B. It has been said that an advertising manager lives in an environment of considerable uncertainly. Explain the statement. Do you agree? What are the chief avenues open to reduce uncertainty?
Challenges of the External Environment Imposed on Managers
The manager’s job cannot be accomplished in a vacuum within the organization. Many interacting external factors can affect managerial performance. The external environment consists of factors that affect a firm from outside its organizational boundaries. The external factors include the labor force, legal, political, legal considerations, society, unions, the competition, customers/suppliers, and technology. One of the greatest challenges facing all organizations today is managing uncertainty. Managers must do what they can to reduce uncertainty by reading the signals, following the trends, and scanning the external environment. The way in which trends in each of these areas affect the workplace is discussed later in this paper.
The capabilities of a firm’s employees determine to a large extent how well the organization can perform its mission. Since new employees are hired from outside the firm, the labor force is considered an external environment factor. The labor force is always changing. This inevitably causes changes in the workforce of an organization thus affecting the way management must deal with its workforce. (Mondy 1995, p.36) Changes in the country’s labor force create dynamic situations within organization. For example, changing values and laws have contributed to greater participation rates by women in the employment market thus parental leave and child-care facilities provided by employers are becoming more common demands.
Law is important in business transactions. It provided a basic framework within which a business enterprise must operate. It facilitates smooth functioning of business transactions and protects both the businessmen and customers. All business organizations must comply also with the legal constraints of that country. In turn when a firm’s operations extend into other countries, the laws and regulations of those countries must be taken into account. (Mondy 1995, p.36)
Members of society may also exert pressure on management. The public no longer accepts the actions of business organizations without questions. People learned that voicing out their disagreements in newspapers and other forms of media can produce changes. The large number of laws and policies passed in recent years is the result of the publics¡¦ influence. An organization in order to remain acceptable to the general public must accomplish its mission within the range of societal norms and remain in societal good books. When a firm responds effectively to societal interests, it is said to be socially responsible. Social responsibility is the enforced or felt obligated of managers, acting to serve or protect the interest of groups other than themselves. Many firms strive to be good corporate citizens by working with cooperatively with members of the community to control pollution, drug abuse, unemployment, participating in drive funds, supporting the women’s movement, implementing physical fitness activities for employees and also encouraging and advising employees on the correct diet. Such activities enhance a firm’s image in the community and in the long run may improve the firm’s profitability. (Mondy 1995, p.37)
Wage levels, benefits, and working conditions for millions of employees now are decisions made jointly by unions and management. A union is a group of employees who have joined together for the purpose of dealing with their employer. (Mondy 1995, p.36) Its is considered as an external environment because the impact of the decisions made are being influenced by external forces outside the boundaries of the organization. Sometimes the outcome of making those decisions lies in the favor of labor and sometimes in management. The emphasis in the future will likely shift to a management system that deals with directly with individual workers to satisfy their needs and allow the company to compete more effectively. That’s the reason why union membership is slowly decreasing. Some of the strategic actions undertaken by managers with unions are to negotiate a long-term no strike agreement, increase usage of subcontractors, negotiate a dispute settling procedure, and also appointing a prestigious union official to board of directors. (Robbins 1989, p.262)
Business organizations not only must compete in terms of sales and profit but also in other areas. For example, each firm must have competent and skilled employees, which are often in short supply. An easy solution would be to increase the wages but this will lead to a bidding war when several competitors need people with the same skills. Besides competition in product and service markets forces employers to keep labor costs low. What managers do is that they introduce other benefits and working conditions in terms of recruitment and retention. In terms of sales and profit, what managers can do is advertise the product to build brand loyalty, select a less competitive domain, and merge with competition to gain larger market share and also negotiate a co-operative agreement with the competition.
The people who use a firm’s product and services are an important part of the external environment because sales are critical to a firm’s survival. In order to survive in the competitive business world, what managers can do is advertise, use a differentiated price structure, ration demand, change domain to where there are more customers in order to reduce environment uncertainty. (Robbins 1989, p.262)
In dealing with suppliers, managers can use multiple suppliers instead of just sticking to one supplier. This to ensure that even if one particular supplier stops supplying, the firm will still go on operating due to the services or goods provided by the other suppliers. The managers could also negotiate long-term contracts; inventory critical supplies or maybe even vertically integrates through merger.
This includes the level of advancement of knowledge and equipment in society (or in specific countries), and the rate of development and application of such knowledge. The need for new technology results from changes in other environment factors. New skills are continually needed to meet new technological demands. Advancements in technology have rendered some skills obsolete, requiring periodic retraining of affected employees. Its not only employees that have to be trained but also managers have to constantly upgrade themselves to keep up with new technology.
By economic environment, we mean the characteristics of the economic system in which the business operate, i.e., the pattern of economic growth, economic policies, measures, and incentives provided for economic development. Organizations rely on economic surplus to thrive and prosper. With larger surplus, more organizations get the resources they need to grow and develop thus becoming more specialize. For instance, Australian companies benefit directly from government economic forecasts, a national banking system and international economics treaties. The economy of the nation and of various segments of the country is a major environmental factor affecting a manager’s job. (Mondy 1995, p.41) For example, when the economy is booming, managers will find it often more difficult to recruit qualified workers. On the other hand, when a downturn is experienced, more applicants are typically available.
Political stability provides a conducive environment to do business. A responsive and responsible government instills the confidence and attracts both local and foreign investors. In a politically stable society, organizations are assured that their investments, properties and other assets are safe. They will be more willing to invest larger amounts of capital for a longer period of time. There is also a considerable variation in the scope of government activities across nations. At one extreme sit the governments that confine their activities strictly to protecting the nation from internal and external threats thus implementing a few laws or rules to limit the actions of organizations. At the other extreme is government that attempt to permeate virtually all aspects of society. Sometimes organizations may find themselves making the decision to withdraw their business from a particular country due to the many constraints. Managers of the organization will then have to adapt to doing business in a new environment.
Major environmental changes in recent years (Australia)
Introduction of personal computers
Ability to transmit data, both nationally and internationally
Worldwide telephone direct dialing and uses of faxes
Concern for physical fitness and correct diet
Return to inner-city living
Deregulation of various industries
Lowering of tariffs
Decline in the inflation rate
Move to the ¡§right¡¨ by political parties
Rise of the ¡§green¡¨ movement
Aboriginal land rights movement
Managers’ response to the external environment and the external strategies used
Manager’s approaches change in the external environment either proactively or reactively. A proactive response is taking action in anticipation of environmental changes. A reactive response is simply responding to the environmental changes after they occur. For example, reactive managers may demonstrate concern for employee welfare only after the start of a union-organizing attempt. Proactive managers try to spot early signs of discontent and correct the signs of discontent before matters get worst. Proactive managers also prevent customers¡¦ complaints rather than ¡§handle¡¨ them. In all matters, proactive managers initiate rather than react.
Now we turn to some external strategies used by managers to change the environment to make it more favorable to an organization.
Managers in an organization engage the services of advertising firms to market their product or services thus building on brand loyalty and lessening its dependence on consumers. Managers seek to reduce competitive pressures, stabilize demand and allow it the opportunity to set prices with less concern for the response of its competitors. It is successful when one organization gains differential advantage over another in the same industry.
This protects the organization from changes in quantity or price on either the input or output side. For instance, managers may agree to a long-term fixed price contract to purchase materials and supplies or to sell a certain part of the organization’s output.
When an organization combines with one or more other organizations for the purpose of joint action, it is called coalescing. These mergers often brought about economies of scale by eliminating redundant administrative personnel and by providing opportunities for merging technical and managerial expertise. Its also reduces uncertainty by lessening inter-organizational competition and dependency.
Managers may choose to absorb uncertainties by encompassing elements in the network. For example, inviting an environmentalist lobbyist or a merchant banker to sit on the board of your organization is likely to reduce resistance and could also lead to easier access to money markets.
Use of third parties
Occurs when managers of one organization use the services of another organization to negotiate on their behalf. Professional and trade associations are obvious examples. It protects the interests of consumers and maintains standards. (Wilson 1990, p.311)
The one certain condition managers will face in the latter half of the 1990s is rapid change, and successful managers will be those who adapt and thrive. The task of managers in the latter half of the 1990s will be the same as in the latter half of the 1960s--producing results--but the external environment will be very different. Today's world is more complex and international and boasts far more technology and less government regulation. To be successful in this environment, managers must demonstrate personal commitment to the success of the organizational unit and excellent communications. Moreover, managers must educate and train, get individuals to work together as members of teams, and measure performance improvement. It is also important to learn from past successes and failures in developing an approach to a better business organization.
Conditions that Influence Decison Making
Managers make problem-solving decisions under three different conditions: certainty, risk, and uncertainty. All managers make decisions under each condition, but risk and uncertainty are common to the more complex and unstructured problems faced by top managers.
Decisions are made under the condition of certainty when the manager has perfect knowledge of all the information needed to make a decision. This condition is ideal for problem solving. The challenge is simply to study the alternatives and choose the best solution.
When problems tend to arise on a regular basis, a manager may address them through standard or prepared responses called programmed decisions. These solutions are already available from past experiences and are appropriate for the problem at hand. A good example is the decision to reorder inventory automatically when stock falls below a determined level. Today, an increasing number of programmed decisions are being assisted or handled by computers using decision-support software.
Structured problems are familiar, straightforward, and clear with respect to the information needed to resolve them. A manager can often anticipate these problems and plan to prevent or solve them. For example, personnel problems are common in regard to pay raises, promotions, vacation requests, and committee assignments, as examples. Proactive managers can plan processes for handling these complaints effectively before they even occur.
In a risk environment, the manager lacks complete information. This condition is more difficult. A manager may understand the problem and the alternatives, but has no guarantee how each solution will work. Risk is a fairly common decision condition for managers.
When new and unfamiliar problems arise, nonprogrammed decisions are specifically tailored to the situations at hand. The information requirements for defining and resolving nonroutine problems are typically high. Although computer support may assist in information processing, the decision will most likely involve human judgment. Most problems faced by higher-level managers demand nonprogrammed decisions. This fact explains why the demands on a manager's conceptual skills increase as he or she moves into higher levels of managerial responsibility.
A crisis problem is an unexpected problem that can lead to disaster if it's not resolved quickly and appropriately. No organization can avoid crises, and the public is well aware of the immensity of corporate crises in the modern world. The Chernobyl nuclear plant explosion in the former Soviet Union and the Exxon Valdez spill of years past are a couple of sensational examples. Managers in more progressive organizations now anticipate that crises, unfortunately, will occur. These managers are installing early-warning crisis information systems and developing crisis management plans to deal with these situations in the best possible ways.
When information is so poor that managers can't even assign probabilities to the likely outcomes of alternatives, the manager is making a decision in an uncertain environment. This condition is the most difficult for a manager. Decision making under conditions of uncertainty is like being a pioneer entering unexplored territory. Uncertainty forces managers to rely heavily on creativity in solving problems: It requires unique and often totally innovative alternatives to existing processes. Groups are frequently used for problem solving in such situations. In all cases, the responses to uncertainty depend greatly on intuition, educated guesses, and hunches — all of which leave considerable room for error.
These unstructured problems involve ambiguities and information deficiencies and often occur as new or unexpected situations. These problems are most often unanticipated and are addressed reactively as they occur. Unstructured problems require novel solutions. Proactive managers are sometimes able to get a jump on unstructured problems by realizing that a situation is susceptible to problems and then making contingency plans. For example, at the Vanguard Group, executives are tireless in their preparations for a variety of events that could disrupt their mutual fund business. Their biggest fear is an investor panic that overloads their customer service system during a major plunge in the bond or stock markets. In anticipation of this occurrence, the firm has trained accountants, lawyers, and fund managers to staff the telephones if needed.
Cost-oriented budgets are calculated on the basis of cost considerations, without explicitly taking demand reactions into account. There are three types of cost-oriented budget
• Percentage of sales.
Affordable budget is directly linked to the company’s short-term financial outlook. Advertising will be appropriated after all other unavoidable investments and expenses have been allocated. As soon as things go badly, this budget can be eliminated, and if cash is abundant then it can be spent. The fiscal system encourages this type of practice, since increased advertising expenditure reduces taxable profit. This is not a method as such, but rather a state of mind reflecting an absence of definite advertising objectives.
The break-even budget method is based on the analysis of advertising’s profitability threshold. The absolute increase in unit sales and in turnover necessary to recoup the incremental increase in advertising expenditures is simply obtained by dividing advertising expenditure (S) by the absolute gross profit margin or by the percentage of gross profit margin:
Break-even volume = S / P-C
Break-even turnover = S/ (P-C/P)
For instance, if the gross profit margin is £60, or 30% of the unit price, the absolute increase in unit sales to recoup a £1.5 million advertising budget will be
60 = 25,000 units
and the break-even turnover will be
0.30 = £5,000,000
To determine the percentage increase of sales volume or turnover necessary to maintain the previous level of profit, one can use the following expression:
Percentage sales increase = _Q/Q = 100 x _S/ (F+S+Profit)
where _S is the proposed change in budget.
The advertiser can determine by how much sales must increase to retain the same level of profit, and also calculate the implicit demand elasticity to advertising, by comparing expected sales levels ‘with advertising’ to expected volume ‘without advertising’.
Using this data, the advertiser can verify whether the proposed budget implies an unrealistic increase in market share given the state of the market, competitors’ power, etc. The weakness
of the method is that it is strictly an accounting exercise, whereas advertising objectives are not necessarily reflected in higher sales in the short-run, even if they have been reached completely. Nevertheless, this type of analysis is useful because the advertiser is encouraged to view advertising as an investment rather than overhead costs.
Percentage of sales budget
The percentage of sales budget method is used frequently and treats advertising as a cost. In its simplest form the method is based on a fixed percentage of the previous year’s sales. One advantage of this procedure is that expenditures are directly related to funds available. Another advantage is its relative simplicity.
Although this method is quite popular, it can easily be criticised from a logical point of view, because it inverts the direction of causality between advertising and sales. Relating advertising appropriation to anticipated sales makes more sense, because it recognises that advertising precedes rather than follows sales. Nevertheless, this approach can lead to absurd situations: reducing the advertising budget when a downturn in sales is predicted can be damaging, and increasing it when turnover is growing risks overshooting the saturation threshold.
In practice, however, it seems that this method is mainly used with the objective of controlling total advertising expenditure at the consolidated level of turnover, in order to keep an eye on total marketing expenditure or to compare with competitors. More refined methods are used when deciding on advertising at the brand level.
Cost-oriented advertising budgets are only the first stage of the process of determining the advertising budget. They enable the firm to define the problem in terms of financial resources, production capacity and profitability. As for the determination of prices, these methods must be completed with an analysis of market attitudinal and behavioural responses.
Communication-oriented advertising budgets
These approaches emphasise communication objectives and the means necessary to reach them. Two methods can be adopted:
• Task and objective – based on contact, which is defined in terms of reach and frequency
• Perceptual impact – based on a measure of probably impact on attitude.
Task and objective budgeting
The task and objective method starts either with an objective of reach and frequency for which a budget is calculated, or with a budget constraint for which the best combination of reach and frequency is sought to maximise total exposure. By trying to maximise exposure, this approach places the emphasis on the first level of advertising effectiveness – communication effectiveness – while clearly linking the communication objectives to costs.
The term exposure used in this context has a very precise meaning, because it only refers to opportunity to see (OTS) or to hear (OTH), which does not imply perception. Newspapers only sell OTS to advertisers: a certain number of readers will (in theory at least) have the paper in their hands, but this does not imply that they will see the advertisement, or that they will familiarise themselves with it or assimilate it.
The task and objective method ensures the productivity of the budget by searching for the best way to spend the money in the media given the target audience and given an expected creative level of the campaign. For this reason, it is the method widely chosen by advertising agency people.
By way of illustration, let us consider the following example:
A Company wants to reach women in the 25–49 age group. The socio-professional profile is determined by the following criteria:
• Middle management
• Owners of small–medium sized companies.
The size of the target population is 3,332,000 women, or 16,7% of women of 15 years old and more.
The vehicles are magazines selected for their affinity with the target. The budget is 650 000 francs.
The advertising agency has suggested the three media plans presented in Table Web 12.1 (below). For each alternative, the agency has specified the number of ads
per magazine, the reach, the frequency, the budget and the Gross Rating Point (GRP).
Table Web 12.1
Comparing three media plans Media Plans Plan 1 Plan 2 Plan 3
Magazine 1 3 (1+2) 4 (1+3) -
Magazine 2 2 (2) - 3 (1+2)
Magazine 3 3 (1+2) 4 (1+3) 4 (1+3)
Magazine 4 3 (1+2) 4 (1+3) 4 (1+3)
Magazine 5 3 (1+2) 4 (1+3) -
Magazine 6 3 (1+2) 4 (1+3) 4 (1+3)
Budget 660,500 652,120 650,30
Reach 67.07% 66.3% 65.4%
Frequency 3.7 4.1 3.7
Gross Rating Point 248.2 271.8 242.0
12: ADVERTISING BUDGET DECISIONS 5 Logically plan 2 will be preferred because it has the highest GRP.
The value of this budgeting method is its attempt to search for the best possible allocation of the budget given the profile of the target group and the structure of the audience of each media or vehicle. Another advantage is its simplicity.
The major drawback is its systematic overestimation of the number of people reached by the ad. The gap between the number of people ‘exposed’ and the number of people having ‘perceived’ the message may be very high.
Perceptual impact budgeting
Perceptual impact budget is based on psycho-sociological communication objectives. To achieve these objectives,
conditions are defined in terms of the means used – for example:
Next, the cost of the various activities is calculated and the total determines the necessary budget.
What is sought here is an impact on one of the three components of attitude – cognitive, affective or behavioural. It is a much more fundamental approach, based on the learning process (Lavidge and Steiner, 1961) and the resulting hypothesis about the hierarchy of advertising effects (Colley, 1964).
The difficulty with it is that the advertiser must be able to link the communication impact to the perceptual impact, and the perceptual impact to the attitudinal impact, and finally to the behavioural response. The problem is stated in the following terms:
How many OTS or exposures to the message in a given medium are necessary to achieve, among 60% of the potential buyers within the target group, the cognitive objective of ‘knowing product characteristics’, the attitudinal objective ‘being convinced of product superiority’ and the behavioural objective ‘intention-to-buy?
In the task and objective budget example given above, all the women belonging to the target group were simply supposed to be exposed to the vehicle. Using the
perceptual impact budgeting approach, this number should be corrected by two factors:
• The probability of reading (which is, in general, specific to each magazine)
• An estimate of the ad’s perception probability (which will be determined by the creativity of the message, its relevance for the target group, its ability to get attention and so on.
This method is much more demanding, but it has the advantage of requiring management and advertising people to spell out their assumptions about the relationships between money spent, exposure, perceptions, trial and repeat purchase.
Communication-oriented advertising budgeting methods constitute the second stage of the process of determining the advertising budget. They offer a way of explicitly taking into account market response. Because they are mainly based on intermediary objectives of communication, their advantage lies in the emphasis they place on results directly attributable to advertising, and the fact that they allow the advertiser to control the advertising agency’s effectiveness.
The limitation of these methods is that there is not necessarily any link between achieving the intermediate communicational objective and the final goal of improving sales. One cannot therefore view measures of communicational effectiveness as substitutes for direct measures linking advertising to sales or market share.
Sales-oriented advertising budgets
Determining a sales or market share-oriented advertising budget requires knowledge of the parameters of the response function. In some market situations, in particular where advertising is the most active marketing variable, it is possible to establish this relationship and then use it to analyse the effects of various levels of expenditure on market share and profits.
Various models of determination of advertising budget exist, the most operational among them being the model by Vidale and Wolfe (1957) and the model ‘ADBUDG’ by Little (1970). Both models have some strong and some weak points that we shall consider briefly. The contribution of economic analysis will also be reviewed.
Budgeting to maximise profit
Advertising optimisation rules can be used to verify whether the current level of advertising spending is about right or whether the firm is over-advertising. As for the price optimisation problem, these rules can be used as a guide for the budgeting decision.
The normative value of this type of economic analysis is reduced, not only because of the ever-present uncertainty about the true value of the response coefficients, but also because the advertiser faces multiple objectives other than profit maximisation. Also, the advertising quality (copy and media) is taken at its average value, while large differences may exist from one campaign to another. For these reasons, the output of economic analysis should be used as a guideline for advertising budget decisions and be complemented by other approaches.
The Vidale and Wolfe advertising model
The model developed by Vidale and Wolfe expresses the following relationship between sales (in units or value) and advertising expenditure:
= [(ß).(A). ] - (1 - λ).(s)
ds/dt = rate of increase of sales at any time t
ß = sales response constant when q=0 Ss - Sdtds
A = rate of Advertising
s = company or brand sales
S = product category saturation level
λ = sales retention rate
In words, within a given period, the increase in sales (ds/dt) due to advertising is equal to:
• The product of the sales response constant per dollar of advertising when sales are zero and of the rate of advertising during the period (response effect) ...
o ... adjusted by the proportion of the untapped market potential (saturation effect) ...
... reduced by the fraction of current sales that will decrease in the absence of advertising because of product obsolescence, competing advertising, etc. (depreciation effect).
This is an interesting model because it takes into account the main features of advertising response functions while explicitly setting out the key parameters to be estimated. By way of illustration, let us consider the following example.
Sales of brand X are $40,000 and the saturation level is $100,000; the response constant is $4 and the brand is losing 10% of its sales per period when advertising is stopped. By adopting a $10,000 advertising budget, the brand could expect a $20,000 sales increase.
ds/dt = 4 (10,000) (100,000 – 40,000 / 100,000) – 0.10(40,000) = 20,000
One can also state the problem in terms of the advertising budget required to achieve a given sales objective. Referring to Table Web 12.2., the equation has to be solved for A, the advertising budget.
The Vidale and Wolfe model does however have some weak points:
• It does not allow explicit consideration of marketing variables other than advertising, such as price, distribution, etc.
• It does not integrate competitive advertising and is therefore implemenTable Web only in monopolistic situations.
• It assumes that advertising merely obtains new customers and increased customer usage is neglected.
• It does not explicitly consider possible variations in advertising quality, unless one could assume different sales constants per medium or per advertising theme.
• In some markets, it is difficult to estimate the absolute market potential.
• It has an interesting conceptual structure, but its range of application is limited.
Comparing two Advertising Budget Models
The Vidale and Wolfe model
ds/dt = (ß).(A). (S -s / S) - (1-λ).(s)
where ds/dt = sales increase per period
ß = sales response constant when s=0
A = advertising expenditures
s = company or brand sales
S = saturation level of sales
λ = sales retention rate
Little’s ADBUDG model
Where MS(t) = initial market share
MS(min) = minimum market share with zero advertising
MS(max) = maximum market share with saturation advertising
Adv = effective advertising (adjusted for media and copy effectiveness)
γ = advertising sensitivity coefficient
δ = constant
Source: Vidale M.L. and Wolfe H.B. (1957) and Little J.D.C. (1970).
The ADBUDG model
The ADBUDG model, developed by Little (1970), can be applied to a market where primary demand is non-expansible and where advertising is a determinant factor in sales and market share development. The model establishes a relationship between market share and advertising and assumes that managers are able to provide answers to the following five questions:
• What is the current level of advertising expenditure for the brand?
• What would market share be if advertising were cut to zero?
• What would maximum market share be if advertising were increased a great deal, say to saturation (saturation advertising)?
• What would market share be if the current level of advertising were halved?
• What would market share be if the current level of advertising were increased half as much?
The market share level estimates in response to these five questions can be represented as five points on a market share response to advertising curve