Market Experiments

Unlike consumer clinics, which are conducted under strict laboratory conditions, market experiments are conducted in the actual marketplace. There are many different ways of performing market experiments. One method is to select several markets with similar socioeconomic characteristics, and change the commodity price in some markets or stores, packaging in other markets or stores, and the amount and type of promotion in still other markets or stores, and record the different responses (purchases) of consumers in the different markets. By using census data or surveys for various markets, a firm can also determine the effect of age, sex, level of education, income, family size, etc., on the demand for the commodity. Alternatively, the firm could change, one at a time, each of the determinants of demand under its control in a particular market over time and record consumers’ responses.

The advantage of market experiments is that they can be conducted on a large scale to ensure the validity of the results and consumers are not aware that they are part of an experiment. Market experiments also have serious disadvantages, however. One of these is that in order to keep costs down, the experiment is likely to be conducted on too limited a scale and over a fairly short period of time, so that inferences about the entire market and for a more extended period of time are questionable. Extraneous occurrences, such as a strike or unusually bad weather, may seriously bias the results in uncontrolled experiments. Competitors could try to sabotage the experiment by also changing prices and other determinants of demand under their control. They could also monitor the experiment and gain very useful information that the firm would prefer not to disclose. Finally, a firm may permanently lose customers in the process of raising prices in the market where it is experimenting with a high price.

Despite these shortcomings, market experiments may be very useful to a firm in determining its best pricing strategy and in testing different packaging, promotional campaigns, and product qualities. Market experiments are particularly useful in the process of introducing a different product, where no other data exist. They may also be very useful in verifying the results of the other statistical techniques used to estimate demand and in providing some of the data required for there other statistical techniques of demand estimation. 

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Consumer Clinics

Another approach to demand estimation is consumer clinics. These are laboratory experiments in which the participants are given a sum of money and asked to spend it in a simulated store to see how they react to changes in the commodity price, product packaging, displays, price of competing products, and other factors affecting demand. Participants in the experiment can be selected so as to closely represent the socioeconomic characteristics of the market of interest. Participants have an incentive to purchase the commodities they want the most because they are usually allowed to keep the goods purchased. Thus, consumer clinics are more realistic that consumer surveys. By being able to control the environment, consumer clinics also avoid the pitfall of actual market experiments (read the post here), which can be ruined by ruined by extraneous events.

Consumer clinics also have serious shortcomings, however. First, the results are questionable because participants know that they are in an artificial situation and that they are being observed. Therefore, they are not very likely to act normally, as they would in a real market situation. For example, suspecting that the researches might be interested in their reaction to price changes, participant are likely to show more sensitivity to price changes than in their everyday shopping. Second, the sample of participants must necessarily be small because of the high cost of running the experiment. Inferring, however, a market behavior from the results of an experiment based on a very small sample can be dangerous. Despite these disadvantages, consumer clinics can provide useful information about the demand for the firm’s product, particularly if consumer clinics are supplemented with consumer surveys. 

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Consumer Surveys and Observational Research

Consumer Surveys involve questioning a sample of consumers about how they would respond to particular changes in the price of the commodity, incomes, the price of related commodities, advertising expenditures, credit incentives, and other determinants of demand. These surveys can be conducted by simply stopping and questioning people at a shopping center or by administering sophisticated questionnaires to a carefully constructed representative sample of consumers by trained interviewers.

In theory, consumer questionnaires can provide a great deal of useful information to the firm. In fact, they are often very biased because consumers are either unable or unwilling to provide accurate answers. For example, do you know how much your monthly beer consumption would change if the price of beer rose by 10 cents per 12-oz can or bottle? If the price of sodas fell by 5 cents? If your income rose by 20 percent? If a beer producer doubled its advertising expenditures? If the alcoholic content of beer were reduced by 1 percentage point? Even if you tried to answer these questions as accurately as possible, your reaction might be entirely different if actually faced with any of the above situations. Sometimes consumers provide a response that they deem more socially acceptable rather than disclose their true preferences. For example, no one would like to admit that he or she drinks 200 beers per month. Depending on the size of the sample and the elaborateness of the analysis, consumer surveys can also be expensive.

Because of the shortcomings of consumer surveys, many firms are supplementing or supplanting consumer surveys with observational research. This refers to the gathering of information on consumer preferences by watching them buying and using products. For example, observational research has led some automakers to conclude that many people think of their cars as art objects that are on display whenever they drive them. Observational research has also shown that consumer prefer to take several cold medicines, not just one. Observational research relies on product scanners which are increasingly found in stores and on people meters in homes. These make it possible for a company to learn overnight how a wide variety of products sell, the effectiveness of commercials, as well as television viewing patterns. Scanners and people meters, however, raise legal questions about privacy.

Observational research does not, however, render consumer surveys useless. Sometimes consumer surveys are the only way to obtain information about possible consumers’ responses. For example, If a firm is thinking of introducing a new product or changing the quality of an existing one, the only way that the firm can test consumer’s reactions is to directly ask them since no other data are available. From the survey, the researcher then typically tries to determine the demographic characteristics (age, sex, education, income, family size) of consumers who are most likely to purchase the product. The same may be true in detecting changes in consumer tastes and preferences and in determining consumers’ expectations about future prices and business conditions. Consumer surveys can also be useful in detecting consumers’ awareness of an advertising campaign by the firm. Furthermore, if the survey shows that consumers are unaware of price differences between the firm’s product and competitive products, this may be a good indication that the demand for the firm’s product is price inelastic. 

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BENCHMARKING

Benchmarking refers to the finding out, in an open and aboveboard way, how other firms may be doing something better (cheaper) so that your firm can copy and possibly improve on its technique. Benchmarking is usually accomplished by field trips to other firms. The technique has now become a standard tool for improving productivity and quality at a large number of American firms, including some of the best-known, such as IBM, AT&T, Ford, Du Pont, and Xerox.

Benchmarking requires:

1.  Picking a specific process that your firm seeks to improve and identifying a few firms that do a better job, and

2.   Sending on the benchmarking mission the people who will actually have to make the changes.

Benchmarking can result in dramatic costs reductions. For example, through benchmarking, Xerox was able to cut the cost of processing each order from $95 to $35 and, as a result, save tens of billions of dollars. Similarly, benchmarking allowed Ford to reduce the number of employees handling accounts payable from 500 to less than 200 in a few months. Through benchmarking, the Mellon Bank cut complaints by 60 percent and was able to resolve them on the average in 25 days instead of 45 days. Benchmarking has now become a standard tool to increase productivity and minimize costs at many U.S. and foreign firms. The explosion in interest in benchmarking has led to the formation of many benchmarking associations, councils, conferences, courses, data, and consultants. 

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The Strategic Alliance Boom

In the new global environment, with greater competition from more and more products and choices, alliances are not just a planning option but a strategic necessity. Strategic alliances are booming across the entire spectrum of industries and services and for a wide variety of purposes. According to Booz, Allen & Hamilton, the number of U.S. firms with partners in Europe, Asia, and Latin America is growing at a rate of 25 percent annually.

Why the boom? Here are several strategic reasons companies enter into alliances:

§  Fill gaps in current market and technology

§  Turn excess manufacturing capacity into profits

§  Reduce risk and entry costs into new markets

§  Accelerate product introductions

§  Achieve economies of scale

§  Overcome legal and trade barriers

§  Extend the scope of existing operations

§  Cut exit costs when divesting operations

Despite the many good reasons for pursuing alliances, a high percentage end in failure. A study by McKinsey & Company revealed that roughly one-third of 49 alliances failed to live up to the partners’ expectations. Yet such painful lessons are teaching companies how to craft a winning alliance. Three keys seem to be:

1.    Strategic fit: Before even considering an alliance, companies need assess their own competencies. Then they need to find a partner that will complement them in business lines, geographic positions, or competencies. A good example of strategic fit is AT&T and Sovintel, a Russian telephone company. The two joined forces to offer high-speed ISDN service for digitized voice, data, and video communication between the two countries. By joining together, the two telecommunications companies can offer new services for more business customers than either could do alone.

2.    A focus on the long term: Rather than joining forces to save a few dollars, strategic partners should focus more on gains that can be harvested for years to come. Corning, the $5-bilion-a-year glass and ceramics maker, is renowned for making partnerships. It has derived half of its products from joint ventures and even defines itself as a “network of organizations.” That network includes German and Korean electronics giants, and Mexico’s biggest glassmaker.

3.    Flexibility: Alliances can last only if they’re flexible. On example of a flexible partnership is Merck’s alliance with AB Astra of Sweden. Merck started out simply with U.S. rights to its partner’s new drugs. For the next phase, Merck set up a new corporation to handle the partnership’s $500-million-a-year business and sold half the equity to Astra. 

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The Management Revolution

Business and society are today in the midst of a revolution comparable to the Industrial Revolution in both scale and consequence. Today’s revolution has four components: the globalization of markets, the spread of the information technology and computer networks, the dismantling of traditional managerial hierarchies, and the creation of a new information economy. These four components are all occurring fast and at the same time, and are affected by and affect one another.

Globalization (the first component of today’s revolution) once meant simply exporting some goods and services to other nations and maybe setting up a few production facilities abroad. Today, globalization means that more and more managerial decisions must consider the world as whole, rather than the region or the nation, as the relevant marketplace. Because of the tremendous improvement in communications and transportation, tastes are converging internationally, many more products than in the past are now imported and most others parts of components made abroad, and domestic producers face ever growing competition from abroad.

The second component of today’s revolution is the spread of the information technology and computer networks. Practically every bank teller, post office worker, retail clerk, telephone operator, bill collector, and so on works with a computer today. This greatly speeds up the delivery of goods and services, cuts waste, reduces inventory, and generally increases productivity. The computer has also dismantled traditional managerial hierarchies and decimated the ranks of middle management (the third component of today’s revolution). In the past, middle managers were the transmission lines for information between top management and workers. Today, information can in most instances be transmitted from top management directly to workers and vice-versa by a simple tap of a computer key and without any need of middle management.

The fourth component of today’s revolution is the rapid spread of the information economy where the creation of value is increasingly based on knowledge and communications rather than as in the past on natural resources and physical labor. For example, many auto repairs will soon be made not by a mechanic with a wrench but by a technician who fixes an engine knock by reprogramming a computer chip, and goods and services will increasingly be marketed and distributed electronically. Today’s four-pronged revolution affects drastically not only how traditional products and services are produced and distributed but also the entire organization of production, consumption, and management in ways that are not yet fully evident or understood. 

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