Market orientation vs Product orientation

Introduction to marketing

“Business has only two functions - marketing and innovation”.
- Peter F. Drucker (1909 - 2005), management guru

Marketing is the art of determining the goods and services required to meet the needs and wants of customers in a sustainable way. As most businesses aim to earn a profit, most marketing activities are concerned with anticipating, identifying and satisfying the needs and wants of the market, in a profitable manner.

Needs are the things people need in order to survive. They are necessities rather than human desires, including:

Food
Water
Shelter

Clothing
Warmth, and
Sleep

Wants are human desires, i.e. things people would like to have, or have more of. Human nature means that unlimited wants exist, i.e. people will also want more things. This creates huge marketing opportunities for businesses.

One reason why wants are unlimited is because perishable products need to be replaced regularly. Even durable products (such as furniture, cars and consumer electronics) will eventually need to be replaced, thus creating ongoing demand for these products.

ATL Activity 1 - Perishable goods

Think, Pair, Share - Can you list 5 examples of perishable products? Discuss your answers with a partner in the class.

Examples of perishable goods could include:

Fruits and vegetables
Fresh flowers
Tobacco products
Medications

Vaccines
Meats
Dairy products

The marketing function of an organization strives to provide the market with:

the right products that appeal to customers
at the right prices in order to attract customers
effective promotion to entice customers, and
convenient and efficient distribution for ease of purchase.

The size of a market can be defined as the total number of individual customers or the total value of sales revenue in a certain market. Alternatively, it can also refer to the number of potential buyers in the market. The size of a market can be measured in a number of ways, but usually refers to the number of people in a certain market who are potential customers of a product or service. For example, the market for smartphones is significantly larger than the market for lawnmowers. Businesses are interested in knowing the market size of a good or service before launching a new product in the market.

The most common methods of measuring the size of a market are:

The potential number of customers in a market for a particular good or service.
Sales volume, i.e., the quantity products sold to customers.
Sales value (or sales revenue), i.e., the amount spent by customers on the product sold by firms in the market.
The number of competitors (rivals) in the market. This can give an indication of the degree of intensity of competition. The greater the barriers of entry into the market, the fewer the number of rivals will exist in the market.

However, in order for the marketing department to function effectively, it must have good relationships with the other functional areas of the organization: human resources, finance and accounts, and operations management.

ATL Activity 2 - The Humble Potato (or Egg) activity

A major role of marketing is to add value to a product in order to attract customers to pay prices that enable the firm to earn a profit. Create four key marketing strategies to add value to a potato (or an egg). You have 10 minutes.

Be prepared to report your suggestions to the rest of the class.

ATL Activity 3 - Marketing yourself

Reflect on how you, as an IB student, could (should) improve your value for a university placement or for a particular job.

Some possible answers could include:

Gain better exam results
Learn new (relevant) skills
Exercise more to improve physical and mental health
Do some voluntary / charity work
Get more involved with extra-curricular activities
Better manners
Get some additional qualifications, other than academic qualifications such as IGCSEs and an IB Diploma
Dress smarter (at the interview).

Market orientation (AO2)

“Producing a hit without listening to customers is inefficient.”
- Ryoji Chubachi (b. 1947), former Vice Chairman and President of Sony Corp.

Market orientation and product orientation are two alternative approaches to an organization’s marketing strategies.

Market orientation is an approach to marketing that focuses on meeting the specific demands (desires and needs) of customers and potential customers. Hence, businesses focus on making products that they can sell, rather than selling products that they can make, i.e. they prioritise the needs of their customers above everything else. Such information can be gathered from market research, rather than from research and development (R&D), which is used to formulate decision-making. For example, the businesses design, develop and improve their products based on customer feedback.

Market oriented firms use promotional strategies, such as television advertising, to inform, remind and persuade customers to purchase the products.

Market research is vital for market oriented businesses

Advantages of market orientation

As Jeff Bezos, the world's richest man and the founder of Amazon, said “If you’re competitor-focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering.” The advantages of market orientation as an approach to marketing include the following points:

New product launches are more likely to be successful as they are based on market research, so are more likely to be accepted by the target market.
It helps to reduce the financial risks involved in product development by focusing on the changing needs and wants of customers and potential customers.
Being able to predict or anticipate market changes and trends will help businesses to be in a stronger position to handle the threats of new entrants in the market and to respond to changes in the needs and wants of people.
Market research findings enable businesses to access the latest market information, so firms can respond quicker to changes in the market and/or enable firms to anticipate market changes.

Disadvantages of market orientation

The disadvantages of market orientation as an approach to marketing include the following points:

Gathering meaningful and representative market research information and data can be very expensive for the organization, so have an negative impact on it finances.
Market research data, especially secondary sources, is often easily accessible to rival firms, so any competitive advantage and attractive profit margin can quickly disappear.
There are limitations to how the market research could have been carried out, such as researcher bias, unrepresentative results from using an inappropriate sample size, and/or using outdated information.

Business Management Toolkit - Ansoff matrix

Discuss how use of the Ansoff matrix can help market orientated businesses with their growth strategies.

You might find it useful to refer to Ansoff matrix prior to answering this question.

Product orientation (AO2)

“A lot of times, people don’t know what they want until you show it to them.”
- Steve Jobs (1955 - 2011), Co-founder of Apple

“If I'd asked customers what they wanted, they would have told me, 'A faster horse!'"
- Henry Ford (1863 - 1947), Founder of Ford Motor Company and the world's first mass produced car

Product orientation is an approach to marketing that focuses on making products a business knows how to make well, rather than primarily concentrating on the needs and desires of potential customers. Such businesses prioritise research and development (R&D) over market research. Product orientation tends to be used by highly innovative and tech-savvy manufacturers. Examples include Apple, Boeing, Gillette, Google, and Tesla.

Aircraft manufacturers are product orientated

Case Study - Apple's product oriented approach

In 2008, a year after Apple launched its iconic iPhone, Steve Jobs said:

“Apple is a $30 billion company, yet we've got less than 30 major products. I don't know if that's ever been done before. Certainly the great consumer electronics companies of the past had thousands of products. We tend to focus much more. People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are.”

In early 2022, Apple became the world's first company to be valued in excess of $3 trillion. To put this into context, only 4 countries in the world had a higher gross domestic product (GDP) of more than $3 trillion at the time - the USA, China, Japan, and Germany.

Advantages of product orientation

The advantages of product orientation as an approach to marketing include the following points:

By being innovative, product orientation can give firms a competitive advantage or unique selling proposition (USP). For example, Toyota gained a USP for its Prius, which went on to become the world’s best-selling hybrid car.
This can also help a business to gain a positive corporate image for being innovative, thereby helping to strengthen customer loyalty. For example, Apple enjoys a very high retention rate for each new product launch of its iPhones.
By focusing on R&D, rather than market research, it is harder for competitors to copy the products created by the firm. In particular, patenting the technology can also give the firm a competitive advantage.

Disadvantages of product orientation

However, the disadvantages of product orientation as an approach to marketing include the following points:

It requires highly skilled and costly staff (such as product designers) to come up with new and innovative ideas.
It can be very risky to ignore the (changing) demands of the market, especially if competitors are market orientated. For example, Kodak collapsed mainly because it failed to embrace digital technologies and the potential of the digital cameras market.
Despite the need to invest a lot of money in research and development (R&D), there is no guarantee that customers will like to want to buy the final product.

Whether an organization chooses to be product or market orientated largely depends on the nature of the product. For instance, market orientation is suitable for mass-market products, such as breakfast cereal or sports shoes. By contrast, product orientation is more suitable for innovative and high-end quality products (such as designer clothing and top-of-the-line electronic equipment) or unique products (such as a Hollywood movie).

Movies are an example of product orientated output

Business Management Toolkit - Hofstede's cultural dimensions (HL only)

Recall that product oriented firms produce what they can and hope the market will appreciate and purchase the product. By contrast, market orientation occurs when a firm adopts an outward-looking approach to marketing, i.e., it strives to discover and meet the changing needs and wants of customers.

Discuss how culture, including cultural dimensions, is an important determinant of whether a business adopts a market or product oriented approach.

Organizational and national cultures are an important factor in determining the orientation of a business.

A business with a culture that appreciates creativity, innovation, and R&D is more likely to be product oriented.
A business with a culture that values customer service is expected to take a market oriented approach.

Key terms

Market orientation is an approach to marketing that focuses on meeting the specific demands (desires and needs) of customers and potential customers.
Market size can be defined as the total number of individual customers or the total value of sales revenue in a certain market.
Marketing is the art of determining the goods and services required to meet the needs and wants of customers in a sustainable way.
Needs are the things people need in order to survive, e.g., food, water, shelter, clothing, warmth, and sleep.
Product orientation is an approach to marketing that focuses on making products a business knows how to make well, rather than primarily concentrating on the needs and desires of potential customers.
Wants are human desires, i.e., things people would like to have, or have more of. Human nature means that unlimited wants exist, i.e. people will also want more things.

Exam Practice Question

Exam Practice Question - Tesco

In 2013, Tesco, the UK supermarket giant, introduced restaurants and coffee shops in many of its larger stores in an attempt to attract customers back to its stores. In response to its own market research, Tesco opened almost 300 restaurants in its supermarkets, and many more coffee shops, with the operations outsourced to catering firms Elior Group and Compass Group.

The grocery giant’s cafe concept offers everything from breakfasts to salads and roast dinners. The additional services cater for customers who do not necessarily shop regularly at Tesco, but also provides value added services for its millions of customers each week. Tesco had been losing market share to the growing emergence of discount supermarket companies such as Germany's Aldi and Lidl, as well as many customers spending more ordering groceries online.

(a)

Define the term market share.

[2 marks]

(b)

Explain whether the above example illustrates market orientation or product orientation.

[4 marks]

(c)

With reference to Ansoff's matrix, explain the method of growth used by Tesco.

[4 marks]

Answers

(a) Define the term market share. [2 marks]

Market share is a measure of the size of a business in comparison to others in the same industry. It is calculated by expressing the firm' sales revenue as a percentage of the sales revenue of all firms in the industry.

Award [1 mark] for a limited response that shows some understanding of the term market share.

Award [2 marks] for an accurate definition of market share, similar to the example above.

(b) Explain whether the above example illustrates market orientation or product orientation. [4 marks]

Market orientation is a strategic approach used by a business that provides a good or service to meet the requirements of consumers, usually based on market research. Tesco used market research findings to respond to the changing market needs of its customers.

By contrast, product orientation is an alternative marketing approach that focuses on making or supplying products a business knows how to make well, rather than primarily concentrating on the needs and desires of potential customers. Tesco outsourced the catering services to Elior Group and Compass Group because operating restaurants and cafes is not part of the supermarket chain's core competencies. This enables these catering companies to better meet the need of customer who visit the 300+ restaurants or many more coffee shops at Tesco supermarkets.

Note:

Outsourcing of non-core functions can be an example of both market orientation and product orientation, depending on the reason behind it. If outsourcing is done with the aim of improving Tesco's ability to meet their customers' needs and improving the supermarket's competitiveness, then it can be considered an example of market orientation.

However, if outsourcing is done to improve the quality, functionality, or cost-effectiveness of a product or service (as in the case of Tesco's restaurants and coffee shops), then it can be considered an example of product orientation.

Accept any accurately explained answer that shows knowledge and application to the case study.

Award [1 - 2 marks] for a limited response that shows some understanding of the demands of the question.

Award [3 - 4 marks] for an accurate response that shows good understanding of the demands of the question. There is effective use of business management terminology throughout the answer, making a clear distinction between market orientation and product orientation.

The Ansoff matrix is a strategic management tool, used to devise product and market growth strategies for a business.In this particular case, Tesco is adopting a diversification growth strategy, which involves the business launching new products (coffee shops and restaurants in some of its larger supermarkets) in new markets (catering services for people who do not necessarily shop regularly in Tesco). Having invested in almost 300 restaurants and coffee shops, Tesco had taken immense risks by providing a new service (not part of its core competencies) and catering for new customers (those who do not necessarily shop in Tesco).

Note: it may be possible that some students argue this to be a market development strategy in that Tesco is catering for new customers (diners and coffee drinkers) in their existing stores. After all, market development is a growth strategy that uses customer loyalty to persuade people (existing and prospective customers) to buy a new product. Award answers that are substantiated and justified accordingly.