Environments Affecting Marketing

Key Terms: environmental threat, controllable and uncontrollable environments, price discrimination, Robinson-Patman Act, horizontal price fixing, vertical price fixing, predatory pricing, Federal Dilution Act, FDA, CPSC, FTC, Sherman Antitrust Act, Clayton Act, counterfeit goods, futuristics, cultural shift, and technological forecasting.

Some of the environmental variables affecting a firm are controllable and some are uncontrollable. The 4P’s of marketing, i.e., the marketing mix, are controlled by the marketing manager. There are variables, however, that are uncontrollable and managers have to take them as givens. These include the: cultural, economic, legal, political, technological, competitive, and social environments. A good marketer scans these various environments for threats and/or opportunities.

Environmental threat—Sometimes, there is something going on in the environment that can have an adverse effect on an organization if no action is taken. Consider the effect of electronic commerce on various businesses, e.g., the music industry and software retailing. Similarly, do you think there is a future for travel agents and video rental stores?

Big threat to the music industry:  Consumers like to purchase individual songs on websites such as iTunes.  Will this have an effect on sales of albums?  Why buy an expensive CD consisting of many songs when all you want is one or two songs?  Sales of albums have been dropping while sales of individual digital songs have been rising. In fact, catalog sales (this is what the music industry calls the sale of old releases) account for 50% to 66.67% of the sales of digital singles. Some companies are afraid that online sales of digital singles will hurt profits so they only sell songs in album form and do not allow downloads of digital singles (see NY Times "When all the 'Greatest Hits' are too many to download."  2/2/2006 pp. 1, 6).

A. Pricing:

Robinson-Patman Act (1936) – prohibits price discrimination in interstate commerce unless based on a cost-difference or if the goods are not of "like grade and quality." This means that a company cannot charge different retailers (or wholesalers) different prices without justification. Very large retailers with their great buying power could demand huge price discounts which small retailers cannot.

Vertical price fixing—when a manufacturer controls the price charged by a retailer. 

On June 28, 2007, the Supreme Court eliminated a ban on manufacturers and retailers getting together and establishing minimum prices for products; agreements on minimum prices are legal if they do not hurt competition. This means that manufacturers and retailers are now permitted to set a price floor for products and are not violating federal antitrust law.  Why would manufacturers want to establish a price floor for a product?  Supposedly, this will make it possible for retailers to offer better service. If prices go too low because of discounters, service may suffer.   Is this true?  I have no idea.

Horizontal price fixing – competitors at the same level of the channel of distribution (e.g., manufacturers or retailers) getting together to set prices. This is illegal and a violation of the Sherman Antitrust Act.

Predatory pricing – Pricing below cost in order to drive a competitor out of business. This is also illegal.

B. Product:

Pure Food and Drug Act (1906) – prohibits adulteration and misbranding of foods in interstate commerce. Today the FDA (Food and Drug Administration) is concerned with misleading brand names and deceptive labels on food and drugs (e.g., the word "fresh"). Check out their web site at: http://www.fda.gov/

Consumer Product Safety Act (1972) – Created the Consumer Product Safety Commission (CPSC), which establishes safety standards for products. Check out their web site at: http://www.cpsc.gov/

If you purchase a bicycle, you might find the following statement on it: "This bicycle meets the requirements of the Consumer Product Safety Commission standards."

Their research (performed by examining emergency room patients) found that two of the most dangerous products are bicycles and stairs/steps. The CPSC is also involved in removing dangerous products from the marketplace. The CPSC has recalled several dangerous products that were being sold to consumers. These include: disposable lighters that leaked and exploded, rayon skirts made abroad that ignited easily, child swings, foam cushions, etc. Many toys for infants have been found to be quite dangerous.

On July 8, 2004 the CPSC announced the recall of the largest number of products ever--150 million pieces of toy jewelry.  The jewelry is sold in vending machines and costs 25 to 75 cents. The problem with the toy jewelry (it is made in India) is that it has a very high lead content and children sometimes eat it.   One boy, who swallowed a toy pendant purchased for a quarter, suffered from lead poisoning.  If you have any toy metal jewelry, throw it away.

Trademarks

This will be covered more thoroughly in a later chapter.  You should know that a company can obtain legal protection for its brand name or symbol (e.g., Nike's swoosh).  Even a color can be part of a trademark.  Thus, no company is permitted to use the name Coke® or Pepsi® . The ® means that it is a registered trademark and no other company may use that name or even a similar name that might cause confusion e.g., Cooka Cola or Pepi's Cola.  In fact, if a company tries to introduce a new soft drink called Cooka Cola, I can almost guarantee them a lawsuit. There is no way that Coca Cola will allow a firm to market another brand of soft drink with such a similar name.  Indeed, the Lanham Act was enacted to prevent this kind of confusion among competing brands in the same product category.

The Federal Dilution Act goes beyond the Lanham Act, and may allow a firm to prevent another company, even one in a non-competing business, from using a registered name.  You can see why it is called dilution.  Suppose I want to use the Rolex name which represents quality on a new brand of toilet paper, Rolex toilet paper.  This might dilute the value of the Rolex name.  

C. Promotion

Federal Trade Commission Act (1914) – unfair methods of business competition and deceptive acts and practices, e.g., bait and switch advertising.

The FTC is a powerful regulatory agency that can issue fines and cease and desist orders. One of their major functions today is to protect consumers from deceptive advertising and selling practices. Check out their Web site at: http://www.ftc.gov/

One example of a power of the FTC is corrective advertising.  The FTC has the power in certain situations to force a company to run new ads that correct a false impression made by previous ads.  One famous example of the use of corrective advertising was when Warner Lambert was ordered to run ads that stated that Listerine will not prevent colds or lessen their severity.  There were a large number of television commercials that suggested that Listerine would help prevent colds.  Incidentally, if you have a cold and/or sore throat, no mouthwash can help.  You might as well just Gargling with warm salt water.  

Bait-and-switch pricing is illegal and works as follows: A store runs an advertisement for a product at a very low price (the bait) and once the customers come to the store, salespeople try to "switch them," i.e., convince the to buy more expensive models or brands.

Most of the time, companies do not want to go to court with the FTC and will agree to sign a consent order. This means that they waive all rights to seek a review and agree not to continue the questioned practice (e.g., running an ad the FTC claimed to be deceptive), but they do not have to admit that they did anything wrong. If a firm refuses to sign a consent decree, the FTC will issue a cease and desist order which is the first step in a process that leads to a trial before an administrative law judge.

The FTC Web site that exposes popular Internet scams and informs consumers on how to avoid them is at: http://www.ftc.gov/dotcons Check out the Top Ten Dot Cons.

D. Place and Competition

Sherman Antitrust Act (1890) – deals with activities that are in restraint of trade or tend to create a monopoly (e.g., price fixing, predatory pricing, bid rigging, market/territory allocation). The Sherman Antitrust Act was the first federal law that was passed-- note the year of 1890-- to encourage competition. 

Clayton Act (1914) – Supplemented the Sherman Antitrust Act and also deals with exclusive dealing arrangements (which limit the sources of supplies available to consumers) and tying arrangements (the forced purchase by dealers of some products with others).

If a manufacturer insists that wholesalers and other intermediaries only carry their brands and not the brands of competing companies, this would be an example of exclusive dealing.  It might be illegal under the Clayton Act if it can be shown that competition is being hurt by this practice.

Suppose a company that manufactures printers forces intermediaries (wholesalers and/or retailers) that want its printers to also purchase fax machines, this is a tying arrangement.  It could be illegal under the Clayton Act if it can be shown that it hurts competition.  Car manufacturers sometimes try to do this.  A dealer wants small cars and is told that he also has to purchase some SUVs to get the small (and very popular) cars.  

Find online legal help and get free access to a vast collection of understandable legal information at: http://www.mycounsel.com/

As far as self-regulation for businesses, i.e., businesses regulating themselves, the self-regulatory organization that is the best known is, of course, the Better Business Bureau (BBB).  They have a website at   http://welcome.bbb.org/  You can use the BBB website to check out a charity or company and see whether a retailer has a satisfactory record.  I checked out a store in my neighborhood and this is what I found:

"Based on BBB files, this business has a satisfactory record with the Bureau. A “satisfactory record” means that a company has been in business for at least 12 months, and has properly addressed complaints referred to it by the Bureau. The business cannot have an unusual volume or pattern of complaints, or any government actions against it involving its marketplace conduct. The Bureau must understand and have no concerns about the business’s products, services and type of business."

The unauthorized copy of a product is known as a counterfeit good.  It is against the law; the Federal Anti-Counterfeiting Law was passed in 1984.  You can go to jail and pay a stiff fine for manufacturing counterfeit goods. It is a huge problem and has caused plane crashes (key engine components were found to be counterfeit) and faulty medical equipment (counterfeit batteries in pace-makers). At least 11% of the world's branded clothing (t-shirts, jeans, etc.) is fake.  Many people think that buying a counterfeit handbag or t-shirt is a victimless crime.  In fact, it is easy to pick up counterfeit goods on Canal Street in NYC and many flea markets. It is not a victimless crime. According to Magnus Ranstorp, an expert on terrorism, "Profits from counterfeiting are one of the three main sources of income supporting international terrorism." (quoted in NY Times, "Terror's Purse Strings" by Dana Thomas --  p. A23, 8/30/2007). Many counterfeit goods are manufactured in factories in China using child labor.  According to Dana Thomas, The average American woman buys more than four handbags a year; the average brand name bag costs 10 to 12 times what it costs to manufacture it.  Many women (even judges) will shop for counterfeit handbags with a designer label (e.g., Gucci bag) to save money.  People are proud to tell others how much they saved by buying the fake bags. The phonies look exactly like the real thing.  Quality is not that important since many women will buy a new hand bag every year as the fashion changes, even if the "old" hand bag is still in excellent shape. The next time you are thinking of buying a counterfeit good, remember that you might be supporting international terrorism, child labor, and/or organized crime.  What do you think?  Is it ethical to knowingly buy counterfeit goods?

Futuristics is the study of the future. A good marketer should have a future orientation and try to determine what lies ahead as far as technological, social, and cultural changes. Technological forecasting refers to the prediction of future technology and inventions and is part of futuristics. Technology is not the only factor with which marketers have to be concerned. Marketers also have to be concerned with social/cultural shifts. A shift away from materialism and ostentatiousness towards simplicity, for example, could have a huge impact on the demand for super luxury products such as $5,000 watches, $2,000 pens, and $100,000 cars. Several articles have been written about religion in the workplace. Apparently, religion is becoming more important to Americans.

For instance, many shopping malls were built assuming that women stay home and take care of the children. The percentage of women in the labor force with small children keeps growing. Today, working women do not go to malls on weekdays, they have to be at work. They prefer shopping from catalogs. In fact, there are several successful catalogs that specialize in clothing for working women. Electronic commerce will have a huge impact on catalogs and, in the future, it seems quite likely that people will prefer electronic catalogs (using the Web) to paper catalogs.

It is only a matter of time before technology makes video rental stores obsolete.  C onsumers will be able to easily download (from a Web site) movies they wish to see ("video on demand"). The future of the music industry is also moving to the Web. Consumers are downloading the music they want and pay per individual song. The same is true of books. I believe that it is quite likely that in the future most books will be downloaded; you will print books on your own printer, rather than buying books at bookstores.

Check out the Futurist magazine site and examine their Top 10 Forecasts:
http://www.wfs.org/futurist.htm

The Future-at-Society site has numerous links that might be of interest to you:
http://future.at-society.com/

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(c) 2008 H.H. Friedman