4.1 Introduction to marketing 

Full video class on YouTube, summary and notes on Instagram, class extracts on TikTok, text below. Have fun!

The main point of this class is to learn the basics of marketing.

To begin with, just a reminder that marketing is one of the four business functions, that refers to making sure the right goods and services are provided to the right customers in the right place and the right time. We will explore the concept of marketing further in Unit 4, but one thing that needs to be made clear right from the very beginning is that marketing, advertising and promotion are not the same thing and cannot be used as synonyms. All these three terms are related but they are not synonymous. Very often, students use these words interchangeably and it is a big obstacle in the understanding of marketing. We’ll get back to it later, but for now please consider the infographic below.

Market orientation and product orientation are two different approaches to marketing. Both approaches serve the same purpose (selling as much as possible and generating the highest possible revenue) but they are very different in terms of how they achieve that purpose. It is important to understand in which ways they are different and I suggest you copy the table below and fill it in as you read this chapter.

Market orientation is an approach to marketing that is focused on market research. Simply speaking, market oriented businesses think about what to sell, not about what to produce. The main idea here is that market oriented businesses conduct market research in order to understand customers’ needs and wants and provide them with the desired goods and services. Thus, this approach is outwards-looking, which means that it is not focused on the business and product, it is focused on the market (i.e. customers).

On the one hand, market orientated approach helps the business to quickly reply to market/customer needs and wants because of continuous market research. Market oriented businesses always know what their customers want and their main goal is to make sure they are selling exactly what people need. On the other hand, market research is a time consuming and expensive process, so reliance on market research is costly for market-oriented businesses.

A typical example of a market oriented business is Coca-Cola. Market research revealed that sales of Coke are dropping because people are concerned with the consumption of sugar. As a response to that, the company launched Diet Coke. After that, market research results revealed that men who tried to cut down on sugar neither buy regular Coke nor Diet Coke, because the latter seems “too girly” to them. The company responded to that with Coke Zero. So, Coca-Cola puts most of its effort on identifying customers’ needs and wants and providing exactly what they need.

Product orientation is an approach to marketing that is focused on innovation. Simply speaking, market oriented business think about what to produce/invent, not about what to sell. The main idea here is that product oriented businesses try to develop unique innovative products that do not even have alternatives. Thus, this approach is inwards-looking, which means that it is not focused on the customers and market research, it is focused on the business itself and the product.

On the one hand, product orientated approach helps the business to avoid competition. Product oriented businesses provide unique products that have no alternatives, so they enjoy the first-mover advantage — being the first to create a market and thus enjoying the market leadership and market power (we’ll talk about these terms in more detail a bit later). On the other hand, product-oriented approach is also time consuming and expensive (same as market oriented-approach), but for a different reason. Innovation requires constant research and development (R&D), which requires experienced well-paid specialists and a long time. On top of that, there are no guarantees that the newly-launched unique product will be successful, so maybe all the R&D may end up being useless…

We may use Apple as an example of a product-oriented business. Back in the times when the first iPhone was released, there was no market research that could reveal that people were in need of a touch-screen smartphone. Believe me, I lived at that time, and everyone was perfectly happy with Nokia back then! But after Steve Jobs showed the first iPhone, that was a complete game-changer. However, back in the early 90s, Apple released Newton, which was something like an iPad, but with very limited functionality. It was an amazing state-of the art product that was an outcome of Apple’s product-oriented approach. That product was also a commercial failure. It was too innovative for that time and people clearly did not need anything like that. As you can see from Apple’s example, product orientation is a big risk that may result in a big success (if it works) or a big failure (if it doesn't)...

Before we move on to the next part of this class, let’s see which factors may impact the choice of an approach, which factors managers consider when they think “are we market oriented or product oriented?”:

• First of all, it’s nature of the product. If the product that you are offering is pizza, then it would be quite hard to be product-oriented… Clearly for products like pizza market oriented approach is more suitable.
• Secondly, barriers to entry (obstacles that prevent businesses from entering different markets) matter. For example, competition. If the competition in a certain market is intense, then how will you try to minimise it: by understanding what customers want (market-oriented) or by providing something unique that has no alternatives (product-oriented)?
• Lastly, organisational culture impacts the choice of an approach to marketing. If an organisation is working under the assumption that “customer is always right” then it clearly refers to market orientation. However, if the company’s slogan is “Think different” (Apple), then it forms a culture of innovation, risk taking and creativity, which are the features of a product oriented approach.

Lastly, it does not have to be either market orientation or product orientation. These two approaches may complement each other and in reality most business use a combination of both approaches. Look at the picture below and let me know what you think is a more accurate way to understand the relationship between the two approaches: are they the opposites on one spectrum or are they two things that may come together?

Quick reminder: by now, filling in the table below should be a piece of cake. If it's not, please read this chapter again or find a video class on my Youtube channel.

Before we talk about market share and market growth, we have to establish what market is and how to measure its size. Market can refer to many things: all the people that purchase a certain product, or a place where trade happens, or products that are offered by businesses. Market size refers to the total sales in the industry. It can be measured by value (dollars, yuan, rupiah, etc.) or by volume (number of items sold, for example number of smartphones). Perhaps, you heard phrases like “this is a billion-dollar market” which means that total sales of all firms in this market equal to one $1b.

Market size = cumulative sales of all organisations in the industry

For example, in XYZ town there are only 3 firms (A, B and C) producing chairs. A sells 55 chairs and makes $550. B sells 25 chairs but earn $350. C sells 20 chairs and only makes $100. Then, chair market size in XYZ is:

Market size by value = $550 + $350 +$100 = $1,000

Market size by volume = 55 chairs + 25 chairs + 20 chairs = 100 chairs

Market share is the percentage of the total sales in a market that a business makes up, i.e. a firm’s portion in total sales in the market/industry. Even though market share is always expressed as a percentage, this percentage may refer to either value (dollars, yuan, pound, etc.) or to volume (number of smartphones, items of furniture, laptops, etc.). For example, you might have heard phrases like “we hold a 20% market share in a billion dollar market” which means that a firm’s market share is measured by value and equals to 200 million dollars (20% of a billion). The last thing to mention about market share is that it refers to organisation, it is a measure of organisation’s success, not the market/industry.

Regardless of what market share refers to (value or volume), market share is a percentage and the formula for it is very simple and straightforward:

Market share (%) = organisation’s sales ÷ total sales in the industry ⨉ 100

Let’s get back to XYZ town. As you remember, all firms (A, B and C) altogether produce 100 chairs and altogether earn $1,000 on their chair sales. A sells 55 chairs and makes $550. B sells 25 chairs but earn $350. C sells 20 chairs and only makes $100. Let’s calculate B’s market share by value and volume.

B’s market share by value = $350 ÷ $1,000 = 35%

B’s market share by volume = 25 chairs ÷ 100 chairs = 25%

So, even though B only produces 25% of all chairs in the industry, its sales value is 35%. Good for B!

Usually, the higher the market share, the higher the market power (a firm’s ability to establish the “rules” in the market, for example manipulate the price by controlling the supply).

Market growth is the percentage of the positive change in market size. It can also be measured by value or by volume, similar to market share. But, it refers to the industry (not to the firm, like market share). Formula is also pretty simple and straightforward:

Market growth (%) = (market size now – market size before) ÷ market size before ⨉ 100

Let’s say, chair sales in XYZ town this year have increased to $1,300, compared to $1,000 last year. Additionally, all chair manufacturers (A, B and C) are now producing 150 chairs, compared to 100 last year. Let’s calculate market growth by value and volume.

Market growth by value = ($1,300 – $1,000) ÷ $1,000 ⨉ 100 = 30%

Market growth by volume = (150 chairs – 100 chairs) ÷ 100 chairs ⨉ 100 = 50%

This means that in XYZ chair market this year there are 50% more chairs, but value of sales only increased by 30%… What does it tell us? It tells us that chairs are getting cheaper.

As we learnt in the previous part of class, market share is a firm’s portion in total sales in the market/industry. If you know market share of all firms in the industry/market, then you will be able to identify the market leader — the firm with the highest market share in the industry.

The assessment objective of this part of class is to discuss the importance of market share and market leadership. In other words, the IB wants you to elaborate on their pros and cons and come to final judgement — how important are market share and market leadership? With regards to the final judgement, this is something you will make yourself, based on the pros and cons that I outline below.

On the one hand, high market share or the highest market share (i.e. market leadership) can allow the firm to use economies of scale by being able to produce more items at lower average costs. In addition, market leadership or high market share may result in high market power, which means that a firm is able to become a benchmark for other firms in the industry. And lastly, market leadership and high market share are indicators of high demand, which means that customers are familiar with the firm’s brand and recognise it well which, in turn, results in customer loyalty and repeat purchases. We will explore branding, loyalty, recognition and repeat purchases later in Unit 4, stay tuned.

On the other hand, market share/leadership is not in any way an indicator of profitability. A firm might set a very low price for its products and, as a result, attract a lot of customers and increase its market share, but, at the same time, not be very profitable because of the low price… So, achieving high market leadership is relatively easy, but making sure you are a profitable market leader is a real challenge. In addition, once a firm reaches a high market share or even achieves market leadership, the priority switches to maintaining high market share or leadership. This is not a simple task and the ways to maintain it depend on the firm’s marketing approach (see the first part of this class). If a firm is market-oriented, then it will have to invest heavily in market research in order to make sure the products meet customers’ expectations and their needs and wants are satisfied. If a firm is exploiting product-oriented approach, then it will have to invest in constant research & development and innovation in order to make sure it can continuously offer innovative products.

Overall, market share and market leadership are, of course, important indicators of a firm’s success from the marketing perspective. However, maintaining market leadership or high market share is a costly and difficult task, given that profitability has to be maintained as well.

Make sure you can define all of these:

1. Marketing
2. Market orientation
3. Product orientation
4. First-mover advantage
5. Barriers to entry
6. Market
7. Market size
8. Market share
9. Market power
10. Market growth
11. Market leader
12. Market leadership