Category: Free Essays

This work was produced by one of our professional writers as a learning aid to help you with your studies

Why consumer behaviour and an understanding of such processes is useful from the perspective of the marketer

Introduction

Marketers in today’s business environment are presented with the particular challenge of circumventing conflicted messaging, over-saturation of marketing initiatives, and consumer hesitation and guarded behaviour in order to achieve their objectives of enhancing long term brand loyalty and encouraging product purchases. While there are various environmental stimuli which may influence consumer behaviour, the most significant affectation comes from psychological influences associated with marketing communication and personal interpretation of brand and product value. By expanding this value beyond base level interpretation, marketers are able to influence consumer behaviour and redirect purchases over extended periods of time. In order to achieve such standards, however, it is essential that marketers understand what behaviour may be influenced and in what ways this influence may be affected. Undeniably, the product itself has particular importance in this process; however, the result of a product-based marketing campaign may not demonstrate the value desired by a diverse consumer population. Therefore, the achievement of key consumer development and loyalty objectives is based on investigation and analysis of past, present, and future consumer behaviour.

This investigation seeks to expand upon the relationship between consumer behaviour and marketing, highlighting those mechanisms that can contribute to more effective marketing practices. A variety of academic theories and empirical studies have been compiled and analysed over the following section and models of consumer behaviour analysis and marketing programme development will be highlighted. Ultimately, conclusions will be drawn in which effective marketing is directly affected by consumer behaviour, and more effective means of communication and consumer encouragement are the direct result of cognitive stimuli. From both scientific and market perspectives, the ability to influence consumer behaviour is directly reliant upon an understanding of the intrinsic and extrinsic motivation which the majority of consumers within a given market or business sector exhibit. By modelling such motivations and establishing value associated with a particular brand or product, marketers will be able to sustain consumer loyalty over the lifecycle of a product and compete more effectively within marketplaces that are highly saturated.

Consumer Behaviour

A milestone definition of marketing by Peter Drucker (1999) would firmly establish the relative value and importance of consumer behaviour in effective marketing, arguing that marketing is ‘the whole business seen from the point of view of its final product, that is, from the customer’s point of view’ (58). Marketing, therefore, becomes a composite of both pre-purchase consumer behaviour interpretation and forecasting and post-purchase behavioural analysis. In this way, a rapid increase in consumption over a short period of time may be viewed as an opportunity to develop a broader, loyal consumer base and marketing tactics must change to accommodate such an opportunity. While early marketing efforts were based on communicating new and diverse products with a growing class of discerning consumers, Raaij et al. (2001:60) argue that marketing communication has since been repurposed in order to establish brand loyalty and reinforce consumer perceptions of value. In effect, marketers attempt to influence consumer behaviour through their presentation of a strategic, targeted marketing message, establishing the unique value of a given product or brand that will ensure future purchasing loyalty.

In his empirical analysis of consumer behaviour and its affectation by marketing initiatives, Foxall (1992:397-98) argues that marketing interventions provide reinforcement of the anticipated result or features of a given product while simultaneously modifying the scope of consumer settings (i.e. purchase intent, brand loyalty, etc.). Such reinforcement is affected through a variety of channels including product features, strategic delays in provision, and modulation of information exchange and messaging (Foxall, 1992:398). Ultimately, the marketer assumes responsibility for a psychological connection between a particular brand or product and the consumer, strategically directing communications in order to improve a cognitive connection that can potentially influence consumer behaviour. Foxall (1992:398) addresses key concerns surrounding the effectiveness of such communication, but indicates that consumer behaviour has a direct impact on marketing strategies, the result of a measurable need for reinforcement and connection.

As the internet age continues to challenge marketers to consider more diverse relationship formats in the online environment, behavioural analysis has quickly become an effective means of programme development and modulation. From trust to satisfaction to site navigability, Taylor and Strutton (2010:954) have compiled widespread academic evidence that investigates various behavioural features that are frequently evaluated by marketers seeking to enhance their online presence and consumer loyalty. Consumer satisfaction, for example, was found to have a direct impact on trust and brand loyalty in addition to the perceived value of a given product, potentially influencing future purchasing decisions or commitments (Taylor and Strutton, 2010:954). While such concerns are more traditional in nature, their applicability within an online purchasing environment is undeniable, and without marketer intervention and a strategic reinforcement of value, there is a potential that future purchases will be impacted. Yet such interventions require a concise and accurate understanding of consumer behaviour in order to effectively provide value-oriented reinforcement and messaging that is directly related to consumer value systems.

Aside from the electronic nature of online consumption, the diversification of communication channels and its impact on consumer behaviour in the past decade has had direct and remarkable influences purchasing decisions, brand loyalty, and consumer commitment. Anton et al. (2007:515) argue that as consumer access to information, feedback, and peer reviews has increased, consumers have increasingly become intolerant to inconsistency and mediocrity, the result of exposure to choice. Essentially the consumer right to choose continues to impact behaviour and future purchasing considerations, as substitute products and competitive messaging have a direct impact on interpretation and loyalty. By communicating added value and fostering a stable and sustainable relationship, Anton et al. (2007:516) suggest that marketers are able to influence consumer switching behaviour and restrict the influence of competitive initiatives. The affectation provided by strategic marketing communication is essentially a direct link to consumer preferences and purchasing models, as psychological affectation becomes a means of sustaining a particular, idealised behaviour.

The role between consumer behaviour and marketing is based on adaptation, a concept that is oftentimes difficult to implement within a diverse, competitive environment as firms attempt to strategically manage resources and reduce corporate excess. Thrassou and Vrontis (2009:499) argue that the consumer behaviour is the most valuable information conduit for marketers as they attempt to navigate market changes, competitive influences, and the consumer buying cycle. From channel preferences (i.e. television, magazine, etc.) to message content, the consumer response to various initiatives should be predictable, a function of extensive market research and behavioural analysis (2009:510). Marketing communications, as a strategic, value-added enterprise for modern organisations has shifted in its purpose, embracing the demonstration and modelling of product value within the context of consumer preferences, as opposed to past models of feature presentation, differentiation, etc (2009:516). Essentially, the role of the consumer has become one of exchange and communication, providing marketers with information necessary to evolve their messaging, models, and marketing channels.

While there is inherent value in strategic messaging, the targeted nature of such communication must be linked to key stimuli which inspire consumer behaviour. Chiu et al. (2005:1682) evaluate such phenomena from a more scientific perspective, suggest that the stimulus-organism-response (SOR) paradigm provides evidence the underlying psychological response that can be expected from consumers. Essentially, the relational bonding activities by a firm (stimulus) can have a measurable impact on consumers’ value perceptions (organism), whereby their purchase behaviours may be influenced (response) (Chiu et al., 2005:1682). Within such a model, it is evident that the consumer perception of value has a direct influence on their subjective response to stimuli from marketers, but in order to ensure that such responses are consistent with what the marketing initiative had intended, marketers must understand consumer perceptions and their impact on behaviour. Chiu et al. (2005:1687) used empirical data to model the influence which value perceptions can have on switching behaviour amongst consumers, suggesting that dissatisfaction in general cannot be overcome through messaging or branding alone. Instead, there is a measurable link between the depth of the relationship between a given brand and its consumers which can allow marketers to overcome dissatisfaction and achieve a renewed state of trust. Such relational bonding focuses on the inherent value of a given product to the consumer in relation to their wants and needs, establishing a connection between fulfilment and the particular product in which there is an inherent purchasing response when considering that particular need.

When considering the decision making process of consumers, there tangible rewards which must be considered for picking a particular brand or product. De Wulf and Okerken-Schroder (2003:97), for example, have suggested that at the first level of relationship marketing, basic, tangible rewards are identified including cost savings and pricing incentives which provide consumers with a more general value based on financial concerns. More dynamic rewards also focus on intrinsic value in which rewards systems connect consumers and products according to an extended, implied position of loyalty. From rewards coupons to frequent flyer programmes to loyalty bonuses, the long term achievement of reward for consumers can lead them to remain loyal to a particular brand, as switching behaviour would ultimately have a measurable consequence for their rewards earnings (De Wulf and Okerken-Schroder, 2003:97). Such second tier rewards systems establish a long term relationship between the consumer and the brand, ultimately defining consumer participation within the programme in spite of other value challenges or product inconsistencies.

Oftentimes the value of understanding consumer behaviour can provide marketers with the information necessary to repurpose their products, meeting consumer needs without directly impacting the product or brand itself. Fine (2010) presents evidence of the information value associated with purchase behaviour, as consumers self-actualise particular objectives and needs through consumptive actions. From luxury items to particular brands, the decision to purchase a particular product is frequently based on deeper psychological influences, oftentimes influencing brand loyalty according to psycho-social interpretation of product value (Fine, 2010:244). While such peer-based acknowledgement of value can be identified through survey and research, information surrounding consumer behaviour and brand preferences is much more valuable when considering rebranding efforts and consumer communication. Ultimately, Fine (2010:245) argues that it is the achievement of status through the purchase of a luxury or personally valuable brand that can provide consumers with a level of satisfaction that is linked to their future purchase intentions. As previously discussed, dissatisfaction or product failure can ultimately lead to reduced value within this relationship and dissolve the psychological connection.

Consumer behaviour is both time sensitive and immediate, experiencing influences according to various stimuli over time. Kowatsch and Maas (2010:702) have modelled the impact which direct communication can have on consumer behaviour during their purchasing process, using an in-store, mobile recommendation agent (MRA) to provide information and feedback for consumers as they shop. The inherent value of such decision assistance systems was demonstrated from a practical perspective, allowing consumers to access additional product data that might have otherwise remained unavailable. The authors also determined that the effectiveness of the system (MRA) had a measurable impact on consumer purchasing behaviour, suggesting that the personal value of the information and the means in which it was communicated could determine whether or not the consumer would engage in the purchase (Kowatsch and Maass, 2010:702). These findings also have implications for more practical marketing applications, as information exchange during the consumption process can have different influences on consumer behaviour than information exchanged over a more extended period of time.

Whether communicated at the point of purchase or over other channels, the marketing message can have a direct impact on consumer behaviour. Research on exploratory buying behaviour has been conducted by Baumgartner and Steenkamp (1996:132), demonstrating how psychological affectation can ultimately lead to consumers decision to purchase, even without original experience with a particular product. The authors argue that there are a host of unique, individual-specific traits which can lead to differences in product purchasing behaviour, the result of interpretation of stimuli and risk taking proclivity (Baumgartner and Steenkamp (1996:131). In order to chase consumers motivated by curiosity or by particular incentives, the authors suggest that marketers must explore the psychological implications of their particular messaging, potentially resulting in a greater sales opportunity. Taking advantage of promotional campaigns and marketing to specific niche consumers are some methods in which consumer behaviour can be influenced by particular psychological undercurrents within a singular marketing mix. The authors also suggested that there may not be a large difference in consumption behaviour amongst individuals with similar cultural ties, as the influence of marketing campaigns may resonate universally amongst these individuals (Baumgartner and Steenkamp, 1996:134). Regardless of affectation, such findings do have important implications when considering the inherent value of marketing campaigns in affecting consumer purchasing behaviour.

While marketing initiatives are frequently associated with consumer purchasing behaviour, there are underlying variables related to such consumption that must also be addressed in order to encapsulate the value of a particular product or brand for consumers. Demirdijian and Senguder (2004), for example, have investigated products from a psychological perspective, highlighting key genetic characteristics that influence behaviour and programme future purchasing behaviour. Whether linked to an individual’s personal preferences or actually a function of internal chemical stimuli, the researchers suggest that there are more scientific reasons for consumer behaviour that can ultimately be determined, modelled, and used in product marketing (Demirdijian and Senguder , 2004:351). From the interpretation of a particular taste to the analysis of various sensations associated with fabric, analysts are able to determine and synthesise a future intent to purchase. While such product development can be used for consumer influence, it can also be used to generate data relevant to the development of those products and services that have greater value to consumers over the long term. While value-added positioning can be achieved through market research, scientific analysis of consumer behaviour will also produce a means of defining those more subversive value components that might otherwise not be identified, from product packaging to secondary uses to the inherent status perceptions held by consumers during use.

Conclusions

This analysis began with a simple question of why consumer behaviour and an understanding of such processes is useful from the perspective of the marketer. There were a variety of findings uncovered over the course of this research, the majority of which establish some form of affectation according to psychological influences and messaging stimuli. Inherently linked to brand loyalty and the consumer commitment to the product or brand over time, the means of reducing switching behaviours within extremely saturated marketplaces are directly afforded by marketing communication. The effectiveness of such communication, however, can have the desired (or opposite) result on sustaining consumer loyalty over an extended period of time. While more traditional marketing models focused on product features and competitive positioning of particular brands or products, modern marketing emphasises the relationship between consumer behaviour and value. By enhancing a product’s value, consumers are encouraged to engage in the buying process and are more likely to maintain personal investment in a product over an extended period of time.

There are several implications associated with this research and this analysis of various academic perspectives within this field. First, there is a psychological link between purchase and loyalty. Where cognitive interpretation of marketing messages may have influence on purchasing behaviour over the long term, exploratory consumption may result from proper stimulation and more dynamic brand messaging early in the buying cycle. It is this internalisation of intent which ultimately allows marketers to attract a larger base of consumers, even in a marketplace where there are various substitute products. In order to identify the best fit communication strategy, marketers are oftentimes forced to rely on trial and error or unsupported market research. By modelling particular behaviour patterns, however, associated with exploratory buying, these firms and individuals may be able to predict consumer responses to more dynamic marketing campaigns. From rewards programmes to creative branding to niche marketing, the ability to communicate with consumers according to their personal preferences and their understanding of intrinsic an extrinsic product value is invaluable and can sustain a product’s market expansion over the long term. This research has demonstrated that consumer behaviour and marketing are undeniably linked, and through the understanding of the former, the latter may be more appropriately defined.

References

Anton, C., Camarero, C., Carrero, M. (2007) ‘The Mediating Effect of Satisfaction on Consumers’ Switching Intention.’ Psychology and Marketing, Vol. 24, No. 6, pp. 511-538.
Baumgartner, H., Steenkam, J.B.E.M. (1996) ‘Exploratory Consumer Buying Behavior: Conceptualization and Measurement.’ International Journal of Research in Marketing, Vol. 13, pp. 121-137.
Chiu, H.C., Hsieh, Y.C., Li, Y.C., Lee, M. (2005) ‘Relationship Marketing and Consumer Switching Behavior.’ Journal of Business Research, Vol. 58, pp. 1681-1689.
Demirdijian, Z.S., Senguder, T. (2004) ‘Perspectives in Consumer Behavior: Paradigm Shifts in Prospect.’ The Journal of the American Academy of Business, pp. 348-353.
De Wulf, K., Odkerken-Schoder, G. (2003) ‘Assessing the Impact of a Retailer’s Relationship Efforts on Consumers’ Attitudes and Behavior.’ Journal of Retailing and Consumer Services, Vol. 10, pp. 95-108.
Drucker, P.F. (1999) Management: Tasks, Responsibilities, and Practices. Oxford: Butterworth-Heinemann.
Fine, L.M. (2010) ‘Altruism and Hedonism: A Review and Discussion of Recent Findings in the Marketing and Consumer Behavior Literature.’ Business Horizons, Vol. 53, pp. 241-246.
Foxall, G.R. (1992) ‘The Consumer Situation: An Integrative Model for Research in Marketing.’ Journal of Marketing Management, Vol. 8, pp. 383-404.
Kowatsch, T., Maass, W. (2010) ‘In-Store Consumer Behavior: How Mobile Recommendation Agents Influence Usage Intentions, Product Purchases, and Store Preferences.’ Computers in Human Behavior, Vol. 26, pp. 697-704.
Mooij, M., Hoftede, G. (2002) ‘Convergence and Divergence in Consumer Behavior: Implications for International Retailing.’ Journal of Retailing, Vol. 78, pp. 61-69.
Raaij, W.F.V., Strazzieri, A., Woodside, A. (2001) ‘New Developments in Marketing Communications and Consumer Behavior.’ Journal of Business Research, Vol. 53, pp. 59-61.
Taylor, D.G., Strutton, D. (2010) ‘Has E-Marketing Come of Age? Modeling Historical Influences on Post-Adoption Era Internet Consumer Behaviors.’ Journal of Business Research, Vol. 63, pp. 950-956.
Thrassou, A., Vrontis, D. (2009) ‘A New Consumer Relationship Model: The Marketing Communications Application.’ Journal of Promotion Management, Vol. 15, No. 4, pp. 499-521.

This work was produced by one of our professional writers as a learning aid to help you with your studies

1. Introduction

Multinational corporations operating in complex and diverse political, economic, social and cultural environments have to improve, adjust and develop their marketing strategies on a regular basis (Bamberg, 2009:46). Changing environmental factors create new conditions for their operating, which often require considerable and serious changes in strategic decision-making and positioning of companies. Inflexible and rigid firms will cease to be competitive in the market every time changes occur (Fight, 2006:85). The aim of the present report is to identify the past and present changes in marketing strategy of British Petroleum, which have occurred under the pressure of environmental factors. It is evaluated whether these changes were necessary, and future strategic options for British Petroleum are recommended.

2. Background

British Petroleum (BP) is a multi-national gas and oil company located in the United Kingdom. Taking into consideration the size of revenues, BP proves to be the third largest energy company in the world. It is reported that its revenue was equal to as much as $308 billion in 2010 (BP, 2010:18). Working in the field of the gas and oil industry, the corporation carries out a wide range of operations, namely exploration, refining, production, trading, power generation, renewable energy production, etc. BP is presented in more than 80 countries all over the world and employs more than 80,000 workers. The company was founded in 1909 as the Anglo-Persian Oil Company, but only in 1954, it was known as the British Petroleum Company. 1998 was marked by the merger with Amoco (BP, 2011:1). Operating in turbulent and dynamic industrial sector, BP has always had to adequately react to the environmental changes and adjust their marketing strategy (Bamberg, 2009:49).

3. BP in Dynamic and Changing Environment

Taking into account that this report analyses strategic positioning of BP as a response to environmental changes and influences, the external environment of the company should be carefully scanned. It is important to note that not only contemporary external influences ought to be investigated, but also the environmental factors that used to influence BP some time ago. This will allow for observing changes from a historical perspective. In this sense, the PESTEL framework appears to be a very useful tool. It is argued that “the PESTEL framework helps to identify the relative importance of political, economic, social, technological, environmental and legal influences, and can be used to identify the key long-term drivers of change” (Fight, 2006:44).

It may be critically stated that “recent market events have provided a sharp reminder of the central role of energy for our near-term security; insecurity arises from a range of issues, including geopolitical instability, natural disasters, terrorism and even poor regulatory design” (ORCD, 2003:421). Indeed, geopolitical instability proves to be a powerful political factor, which can influence volatility in the energy markets. It is reported that the world is heavily dependent on Middle East since this region has more than 60% of the world’s oil reserves (Thomas White Global Investing, 2010:1). The key oil producing countries are Saudi Arabia, Iran, Iraq, Kuwait, UAE, Venezuela, Russia and Libya. Oil reserves of these countries are demonstrated in the graph below. It is valid to argue that a number of instability ‘symptoms’ have been observed in these countries recently, including military conflicts, authoritarian political regimes, corruption, etc. For instance, Venezuela tends to use its oil revenues to finance governmental programmes and ideology (Thomas White Global Investing, 2010:1).

As it may be observed from the histogram, Saudi Arabia has the largest oil reserves in the world, namely 262.2 billion barrels. Canada, Iran and Iraq have 179.2 billion, 136.3 billion and 115 billion barrels respectively (Thomas White Global Investing, 2010:1).

In response to the mentioned political influences, BP’s strategy has been changed the following way. Generally, it is possible to observe two main tendencies. First, British Petroleum attempts to hedge political risks in the oil producing countries by means of partnership and deals with the governments. For instance, BP signed a contract with the Russian state-run oil company Rosneft in 2009 (Hernandez, 2011:1). Second, the company evacuated its personnel from northern Africa because of growing political instability in Tunisia, Egypt and Libya. Simultaneously, BP develops its cooperation with emerging economies in Asia, which are more politically stable, namely India (Hernandez, 2011:1). These changes were necessary in order to avoid political risks in the countries, which prove to be the leading producers of oil.

Geopolitical instability in the world and political tensions in these countries can be viewed as important factors that have led to the fluctuations in oil prices, which may be illustrated by the following graph.

As it may be grasped from the graph, crude oil price reached its maximum in 2008 and constituted as much as $91.48 per barrel (IBP Oil, 2011:1). The period from 2002 to 2008 was marked by the gradual rise in crude oil prices. In 2009, the indicator was equal to $53.56, and oil prices started growing again (IBP Oil, 2011:1). It may be argued that fluctuations in crude oil prices are also the result of economic influences. It is obvious from the graph that crude oil prices skyrocketed simultaneously with the coming of the global financial crisis. Another increase in oil prices occurred during the prolonged recession, in the long-term of the financial crisis (Bamberg, 2009:184; IBP Oil, 2011:1).

In accordance with Brigham and Ehrhardt (2010:901), the main causes of fluctuations in crude oil prices are demand and supply forces, investment demand and monetary inflation. The US Dollar inflation can be graphically presented the following way.

As it is observed, inflation reached its maximum in 2008 when the indicator was equal to 3.85% (Inflation Data, 2011:1). It has already been stated that the rapid growth of crude oil priced took place the same year. As argued by Brigham and Ehrhardt (2010:901), it is possible to establish cause-effect relations between high inflation and the growth of oil prices. Indeed, these environmental factors had economic influence on British Petroleum. The excessive dependence on non-renewable energy carriers and fluctuations in crude oil prices have contributed to the popularity of renewable energy, namely wind, solar and geothermal (Fight, 2006:93). The point is that the reserves of renewable energy are not limited.

In response to these economic influences, BP reconsidered its business strategy the following way. It is reported that the company started producing solar panels after the acquisitions of Lucas Energy Systems (1980) and Amoco (1998). At the present moment, the company proves to be the largest manufacturer of solar panels in the world. BP has launched two main types of solar energy products, namely products for individual consumers and products for organisations. For instance, the firm is planning to run a new solar energy project aimed at energy supply for Wal-Mart stores (BP, 2011:1). Furthermore, it is reported that BP invested more than $6 billion in wind and biofuel energy projects during the period from 2005 to 2010 (BP, 2010:61). These changes were necessary because the PB attempted to attract customers by cheaper and ‘green’ energy. The volumes of ‘green’ energy production by BP can be presented by the following graph.

It is illustrated by the histogram that BP produced as much as 774 megawatts in 2010. The total volume of wind energy produced by the company is more than the volume of solar energy (BP, 2010:63). However, the company tends to produce more solar energy every following year. If 162 megawatts were produced in 2008, the indicator increased to the level of 325 megawatts in 2010 (BP, 2010:63).

Global energy consumption patterns may be viewed as an important social influence on BP. The following histogram illustrates the changes in energy consumption during the last two decades. It can be observed that the world’s population consumed as much as 8,131 million tons in oil equivalent in 1990. However, the indicator constituted 11,808 million tons in 2010 (BP, 2011:1).

However, it should be taken into consideration that energy is not consumed equally by different regions of the world (BP, 2011:1). The following graph illustrates energy consumption patterns by economic zones, unions and countries. As it may be understood, this social influence could lead to changes in marketing strategy of BP.

It is reported that nearly 20% of the world energy is consumed in the US market. To be more specific, the indicator was equal to 89,021 kWh/hab in 1990 and decreased to the level of 87,216 kWh/hab in 2008 (BP, 2011:1). It can be observed that the EU countries consume half the amount of energy used in the US; it constitutes 40,812 kWh/hab. It is interesting to note that the EU consumption patterns had grown by 2008. Furthermore, it should be emphasised that such regions as Middle East and China have experienced enormous growth of energy consumption recently (BP, 2011:1).

In response to these socials changes, BP has reconsidered and changed its strategy the following way. The company used to operate in the US market very actively and have large manufacturing facilities in this country during the 1990s. It is understandable that the region consuming nearly 20% of the world energy will be of strategic interest for British Petroleum (Bamberg, 2009:142). Nevertheless, the company attempted to move considerable part of its manufacturing facilities from the US to China during the 2000s. For instance, BP’s factories in Frederick, Maryland were closed in 2000 (Wenying, 2004:100). Moving production facilities to China continued regardless of the fact that the Chinese government issued a number of protectionist laws, which require than no less than 85% of input materials must be manufactured in China (Bamberg, 2009:83). These changes were necessary because energy consumption patterns in the US market had reduced by 2008.

It may be argued that technological progress is associated with the growth of energy consumption patterns by such sectors as industry and transport. The following graph can be presented to illustrate this relationship.

All the four sectors have experienced growth in energy consumption recently. It is reported that in 2008, industry and transport used 27,273 TWh and 26,742 TWh respectively (BP, 2011). It may be explained by the fact that new technologies are more energy consuming. Furthermore, rapid growth of the world’s population means that more and more oil should be spent on manufacturing of industrial goods and transportation (Bamberg, 2009:42). For example, there were about 400 million motor cars in 2000; however, the total amount of vehicles constitutes more than 750 million today (Heitmann, 2009:167).

These technological changes have led to the following reconsiderations and amendments in BP’s strategy. First, the company started popularising efficient use of energy and invested in energy efficiency of industrial enterprises and engines for motor vehicles (BP, 2010:53). Second, BP introduces new technologies in their own production process. It was officially stated by the Group Chief Executive that “the answer to the problems caused by some technology is more and better technology – to reduce the environmental impact of exploration, to reduce the carbon content of the fuels we use, to give people everywhere better choices” (BP, 2001:1). To be more specific, BP has rationalised transportation of oil and its products and has reduced the content of carbon in its fuel (Bamberg, 2009:142).

Being an energy company, BP is subjected to manifold environmental influences. It is possible to differentiate between environmental factors that refer to the global ecological changes and environmental influences provoked by the company itself. The latter are numerous chemical leaks, oil spills and dumping of hazardous substances. For instance, BP was blamed for dumping of chemical wasted in Alaska during the period from 1993 to 1995 (Roach, 2006:1). Prudhoe Bay oil spill, which occurred in August 2006, was the result of pipeline corrosion. More than 5,000 barrels of crude oil leaked and caused environmental damage to the sea life. Another problem was registered in Texas City in 2010 when there was a chemical leak of hazardous elements into the atmosphere (Aulds, 2010:1).

Regardless of the fact that BP runs a great number of ‘green’ practices and corporate social responsibilities (investment in renewable energy projects, restoration of the environment after oil accidents, funding of ecological projects and initiatives, etc.), the company was given the Greenwash Award in 2009 (Green Peace, 2010:24). The firm tends to manipulate the public paying considerable attention to its CSR activities. It is argued that BP spends on ‘green’ practices less than it is proclaimed in official statements of the company (Green Peace, 2010:26). It can be summarised that BP attempted to build positive public image by its ‘green’ practices in response to the mentioned environmental influences. However, these attempts cannot be classified as successful. These changes in strategy cannot be classified as a necessity. The company could have been more open and honest with the public, which could have created more positive public image.

Finally, it may be stated that BP has already had a series of legal arguments with the governments and non-governmental organisations. It is reported that “yet already BP’s actions are facing unprecedented scrutiny, thanks to a years-long history of legal and ethical violations that critics, judges and members of Congress say shows that the London-based company has a penchant for putting profits ahead of just about everything else” (Mauer and Tinsley, 2010:1). In response to these legal influences, the company has become more careful and prudent (Aulds, 2010:1).

4. Strategic Position of BP

Prior to the identification of the generic strategy of BP, it is necessary to conduct a stakeholder analysis and detect the recent changes in BP’s attitude towards different interest groups. The main stakeholders of the company are the government, the press, suppliers, ecological organisations, customers, alliance partners, shareholders, the public and employees (BP, 2010:34). The positioning of these interest groups in the stakeholder matrix can be presented the following way.

It may be observed that role of the governments has changed under the influence of political influences and geopolitical instability. The governments of oil producing countries and suppliers appear to be very powerful (BP, 2010:74). At the present moment, BP has to build strong long-term relationships with governments in order to avoid political risks, limitations and possible restrictions (Thomas White Global Investing, 2010:1). It is argued that ecological organisations and customers are less powerful, but they tend to demonstrate greater interest to the company. Ecological organisations and the public are worried about harmful effects of the company’s operations. Customers are interested in BP because the energy consumption patterns are growing and there is always demand for oil (Bamberg, 2009:34). The company has several groups of customers, namely car owners using service stations (Aral, ARCO, BP Connect, BP Express and BP2go), users of convenience stores, users of solar panels, users of motor oils and derived products, the transport industry and the aerospace industry (BP, 2010:74).

Another important change that has happened recently is that employees’ power has increased. This change can be explained by several accidents, disasters and safety problems, which have occurred at British Petroleum. For instance, it is stated by the US Department of Labour (2011:1) that the explosion in the isomerisation unit of the BP refinery in Texas City led to the death of 15 workers and injury of 170 employees. Similar scandals attract the public attention and interest and stimulate better maintenance of safety standards and norms. It should be noted that the power of the press and the public has increased too (Green Peace, 2010:21).

Discussing generic strategies of the company, it is also possible to identify changes. At the early stages of its development, BP was following the cost leadership strategy (Bamberg, 2009:132). Indeed, the company made considerable efforts to remain the leader in developing costs. Nevertheless, it is argued by Business & Leadership (2011:1) that the firm’s cost reduction practices were the main reason for oil spills and leaks. Cost cutting measures prevented the company from timely and regular repairs and maintenance of the infrastructure (Business & Leadership, 2011:1). BP has transformed the cost leadership strategy into the differentiation strategy by the present moment. It is argued that “the company has endeavoured to redefine its market space by laying claim to activities beyond oil and gas such as alternative energy and a lower carbon future” (Bright, 2011:4).

As it may be seen, the turbulent and changing external environment has forced BP to undertake a series of new decisions, which were different from those undertaken in the past. These changes in the corporate marketing strategy can be evaluated as a normal reaction to external political, economic, social and technological influences. As a result, it is possible to observe the change in stakeholders’ power and interest towards the company. Furthermore, BP’s generic strategy has evolved from cost leadership into differentiation (Business & Leadership, 2011:1; Bright, 2011:4).

5. Future Strategic Options

The discussion of future challenges for BP will reveal that future energy consumption patterns will continue growing. The forecast of future changes may be presented the following way.

The total volume of energy consumed by the world will have constituted as much as 16,432 million tons in oil equivalent by 2030 (BP, 2011:1). Another important challenge that should be taken into account is possible growth and fluctuations of oil prices. The company should avoid accidents, disasters and safety problems, which prove to be serious challenges to British Petroleum. Finally growing popularity and demand for renewable energy are both opportunity and challenge for the firm (Aulds, 2010:4).

Relying on the previously identified environmental influences and pressures, it can be suggested that British Petroleum should follow the diversification strategy as a future option. In accordance with Ansoff matrix, diversification is the strategy, which implies entering new markets with new products (Meldrum and McDonald, 2007:142).

This choice of the future strategic option can be explained by a number of reasons. First, growing geopolitical instability and political risks and oil producing countries have forced BP to entering new markets, which are characterised by considerable potential. Second, the company can continue running and developing renewable energy projects, which have become very popular (Hernandez, 2011:1). In the conditions of growing demand for energy, growing consumption patterns and increasing crude oil prices, the company should be more active in the field of alternative energy.

A modified version of strategic options was offered by Turner (2005:340).

As it can be grasped from the improved framework, BP should follow the offensive strategy in future. It is implied that new services should be delivered to more politically stable and balanced markets (Turner, 2005:340). It is expected that this choice of the future strategy will be consistent with contemporary changes and tendencies in the industry, namely growing demand for renewable energy, unstable crude oil prices, ecological awareness and energy efficiency (Bamberg, 2009:153).

6. Conclusion and Recommendations

It may be concluded that the main strategic changes undertaken by British Petroleum in response to the turbulent and dynamic environment are contracts with the governments to avoid political risks, moving to more stable countries such as India from the northern Africa, acquisition of the solar panel manufacturers, investment in wind and solar projects, moving manufacturing facilities to China, investment in energy efficiency, reduction of carbon content in fuels, participation in ‘green’ activities an ‘greenwashing’. The company had to transform its generic strategy from cost leadership to differentiation since cost reducing practices had led to oil spills and leaks. It may be summarised that the identified changes were necessary. Nevertheless, the company could have been more honest and open in its CSR projects.

It is recommended that BP should use the diversification strategy as a future strategic option in order to continue responding to the environmental challenges. The company should diversify its product range associated with the production of solar and wind energy for individual and corporate customers. It is expected that these products will be popular in the emerging markets such as India and China where incomes are not high, but energy consumption patterns are growing very fast. Furthermore, it is recommended that the company should increase expenditures on infrastructure maintenance and employee safety. Together with alternative energy production, this will positively influence corporate reputation after the recent safety scandals and ‘greenwashing’. Finally, it is recommended that BP should continue popularising efficient use of energy by individual consumers and industrial enterprises.

References

Aulds, T. (2010) ‘BP: 500,000 pounds of emissions released’, The Daily News, [online] Available at: http://galvestondailynews.com/story/157738/ [Accessed 8 May 2011].

Bamberg, J. (2009) The History of the British Petroleum Company, Cambridge: Cambridge University Press.

BP (2001) ‘Technology and business – a progress report’, [online] Available at: http://www.bp.com/genericarticle.do?categoryId=98&contentId=2000347 [Accessed 8 May 2011].

BP (2010) ‘Annual Report’, [online] Available at: http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/I/BP_Annual_Report_and_Form_20F.pdf [Accessed 8 May 2011].

BP (2011) ‘Strategy’, [online] Available at: http://www.bp.com/genericsection.do?categoryId=135&contentId=7038549 [Accessed 8 May 2011].

Brigham, E. and Ehrhardt, M. (2010) Financial Management: Theory and Practice, 13th ed., London: Cengage Learning.

Bright, F. (2011) ‘BP’s Competitive Strategy: Leadership at What Cost?’, [online] Available at: http://www.themixoilandwater.com/2011/01/bps-competitive-strategy-leadership-at.html [Accessed 8 May 2011].

Business & Leadership (2011) ‘BP cost-cutting contributed to spill’, [online] Available at: http://www.businessandleadership.com/leadership/item/27593-bp-cost-cutting-contributed [Accessed 8 May 2011].

Fight, A. (2006) Cash flow forecasting, London: Butterworth-Heinemann.

Green Peace (2010) ‘Carbon Scam’, [online] Available at: http://www.greenpeace.org/usa/Global/usa/report/2010/1/carbon-scam-noel-kempff-clima.pdf [Accessed 8 May 2011].

Griffin, R. (2006) Management, 9th ed., London: Cengage Learning.

Heitmann, J. (2009) The automobile and American life, New York: McFarland.

Hernandez, J. (2011) ‘BP strikes $7.2 billion oil deal with Indian company’, [online] Available at: http://www.trendbuzz.com/technology/12913/bp-strikes-7-2-billion-oil-deal-with-indian-company.html [Accessed 8 May 2011].

IBP Oil (2011) ‘History Of Illinois Basin Posted Crude Oil Prices’, [online] Available at: http://www.ioga.com/Special/crudeoil_Hist.htm [Accessed 8 May 2011].

Inflation Data (2011) ‘Historical Inflation’, [online] Available at: http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx [Accessed 8 May 2011].

Mauer, R. and Tinsley, A. (2010) ‘Gulf oil spill: BP has a long record of legal, ethical violations’, McClatchy Newspapers, [online] Available at: http://www.mcclatchydc.com/2010/05/08/93779/bp-has-a-long-record-of-legal.html#ixzz0nZaTzdqN [Accessed 8 May 2011].

Meldrum, M. and McDonald, M. (2007) Marketing in a nutshell: key concepts for non-specialists, Oxford: Butterworth-Heinemann.

ORCD (2003) Energy policies of IEA countries: 2003 review, New York: OECD Publishing.

Roach, J. (2006) ‘Alaska Oil Spill Fuels Concerns Over Arctic Wildlife, Future Drilling’, National Geographic, [online] Available at: http://news.nationalgeographic.com/news/2006/03/0320_060320_alaska_oil.html [Accessed 8 May 2011].

Thomas White Global Investing (2010) ‘Geopolitical Instability and Energy Prices’, [online] Available at: http://www.thomaswhite.com/explore-the-world/Geopolitical-Instability%20.aspx [Accessed 8 May 2011].

Turner, C. (2005) ‘The international strategies of Europe’s incumbent telecommunications operators: towards a strategic typology’, European Business Review, Vol. 17, Issue 4, pp. 340-351.

US Department of Labour (2011) ‘BP History Fact Sheet’, [online] Available at: http://www.osha.gov/dep/bp/bphistory.html [Accessed 8 May 2011].

Wenying, C. (2004) China’s energy outlook 2004, New York: Guida Editori.

This work was produced by one of our professional writers as a learning aid to help you with your studies

Index
Introduction
General Motors (GM)
PESTEL
SWOT
Jaguar Landrover (JLR)
PESTEL
SWOT
Rolls-Royce
PESTEL
SWOT
Toyota
PESTEL
SWOT
Reference List

This work was produced by one of our professional writers as a learning aid to help you with your studies

The marketing mix is a very simple concept, widely accepted as being of high utility in the management of the marketing function. Critically discuss the interrelationships between the seven P s of the services marketing mix. Are the seven P s really mutually dependent as some observers would maintain, or can each of the P s be managed independently of the others- Use relevant examples to illustrate your points of views where necessary.

Introduction

The seven Ps of the services marketing mix were developed from the four Ps, which were introduced by McCarthy (1960). These original four Ps were the Product, Price, Promotion and Place of a good. The main reason that these aspects were chosen to be the main part of the marketing mix is that they are specific factors over which the marketing manager should be able to exercise a degree of control, depending on the nature of their firm’s resources. For example, the marketing manager is able decide what type of products a firm will develop to best fit the market, depending on the firm having the necessary technology, and also the places it can be sold within the firm’s wider distribution network. However, when considering services, it is clear that marketing managers have control of more factors, leading to a debate around the use of other factors in the marketing mix. Ultimately, this led to the creation of the services marketing mix by Booms and Bitner (1981), which includes People, Processes and Physical Evidence as critical aspects of the mix. This seven Ps framework has been used to drive and analyse marketing activities in a wide range of markets (Kotler and Keller, 2005).

However, the extent to which this framework can be used to create a specific marketing mix for a specific organisation is strongly dependent on the extent to which each of the seven Ps can be manipulated and controlled. As such, marketing managers will need to be aware of any interrelationships between the different Ps when attempting to create their own marketing mix, else these interrelationships can affect the desired balance of the different Ps. This will also be strongly affected by the extent to which the seven Ps can be managed independently of each other. As such, this work will examine the interrelationships between the Ps and the extent to which they can be managed independently to determine how this will affect the creation of the marketing mix.

Interrelationships between the seven Ps

When considering the seven Ps themselves, the product is mainly seen as the first, and arguably the most important. This is because the product represents whatever the company sells to its customers. As a result, it could potentially be a tangible product like a magazine; a service like a flight; or even information, such as a training course. As such, the product will potentially have interrelationships with all other aspects of the seven Ps. The quality of the product will help determine its cost to produce, and hence its price. It will also affect the market segments to which is can appeal, hence influencing its place and the promotion necessary to sell it. Finally, if it is a high quality service, it will need to be supported by well trained people, with highly consistent and high quality processes to maintain the quality of the product. As such, the product can potentially interact with all other aspects of the marketing mix, particularly in services where customer perceptions of the product will depend on the supporting aspects of the mix (Aaker, 2007).

Similarly, the price of a product will tend to have significant interrelations with a number of the other aspects of the mix. This is because the price is not just the headline price for a given service, but rather it encompasses all the decisions the company needs to make around the pricing strategy and any discounts the firm may offer. This is strongly related to the promotions the firm will use, as a skimming pricing strategy will require a significantly different style of promotion when compared to a penetration strategy. The price will also be affected by the costs associated with the product, hence price itself will be quite strongly related to the product characteristics, the people employed to market it and their salaries, and the places the service is provided and the costs associated with these places (Nagle and Holden, 2001).

Similarly, the places in which a service is offered will be quite significantly related to the price and promotion, as the distribution channels through which a service is offered will each have their own costs and accepted advertising methods. For example, if a service is being offered in a major store, it will have quite high costs, and the promotions will be heavily reliant on attracting people to the store, and appealing to customers who are walking by the display where the service is offered. On the other hand, if the product is offered over the internet it will need to have a lower price, as internet shoppers have been conditioned to expect lower prices from online offerings. In addition, the promotion will need to focus around creating the buying decision in potential customers, as the ubiquity of internet advertising means that many consumers are strongly turned off by attention grabbing adverts on the internet (Chaffey, 2006). The place will also be linked to the process used to provide the service. For example, a restaurant in a busy town centre will need much more efficient and less personalised processes to keep customers from having to wait when compared to one in a quite village, where customers may expect more personalised service.

As discussed above, promotion is strongly linked to product, price and place. This is because the promotion is one of the broadest aspects of the marketing mix, covering all of marketing communications, including the advertising and publicity around the service. Therefore, different aspects of the promotion will often be strongly dependent on the product, the price charged, the place, the characteristics of the people who provide it, and the processes involved in the service. In addition, the promotion and the physical evidence will be strongly related, as the effectiveness of any promotion will tend to rely on the physical evidence on which it is based (Bitner, 1990).

Finally, the three aspects of the service marketing mix introduced by Booms and Bitner (1981) tend to be somewhat less related to the other four, as they are amendments to the original model. In particular, the people who support the marketing mix can arguably be kept almost completely unrelated from any other aspect of the mix. This is because they are the one aspect of the marketing mix which is not directly always related to the service itself. For example, when a person is booking and taking a flight, they may only have very limited contact with people during the booking process and the flight, particularly if it is a low cost airline (Creaton, 2007). As such, people are only strongly related to other aspects of the marketing mix in certain situations. However, even in the low cost airline example, the absence of people is actually quite strongly related to people’s perceptions of the product and the price, hence there is still a relationship.

In addition, whilst the process by which customers are served tends to be specifically related to the service provided, it does not always relate to the other aspects of the marketing mix. This is because the main requirement of the process is that it is consistent and does not vary amongst customers; otherwise the service itself will vary amongst customers. As such, it is perfectly acceptable for a high class sushi restaurant to use the same mass production techniques as McDonald’s, or an expensive salon to use the same process for cutting hair as a standard hairdresser, provided the process is consistent across all customers. Finally, physical evidence is not strongly related to most of the other aspects, as it simply relates to the need to demonstrate the promotional claims made around the service. As such, it does not strongly relate to the product, price or other aspects, rather it only generally relates to the promotions offered (Booms and Bitner, 1981).

Characteristics of Services

The above section demonstrates the significant potential for interrelationships amongst the seven Ps of the marketing mix. However, in order to determine whether any of them can actually be made completely independent from the others in the case of services marketing, it is necessary to consider the characteristics of services. These are the lack of ownership, intangibility, inseparability, perishibility and inconsistency of services, and are the factors that any business needs to consider when marketing services (Gronroos, 1978). The lack of ownership occurs because a service is delivered at a certain point in time, and hence can never be owned or transferred to the purchaser. For example, a restaurant does not just provide food, it provides it prepared to certain standards, as well as served in a certain manner. As such, in order to provide a high quality meal, the restaurant needs to ensure that the food is cooked and served in an expected manner. This implies significant dependencies between the people, product and processes that operate in the restaurant industry.

The second characteristic is intangibility, which implies that services cannot be physically touched, or quantified. For example, when using an airline, a passenger is simply transported from one place, in a certain physical condition, to another place, with a different physical condition. The critical requirements for the passenger is thus that they arrive in a timely manner, and in a physical condition which is not significantly worse than when they left, i.e. they have not been in uncomfortable seats and their luggage hasn’t been lost. The main requirement for this is that the airline must offer a reasonable form of physical evidence around the quality of the service they provide, and this evidence must be believable. This physical evidence can be in almost any form, including photos, statistics around lateness and lost luggage, critical reviews or consumer testimonials (Bitner, 1990). As a result, the physical evidence provided can arguably be said to be independent from much of the rest of the marketing mix, with only the promotion depending on the level of evidence available to support any claims it makes.

Inseparability refers to the fact that the service must be provided by a business at the point of use; it cannot be packaged up and sold in a remote location. For example, an accountant must look at the business accounts and interact with the director and staff in order to produce accounts. This implies that there must be a strong relationship between the people, place, process and product in order to effectively deliver the service. If the accountants are working at a remote location away from their client, their process will be different and so will the final product. On the contrary, with the accountants working in the same location as their client, they can follow a different process due to the availability of the client for meetings etc.

Services are perishable because they only last for the effective time that the service is being provided, unlike physical goods which can often be stored and reused. For example, a haircut will only last until the hairdresser stops cutting, after this point the customer’s hair will keep growing and cannot be altered. As such, it is important that a service is provided correctly the first time and according to the customer’s requirements to avoid unhappy customers and poor service provision. The main implication of this is that, again, there is a strong relationship between the process and the end product, as well as the people who provide it and the promotion. This is because, in order for the process to be consistent enough to avoid any divergence from the customer’s requirements, the people have to be well trained; the product well defined; and the promotion has to make clear the nature of the service to avoid confusion from the customer.

Finally, the inconsistency of services is a consequence of the different people who produce and consume services. As a result, the same service provided at different times to different will tend to be different. For example, the same burger produced in the same restaurant will tend to be different for different customers depending on the temperature of the over, the requirements of the customer and the consistency of the staff. Again, this implies a strong interrelationship between product, people and process, to ensure that the service provided is as consistent as possible for all consumers and avoid failing to meet customer expectations.

Conclusion

It is clear from the literature and the examples discussed above that there are significant interrelationships between the seven Ps of the services marketing mix, particularly between the product, the people and the process used to produce the service. In addition, the price of the service will tend to be strongly dependent on its cost to produce, and hence on the people, the process and the place in which it is delivered. Also, the promotion used for any service will need to be based on factors such as the product, price and the availability of physical evidence. This tends to indicate that the seven Ps really are mutually dependent, and most of them cannot be managed independently of the others without damaging the potency and effectiveness of the marketing mix. For example, a business could change the process it uses to produce a service, but without improving the training of its people and promoting this change it would likely either reduce the quality of the service or cause some inconsistency with customer expectations. As such, it appears that only the physical evidence used to demonstrate the product to the customer can be managed independently, as it can take a variety of forms each of which can be persuasive.

References

1. Aaker, D. A. (2007) Strategic Market Management. Wiley.
2. Bitner, M. J. (1990) Evaluating Service Encounters: The Effects of Physical Surroundings and Employee Responses. The Journal of Marketing; Vol. 54, Issue 2, p. 69-82.
3. Booms, B. and Bitner, J. (1981) Marketing strategies and organizational structures for service firms. In Donnelly, J. and George, W. Marketing of services. American Marketing Association.
4. Chaffey, D. (2006) Internet Marketing: Strategy, Implementation and Practice: 3rd Edition. Prentice Hall.
5. Creaton, S. (2007) Ryanair: The Full Story of the Controversial Low-cost Airline. Aurum Press.
6. Gronroos, C. (1978) A Service-Orientated Approach to Marketing of Services. European Journal of Marketing; Vol. 12, Issue 8, p. 588.
7. Kotler, P. and Keller, K. L. (2006) Marketing Management: 12th Edition. Financial Times / Prentice Hall.
8. Kumar, N. (2004) Marketing As Strategy: Understanding the CEO’s Agenda for Driving Growth and Innovation. Harvard Business Press.
9. McCarthy E. J. (1960) Basic Marketing: A Managerial Approach. Irwin.
10. Nagle, T. and Holden, R. (2001) The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making: 3rd Edition. Prentice Hall.

This work was produced by one of our professional writers as a learning aid to help you with your studies

Economic Man, Psychodynamic, Behaviourist, Cognitive and Humanistic

Consumers possess considerable discretion to make independent and autonomous choices about what they will and will not buy, from whom they will buy, as well as from whom they will not, and this purchasing power leaves most businesses that are not monopolies little choice but to adopt a consumer orientation, meaning that they must resolutely focus on understanding customers in order to more effectively fulfil their needs (Baker & Hart, 2003). Specifically, in marketing, a good understanding of customers’ lives to the maximum extent possible is crucial to ensuring that the most appropriate products and services are being marketed to the right people in the most effective way possible (Kotler & Keller, 2012).

Influencing consumers’ behaviour, and in particular their purchasing decisions, is at the focal point of all the effort and resources that are devoted to marketing (Kotler & Armstrong, 2014) and because of this fact, marketers will require an in depth understanding of the principles and motivations behind consumers’ behaviour if they expect to be able to effectively anticipate, forecast and perhaps even instigate what consumers will do in the future (Baker & Hart, 2003). According to Jobber and Fahy (2006), it is nearly impossible to succeed at marketing without an in-depth understanding of how and why consumers behave in the ways that they do and therefore, it is unsurprising that consumer behaviour and the ways in which consumers make decisions, particularly purchasing decisions, are prominent research topics and have been studied extensively in the various fields of consumer science (Erasmus, Boshoff, & Rousseau, 2001).

The first attempts at understanding consumer behaviour were based on the assumptions typically made in orthodox economics, that in a world of scarce resources, economic actors or ‘economic men’, are primarily motivated to reconcile the inevitable tension between unlimited needs and limited resources (Keizer, 2010) and that all behaviour results from rational decision making in the pursuit of purely self-regarding choices (Camerer & Fehr, 2006). For instance, a consumer presented with the same product at different prices, all other things being equal, will almost certainly choose the option which has the lower price. This approach assumes that consumers are always consciously aware of all their true preferences, ranked in order of priority and social factors are assumed to be irrelevant in interpersonal relations, which are assumed to be primarily motivated by economics (Keizer, 2010). In essence, the ‘economic men’ approach considers consumers’ behaviour to be motivated primarily by the rational pursuit of optimum economic benefit.

Over the last three decades however, a large body of evidence has been accumulated showing that a number of the assumptions routinely made in economics about rationality and preference are, in reality, abstractions which are regularly violated in ‘real world’ situations (Camerer & Fehr, 2006). Behavioural psychologists dispute the assumption that consumers are by and large rational actors, the central assumption of the economic man approach (Keizer, 2010). In reality consumer’s behaviour is often driven by psychological forces that often occur completely outside the conscious mind and of which consumers are not aware as well as motives that they may not fully understand (Kotler & Armstrong, 2014) and, therefore, according to Keizer, (2010) to understand the functioning and the inner workings of the human mind is to gain insight as to what underlies and drives consumer behaviour. Even though the cognitive, psychodynamic and behavioural approaches to the study of consumer behaviour are all based on understanding the functioning of the mind, each takes a different perspective on the consumer in order to interpret their behaviour.

The first attempts to ascribe consumer behavior to cognitive processes made use of the information processing patterns of digital computers in the 1960s as the model for the mental process of decision making (Baker & Hart, 2003) and typically depict purchasing decisions by consumers as a five step sequential process which occurs mostly subconsciously (Marsden & Littler, 1996) starting with the recognition of a need or problem, followed by a search for information as to how that need may be fulfilled, which is then followed by an evaluation of available choices and options uncovered in the information search, after which the actual decision to purchase is made and then, finally, consumers undertake a post-decision evaluation of the outcome of the choice they have made (Erasmus, Boshoff, & Rousseau, 2001). Baker & Hart (2003) identify a weakness in this cognitive approach in pointing out that no account is taken of individual situational factors or context as no differentiation is made, for instance, between consumers making one-off buying decisions for durable products and others making repeat purchases of familiar brands or consumer goods. Also, in the case of low-risk, low-cost or low-involvement decisions or variety seeking consumers, information is not always processed in a deliberate rational manner (Kotler & Keller, 2012).

As the minds of other people are inaccessible, the cognitive approach is necessarily subjective (Keizer, 2010) and since there is no means by which cognitive processes can be directly observed or objectively measured, according to Bennett & Bove (2002) they do not have a place in study and research. The psychodynamic approach to the study of consumer behaviour is largely based around the ideas and theories of Sigmund Freud (Backhaus et al., 2007) who believed that behaviour is not based on environmental stimuli or cognitive processes (Hoyer and Macinnis, 2008) but instead is the result of a fundamental internal conflict and interplay between the drive for gratification of needs, wants with desires, will power and the limitations on behaviour brought about due to the survival and social necessities of being accepted as a functioning member of society (Solomon, Russell-Bennett & Previte, 2013). Some drives may be innate, like the need to eat, while others will be acquired or learned, like the need to smoke cigarettes (Bennett, 1996), but both drive behaviour all the same. According to Marsden & Littler (1996) childhood experiences have a powerful influence on many of the drives that follow consumers throughout their lives.

Sigmund Freud theorised that there are three ‘systems’ within the human mind: the id, the ego and the superego. According to his theories, we are motivated as humans to behave in ways which minimise any conflict between these three entities (Solomon, Russell-Bennett & Previte, 2013).

The id is about selfish, illogical and immediate gratification and nothing more, without regard for any consequences and operating according to the pleasure principle, which is the basic desire to maximise pleasure and avoid pain. The superego counteracts the id, acting in essence like a ‘conscience’ and internalising society’s rules especially as was taught by one’s parents (Solomon, Russell-Bennett & Previte, 2013).

The ego is the system that mediates between the id and the superego. The ego tries to find the balance between the other two, applying the reality principle which means finding ways to attain the maximum gratification for the id that society at large will accept. As these conflicts occur unconsciously, consumers are not normally aware of the underlying reasons for the behaviour they bring about (Solomon, Russell-Bennett & Previte, 2013).

In a landmark study into behaviour, Watson & Rayner (1920) proved behaviour could be learned due to external events by teaching a small child to fear otherwise harmless objects through the repeated association with loud noises. The behaviourist approach, contends that conditioning of consumers’ behaviour occurs as a result of external stimuli (Marsden & Littler, 1996) which triggers responses while, at the same time feedback received from the environment as a result of past behaviours, whether perceived as positive or negative, will act as reinforcement and will serve to strengthen or weaken future responses accordingly so that consumers will be driven to repeat behaviour which is perceived to have been rewarded, whereas behaviour that elicits negative feedback will likely be avoided (Bennett, 1996).

For example, a satisfactory experience when consuming a product or service will make it more likely that the consumer will purchase the product again, whereas a negative experience will probably cause the consumer to avoid that product.

Around the time of the turn of this century, Nataraajan & Bagozzi (1999: 637) identified in adequacies in the approaches to the study of consumer behaviour stating:

“a pressing need in the field to balance the rational, cognitive side of marketing thought and practice with new ideas and research on the emotional facets of marketing behaviour”.

The humanistic approach emphasizes the ‘self’, and places the individual consumer at the centre of the analysis (Keizer, 2010). The cognitive, economic, psychodynamic and behaviourist approaches outlined above all make assumptions based largely on generic rules, without taking into account that consumers are all unique individuals who may respond differently to the same stimuli, and without taking into account that experiences are personal, subjective and unique to each individual by definition, as are the emotions associated with those experiences (Ahola, 2005). Also, they assume that behaviour is always self-interested and do not account for selfless or altruistic behaviour (Nataraajan & Bagozzi, 1999). Consumers will often seek to express some sort of self-definition through their belongings leading to an unsurprising consistency between a consumer’s values and the things they buy (Solomon, et al., 2006). These aspects of individualism and personality are manifested in the concept of the “true self” (Keizer, 2010) or, as referred to by Sirgy (1982) the “self-concept”. Demand for certain goods and services is known to be driven by the perceived emotional value to consumers (Vigneron & Johnson, 1999), for instance, there are certain product classes, particularly in the entertainment industry for which consumption is largely driven by consumers seeking emotional arousal, not economic benefit or functional utility (Ahola, 2005).

In terms of comparison and differentiation, consumer behaviour is portrayed as highly rational in the economic man approach (in responding to economic stimuli) as well as in the cognitive approach (in following the sequence of decision making steps). The cognitive approach is, however, vulnerable to certain biases due to the way that people normally process information. Of these errors, two are of note and these are: fundamental attribution error, which results from incorrect identification of the impact or origin of certain situational factors which will have an impact on behaviour and self-serving bias, which is the tendency of individuals to play up their role in successes while ascribing failures to external situational factors (Keizer, 2010).

In summary, the psychodynamic and the behaviourist approaches both acknowledge that there are internal cognitive processes taking place in the mind and both regard human behaviour to be the outcome of various interactions between internal factors like drive and response and external factors like stimulus and reinforcement (Skinner, 1953) however, in the behaviourist approach, behaviour is originated externally from the environment whereas the psychodynamic approach ascribes the origin of behaviour to internal biologically drives.

The humanistic approach made an appearance in psychology as an alternative to behaviourism and psychoanalysis approach (Dafermos, 2006) and is the only one that accounts for individual perception and interpretation also, acknowledging that these are not completely determined by the environment, by economics or by internal psychology (Keizer, 2010). Proponents of the humanistic approach attribute consumers’ behaviour to free will and considers them to be responsible for their actions, while criticising the research techniques adopted by in approaches for examining consumers solely as objects and not as subjects (Dafermos, 2006).

In conclusion, consumer behaviour has been established to be a highly important aspect of management, in particularly, marketing management. The five approaches to the study of consumers covered compared and contrasted in this paper, are the economic man approach, the cognitive approach, the psychodynamic and behaviourist approaches and finally, the humanistic approach.

These studies have come from different perspectives but, given the value to businesses of understanding how consumers behave, as well as the ability to more accurately predict future consumer behaviour, it is not surprising that there have been a number of research studies on the nature and origins of consumer behaviour.

References

Ahola, E. K. (2005). How is the concept of experience defined in consumer culture theory? Discussing different frames of analysis. Kulutustutkimus. Nyt.[Publication of the Finnish Association of Consumer Research]. Vol. 1. [Online] Available from: http://www.kulutustutkimus.net/wp-content/uploads/2006/09/1-10-ahola.pdf

Backhaus, K. Hillig, T. and Wilken, R. (2007) Predicting purchase decision with different conjoint analysis methods. International Journal of Market Research. Vol. 49, No. 3. pp. 341-364

Baker, M., & Hart, S. (2003) The Marketing Book. 5th Ed. Oxford, England/Burlington, Massachusetts: Butterworth-Heinemann

Bennett, R. (1996) Relationship formation and governance in consumer markets: transactional analysis versus the behaviourist approach. Journal of Marketing Management. Vol. 12, No. 5. pp 417-436.

Bennett, R., & Bove, L. (2002) Identifying the key issues for measuring loyalty. Australasian Journal of Market Research, Vol. 9, No. 2. pp 27-44.

Camerer, C. F., & Fehr, E. (2006) When does “economic man” dominate social behavior? Science. Vol. 311, No. 5757. pp 47-52.

Dafermos, M.- (2006). Psychology and Ethics: the double face of Janus. Eleftherna. Vol. 3, pp 97-110. [Online] Available from: http://ilhs.info/en/34%20PsychEthicsMDafFV.pdf

Erasmus, A. C., Boshoff, E., & Rousseau, G. G. (2001). Consumer decision-making models within the discipline of consumer science: a critical approach. Journal of Family Ecology and Consumer Sciences. Vol. 29. pp 82-90

Hoyer, W.D. & Macinnis, D.J. (2008) Consumer Behaviour. 5th ed. Mason, Ohio: Cengage Learning

Jobber, D. & Fahy, J. (2006) Foundations of Marketing. 2nd Ed. Maidenhead, Berkshire: McGraw-Hill Education

Keizer, P. K. (2010) Psychology for economists. Tjalling C. Koopmans Institute Discussion Paper Series. Vol 10, No. 17. pp 1-43.

Kotler, P. & Armstrong, G. (2014) Principles of Marketing. Global Ed. Harlow, Essex: Pearson Education Ltd

Kotler, P & Keller, K. L. (2012) Marketing Management. 14th Ed. Upper Saddle River, New Jersey: Pearson Hall

Marsden, D., & Littler, D. (1996) Evaluating alternative research paradigms: A marketaˆ?oriented framework. Journal of Marketing Management. Vol. 12, No. 7.pp 645-655.

Nataraajan, R., & Bagozzi, R. P. (1999) The year 2000: Looking back. Psychology & marketing, Vol. 16, No. 8. pp 631-642.

Sirgy, M. J. (1982) Self-concept in consumer behavior: A critical review. Journal of consumer research, vol. 9, No. 3. pp 287-300.

Skinner, B.F. (1953) Science and Human Behaviour. New York: The Free Press

Solomon, M., Bamossy, G., Askegaard, S. & Hogg, M. K. (2006) Consumer Behaviour: A European Perspective. 3rd Ed. Harlow, Essex: Pearson Education Ltd.

Solomon, M., Russell-Bennett, R., & Previte, J. (2013). Consumer behaviour. 3rd Ed. Frenchs Forest, NSW, Australia: Pearson Australia Vigneron, F., & Johnson, L. W. (1999) A review and a conceptual framework of prestige-seeking consumer behavior. Academy of Marketing Science Review. Vol 1, No. 1. pp 1-15.

Watson, J. B., & Rayner, R. (1920). Conditioned emotional reactions. Journal of experimental Psychology, Vol. 3, No. 1. pp 1 -14

This work was produced by one of our professional writers as a learning aid to help you with your studies

Everywhere we look, we see advertisements and logos. These features of capitalist commodity culture have become not just ways of selling goods but an inescapable mode of modern communication (Cartwright and Sturken, 2001). In the commodity culture of the twenty-first century, advertising images and corporate logos are no longer simply a part of the marketing strategies of consumer goods manufacturers, but features of our culture. Many members of the advertising profession see advertising as consistent with the needs of a democratic society, helping to make consumers aware of available market choices and educating consumers about product benefits (Myers, 1996). But the vision of advertising as a democratic information service is distorted by the fact that “it is the job of each individual advertiser to promote one product at the expense of competing products, and, implicitly, to systematically foreclose the appeal of alternatives by creating desire” (Myers, 1996, p.485).

Marxist analysts have constructed advertising as the iconographic signifier of multinational capitalism (Nava, Blake et al, 1997). This construction portrays capitalism, commodity culture, and therefore advertising as inherently flawed, as bad and beyond redemption. By analysing single ads, theorists come to conclusions where poor consumers are duped into buying more than they really need. Consumption will never fulfil the true human needs, because the fulfilment of these needs would mean changing our lifestyles and societies, it will never happen. According to Marxist theories large corporations control everyday social and cultural identities nationally and globally, whilst their global brands make the world seem more uniform, denying real choice.

Although Marxist criticism gives a good account of the state of the contemporary consumer societies, it tends to dismiss or ignore the trends in twenty-first century culture. Adverts and logos are an essential feature of post-modern life, where individuality, consumption, freedom, fragmentation and heterogeneity are the main features of Western societies. Post-modern cultures and societies are constantly changing and cultural practices are constantly being reinvented. Advertising is part of the culture of capitalism where meanings are a constant site of struggle. Commodities are understood to be a central part of these societies and individuals participate in the exchange of commodities in search of new trends, new meanings for coolness. Post-modern culture is above all a mix of different things. Art, politics, trends, consumption, economic issues and social relationships all mix with each other and in the end none of the features of contemporary life would have a meaning without the others. Although the influence of large corporations is bigger than ever, there still remain sites for resistance. Resistances and subcultural trends work in a constant cycle with market forces that appropriate them into the mainstream culture. Therefore, the impact of advertising and branding is constantly being renegotiated. However, despite being a well-established part of contemporary culture, advertising continues to attract moralistic disapproval. One could ask why does advertising attract more disapproval than other forms of post-modern culture, say, television, magazines, cinema or the music industry?

This work was produced by one of our professional writers as a learning aid to help you with your studies

Why do people resist change at work and how can this resistance be overcome from an HR perspective?

1. Introduction

Change is a common feature of the workplace. This paper examines why people resist change at work. It then explores how this resistance can be surmounted from an HR viewpoint.

2. Resistance to change at work

From research into individual and organisational behaviour, it is well established that people at work can sometimes resist change (Robbins, 1992). The Chartered Institute of Personnel and Development (CIPD) define resistance to change at work as “an individual or group engaging in acts to block or disrupt an attempt to introduce change” (CIPD, 2014, p.2) and argue that, in general, resistance to change in the workplace occurs in two ways: “resistance to the content of change” and “resistance to the process of change” (CIPD, 2014, p.2).

The reasons for resistance to change at work are numerous. Resisting change enables stability and for the status quo at work to be maintained (Robbins, 1992). Change jeopardises the comfort zones and security of employees who are risk averse and who like familiarity (Holbeche, 2001). The fear of the unknown may result in resistance to change (Robbins, 1992). There may be resistance when change appears to threaten someone’s income (Robbins, 1992). Change can appear threatening to the individual worker when it is foisted on them top down without their input as they do not feel in control (Holbeche 2001).

Gifford et al (2012), in their review of change programmes in NHS South of England, found that “many people do embrace change, but it is easy to feel undermined or threatened by it, even if one accepts at a broad level that change is needed. As well as the challenge of embracing new ways of working, it can be hard to let go of the old ways. Not only do people have ingrained habits and ways of thinking; they also become skilled in familiar work and may feel that their credibility is based upon it. For example, if someone spends years honing skills in a specific procedure and is then told they should be using a completely different technique, this may cut at their sense of self worth” (Gifford et al, 2012, p. 15).

Thus, there may be resistance if a person’s perception of how the world of work should be is threatened. Robbins (1992) explains that “individuals shape their world through their perceptions. Once they have created this world, it resists change. So individuals are guilty of selectively processing information in order to keep their perceptions intact” (Robbins, 1992, p.281).

Psychologists have studied resistance to change and it has been recognised that change may involve a significant shift for the individual, like a bereavement, where what was once certain is no longer so and they have to relinquish the familiar in order to be able to embed change (Holbeche, 2001).

The psychological contract is an important consideration when looking at resistance to change at work. Guest and Conway (2002) defined the psychological contract as “the perceptions of both parties to the employment relationship, organisation and individual, of the reciprocal promises and obligations implied in that relationship” (Guest and Conway, 2002, p.22). The CIPD (2005) argue that the psychological contract is “now best seen as a tool that can help employers negotiate the inevitable process of change so as to achieve their business objective without sacrificing the support and co-operation of employees along the way” (CIPD, 2005, p.4).

CIPD (2005) commented that people expected commitments made to them by management to be honoured and that management should make the effort to do so. Where management is not able to honour a commitment, attempts should be made, however difficult, to explain why and its impact on the employee. A breach of the psychological contract is likely to result in employees having a negative attitude to their employer which would include resistance to change. A case study at a Scottish manufacturing plant, where employees believed that the psychological contract had been breached by the employer, noted that the regular imposition of change programmes had resulted in a high level of cynicism amongst supervisors and shop floor staff (Pate, Martins and Staines 2000).

If there is a lot of organisational change in a workplace, it is likely to be negatively received by its staff (CIPD, 2005;Guest and Conway 2001). Furthermore, where there is frequent change, it is likely to result in staff believing that management do not know what they are doing and their trust in them declines (CIPD 2005) (Guest and Conway 2001).

In spite of all the above, research into change management reveals that there are things that can be done to alleviate resistance to change.

3. Overcoming resistance to change: the HR viewpoint
3.1 Adopt a positive approach to resistance at work

Resistance to change can be a cue for stakeholders in an organisation to have a meaningful debate about the merits of the proposed change. This may lead to amendments and improvements to the change (Robbins 1992).

3.2 The need to understand why change is happening

Research has shown that it is important for staff to understand why change is happening in terms how it will benefit the business and ideally how will it benefit them.

In the Gifford et al (2012) review of change programmes across the NHS South of England, it concluded that “leaders need to sell the benefits of the change. To do this they need to express their vision in a way that makes it easy for stakeholders to relate it to the purpose and values of the NHS and to their own principles and motivations” (Gifford et al., 2012, p.5). Gifford et al (2012) added that “purpose and vision [of the change programme] are crucial factors” (Gifford et al., 2012, p. 51) that should be communicated in many ways to make sure the message connects with the stakeholders.

In redundancy situations, Holbeche (2001) discovered that there was a “link between the perceived reason for the delayering and the effect on employees. If people thought that the reason for the delayering was simply cost cutting, their morale and motivation tended to be more adversely affected than where there appeared to be a more ‘strategic’ reason for the change” (Holbeche, 2001, 367).

3.3 Communication

Communication plays a critical part in helping staff understand why change is happening and in feeling engaged in the change process. Internal communication mechanisms which enable staff to feel empowered and involved are key to minimising resistance. Two way communication mechanisms like attitude surveys can be effective, but only if visible changes arise as a result (Holbeche, 2001). Other forms of communication that can help are senior management presentations (where questions can be asked and answered), road shows, team briefings and management cascades, question and answer mechanisms (for example by email) and internal newsletters (Holbeche, 2001).

Communication should ideally involve an element of being two way and should include all stakeholders. The CIPD (2005) found that top down communiques by senior managers were perhaps the most ineffectual way of delivering important messages to staff. Mission statements were slightly more effectual, but the most successful way of reaching staff with messages that they are likely to believe is through line managers (CIPD, 2005).

In recent times, storytelling, narratives and theatre have been used in change situations as innovative ways of communicating with staff in order to get them engaged and involved. These methods allow for a move away from top down senior management communication (Daley and Browning, 2014, Dennis, 2010, Thomas and Northcote, 2012).

Formal communication, in times of change, should:

Inform – about the organizational/ personal implications
Clarify – the reason for the change, the strategy and benefits
Provide direction – about the emerging vision, values and desired behaviours
Focus – on immediate work priorities and actions, together with medium term goals
Reassure – that the organisation will treat them [staff] with respect and dignity” (Holbeche, 2001, p.368).
3.4 Staff engagement

Those affected by the change need to feel engaged so that they believe that they are invested in the change. This can be time consuming and difficult for those leading the change (CIPD 2005, Gifford et al. 2012). Engagement can mean getting staff to buy into change that has already been devised or it can mean getting staff involved in actually designing the change (Gifford et al., 2012). Leaders need to be clear about what level of engagement is being offered as unfulfilled expectations risk demotivating staff and weakening good will. (Gifford et al, 2012).

Bearing in mind the psychological contract, the CIPD (2005) argue that managing change well involves getting employees’ buy-in and making sure that they are not caught unawares. Employees want fair treatment and it is important that they believe that they can trust management. As stated earlier, if employees’ expectations are not to be met, the reason why should be explained by management (CIPD, 2005).

3.5 Leadership

Those in leadership positions in the organisation have to act as role models for change to be successful. If the behaviour of the leaders in an organisation is at odds with their verbal utterances in a change situation, it can result in cynicism in staff and thus resistance to change.

Holbeche (2001) reports of a case study where company directors were charged with leading an organisational change involving paying particular attention to the customer. The directors talked to staff about the importance of the organisation’s values, especially teamwork. However, staff knew that the senior leadership team did not work well as a team and thus, the change message was being met with cynicism. When the Chief Executive took drastic action and threatened to punish the directors financially, that was when the directors became serious about role modelling good team work and effective leadership. As a result, the change message became believable to staff.

3.6 Apply learning from neuroscience

Dowling (2014) explored the connection between neuroscience and change management. He found that neuroplasticity, the concept of the adult brain being able to change through specific activity and experiences, was applicable in change situations, if it was self-directed by the individual employee. He advised that employers should give their employees the latitude to have their own insights into the proposed change and that this would allow new neural pathways to be formed in the employees’ brain, making sustainable change possible.

Downing (2014) also explored the impact of threat and reward on employees’ behaviour. He argued that when a person is faced with a perceived threat, the brain has an inbuilt defence mechanism which is activated. This provides some explanation as to why there is resistance at work when an employee feels threatened. This argument reinforces the need for those leading the change to emphasize the benefits of the proposed change so that the employee’s brain reward response is activated as opposed to their threat response.

Downing (2014) additionally looked at habit and how the prefrontal cortex of the human brain (the advanced cognition brain area) operates primarily on the basis of habit, otherwise it would be using a huge amount of energy which would not be sustainable. During periods of change, when individuals are being required to adopt new habits, a heavy burden is potentially being placed on the prefrontal cortex. When designing change programmes, there needs to be an awareness of the brain’s limited capacity for change (Downing, 2014, Scarlett, 2013).

3.7 HR

HR has a pivotal role to play in staff communication and engagement as well as in planning change effectively, including taking into account the learnings from neuroscience. There has to be a real partnership between the business and HR for change to be effective. HR plays a role in assisting, developing and supporting those in leadership positions to be effective in their roles so as not to undermine the success of the change programme and engender resistance to change (Holbeche, 2001, CIPD, 2005, Gifford et al., 2012).

4. Conclusion

Although resistance to change is something that occurs in the workplace for many understandable reasons, it can be minimised by good communication and staff engagement, explaining the need for change in terms of its benefits to the business and to the individual member of staff, learning from research, effective leadership as well as HR working well with the business and being an integral part of the change. Overcoming resistance at work matters, as while resistance is occurring, it may result in negative consequences such as having a negative impact on performance and productivity, creating an environment for turf wars at work as well as demoralising and demotivating staff (Holbeche, 2001,Robbins 1992, Cannon and McGee 2008, Hughes, 2010).

5. References

CANNON, J. A. and MCGEE, R. (2008) Organisational development and change. CIPD toolkit. London: Chartered Institute of Personnel and Development.

CHARTERED INSTITUTE OF PERSONNEL AND DEVELOPMENT (2005) Managing Change: The role of the Psychological Contract. Research report. London: Chartered Institute of Personnel and Development.

CHARTERED INSTITUTE OF PERSONNEL AND DEVELOPMENT (2014) Change management. Factsheet. Available: http://www.cipd.co.uk/hr-resources/factsheets/change-management.aspx#link_2

DAILEY, S.L. and BROWNING, L. (2014) Retelling stories in organizations: understanding the functions of narrative repetition. Academy of Management Review. 39(1). p. 22-43.

DENNIS, R. (2010) Intimacy at work: playback theatre and corporate cultural change in Mercedes Benz, Brazil. Journal of Organizational Transformation & Social Change. 7(3). p. 301-319.

DOWLING, N. (2014) It’s all in the mind. Training Journal. Aug2014. p.47-51.

GIFFORD, J., BOURY, D., FINNEY, L., GARROW, V., HATCHER, C., MERIDITH, M. AND RANN, R. (2012) What makes change successful in the NHS? A review of change programmes in NHS South of England. Horsham: Roffey Park.

GUEST, D. E. AND CONWAY, N, (2002) Communicating the psychological contract: an employer perspective. Human Resources Management Journal. 12(2). p. 22-38.

GUEST, D.E. AND CONWAY, N. (2001) Organisational change and the psychological contract: an analysis of the 1999 CIPD survey. Research report. London: Chartered Institute of Personnel and Development

HOLBECHE, L. (2001) Aligning Human Resources and Business Strategy.

Oxford: Elsvier Butterworth Heinemann.

HUGHES, M. (2010) Managing change: a critical perspective. 2nd Ed. London: Chartered Institute of Personnel and Development

PATE, J., MARTIN, G. AND STAINES, H. (2000) Exploring the relationship between psychological contracts and organizational change: a process model and case study evidence. Strategic Change. 9 (8). p.481-493.

ROBBINS, S. P (1992) Essentials of Organizational Behavior. Third edition. New Jersey: Prentice-Hall International

SCARLETT, H. (2013) Neuroscience helping employees through change. Strategic Communication Management. 17 (1). p.32-36.

THOMAS, P. and NOTHCOTE, R. (2012) Storytelling in transforming practices and processes: the Bayer case. In TYRONE, S., SIMPSON, A. and DEHLIN, E. (eds.) Handbook of organizational and managerial innovation. Cheltenham: Edward Elgar.

This work was produced by one of our professional writers as a learning aid to help you with your studies

Introduction

Vertically and horizontally integrated supply chains are supply chain management strategies adopted by companies to take advantage of synergies in their value chain to achieve more profits and competitive advantage (Naslund & Willamson, 2010). Effective supply chains are critical to the success of organisations operating in global multifaceted environments as well as organisations seeking to achieve optimal efficiency and customer satisfaction (Lambert, 2008). An increasingly competitive and interconnected global environment means that successful performance depends on the collective decisions and actions of all members of a supply chain rather than that of a single member and competition is increasingly between supply chains rather than between individual firms (Naslund & Willamson, 2010). Hence, organisations are faced with the challenge of making decisions regarding appropriate supply chain strategies that will deliver their objectives based on their capabilities, needs and circumstances. Vertical and Horizontal supply chain integration are two such strategies that enable companies to manage their organisations and their relationships with other companies in the same supply chain/value chain (Hill & Jones, 2012).

From a supply chain management perspective, vertical and horizontal integration aim to achieve cost savings, higher profits, greater efficiency and customer satisfaction by improving supply chain processes and performance through value-adding investment and activities that benefit all supply chain members (Stonebraker & Liao, 2003). For example, achieving cost reductions, improved performance and better target market access as a result of eliminating redundancies/duplications, lowering inventories, shorter lead times, greater control over supply and distribution, access to partner networks and lower fixed costs (Mentzer et al., 2008).

This essay will discuss and analyse key similarities and differences between vertically and horizontally integrated supply chains, highlighting the key issues and the scope of organisational departments involved.

Supply Chain Management (SCM)

Simchi-Levi et al. (2008) defined SCM as integration strategies aimed at coordinating functions across suppliers, manufacturers, distributors and retailers to ensure that products and services are produced and distributed at the right volume, location and time with the aim of reducing operational costs, maximising profits and ensuring satisfaction across the supply chain.. Vertically and horizontally integrated supply chains are SCM strategies introduced in the early 1980s with roots in the logistics literature.

Supply Chain Integration Strategies

Supply chain integration strategies are network-based business models used by organisations to align strategic decisions and processes across the network from supplier/manufacturer end to the customer end in order to achieve competitive advantages, synergy and efficiency in their operations as well as to gain more control in the input and output of their operations (Hill & Jones, 2012). Network-based business models are organisational structures that allow companies to operate as interconnected configurations across its value chain usually consisting of partnerships, collaborations and optimised cross-organizational activities (Mentzer, 2008).

Vertical Integration

Vertical integration is a coordination strategy in which a company owns its supply chain by incorporating supplier and/or distributor supply chains in its operations strategy or by expanding its operations to perform activities traditionally performed by suppliers and distributors (Hill & Jones, 2012). This strategy helps organizations to ensure high levels of control and to avoid the “hold up” problem, a situation in which an organisation’s contract with another party in its supply chain results in delays and loss of profit due to delays, non-performance of contract or imbalance of bargaining power between the 2 parties (Hill & Jones, 2012). The Ford River Rouge Complex, an automobile factory built by Henry Ford in 1927 is a good example of a vertically integrated supply chain providing economies of scale and ensuring high levels of control in the supply and production process – Iron ore and coal from Ford owned mines arrived on Ford freighters to produce Ford steel. Ford also owned its timberlands, glass plants, rail lines and rubber plantation, which helped to ensure efficiency, availability of necessary components as well as control over inputs and outputs (Slywotzky, 1996).

A vertical integrated supply chain can be implemented to varying degrees, broadly classified into 3 categories:

Backward vertical integration, in which a company owns subsidiaries that produce the inputs/components used in production. For example, the Ford River Rouge Factory with its own timberland and glass making companies (Slywotzky, 1996).
Forward vertical Integration in which a company owns or controls its distribution centres and/or retailers, thereby having direct contact with customers at the bottom of the value chain. For example, airlines performing the traditional roles of travel agents (Hill and Jones, 2012).
Balanced vertical Integration in which a company implements both backward and forward integration by owning/controlling its supply, production, marketing and/or retail centres. Apple is a good example of a company implementing balanced vertical integration by owning their own data centres, manufacturing equipment to produce their own chips and other proprietary components, as well as their own marketing and retail stores, content platforms and support centres (Hill and Jones, 2012).

As a strategic tool, a vertically integrated supply chain can provide companies with solutions to mitigate or remove the threat of powerful suppliers, decrease bargaining powers of suppliers, distributors and customers as well as reduce transaction costs. When properly implemented, a vertically integrated supply chain can help companies achieve competitive advantage and higher profits through economies of scale and scope (Fresard et al., 2014).

Horizontal Integration

Horizontal Integration is a single industry SCM strategy whereby companies seek to achieve competitive advantage and profitable growth through value creation activities that are focused on a single business or industry, for example, McDonald’s with its focus on global fast-food business and Walmart, with its focus on global discount retailing (Hill & Jones, 2012). A horizontally integrated supply chain is a business model whereby companies acquire or merge with industry competitors to achieve competitive advantage through economies of scale and scope (Fresard et al., 2014). For example, Boeing merged with McDonnell Douglas to create the world’s largest aerospace company, Pfizer acquired Warner-Lambert to become the largest pharmaceutical company (Hill and Jones, 2012)

This SCM structure provides the advantage of focus and scope, particularly in fast growing, dynamic industries where companies are required to focus substantial resources and capabilities on competing in one area in order to achieve long term competitive advantage (Lambert, 2008). Technological advancements, changing customer needs, fierce competition and low levels of entry barriers are common features of horizontally integrated supply chains. Due to changing customer needs, new competition and the pace of change in such industries, companies often find it difficult to sustain competitive advantage without changing/adapting their business model (Juttner et al. 2010). For example, with the advent of wireless telephone service and the likes of SKYPE, companies like AT&T had to quickly adapt their business model and join forces wireless companies that provided them with the capability to start offering broadband and wireless services. Its merger with Time Warner and Comcast enabled AT&T’s competitive positioning and its relevance in the changing world of telecommunications (Hill and Jones, 2012).

A successfully implemented horizontal integration strategy can increase a company’s profitability due to reduction in cost structures as a result of (Hill and Jones, 2012):

Economies of scale, particularly in industries with high fixed cost structures;
Increased product differentiation due to the combined product lines from merger or acquisition which enables the company to be able to offer product bundles and innovative new products to customers at different price points;
Replication of the business model due to the ability to leverage the increased product differentiation and lower cost structure achieved through horizontal integration to replicate the business model in new market segment, for example Walmart using its low-cost discount retail business model to enter into the warehouse and supermarket segments in the US as well replicating the model globally as by acquiring supermarket chains in several countries;
Reduced industry rivalry, as excess capacity is eliminated in the industry through acquisition or merging of competitors which results in more stable price environments and the elimination/reduction of price wars;
Increased bargaining power due to the consolidation of the industry resulting in companies that are a much larger buyer and hence wield a level of leverage or “buyer power” which can be used to drive down the price it pays to suppliers. Walmart is a good example of a horizontally integrated supply chain with bargaining power advantage.

Horizontal integration has limitations that are worth noting and guarding against. Similar to vertical integration, horizontal integration is a complex and difficult strategy to implement. For example, it is difficult to successfully merge companies with very different corporate cultures and where the merge/acquisition is a hostile takeover, it often results in high staff turnover and loss of much needed talent and expertise hence resulting suboptimal benefits or downright failure. There is also the risk of failure or penalty due to antitrust laws when companies attempt to use horizontal integration to become a dominant industry player as these laws exist to ensure fair trading and prevent companies from using their market powers to prevent competition.

Vertical and Horizontal Integration – Key issues to consider:
Similarities

Vertically and horizontally integrated supply chains are usually complex and capital intensive to implement. Both are also similar in the sense that they are business models that are aimed at optimising value chain processes and performance in other to achieve competitive advantage through economies of scale and scope. However, organisations need to consider several factors to ascertain the right strategy and whether it will be a profitable investment, including (Fresard et al., 2014):

Are there economies of scope to make it cheaper for the company to own or control subsidiaries involved in the supply and production of its inputs and outputs?
Is there need to establish entry barrier in the industry or obtain monopoly power by controlling the value chain in order to have competitive advantage?
Is it cheaper overall for the company to perform the role of suppliers and distributors than to conduct business with arm’s length suppliers and distributors?
Differences

Companies pursuing vertical integration may also pursue horizontal integration and in fact many do. However, the underlying principles and the operational implications of implementing both strategies have very clear differentiators.

In a vertical integration, the company enters new industries to support the business model of its core industry, whereas in a horizontal integration, the company competes in a single industry but expands through mergers, acquisitions and strategic alliances/collaborations. Vertical integration is more closed/proprietary model compared to horizontal integration which is more open because of the involvement of partners and the need to cooperate/collaborate. The differences in the operational implications include (Hill and Jones, 2012):

Vertical integrationHorizontal integration
More control through ownership of the value-adding stages.Less control due to dependence on others cooperation.
The vertically integrated company reaps the higher benefit.Benefits are from the success of everyone in the value chain
Efficiency over flexibilityFlexibility over maximum efficiency
Intensive capital required to create, produce, and distribute all components of the end product.Lower capital requirements due to shared ownership.

Departmental Functions

One of the challenges faced by organization in managing their supply chain is that of integrating internal functions as well as the entire supply chain (Christopher & Juttner,2000). Understanding the supply chain begins with understanding internal processes as this directly impacts performance. From a supply chain perspective, key internal processes include (Pagell, 2004):

Purchasing, responsible for buying process inputs
Operations, responsible for the transformation of raw materials into final outputs
Logistics, responsible for the management of processes involved in the production and delivery of outputs to customers

The key task in managing these functions is to ensure a process of interaction and collaboration in which purchasing, operations and logistics work together to achieve the mutual objectives of the supply chain.

Stakeholder Management

In vertical integration, the proprietary nature of the investment creates a more closed/not very trusting approach in the interaction with partners as the organization will seek to protect its trade secrets/intellectual property. In horizontal integration however, companies adopt a more open and trusting approach with partners, as this is integral to the success of their business model (Hill and Jones, 2012). For example, Microsoft and Google have adopted a more open approach to working with partners in their values chain as the success is achieved collaboratively and through open source platforms. Apple on the other hand operates a proprietary model, which tightly protects its intellectual property through its vertically integrated supply chain (Pomfret & Soh, 2010).

Conclusion

The decision between vertical or horizontal integration will determine an organisation’s operating strategy and the supply chain dynamics in terms of how functional departments and stakeholders interact. The challenge is to analyse how new emerging technologies will impact their business models, how and why these technologies might change customer needs and customer groups in the future, and what kinds of new distinctive competencies will be needed to respond to these changes (Hill and Jones, 2012). In the end it is all about what is right for the organisation in terms of its objectives, capabilities and customer value proposition and how that can be achieved efficiently and profitably.

References

Awad, A.H., and Nassar, M.O. (2010). Supply Chain Integration: Definition and Challenges. Proceedings of the International Multi Conference of Engineers and Computer Scientists Vol. 1. pp.17-19

Christopher, M. and Juttner, U. (2000). Developing Strategic Partnerships in the Supply Chain: A Practitioner Perspective. European Journal of Purchasing and Supply Management, Vol. 6 (2), pp. 117-27.

Fresard, L., Hoberg, G., and Phillips, G., 2014, The incentives for vertical acquisitions and integration, Discussion paper Working Paper University of Maryland. Available from : http://www-bcf.usc.edu/~gordonph/Papers/vertical_integration.pdf

Hill, C.W.L., and Jones, G.R. (2012) Strategic Management: An Integrated Approach (10th Edition). Mason, OH: South-Western Cengage Learning.

Juttner,U., Christopher, M., and Godsell, J. (2010). A Strategic Framework for integrating Marketing and Supply Chain Strategies. The International Journal of Logistics Management Vol. 21, No. 1, pp. 104-126.

Lambert, D. (2008). An executive summary of Supply Chain Management: Process, Partnerships, Performance, Jacksonville: The Hartley Press, Inc.

Mentzer, J., Stank, T. and Esper, T. (2008), ”Supply chain management and its relationship to logistics, marketing, production and operations management”, Journal of Business Logistics, Vol. 29 (1), pp. 31-45.

Mentzer, J., De Wett, W., James, K., Min, S., Nix, N., Smith, C. and Zacharia, Z. (2001), ”Defining supply chain management”, Journal of Business Logistics, Vol. 22 (2), pp. 1-25.

Naslund, D., and Williamson, S. (2010). What is Management in Supply Chain Management? – A Critical Review of Definitions, Frameworks and Terminology. Journal of Management Policy and Practice Vol. 11(4). pp.11-28

Pagell, M. (2004) Understanding the Factors that Enable and Inhibit the Integration of Operations, Purchasing and Logistics. Journal of Operations Management Vol. 22 (5) pp. 459–487.

Pomfret, J., and Soh, K. (2010) “For Apple Suppliers, Loose Lips Can Sink Contracts,” [Online] available from www.reuters.com/assets/print?aid=USTRE61G3XA20100217

Slywotzky, Adrian J. (1996), Value Migration: How to Think Several Moves Ahead of the Competition, Boston: Harvard Business School Press.

Simchi-Levi, D., Kaminsky, P., and Simchi-Levi, E. (2008). Designing and Managing the Supply Chain: Concepts, Strategies, and Cases (3rd edition). New York: McGraw-Hill.

Waters, D. (2008) Supply Chain Management: An Introduction to Logistics (2nd Edition). Basingstoke: Palgrave Macmillan.

This work was produced by one of our professional writers as a learning aid to help you with your studies

Introduction

There have been many different definitions of supply chain risk, but it can be broadly defined as “the variation in the distribution of possible supply chain outcomes, their likelihood, and their subjective values” (March & Shapira, 1987, p. 1404). However, this definition has since been expanded upon to account for all the different departments and functions that operate within a supply chain. This leads to an overall definition of supply chain risk as “any risks for the information, material and product flows from original supplier to the delivery of the final product for the end user” (Juttner, et al., 2003, p. 202). Simply put, supply chain risk refers to the probability of a risk event occurring the supply line and when the product goes on sale. Furthermore, risk sources are the predominant causes of risk events, which are “the environmental, organisational or supply-chain variables which cannot be predicted with certainty and which impact on the supply chain outcome variables” (Juttner, et al., 2003).

Identifying Supply Chain Risk

There are a variety different approaches that a company can take in order to identify risk in their supply chain. Steele and Court (1996) proposed a conceptual framework for identifying the potential risk in an organisations supply chain. This process was comprised of three key steps:

The probability of a risk event occurring in an organisations supply chain must be determined.
Next, the organisation should attempt to estimate the likely duration the risk event will last for, including when it may occur. This can usually be achieved through the analysis of past experiences.
Lastly, an analysis should be conducted on the probable impact the risk event could have on a certain facet of the organisation, such as market or financial performance.

If a company goes through these stages every time they believe a risk event may be imminent, then it will allow them to successfully identify the severity of the risk event, and put in motion any plans to prevent the risk.

Furthermore, an organisation should constantly be monitoring and attempting to identify risk events, as the earlier a risk is identified, the more likely it will be that an organisation that limit or completely negate the effects. If a company is conducting a new project to improve the supply chain, then risk identification should occur during the planning and preparation stage. This means that the organisation will have to identify risk indices, which aim to give a quantitative analysis of the potential risks associated with a project (Turney, 1996).

After the risk has been successfully identified, it can be categorised into a variety of different supply chain risk categories. This report will aim at identifying three supply chain risk categories, and suggest ways in which risk can be mitigated or managed within these categories. The three supply chain risk categories that will be explore are; exogenous, data integrity and internal resource risks.

Exogenous or External Threat

The supply chain must deal with external forces, such as natural disasters (flooding, hurricanes, or earthquakes) or human-centred issues (fraud or terrorism). Gupta & Maranas (2003) classify exogenous risk into two main sections. The first is long-term uncertainties, which can be in the form of seasonal demand variations or raw material unit price fluctuations. On the other hand, risk could cause short-term uncertainties, such as cancelled/rushed orders or equipment failure.

There are a plethora of issues present when trying to manage exogenous risk. This is mainly in the form of company’s unwillingness to plan for large-scale disruptions. Although organisations generally aim to protect themselves from small, recurrent exogenous risks, they ignore the high-impact, low probability ones (Chopra & Sodhi, 2004; Faisal, et al., 2006).

One of the most prominent strategies for mitigating the impact of exogenous risk events, is through the use of ‘hedging’. Hedging is a “supply side risk management strategy. In a global supply-chain context, hedging is undertaken by having a globally dispersed portfolio of suppliers and facilities such that a single event” (Manuj & Mentzer, 2008, p. 208). This is a particularly strong strategy at mitigating exogenous risk, especially high-impact ones, because it reduces the amount of operations that a potential natural disaster will hit. Furthermore, there are a variety of ways in which an organisation can ‘hedge’ against exogenous risk. One of the most prominent ways is through the use of dual sourcing, which protects the quality, quantity, price and performance of products by sourcing from more than one supplier. Furthermore, these suppliers must be far enough apart to ensure that a natural disaster wouldn’t affect both of them. Although a strong strategy, it is incredibly expensive for a company to do, as dual-sourcing is much more costly then single-sourcing (Berger, et al., 2004). Hedging is the best technique to use if a company has the available investment resources, faces high levels of exogenous risk, and produces goods where strong quality and process controls are in place.

Furthermore, an organisation can use the Supply Chain Operations Reference (SCOR) framework. This model comprised of four factors; source, make, deliver and plan. The SCOR framework can be used to “improve alignment between marketplace and the strategic response of a supply chain, on the premise that the better the alignment, the better the bottom line performance” (Huan, et al., 2004, pp. 24-25). Although it doesn’t identity risks, it acts as model to increase the performance of the supply chain and make it more resilient against potential risk events. A resilient supply chain has the ability to return to its original or desired state after being disturbed by a risk event (Peck, et al., 2003). It also allows firms to conduct thorough, fact based analysis of their supply chain, thus providing them with informed knowledge to make strategic decisions involving the supply chain.

Data Integrity/ Information Security Threats

Data and information security risks can largely be managed by the organisation by implemented thorough security checks throughout their data management software. However, in 2001, Ernst & Young (2001) conducted a survey to investigate how many companies had suffered data loss of failure. From interviewing over 250 chief information officers, over 70% of them stated that they had suffered some form of disruption to a critical IT service. This highlights the issues that data integration is causing many companies across the UK.

To prevent these issues, all organisations should be implementing a variety of security checks and protection systems on their IT systems. Finch (2004) outlines four key systems that all organisations should implement in order to ensure their IT and data integrity. These are;

Virus detection: All companies should have virus detection software to stop incoming threats from effecting critical IT systems. Furthermore, if this is coupled with a strong firewall, it can block the majority of malicious threats.
Firewall: A firewall is fundamental to a networks security. Although many companies install a solid firewall on their network systems, they forget that it needs to be managed. This is because the firewall must be updated with security policies, and log files regularly scanned for potential threats.
Backups: The majority of larger companies will have various backup systems in place to maintain the integrity of data even if a threat occurs. Furthermore, these backups should usually be stored off-site to increase protection. On the other hand, many smaller companies did not recognise the value that back-ups provide.
User accounts/passwords: Although user accounts and passwords are prominent across the majority of organisations, they must also be constantly managed. This means updated employees access rights, and deleted ex-employees from the system.

Although these systems seem like common knowledge for an organisation to install and implement, it is the careful monitoring and management of the systems that is imperative. Letting a security system become outdated will render it useless, as modern threats will be able to effect critical IT systems. Although risk sources related to data integrity cannot be mitigated entirely, they can be successfully managed through the thorough implementation of numerous security checks (Stoneburner, et al., 2002).

Internal Resource Risks

Internal resource risks has some similarities to data integrity risks, as it involves protecting all the internal resources that are connected within the supply chain. This can include things such as; labour strikes, production failure, IT system failure or insufficient interaction between organisations within the supply chain. Furthermore, similar to the other two risk categories, an organisation must conduct careful planning and preparation to help completely mitigate internal resource risks from occurring. There are a variety of methods in which a company can do, including probability reduction, transferring or sharing risks.

educing the probability of a risk event is often preferred by many organisations, and could be reduced by “by improving risky operational processes, both internally and in cooperation with suppliers, and to improve related processes, e.g. supplier selection” (Norrman & Jansson, 2004, p. 439). Fundamentally, if a company wishes to reduce the probability of a risk event occurring then they will attempt to integrate all processes with the supply chain. However, although this reduces the probability of a risk event occurring, it is still likely that one will eventually occur, and with full impact.

Another method of reducing internal resource risks is by transferring risk to insurance companies, or supply chain partners. This could be in the form of changing delivery times or suppliers (just-in-time deliveries) or customers (made-to-order manufacturing), or by outsourcing activities (Norrman & Jansson, 2004). Although this is a beneficial method for one company, it could be extremely damaging to the organisation or customer who ends up dealing with the potential risk event. This could fracture supplier and customer relationships, relating in short-term and long-term financial losses for a company.

The final method of reducing internal resource risk is through sharing them. This is usually through the use of contracts, as commercial risks can be shared via these. Furthermore, the internal resource risk could also be minimised through more collaboration throughout the supply chain, as many different departments of the supply chain could absorb the risk effect, thus mitigating it substantially if it were to just impact one process (Cachon, 2002; Tsay, et al., 1998).

On top of these methods, organisations should also be conducting successful supplier relationship management (SRM). SRM can be defined as “a process involved in managing preferred suppliers and finding new ones whilst reducing costs, making procurement predictable and repeatable, pooling buyer experience and extracting the benefits of supplier partnerships” (Choy, et al., 2002, p. 282). Although this isn’t specifically targeted at managing risk, it has a natural impact to reduce the probability and mitigate the impact of risk. It is similar to the sharing strategy, as it focuses on integrating and collaborating all aspects of the supply chain, to protect internal resource from potential threats. Furthermore, SRM can reap even greater benefits for an organisation if it is coupled with Customer Relationship Management (CRM). Choy, et al., (2002) studied the effects that integrating SRM and CRM had on Honeywell, a company based in Hong Kong. They found that the collaboration of SRM and CRM had many benefits, as suppliers were more aware of what customers had ordered, and could tailor and increase the quality of products accordingly.

Conclusion

There are many different methods for managing risk, and even though risk events can come in many forms, they all follow similar patterns. An organisation should attempt to mitigate all risk events of occurring by driving the probability of the risk event down to zero, or as close to zero as possible. This can be done through the use of a variety of systems, such as the SCOR framework, which aims to increase the resilience of an organisations supply chain. Furthermore, collaborating and integrating the supply chain has many benefits at mitigating exogenous risk and internal resource risk. This is because it spreads the risk over many different processes, thus reducing the impact on one single function.

As risks can cause significant distress to an organisation and its operations, they must ensure that all the relevant frameworks and theories are being utilised. The type of risk that is going to affect the company is completely dependent on the geographical location of the company and the industry they operate in. This means that one risk management strategy does not work for everyone, and an organisation must ensure they are implementing the correct risk management strategy to ensure the risk event is mitigated and its effects negated as much as possible.

Bibliography

Berger, P. D., Gerstenfeld, A. & Zeng, A. Z., 2004. How many suppliers are best? A decision-analysis approach. Omega (Oxford), 32(1), pp. 9-15.

Cachon, G., 2002. Supply Chain Coordination with Contract, Philadelphia: The Wharton School of Business.

Chopra, S. & Sodhi, M., 2004. Managing Risk to Avoid Supply-Chain Breakdown. Sloan Management Review, 46(1), pp. 53-61.

Choy, K. L., Lee, W. B. & Lo, V., 2002. Development of a case based intelligent customer–supplier relationship management system. Expert Systems with Applications, 23(1), pp. 281-297.

Ernst & Young, 2001. Information Security Survey 2001, s.l.: Ernst & Young.

Faisal, M., Banwet, D. & Shankar, R., 2006. Mapping supply chains on risk and customer sensitivity dimensions. Industrial Management & Data Systems, 106(6), pp. 878-895.

Finch, P., 2004. Supply Chain Risk Management. Supply Chain Management: An International Journal, 9(2), pp. 183-196.

Gupta, A. & Maranas, C., 2003. Managing demand uncertainty in supply chain planning. Computers and Chemical Engineering, 27(8), pp. 1219-1227.

Huan, S. H., Sheoran, S. K. & Wang, G., 2004. A review and analysis of supply chain operations reference (SCOR) model. Supply Chain Management: An International Journal, 9(1), pp. 23-29.

Juttner, U., Peck, H. & Christopher, M., 2003. Supply Chain Risk Management: Outlining an Agenda for Future Research. International Journal of Logistics : Research & Applications, 6(4), pp. 197-210.

Manuj, I. & Mentzer, J. T., 2008. Global supply chain risk management strategies. International Journal of Physical Distribution & Logistics Management, 38(3), pp. 192-223.

March, J. & Shapira, Z., 1987. Managerial perspectives on risk and risk taking. Management Science, 33(11), pp. 1404-1418.

Norrman, A. & Jansson, U., 2004. Ericsson’s proactive supply chain risk management approach after a serious sub-supplier accident. International Journal of Physical Distribution & Logistics Management, 34(5), pp. 434-456.

Peck, H. et al., 2003. Creating Resilient Supply Chains: A Practical Guide, Bedford: Cranfield University, Cranfield School of Management.

Steele, P. & Court, B., 1996. Profitable Purchasing Strategies: A Manager’s Guide for Improving Organizational Competitiveness through the Skills of Purchasing. 1st ed. London: McGraw Hill.

Stoneburner, G., Goguen, A. & Feringa, A., 2002. Risk Management Guide for Information Technology Systems, Gaithersburg: National Institute of Standards and Technology .

Tsay, A. A., Nahmias, S. & Agrawal, N., 1998. Modelling supply chain contracts: a review. In: Quantitative Models for Supply Chain Management. Norwall: Kluwer Academic, pp. 299-336.

Turney, R., 1996. Risk Assessment in the Process Industries. 2nd ed. Rugby: Institution of Chemical Engineers.

This work was produced by one of our professional writers as a learning aid to help you with your studies

Introduction

Strategic management involves the construction and implementation of major aims and objectives taken by an organisations managers to represent the views of the owners. It is usually based on the consideration of resources, and on an assessment of the internal and external factors affecting the organisation (Nag, et al., 2007). It is an incredibly important factor for company owners to take into consideration as it is directly related to the success of an organisation.

This report will explore the three theoretical approach to strategic management; resource based view, market based view and I/O view. Furthermore, it will also investigate three type of strategy, which are corporate strategy, business strategy and operational strategy.

Resource Based View

The resource based view to strategic management “provides an explanation of competitive heterogeneity based on the premise that close competitors differ in their resources and capabilities in important and durable ways” (Helfat & Peteraf, 2003, p. 997). Furthermore, the resourced based view has become one of the most prominent and influential theories in management. This is because it aspires to explain the internal resources that an organisation can utilise to gain a competitive advantage (Kraaijenbrink, et al., 2009). The central theme of a resource based view to strategic management is that for a firm to achieve sustained competitive advantage it must acquire and control a wide range of resources and capabilities (Barney, 2002). Although the resource based view appears to be an incredibly appealing technique to use, it has been extensively criticised.

The various criticisms of the resource based view can broadly fall under six main categories. These are (Kraaijenbrink, et al., 2009);

No managerial implications: The resource based view tells managers that certain resources, valuable, rare, inimitable and non-sustainable (VRIN), should be obtained. However, it doesn’t give feedback on how managers should go about obtaining these resources (Conner, 2002).
Implies infinite regress: Many theorists critique the resource based view because it will lead firms into an infinite loop of endlessly searching for the best resources. Collis (1994, p. 148) states “a firm that has the superior capability to develop structures that better innovate products will, in due course, surpass the firm that has the best product innovation capability today…”.
Applicability is too limited: Conner (2002) believes that the resource based view can only be adopted by large firms who have a lot of market power. This alienates many, smaller firms, from being able to benefit from the success that a resources based view can hold.
Sustained competitive advantage is not achievable: The resource based view is focused on sustaining competitive advantage. However, competitive advantage cannot really be sustained because “Both the skills/resources, and the way organizations use them, must constantly change, leading to the creation of continuously changing temporary advantages” (Fiol, 2002, p. 692).
Not a theory of the firm: Most academics agree that the resource based view is not a theory of the firm, but with some turning it into a critique. As the resource based view does not take into account operational boundaries, values, internal structure or asset ownerships, it cannot be a theory of the firm (Dosi, et al., 2008).
Definition of resource is unworkable: Many definitions of resources are extremely broad, and if all were taken account than anything of substance to a company would be considered a resource. As the resource based view does not take into account the different definitions and types of resource, it is hard to apply to specific situations (Kraaijenbrink, et al., 2009).
Market Based View

This perspective focuses on factors “outside the firm on the markets in which it competes”. Furthermore, the market based view states that “the sources of value for the firm are embedded in the competitive situation characterizing its external product markets” (Makhija, 2003, p. 437). This basically means that a firms sources of market power is a contributing factor to the organisations performance. Most academics highlight three main sources of market power, these are (Grant, 1991);

Monopoly: If a firm has market power in the form of a monopoly then they should expect exceptional business performance. This is because they will be the only company operating within a market, and can dictate the pricing of their products at free will. However, they will also be susceptible to new companies penetrating the market.
Barriers to entry: For a company operating as a monopoly they will want to impose strict barriers of entry to try and maintain control of the market for as long as possible Furthermore, this approach should be taken by most companies in a dominant market position, as they do not want other companies to penetrate the market and steal market share.
Bargaining Power: The more bargaining power a company has, in regards to both consumers and suppliers, the higher the expected performance would be. This is because if the firm has a low of power over their suppliers and consumers, then the chances are that there are not many substitutes for the suppliers or consumers to choose between. Once again, this allows the company to have dominant impact on the pricing within the market.

Furthermore, because many academics suggest that business markets evolve very slowly (Geroski & Masson, 1987; Mueller, 1986), it means that market power does not erode rapidly, and a company can maintain it for a reasonably long time. However, even if the market were to dramatically change, a company can utilise their current market power to cushion the effects of any detrimental actions that may occur.

Industrial/Organisation View

The organisation view on strategic management focuses on how an organisation chooses which industries to operate. It suggests that if an industry is performing exceptionally well, then a business can enter that market and reap substantial financial benefits (Chin, et al., 2003). It is centred on Porters Five Forces (1980), as it analyses the different modes and restrictions of entry into a market.

Makhija (2003) takes the view that the I/O view is about manipulating power asymmetries and trying to develop market power. It does this by attempting to minimise the impact of Porters Five Forces, such as industry rivals and threat of new entrants. Furthermore, an I/O view would view market power as a substantial defence against new entrants, and that the industry can have significant impacts on competitive advantage, not so much the market or the organisation. It is a relatively outdated view of competitive advantage, with the resource based view and market based view being preferred by most academics and corporations.

Corporate Strategy

Michael E Porter (1987, p. 1) defines corporate strategy as the concern as business as on “how to create competitive advantage in each of the businesses in which a company competes”. In essence, corporate strategy concerns every facet of the business, to add up to more than the sum of its business unit parts. Furthermore, Porter (1987) outlines four generic strategies that exist at a corporate level. These are;

Portfolio Management: This is a corporate strategy that is in use by most organisations. It is primarily based on a diversification strategy through acquisition. Although acquisitions can be in a completely new market, corporate managers will often limit the differences to focus their own personal expertise. Furthermore, the acquired firms should run autonomous, with teams focusing on their own work and being reward based on unit results.
Restructuring: This is quite dissimilar to portfolio management, as it involves the complete restructuring of businesses. A corporate manager will usually acquire a company with “unrealised potential” and then seek to actively review and restructure the business operations. This strategy benefits from underperforming companies that are at threat of going into liquidation. When well implemented, the restructuring strategy offers many benefits, it is a cheap mode of acquisition and still leaves a lot of freedom for development.
Transferring Skills: The previous two strategies both rely on the acquisition or restructuring of companies and leaving them to operate autonomously. However, a transferring skills strategy seeks to build interconnected relationships between each business unit of the corporation. However, sometimes business units will not synergise well together and no matter how hard a corporation tries, the skills cannot be transferred. This can prove costly and timely for an organisation.
Sharing Activities: The final strategy developed by Porter (1987) is via a sharing activities strategy. This strategy is a blend of the three previous strategies, as it leaves business units to act autonomously, but will seek to share a portion of activities between them. This could be in the form of production, supply chain or distribution. Furthermore, this strategy is becoming more and more prominent as sharing often enhances competitive advantage for a business by lowering costs.

As all four strategies have a variety of benefits, a corporation must decide on what strategy is most beneficial to follow. In general, the sharing activities strategy will be very suitable, as it is a cheap strategic choice, potentially lowering costs, and maintains the autonomy between business units. However, if a company is looking for rapid strategic growth then they may just build up a large portfolio of acquisitions. Unfortunately, this does come with a substantial amount of risk and resource usage.

Business Strategy

A business strategy is fundamentally the way in which an organisation will set out to achieve any designated aims or objectives. Furthermore, a business strategy will typically cover a period of around 3-5 years and encompasses three generic strategies. These are; growth, globalisation and retrenchment. Growth and globalisation both look at how an organisation can expand their operations, either domestically or internationally. On the other hand, retrenchment is a defensive strategy, and looks into ways in which an organisation can reduce their operations to focus on what they do best (BCS, 2015).

As with the other strategies, business strategy is still meant to give an organisation competitive advantage. There are a variety of ways in which a business strategy can achieve this, including lowering prices or product differentiation. Business strategy is significantly different to corporate strategy in this regard, as it relates to the finer details of operation and gives individual employees a say on decision making.

Functional/Operational Strategy

Strategy in an operational context is “essentially about how the organization seeks to survive and prosper within its environment over the long-term” (Barnes, 2007, p. 24). Furthermore, Slack, et al., (2004) outline five key attributes that an operational strategy will try and achieve. These are;

Cost: The ability for an organisation to produce at a low cost.
Quality: The ability for an organisation to produce within specification and with minimal errors.
Speed: The ability for an organisation to produce quickly and meet consumer needs and demands, such as offering a short lead time between when a customer orders a product and when it gets delivered.
Dependability: The ability for an organisation to deliver their products in accordance with any promises made to the consumer.
Flexibility: The ability for an organisation to be able to change their operations at any given time. This can include changing volume of production or the time taken to produce.

If a company can perform exceptionally well in one or more of these factors, then it allows them to pursue a strategy that uses the factor as a competitive advantage. Barnes (2007) provides a table highlighting the different competitive strategies that a company can pursue dependent on where they are exercising efficient operations.

Excellent Operations Performance in…Gives the Ability to Compete on…
CostLow Price
QualityHigh Quality
SpeedFast Delivery
DependabilityReliable Delivery
Flexibility

Frequent new products/services

Wide range of products/services

Changing the volume of product/service deliveries

Changing the timing of product/service deliveries

Furthermore, it is highly unlikely that an organisation will be able to act proficiently at every one of the five factors mentioned above, so choosing one to excel it is a preferred method. If a company were to try and focus on all five factors they will likely cause confusion and actually lose their competitive edge. This concept was proposed by Skinner (1969) and is referred to as the ‘trade-off’ strategy. It basically means that a company can ‘trade-off’ performance in one facet of their operations to perform exceptionally well in another. Operations can play a fundamental role in strategic decision making, and a company must be clear on where they are performing well in order to market this as a competitive advantage.

Conclusion

There is not really an optimum strategy to pursue for an organisation, as it is dependent on a variety of external factors that could be specific to the organisation. Careful planning and preparation must be conducted before any organisation commits to following a certain strategy, otherwise they may risk losing substantial resources.

Furthermore, the resourced based view and market based view both have their merits, with a combination of the two probably being the most optimum method. An organisation should order their resources to establish a strong market power within an industry. Once this market power has been attained, corporate level members can begin filtering down aims and objectives that can be accomplished by business and operational strategies. Strategic choice involves heavy integration throughout all levels of the business, as strategies can be implement by a number of different departments, all of which offer their own benefits to the overall aims and objectives of the organisation.

Bibliography

Barnes, D., 2007. Operations Management. London: Cengage Learning.

Barney, J. B., 2002. Gaining and Sustaining Competitive Advantage. s.l.:Prentice Hall.

BCS, 2015. Business strategy. [Online] Available at: http://businesscasestudies.co.uk/business-theory/strategy/business-strategy.html#axzz3bWvHhfHY

Chin, J. W., Widing, R. E. & Paladino, A., 2003. Comparing the industrial organization view and market orientation, s.l.: Market Orientation and Relationship Marketing.

Collis, D. J., 1994. How Valuable Are Organizational Capabilities?. Strategic Manamement Journal, 15(1), pp. 143-152.

Conner, T., 2002. The Resource-Based View of Strategy and Its Value to Practising Managers. Strategic Change, 11(6), pp. 307-316.

Dosi, G., Faillo, M. & Marengo, L., 2008. Organizational Capabilities,Patterns of Knowledge Accumulation and Governance Structures in Business Firms: An Introduction. Organization Studies, 29(8), pp. 1165-1185.

Fiol, C. M., 2002. Revisiting an Identity-Based View of Sustainable Competitive Advantage. Journal of Management, 27(6), pp. 691-699.

Geroski, P. A. & Masson, R. T., 1987. Dynamic market models in industrial organization. International Journal of industrial organization, 5(1), pp. 1-13.

Grant, R. M., 1991. A resource-based perspective of competitive advantage. California Management Review, Volume 33, pp. 114-135.

Helfat, C. E. & Peteraf, M. A., 2003. The dynamic resource based view: Capability lifecycles. Strategic Management Journal, 24(10), pp. 997-1010.

Kraaijenbrink, J., Spender, J. C. & Groen, A., 2009. The resource-based view: A review and assessment of its critiques, Munich: Munich Personal RePEc Archive.

Makhija, M., 2003. Comparing resource based and market based views of the firm: Empirical evidence from Czech Privitisation. Strategic Management Journal, 24(5), pp. 433-451.

Mueller, D. C., 1986. Profits in the Long Run. Cambridge: Cambridge University Press.

Nag, R., Hambrick, D. C. & Chen, M.-J., 2007. What is strategic management, really? Inductive derivation of a consensus definition of the field. Strategic Management Journal, 28(9), pp. 935-955.

Porter, M. E., 1987. From Competitive Advantage to Corporate Strategy, s.l.: Harvard Business Review.

Skinner, W., 1969. Manufacturing: The missing link in corporate strategy. Harvard Business Review, 68(3), pp. 136-145.

Slack, N., Chambers, S. & Johnston, R., 2004. Operations Management. 4th ed. Harlow: Pearson Education.