage Ratios

These ratios tell you how heavily the firm is burdened by debt and how much the company is being financed by investors or shareholders. The higher the amount of debt, the higher the leverage. In general, highly leveraged firms are considered to be more risky because more of the income generated by the business must be used to simply pay off the debt rather than support operations or increase owner’s equity.

Financial Leverage Ratios. (2019). My Accounting Course. Retrieved from  http://www.myaccountingcourse.com/financial-ratios/financial-leverage-ratios

Efficiency ratios

As its name would suggest, this ratio measures whether or not the firm is making the most out of its assets. If a firm can speed up its collection of receivables or sell its inventory faster, it increases its efficiency, positively affects its cash position, and thus its profitability. Efficiency ratios vary widely by industry. Walmart makes its money by quickly turning over inventory at rock-bottom prices. The profit margin on a single item is so thin that any extra money spent on warehousing or storing products on the shelf cuts into profit (high turnover ratio). On the other hand, Jaguars sell for a high price that includes the probability that the cars will sit on the lot for a while before the right buyer comes in (low turnover ratio).

Efficiency Ratios (2019). My Accounting Course. Retrieved from http://www.myaccountingcourse.com/financial-ratios/efficiency-ratios

Specialized Ratios

Not all industries pay the same amount of attention to the same ratios. Retailers pay a lot of attention to inventory; small businesses and start-ups may keep a close eye on the current ratio to make sure they have enough cash to pay bills. Similarly, different parts of a company may place special attention on specialized ratios. Here are some metrics that are particularly applicable to human resource managers:

· Revenue per employee

· Compensation as a percent of revenue

· Benefits cost as a percent of compensation

· Cost per hire

· Employee turnover

· HR department expense as a percent of total expenses

You will be delving into Human Resource metrics further in later classes in the MSHRM curriculum, but here is an excellent overview of the topic. The video at the end raises some controversial views as to what HR measurements are valuable to the firm from a strategic viewpoint.

Evans, M.H. (2015). Metrics for Human Resource Management. Retrieved from http://www.exinfm.com/board/metrics_for_hr_management.htm

Videos

AccountingWITT. (2010). The accounting equation – Conceptual analogy. [Video file]. Retrieved from  https://www.youtube.com/watch?v=YK4FJ7QrFY0.  Standard YouTube License.

Harris, M. (2018, May 22). Liquidity Ratios. Retrieved from https://youtu.be/D48_G40JACI. Standard YouTube License.

Profitability Ratios. (2015). Corporate Finance Institute. Retrieved from https://youtu.be/hgRLUdWVl3Q. Standard YouTube License.

Quantopian. (2019, August 1). How to read a Balance Sheet. Retrieved from https://youtu.be/q4HOhxCS1u8. Standard YouTube License.

Quantopian. (2019, July 25). How to read an Income Statement. Retrieved from https://youtu.be/bvjRacnAz9I. Standard YouTube License.

The Finance Storyteller (2017) How to analyze an income statement. Retrieved from https://www.youtube.com/watch?v=jovKWaUxdmU.  Standard YouTube License.

Towns, P. (2016, January 5). How do you read a cash flow statement? Retrieved from  https://youtu.be/X17bUV-EfIM. Standard YouTube License.

Tutor2u. (2017). Introduction to the Balance Sheet. Retrieved from https://www.youtube.com/watch?v=Syu2sKv05rQ.  Standard YouTube License.

Required Reading

Efficiency Ratios. (2015). My Accounting Course. Retrieved from http://www.myaccountingcourse.com/financial-ratios/efficiency-ratios

Fields, E. (2016). The essentials of finance and accounting for nonfinancial managers (3rd ed.). New York, NY: AMACOM. Available in the Skillsoft database in the Trident Online Library.

Marler, J. H., & Boudreau, J. W. (2017). An evidence-based review of HR Analytics. International Journal of Human Resource Management, 28(1), 3–26. Available in the Trident Online Library.

Omondi-Ochieng, P. (2018). US table tennis association: A case study of financial performance using effectiveness indicators and efficiency ratios. Managerial Finance, 44(2), 189-206. Available in the Trident Online Library.

Synaptics 2017 Annual Report. (2018). Retrieved from http://www.annualreports.com/Company/synaptics-inc

Optional Reading

Financial Leverage Ratios. (2015). My Accounting Course. Retrieved from http://www.myaccountingcourse.com/financial-ratios/financial-leverage-ratios

Grigorescu, A., & Chiper, A. (2016). The importance of human capital in the strategic development of an organization. Studies and Scientific Researches: Economics Edition. University of Bacău, Romania. DOI 10.29358/sceco.v0i0.344. CC BY-SA

Module 3 - Background

PRINCIPLES OF MARKETING

All readings are required unless noted as “Optional” or “Not Required.”

Introduction

In practice, Marketers use various models to describe the different marketing functions. Some of the more popular models are the 7 step model, STP (segmentation, targeting, positioning), or the 4 C's (Consumer Behavior, Company Analysis, Competitor Analysis, and Context). Each has advantages and drawbacks regarding comprehensiveness. Readings describing each of these models are provided in the Optional Reading list at the end of this section. For this module, however, we will use a model that integrates and abridges these other models.

Consumers, Markets, and Competition

Though many people think of marketing as consisting of sales and advertising, one of the most important marketing functions begins even before the final product or service has been developed. In this early stage, the organization conducts research to determine customer needs, how the market is structured, and the number and nature of competitors addressing that need. As you will see below, these three topics are intertwined.

Consumers

The purpose of marketing is to discover how to provide value to consumers while earning a profit. Marketers must understand the entire consumer base: the customer served by the organization, the customer currently served by competitors, and customers who may be served in the future. One way marketers do this is by analyzing buyer behavior (i.e., how consumers get information and how consumers make buying decisions). Consumer behaviors are influenced by a number of considerations such as psychological factors, convenience, competing choices, and cultural preferences. Read the following book chapter on consumer behavior.

Tanner, J., and Raymond, M. (2012). Marketing Principles (v. 2.0). Ch. 3: Consumer behavior: How people make buying decisions. Sections 3.1-3.6. Retrieved from  https://2012books.lardbucket.org/pdfs/marketing-principles-v2.0.pdf

Markets

Any business needs to know the characteristics of the markets in which the firm operates. Understanding the customer and the market requires extensive and sophisticated research efforts to gather and analyze social and economic trends, human decision-making, and potential competitors. The goal of market research is to enable the firm to identify opportunities and threats in the business environment as well as the organization’s capacity to exploit its strengths and shore up its weaknesses.

Market research can be either primary (collected directly from the source), or secondary (collected/published by someone outside the organization). Some examples of secondary data include:

· US Census

· www.Data,gov

· Internal data (such as customer cards at grocery stores that collect data on buying patterns)

· Nielsen or Arbitron ratings

· Published articles and reports

· Blog posts

· Social media

The following chart illustrates the differences between primary and secondary market research:

Source:  http://www.mymarketresearchmethods.com/primary-secondary-market-research-difference/

Competition

Competition is either direct or indirect. Direct competitors, such as Coke and Pepsi, offer similar products or services. Indirect competitors offer similar functions or meet similar needs, but with different products, such as hardwood flooring vs. granite countertops in a re-model. These are different products, but they compete for the same re-modeling dollar. As we saw in Module 1, when there are substitute products, elasticity of demand is increased. This creates a need for marketing to differentiate the product from that of the competition.

Also relevant to understanding the competitive environment is to know the market share of the industry players. This is initially determined through market research. One important way of competing is to formulate a strategy to increase market share, because when competitors have similar products or services, larger market share generally equates to larger profits. Some common approaches to increasing market share are:

1. Lower production costs

2. Spend more on research

3. Spend more on equipment

4. Spend more on advertising

In analyzing the competition, the business must have a good understanding of itself. What are its own capacities and weaknesses? It may have the capacity to deliver the product – but at what level? Local, regional, national, international? Mass merchandising or boutique market niche? These decisions may be governed by the firm’s capacity to finance its activities. The best way to analyze the competitive situation and the firm’s capacity to respond to internal and environmental challenges is to conduct a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). For an example of a SWOT analysis of Costco, review this report in the Trident Online Library:

GuruFocus.com: SWOT analysis: Costco wholesale corporation. (2015). Chatham: Newstex. Available in the Trident Online Library.

Market Segmentation, Targets, and Positioning

Once the firm has gained a broad understanding of its customers and competitive environment, it is time to make some more specific decisions about the services or products it offers. The first step is to divide the population of potential customers into homogeneous subgroups of consumers with similar needs and desires. This is called segmentation. The second step is to select from among these subgroups, which one(s) the firm will serve best. This is called the target market. Finally, the marketers determine the approach they will take in emphasizing the value their product/service had for the target group. This is called positioning.

Segmentation

Many firms differentiate among their customers and offer different products or level of service depending on customer type. This allows the firm to direct marketing efforts effectively and efficiently to the “right” people to maximize sales and profit. For example, banks may offer their “preferred customers” (large depositors or borrowers) free checking, better interest rates, complementary safety deposit boxes, personal bankers, etc. These perks are geared toward attracting and keeping their most profitable customers. Other firms do not differentiate and offer everyone the same thing. Though segmentation may initially be more expensive than mass-marketing, firms that segment are more profitable than those that do not. The most common categories of segmentation are:

· Demographic (age, gender, income)

· Geographic (SMSA, census)

· Psychographic (lifestyle, personality)

· Behavioral (usage, loyalty, occasion, price consciousness)

The following video offers an excellent overview of these topic areas:

Tutor2u (2016) Market Segmentation, Targeting and Position. Retrieved from  https://www.youtube.com/watch?v=0srjdRDh99Y

Targeting

Once the customer base has been segmented by need and characteristics, the firm needs to decide which group it can pursue most successfully. Considerations include which group(s) the firm can 1) best satisfy, 2) fit best with the firm’s strategy, and 3) be most profitable in the future.

Many things must be considered. The fastest-growing segment may attract more competitors and thus be more expensive to capture and retain. Segments can also overlap. For example, business users of internet services also make decisions about ISP's for personal use. Another consideration is that a product may appeal to a non-targeted segment, thus decreasing its appeal to the targeted segment. For example, when XYZ product becomes the product of choice of “gray hairs,” it may no longer appeal to the 20-something demographic who were the desired customers (think Facebook). This may require the firm to change its strategy. Read about some of the disadvantages of target marketing in this short article from the Houston Chronicle:

Suttle, R. (2019). The disadvantages of target marketing. Small Business, Chron. Retrieved from  http://smallbusiness.chron.com/disadvantages-target-marketing-36131.html

Positioning

When the target market has been selected, the firm has a very important decision to make. How will it position its product or service in relationship to the other offerings in the market? This is the essence of marketing strategy: Positioning determines how the target will view the product or even the firm. Think of the different images that come to mind when you think about Target vs. Saks Fifth Avenue. Do you immediately think of price and quality? Now consider Target vs. Walmart. Both offer low prices, but Target emphasizes that the customer “gets more” while paying less. They are positioning themselves for the more discerning customer by appearing to offer better quality along with value pricing.

Positioning maps are used by marketers to understand customer perceptions of a marketplace and the relative positions of different firms, products, and brands.

The following study guide illustrates how to construct a positioning or perceptual map:

A Step-by-Step Guide to Constructing a Perceptual Map. (n.d) Retrieved from  http://www.segmentationstudyguide.com/understanding-perceptual-maps/a-step-by-step-guide-to-constructing-a-perceptual-map/

The Marketing Mix

While positioning describes the firm’s strategic approach to marketing a product or brand, the 4 P's are direct tactical decisions regarding delivering customer value. The 4 P's are as follows:

Product

What fundamental need does the purchase satisfy? “Product” is more than the actual product; it can involve meeting needs for status, convenience, reliability, ability to customize, etc. Thus, packaging, warrantees, design, options, reputation, or customer service may be just as important as the product itself. Branding is an integral part of product management. Think of BMW or Apple. What comes into your mind when you hear these names? Our imagination translates these brands into descriptive and evaluative phrases having to do with the qualities or attributes of products carrying these brands. Similarly, Target, Pepsi, McDonald's, your favorite restaurant, and even yourself can be said to "have a brand," (i.e., be identified by certain qualities that mean something to those who perceive these brands).

Price

To a marketer, price is more than how much the customer pays at purchase – it also involves the time the consumer spends in making the decision to buy, and the opportunity cost of choosing one product over the other available choices. The price a firm sets for a product is called pricing strategy. Choosing the right price is a complex decision that needs to take a number of factors into account, including the characteristics of your target market and the overall strategy of the firm to gain market share, given the competitive environment. Options include skim pricing and penetration pricing. To review some of the factors involved with pricing strategies and gain insight into how a firm could decide which might be appropriate, read:

Woodruff, J. (2019) Different types of pricing strategy. Chron Retrieved from  https://smallbusiness.chron.com/different-types-pricing-strategy-4688.html

Promotion

No matter how good a product or service is – or how much value it provides to the target market - it will not sell if people do not know about it. This is where advertising and selling come in. There are many approaches and tools marketers can use in promotion. The decision depends on the firm’s strategy, the budget, and availability. TV reaches the most people, but it is very expensive. Personal selling by employing a sales force can also be expensive, but the cost can be mitigated through telemarketing and/or digital marketing online.

Coupons, discounts, and rewards programs are effective tools and can be applied selectively at critical times during the year. Some companies price the product very low to entice sales – but the replacement parts may be very expensive. For example, consider cheap razors with expensive razor blades or free cellphones with expensive data plans.

There are basically two kinds of promotion strategies: the push and pull strategies. Each has advantages and disadvantages. For an explanation of the differences between the two approaches, take a couple of minutes to read this short article from the online Houston Chronicle:

Robertson, T. (2019). Difference between push & pull marketing. Small Business, Chron. Retrieved from  http://smallbusiness.chron.com/difference-between-push-pull-marketing-31806.html

Place

Few companies design a product, manufacture it, and sell it directly to the consumer. Most rely on distributors to transport and independently owned stores to actually sell the product. This is termed the distribution channel. Wholesalers and retailers are critical to the marketing function as they comprise major parts of the distribution channel. Firms prefer that members of the distribution channel act as partners. But when distributors become large and powerful, an imbalance can occur, drastically affecting the marketing strategy of the firm.

Distributors can add value in multiple ways. You can buy an unassembled bicycle on the internet at a discount, or buy the same bike from a specialty shop that will assemble, customize, and service your purchase for a higher price. Some distributors also provide logistics management to ensure the timely delivery of the products to the consumers at the low costs. With the popularity of Internet and e-commerce, more and more companies deliver their products or services directly to the end consumers, using direct distribution channels.

For more information on distribution channels, refer to the following optional resources.

Fontelera, J. (2019). Distribution Channels and Marketing Analysis. Retrieved from  http://smallbusiness.chron.com/distribution-channels-marketing-analysis-60985.html

Blunt, L. (2019) Types of Marketing Channels. Retrieved from  http://smallbusiness.chron.com/types-marketing-channels-21627.html

Quain, S. (2018). How Does Logistics Differ From Distribution? Retrieved from  http://smallbusiness.chron.com/logistics-differ-distribution-77542.html

For a quick review of the 4 P's of the Marketing Mix, view the following video:

Paxton/Patterson (2017) The 4 Ps of the Marketing Mix. Retrieved from  https://www.youtube.com/watch?v=Mco8vBAwOmA

Summary

Product, price, promotion, and place strategies are highly interdependent. Mass distribution generally is coupled with low price, whereas boutique or limited distribution is generally associated with higher product and advertising prices.

Perhaps the area where these interdependencies become most clear is when considering product life cycle. It is in the firm’s best interest to sell the greatest number of products as long as possible. To do this, the firm must capture the greatest market share it can for as long as it can. Product, price, place, and promotion must change over time through product introduction, growth, maturity, and decline. For a summary on how the marketing mix should change according to the product life cycle, read:

Claessens, M. (2015) Product Life Cycle Stages (PLC) – Managing the Product Life Cycle. Retrieved from  https://marketing-insider.eu/product-life-cycle-stages/

Finally, for an overview of general marketing topics from the perspective of a marketeer, review the following optional chapters:

Popky, L. (2015) Chapter 3. What hasn’t changed: Timeless Marketing Truths. Marketing Above the Noise: Achieve Strategic Advantage with Marketing that Matters. Bibliomotion. Available in the Skillsoft data in the Trident University Library.

Popky, L. (2015) Chapter 4. What has changed: The New Realities. Marketing Above the Noise: Achieve Strategic Advantage with Marketing that Matters. Bibliomotion. Available in the Skillsoft data in the Trident University Library.

Videos

Learnloads. (2014, March 10). What are distribution channels? Retrieved from  https://youtu.be/ALoo4vrKKUw

Marcy Research. (2018, November 8). Perceptual mapping. Retrieved from  https://youtu.be/L9hgJ-4hLYg.  Standard YouTube License.

Marketing 91. Product life cycle. Retrieved from  https://youtu.be/pq3e1b_7uho.  Standard YouTube License.

Patel, N. (2019, May 8). Pricing strategies. How to price your product or services for maximum profit. Retrieved from  https://youtu.be/0NGQLgrHRe4.  Standard YouTube License.

Paxton/Patterson. (2017). The 4 Ps of the marketing mix. Retrieved from  https://www.youtube.com/watch?v=Mco8vBAwOmA.  Standard YouTube License.

The audiopedia. (2018). What is perceptuak mapping? Retrieved from  https://youtu.be/CeNpI2ufn44.  Standard YouTube License.

Tutor2u (2016) Market Segmentation, Targeting and Position. Retrieved from  https://www.youtube.com/watch?v=0srjdRDh99Y.  Standard YouTube License.

Required Reading

A Step-by-Step Guide to Constructing a Perceptual Map. (n.d) Retrieved from http://www.segmentationstudyguide.com/understanding-perceptual-maps/a-step-by-step-guide-to-constructing-a-perceptual-map/

Kemp, E. A., Borders, A. L., Anaza, N. A., & Johnston, W. J. (2018). The heart in organizational buying: Marketers' understanding of emotions and decision-making of buyers. The Journal of Business & Industrial Marketing, 33(1), 19-28. Available in the Trident Online Library.

Paxton/Patterson. (2017). The 4 Ps of the marketing mix. Retrieved from  https://www.youtube.com/watch?v=Mco8vBAwOmA.  Standard YouTube License.

Phillips, T. (2017, March 10). Digital marketing strategy: Push vs pull? The Guardian. Available in the Trident Online Library.

Pricing strategy (2010). NetMBA. Retrieved from  http://www.netmba.com/marketing/pricing/

Suttle, R. (2015). The disadvantages of target marketing. Small Business, Chron. Retrieved from  http://smallbusiness.chron.com/disadvantages-target-marketing-36131.html

The product life cycle. (2010). Quick MBA. Retrieved from  http://www.quickmba.com/marketing/product/lifecycle/

Tutor2u (2016) Market Segmentation, Targeting and Position. Retrieved from  https://www.youtube.com/watch?v=0srjdRDh99Y.  Standard YouTube License.

Vanegas, J. G., Restrepo, J. A., Barros, G. A., & Moreno, G. A. (2018). Service quality in Medellin hotels using perceptual maps. Cuadernos de Administración, 34(60). Retrieved from  http://cuadernosdeadministracion.univalle.edu.co/index.php/cuadernos_de_administracion/article/view/5927.  Available in the Trident Online Library. CC BY-NA.

Optional Reading

Annual Reports & Proxies. (2014) Walmart. Retrieved from  http://stock.walmart.com/investors/financial-information/annual-reports-and-proxies/default.aspx

Chaffey, D. (2013) Marketing models that have stood the test of time. Smart Insights. Retrieved from  http://www.smartinsights.com/digital-marketing-strategy/online-business-revenue-models/marketing-models/

Cohen, H. (2013). 7 step marketing framework. Actionable Marketing Guide. Retrieved from  http://heidicohen.com/7-step-marketing-framework/

D’Aveni, R.A. (2007). Mapping your competitive position. Harvard Business Review. Retrieved from  https://hbr.org/2007/11/mapping-your-competitive-position

Hanlon, A. (2013) How to use Segmentation, Targeting and Positioning (STP) to develop marketing strategies. Smart Insights. Retrieved from  http://www.smartinsights.com/digital-marketing-strategy/customer-segmentation-targeting/segmentation-targeting-positioning-model/

Hanlon, A. (2015) The 4 C’s marketing model. Smart Insights. Retrieved from  http://www.smartinsights.com/marketing-planning/marketing-models/4cs-marketing-model/

Jorina, F, (n.d.). Distribution Channels and Marketing Analysis. Retrieved from  http://smallbusiness.chron.com/distribution-channels-marketing-analysis-60985.html

Lanee, B. (n.d.). Types of Marketing Channels. Retrieved from  http://smallbusiness.chron.com/types-marketing-channels-21627.html

Neil, K. (n.d.). How Does Logistics Differ From Distribution? Retrieved from  http://smallbusiness.chron.com/logistics-differ-distribution-77542.html

Module 4 - Background

PRINCIPLES OF STRATEGY

Strategy is a broad term that refers to how a company competes in the marketplace. A strategy reflects the firm’s values, its purpose for existing, and how it will compete. A strategy is not a detailed plan, but rather serves as a guide for how decisions should be made. Strategy provides direction.

There are 3 levels of strategy.

Corporate-level strategy. The corporate level answers the question “What business should we be in?” As an example, a conglomerate corporation like General Electric that competes in many industries or businesses – including aviation and financial services – must carefully consider its corporate strategy.

Business-level strategy. The business level focuses on how the firm will compete in a given industry. Will it try to crowd out the competition by offering multiple brands and dominating grocery store shelf space? Will it offer its products at a cut-rate price and make its profit on volume rather than margin?

Functional-level strategy. The functional level (e.g., financial strategy, marketing strategy, human resource strategy) defines activities and processes that support the firm’s corporate and business strategies.

Various models have been developed to assist strategic decision makers in arriving at the right strategy for their organization. We will review several important ones here:

The BCG Matrix

The Boston Consulting Group (BSG) matrix represents a portfolio approach to corporate strategic planning. Many of this popular models’ terms have become part of the everyday language. This approach recognizes that many firms have more than one product or line of services, and that not all of them should have the same strategies because each may face different competitive environments. Thus, a different strategy may be called for, depending largely on market share and marginal costs. Thus, a product with high market share and low marginal costs would generate a large amount of cash high ROI or return on investment) which could then be “milked” to fund other products or lines that had higher costs and/or smaller market share. The BCG matrix characterizes business into four types, depending on how much cash they generate vs. cash they use:

· Stars

· Cash cows

· Dogs

· Question marks

The following video offers an excellent overview on how the BCG matrix works:

Alanis Business Academy. (2016) Episode 96: How the Boston Consulting Group (BCG) Growth-Share Matrix Works. Retrieved from  https://www.youtube.com/watch?v=lc36fK38pLA

The following reading explains the BCG matrix in the context of overall strategic planning and decision-making. You can locate this book in the Trident Online Library, ebook collection.

Campbell, A., Alexander, M., & Goold, M. (2014). Some history: From Boston box to three logics that drive corporate action. Chapter 2. In Strategy for the corporate level: Where to invest, what to cut back and how to grow organisations with multiple divisions (2nd Ed.). pp 31-73. New York, NY: John Wiley & Sones. Available in the Trident Online Library.

Porter's 5-Forces Model

Before a firm can settle on a specific strategy, it must have a good grasp of the competitive environment in which it operates and the possible approaches it might take to achieve growth. What follows is a description of three models commonly used to help strategic planners understand the competitive challenges faced by the organization.

A traditional approach to strategy has the industry or business as the focus of strategic analysis. The main method used to determine a competitive strategy is the “industry analysis”, and the primary tool used to conduct an industry analysis is renowned strategy scholar Michael Porter’s Five Forces Model. Porter’s model identifies five key forces that shape an industry’s competitive landscape:

1. The threat of substitutes

2. The threat of new entrants

3. Bargaining power of suppliers

4. Bargaining power of buyers

5. Degree of rivalry among existing firms

An analysis of these factors can give insight into concerns like the likelihood of price wars, the ease with which consumers can switch from one product to an alternative, the likelihood that the market could be flooded by competitors offering the same goods or services, etc. All these factors will have an impact on decisions about what products to sell, how to brand them, where to sell, at what price, and how much of a profit margin can be expected. The Harvard Business Review offers the following concise video introduction to Porter’s Model.

Aleem, Q. (2016, March 22). Porter's 5 Forces Model in just 2 minutes. Harvard Business Review. Retrieved from  https://www.youtube.com/watch?v=ZWQMwnCFIj0

For somewhat more, here is an interview with Professor Michael Porter. He discusses several examples of how the five forces work in several industries including airlines, soft drinks, the internet, and others:

The Five competitive forces that shape strategy. (2008). Harvard Business Review. Retrieved from  https://www.youtube.com/watch?v=mYF2_FBCvXw

The Value Chain and Integration

Depending on the characteristics of the industry, the firm must find a way to establish a competitive advantage. One way to think about establishing this advantage is to think of a firm in terms of its value chain. At each step in the manufacture and delivery of a product or service, value is added. So, if you start with a raw material, like ore, that material is then processed, for example into steel. Then the steel is further processed into machinery, which is then distributed to wholesalers, and then retailers, who sell to consumers. You can see how at each step, value is added.

A company can operate at any step in this chain. The degree to which the company performs operations at multiple levels in the process is called Integration. There is forward and backward integration, depending on whether the firm moves closer to the source materials or the end consumer. Integration can eliminate or ameliorate some of the negative competitive forces identified above. A firm can reduce buyer power, for example, by purchasing the outlets where the product is sold. Think of the farmer who sells his produce directly to consumers at a farmers’ market rather than selling to a grocery store. The farmer no longer has to settle for the price the supermarket is willing to pay – he has alternatives.

The following video offers an introduction to Value Chain analysis as conceptualized by Michael Porter:

MindToolsVideos. (2017, March 6). Porter's Generic Value Chain Model. Retrieved at  https://www.youtube.com/watch?v=aeshYi6lj2Y

Also, read this short description of integration and be sure to view the video there that gives some examples of how this might work and provide a firm with strategic advantages:

Kenton, W. (2019, February 19). Backward Integration. Investopedia. Retrieved from  http://www.investopedia.com/terms/b/backwardintegration.asp

Li, W., & Chen, J. (2017, March 2). Backward integration strategy in a retailer Stackelberg supply chain. Omega, 75, 118-130. Available in the Trident Online Library.

Generic Strategies

Once a company understands its competitive environment and its options for growth, it is time to generate some plans for action. Most plans for action can be characterized as one of three basic generic strategies. They are called generic, because they apply to a number of industries: from manufacturing, to service, to education, to health care. Porter’s three original generic strategies were:

· Cost Leadership

· Differentiation

· Focus or Niche

The following video does a good job of explaining the different generic strategies and offers examples:

The five competitive forces that shape strategy. (2008, June 30). Harvard Business Review. Retrieved from  https://www.youtube.com/watch?v=mYF2_FBCvXw . Standard YouTube License.

The following excellent article describes these three strategies and shows how each calls for different types of tactics to address the competitive forces identified in the Industry Analysis (e.g., entry barriers, threat of substitutes, etc.).

Woodruff, J. (2018, December 17) Four generic strategies that strategic business units. Chron. Retrieved from  https://smallbusiness.chron.com/four-generic-strategies-strategic-business-units-use-496.html

Resource-Based View of the Firm

Another approach to analyzing and contemplating a firm’s strategy is the resource-based view of the firm. In the resource-based view, the focus of strategic analysis is not the industry or business and the generic strategy a firm will pursue, but rather the corporation or firm itself and the resources, capabilities, and core competencies that the firm possesses.

The following video explains the resource-based view and contextualizes the theory in strategic management theory:

Academi lib. (2015, August 2). The Resource-Based View (RBV) of the Firm. Retrieved from  https://www.youtube.com/watch?v=E-7wB1kild4.  Standard YouTube License.

The following reading gives an excellent overview of the resource-based view:

Assensoh-Kodua, A. (2019). The resource-based view: A tool of key competency for competitive advantage. Problems and Perspectives in Management, 17(3), 143-152. doi:10.21511/ppm.17(3).2019.12. Open Access article. Available in the Trident Online Library.

Videos

Academi lib. (2015, August 2). The Resource-Based View (RBV) of the Firm. Retrieved from  https://www.youtube.com/watch?v=E-7wB1kild4.  Standard YouTube License.

Alanis Business Academy. (2013, March 7) Episode 96: How the Boston Consulting Group (BCG) Growth-Share Matrix Works. Retrieved from  https://www.youtube.com/watch?v=lc36fK38pLA.  Standard YouTube License.

Aleem, Q. (2016). Porter's 5 Forces Model in just 2 minutes. Harvard Business Review. Retrieved from  https://www.youtube.com/watch?v=ZWQMwnCFIj0.  Standard YouTube License.

Kryscynski, D. (2015, January 5). What is Strategy? Retrieved from  https://www.youtube.com/watch?v=TD7WSLeQtVw.  Standard YouTube License.

MindToolsVideos. (2017, March 6). Porter's Generic Value Chain Model. Retrieved at  https://www.youtube.com/watch?v=aeshYi6lj2Y.  Standard YouTube License.

Porter’s Generic Strategies. (2013, July 15). Education Unlocked. Retrieved from  https://www.youtube.com/watch?v=9wXVnBrpZ-U.  Standard YouTube License.

The five competitive forces that shape strategy. (2008). Harvard Business Review. Retrieved from  https://www.youtube.com/watch?v=mYF2_FBCvXw.  Standard YouTube License.

Required Reading

Assensoh-Kodua, A. (2019). The resource-based view: A tool of key competency for competitive advantage. Problems and Perspectives in Management, 17(3), 143-152. doi:10.21511/ppm.17(3).2019.12. Open Access article. Available in the Trident Online Library.

Backward Integration. (2015). Investopedia. Retrieved from  http://www.investopedia.com/terms/b/backwardintegration.asp

The following reading explains the BCG matrix in the context of overall strategic planning and decision-making. You can locate this book in the Trident Online Library, ebook collection.

Campbell, A., Alexander, M., & Goold, M. (2014). Some history: From Boston box to three logics that drive corporate action. Chapter 2. In Strategy for the corporate level: Where to invest, what to cut back and how to grow organizations with multiple divisions (2nd ed., pp 31-73). New York, NY: John Wiley & Sons. Available in the Trident Online Library.

Hummel. (2018, April 13). Danish sportwear major Hummel International forays into India. Asian News International. Available in the Trident Online Library.

Kenton, W. (2019, February 19). Backward integration. Investopedia. Retrieved from  http://www.investopedia.com/terms/b/backwardintegration.asp

Kunc, M. (2019) "Chapter 4 - Industry Dynamics". Strategic Analytics: Integrating Management Science to Strategy. New York, NY: John Wiley & Sons. Available from Skillsoft database in Trident Online Library.

Li, W., & Chen, J. (2017, March 2). Backward integration strategy in a retailer. Stackelberg supply chain. Omega, 75, 118-130. Available in the Trident Online Library.

Manktelow, J., & Carlton, A. (2015). Porter’s Five Forces: Assessing the balance of power in a business situation. Retrieved from  https://goenglishlive.com/index.php/case10/case10-2.

McGinley, D. (2018). Cable providers in the US. IBIS World Industry Report 51711a. IBISWorld. Available in IBIS World database in the Trident Online Library.

Woodruff, J. (2018) Four generic strategies that strategic business units. Chron. Retrieved from  https://smallbusiness.chron.com/four-generic-strategies-strategic-business-units-use-496.html

Optional Reading

Charan, R. (2014). It's time to split HR. Harvard Business Review. Retrieved from  https://hbr.org/2014/07/its-time-to-split-hr

Lawler, E. III (2012). Corporate Strategy: How HR Can Become a Player. Forbes. Retrieved from  http://www.forbes.com/sites/edwardlawler/2012/08/15/corporate-strategy-how-hr-can-become-a-player/