CHAPTER 2

Chapter 2

Review of Related Literature

 

The Tea Market

 

Tea shares the principal characteristics of the supply of cocoa and coffee in that it is a tree crop which does not yield immediately on planting and which has a long life. The total output thus depends not only on the total acreage planted, but also on the age structure of the tree stock (, 1992). Tea starts to yield around its fifth year and the yields increase to a peak around ten years of age. Thereafter, there is only a very slow decline until an advanced age (sixty or more years) is reached. For countries where the crop is well established and the annual change in acreage is relatively small, the yield would be correspondingly little affected by changes in the age structure. However, for relatively new producers, where the incremental area is substantial in relation to total area, yields can be expected to vary.

If the yield profile over the life of a bush is the same, irrespective of when it was planted (no technical progress), the life is very long with respect to the age at which peak yield is reached, and if there is a constant growth rate in acreage, then yields will rise, but in a non-linear fashion (, 1992). With infinite lives, the upper asymptote for average yield is the maximum yield for an individual bush. Since tea bushes have a very long life (60-100 years), those countries with a long history of production would not be expected to show a substantial trend in yields due to the pure age-composition effect. Newer producers, particularly Kenya among the larger countries, might be expected to show an increase in average productivity of a non-linear form.

In addition, however, there has been technical progress in terms of varieties of bush planted. Yields have thus been driven up and, in effect, the upper asymptote for the average yield has increased (, 1992). Detailed agronomic studies could indicate how important this effect has been. Clearly a trend in past yields cannot be extrapolated as if the trend in the asymptotic average yield will increase constantly with time. If marginal land is less productive than trend, yields can fall. For an ex post simulation model it is merely necessary to distinguish these effects from those of prices, so that policy responses can be evaluated under the assumption that the policy being investigated would not have changed the yield pattern.

 

Influences on consumer behavior

 (2001, p.191) stated out that the central question for marketers is: ‘how do consumers respond to various marketing stimuli that the company might use?’  (2001) pointed out three key dimensions of consumer buying behavior: who buy, how they buy, and the choice criteria. He also indicates that these dimensions are affected by three factors: buying situation, personal and social influences. (2003) shares similar ideas and states that a consumer’s buying behavior is influenced by cultural, social, personal, and psychological factors. Moreover, he claims that, in order to understand how consumers actually make buying decisions, three scopes have to be identified, which are who makes the buying decision, the types of buying decisions, and the steps in the buying process.

Although it is often speculated that the type of product purchased will have a significant impact on Internet retail patronage, little published research exists investigating the impact of the type of product purchase on Internet shopping preferences. Several research studies acknowledge that consumers’ buying behavior characteristics vary noticeably across merchandise categories.  (1974) suggests that consumers may base their purchase decisions on product attributes such as brand image, reliability, styling, and availability of servicing.

 

Based on the research findings about consumers’ skepticism for search, experience and credence advertising claims, the authors of the present study speculate d that because of the differences in consumers’ information needs for different product types, their preference for shopping online will vary across product categories. Particularly, given that the credence products are the hardest to evaluate even after purchase or consumption, consumers’ desire to shop online for credence products may be lower than that their desire to shop for search or experience products. Similarly, the consumer’s need to test or try out the experience products such as clothing and perfume (experience-1) or cellular phone and television (experience-2) will be higher than the need to experience search products such as books and personal computers. As a result, their desire to shop online for search products will be greater than for experience products. Based on ’s (1988) classifications of two types of experience goods (experience-1 and experience-2), information search for experience-2 products are more costly and difficult than for experience-1 products. As mentioned earlier, experience-1 products necessitate direct experience compared to experience-2 products. Therefore, the authors speculate that consumers will be more likely to shop online for experience-1 products than experience-2 products.

 

Porter’s five competitive forces

Customer satisfaction although essential as a marketing principle is insufficient on it’s own to secure a business’s success in a competitive environment. As  (2001) indicates that, “the real question is whether a firm can satisfy customers better than the competition” (p.571).  (1979) suggests that customers, suppliers, substitutes, and potential entrants are all “competitors” to firms in the industry and may be more or less important depending on the particular circumstances. This is also known as the ’s model of competitive industry structure, which is one of the vital perspectives to analyse the competitiveness, attractiveness and opportunities of an industry (, 1979; , 2001; , 2003; , 2000).

                        

Different critical characteristics to the strength of each competitive force will be discussed as below.

 

-          Threat of rivalry among existing firms

The intensity of rivalry among competitors in an industry is associated with the existence of a number of factors.

1.        Status of growth: An industry lacks opportunities if it grows slowly, stably or is declining.

2.        Structure of competition: An industry is unattractive and has more intensive rivalry when it already contains numerous, strong, or aggressive competitors.

3.        Structure of costs: High fixed costs lead to strong enticement of price-cutting.

4.        Degree of differentiation: Less intense rivalry when there is great differentiation among products or services.

5.        Switching costs: Rivalry is reduced when switching costs are high.

6.        Strategic objectives: The competition is more intense when competitors are pursuing build strategies than when players are having hold or harvest strategies.

7.        Exit barriers: More intense rivalry when exit barriers are high.

 

Rivalry occurs when one or more players feel the pressure or see the opportunity to improve there marketing position, make competitive progresses that have obvious effects on the other competitors ( 1995). Nevertheless, firms within an industry must not inhibit competitive stability, because it is often better to “protect industry structure than follow short-term self-interest” (, 2001, p. 573).  shares the similar views and states that, frequent price wars, advertising battles and new-product introductions will make the business expensive to compete on.

 

-          Threat of new entrants

New entrants introduce an increase in competition to an industry thus reducing its attractiveness to potential investors. The threat of new entrants is related to current barriers in the market and the response of entrenched competitors. High entry barriers and sharp retaliation expected prevent the threat of entering from newcomers. The key barriers to entry are as follows:

 

1.        Economies of scale

2.        Capital requirements

3.        Product differentiation

4.        Access to distribution channels

5.        Switching costs

6.        Legal policy

 

-          Threat of buyers’ growing bargaining power

Buyers compete with the industry by forcing the firm to cut prices, demanding for higher quality or more extensive services, better credit facilities, or even playing one competitor against another – all at the expense of industry profitability (, 1995 and , 2000). The bargaining power of buyers is greater when:

 

1.        The buyers are concentrated and purchase in larger volumes in association with seller sales.

2.        The products are standardized or undifferentiated.

3.        The buyers are price sensitive due to low profits, or because products represent a significant fraction of the buyer’s costs.

4.        Switching costs or costs of changing suppliers are low.

5.        The buyers threaten to integrate backward into the industry.

6.        The buyers have significant information; for instance, the information about the market demand, actual market prices or even supplier costs.

 

To protect themselves, firms might select buyers who have the least power to negotiate, increase market share, produce highly valued/differentiated products, build brand leadership, or switch suppliers. A better defense consists of developing superior offers that buyers cannot refuse (, 2001; , 2003).

 

- Threat of bargaining power of suppliers

The cost of raw materials and components has significant influences on the profitability of an industry or a company. The greater the bargaining power of suppliers, the higher are these cost and the lower is the industry’s attractive. The conditions that make suppliers powerful are:

 

1.        Suppliers are dominated by a few companies and are more concentrated than the industry they sell to.

2.        The supplier produces highly differentiated or valued products, or it has successfully built up switching costs.

3.        There are few substitute products for sale to the industry.

4.        The supplied product is an important input to the industry.

5.        The industry is not an important customer group to the suppliers.

6.        The supplier group poses a credible threat of forward integration.

 

In order to reduce the bargaining power of suppliers, a firm can attempt to use multiple supply sources, establish win-win relationship with suppliers, or design standardized components so that many suppliers have the capability to produce them (, 2001; , 2003).

 

- Threat of substitute products

An industry will suffer from substitute products in profitability, in attractiveness and possibly in growth due to the price constraint caused by substitute products. As  (1995) points out that the impact of substitutes is regarded as the “industry’s overall elasticity of demand”. The threat of substitute products is determined by (, 2001):

 

1.        Buyers’ preference and willingness towards to substitute products.

2.        The price-performance trade-off trends of substitutes with the industry’s product.

3.        The costs of switching to substitutes.

 

 (2002) comments that Porter’s five forces model provides a collective set of systemic thinking-frameworks that allow the analysis of business situations, simplification of decision making and the formulation of strategy. However,  (1998) argues that, due to the frequent changes of the forces over time, it is more appropriate to view Porter’s five forces model as a guidance tool rather than a definitive form for an organization.

 

 (1998) believed that Porter’s model are not useful any longer for strategy development , stating that Porter should remember that a good strategy should never base on just a few selected models. Every strategy should base on a careful analysis of all internal and external factors and on their potential future development. Considering ’s (2003, p.138) point of view, the core principle of modern- industrial strategy can also be obtained from supporting infrastructures and freeing up resources as well as by facilitating interactions. The strategic management literature, specifically the place of Michael Porter would inculcate questions on strategic management.

 

Today’s markets are highly influenced by technological progress, especially in information technology. Therefore, it is not advisable – if not to say impossible – to develop a strategy solely on the basis of Porter’s value chain model. Porter’s work suggests long- term strategy which can only be utilized by companies who are already established. Yet, small businesses are taking the back seat. It is necessary to expand knowledge on two distinctive things—strategy and operational effectiveness. Every business strategy the he is incorporating to the readers would depend upon the nature of business, the location and definitely the country involved. Competitive strategy employed by Porter must be properly designed, particularly to small businesses (worldwide) attempting to capture a wider market.

           

 

Competitive advantage, following Porter, was taken to mean, the ability of a firm to provide better value for its customers through lower prices, higher quality, or benefits not available elsewhere. The primary purpose was to test the idea that the information intensive areas of an organization could be identified within the value chain by using the CSF technique to indicate the critical areas and, thereby, enable the identification of corporate information needs. Corporate information needs were defined as those needs for information that must be satisfied if the organization is to achieve its strategic aims. The proposition was that those parts of the value chain that were perceived by organizational members to be of critical significance would be the areas in which effort ought to be concentrated so that the information systems could be effective. In this way, organizational information needs emerge that corporate information management systems must support, if the organization is to remain competitive in whatever environment it is found. Critical success factors are proposed to be utilized as part of a battery of methods in determining the needs of the organization and in contributing to the design of systems that aid competitive advantage. Porter’s strategy frameworks have suffered some ambivalence over the years in academic circles — yet they have proved wildly compelling among business leaders around the world. His perceptions on strategy are widely disseminated than ever and are discussed at business schools, implying that his works are advocated globally. According to (1980, p.328), firms are under great pressure to have modern plans to be competitive and should have adequate capability to achieve their target market share. Porter’s critical success factors comply the needs of both academics and managers who were looking for a theory of strategic management.

 

 

 

Product life cycle model

 

According to  (2000), the product life cycle model is a conceptual framework that illustrates “the evolution of primary demand in a dynamic perspective”. The typical product life cycle has four stages: introduction, growth, maturity, and decline. Each stage of the product life cycle requires different marketing strategies. A company should apply and modify its marketing strategy over the lifetime of a product line so as to adapt to the changes in a market and its competitive environment.  (2003) suggests that a competitive advantage can be achieved by effectively positioning and differentiating offerings throughout the life cycle of a product, by means of managing the marketing mix. As a product moves through its cycle, the strategies relating to competition, promotion, distribution, pricing and market information must be periodically assessed and appropriately adjusted.

 

The consumers have practically consistent in changing their needs and tastes. Likewise, new technologies, shortened product life cycle, and increased domestic and foreign competition have greatly increased the desire of almost all firms to develop new and improved products. Moreover, the factors that make the success of the development of new products more and more difficult, costly and risky are the shortage of ideas for new products, increased global competition, increased market segmentation, strong special-interest group, and increased government regulation (2002).

In line with this, in designing new products or services, the company must first identify the customer requirement to ensure that the product will be supported in the market. According to  (1990), before the process of creating and designing new products and service there must be an idea generation. This means that there must be an understanding of what the customers want and need, then after such identification, the organization is duty bound to fulfill it while satisfying the organizational goals.

To enable to determine the customers wants and needs, customer analysis must be made. The consumers’ needs, desires and wants will have to undergone thorough examination and evaluation. Such activities involve the administration of customer surveys, analyzing consumer information, evaluating market positioning strategies, developing customer profiles, and determining optimal market segmentation strategies ( 2003).

The determination of the customers’ needs, desires, and preferences is necessary to enable the company to monitor the pattern of the customers’ buying habits. To elucidate further, customer analysis can generate necessary and essential information needed in developing an effective mission statement of the company.

For example, a manufacturing company will not produce products which they think will not be supported by the buying public as this will result to low or no profitability at all. To ensure the support of the buying public, the manufacturing company must design the product in such a way that it suits the tastes and preferences of the majority of the buying population.

In designing new and improved products for the consumers’ consumption, there must be a determination of the target market in order that profitability and success is assured.

Should the new products do not suit the needs and desires of the customers, there is a high probability that the product will not boom in the market as the consumers will not be benefiting from the newly introduced products in the market.

Creation of a logical design and physical design must be considered. The design must be unique in order that the buying public will be persuaded to buy the product because of its physical design and appearance. Likewise, to ensure longer time lead in the market the product must hard to imitate.

The new products must be designed in such a way that the style is new and the features of the products are enhanced. It cannot be denied that the physical appearance of the products is one of the factors that can persuade the buyers to purchase the product.

If the products have a unique and attractive physical appearance, the consumers will be likely persuaded to buy the products and thus, enhance the profitability of the company. The management team supervising the creation of new products and development of already existing products must be creative and innovative in designing the products because the competition in all business industry is stiff.

Also, it should be bear in mind that the products created and developed must possess features which are difficult to imitate to ensure longer time lead. This is because if the features of the products are easy to imitate, chances are most of the competitors will be able to produce new products which have the same features as that of the trend setter company. The competition will grow and there will be huge number of same products that are out in the market and thus, as there are many choices in the market, the profitability is low.

Furthermore, in designing new products, the quality of the products must not be taken for granted.  The quality of the new products must be focused primarily on customer satisfaction. The quality must be able to please the customers who purchased the products ( 1996).

In addition, the management must identify the areas where the company’s new products and services could be most competitive in the determined target market. There must be an appropriate product and services positioning to further boost competitiveness and profitability in the industry.

 

References

 

 

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