But the LBS Corporation decided to invest the biggest part of its profit in bonds. It was extremely profitable until 1997 to have your money invested in the government bonds. Later the market of shares began to grow, and the LBS Corporation reinvested in shares. But then, approximately in may, 1998 the economic situation in the country began to dramatically and rapidly deteriorate. For the LBS Corporation it meant a partial loss of the money invested in bonds and shares.
But the management of the LBS Corporation did not want to hold all eggs in one basket. In 1995 they decided to go into the food industry.
The basic motives which made the LBS Corporation chose this industry were the following:
1. The food industry in Russia and especially in big cities was growing fast. After the Perestroika it survived a significant decline which was actually a crisis caused by old methods of business administration, antiqueness of technology, poor quality of products and packaging and availability of imported foods. Then the process reversed: more and more of consumers realized that the imported foods they used to buy were of poor quality though packaging was good-looking. In addition to this Russian manufacturers began to use more progressive methods of business administration and more modern technology of manufacturing and packaging. This made the consumer’s preferences to change in favor of the Russian manufacturers and Russian foods.
2. Market size.
3. The fact that most of foods are necessities. As a consequence of this, people will not reduce their consumption of foods or will reduce it less than consumption of other products.
4. Absence or low competition with Russian manufacturers due to small quantity of them, the tendency of pushing the foreign manufacturers out of the market, and as a consequence- an opportunity to capture a significant market share and relatively low entering barriers.
5. The demand for many foods is not seasonal, neither the prices are.
6. Short operation and production cycle.
After the industry had been chosen it was necessary to choose the concrete product to be manufactured. The management of the LBS Corporation decided that the most acceptable product according to the resources possessed was pastas.
The basic advantages of this decision were:
1) Easy to start:
a) The technology of pasta production is not sophisticated
b) The equipment is relatively inexpensive and available
c) Short list of ingredients required
d) On the first stage automated packaging process is though desirable but not necessary. This significantly decreases the capital necessary to start-up because in the food industry the cost of a packaging line very often is similar to or even exceeds the cost of the production line.
2) Market size:
a) Pastas are necessities. Because of this people with low disposable income are among the potential buyers. This is extremely important in Russian environment.
b) The technology makes it possible to vary the quality of the product by using wheat of different quality and different technology of packaging. Using the wheat of lower quality allows to decrease costs and, as a consequence, the price of the product. This allows to cover more segments of the market of pastas if we make an income segmentation of it. This is important because income of people of different stratas in Russia differs dramatically.
c) Market stability. The biggest indirect competitor of pastas is potato. Of course, the price of potato does vary during the year, but:
i) The period when the price of potato is significantly below average is short,
ii) The seasonal variation of the price of potato does not usually exceed 40%.
iii) Since potato and pasta have a lot of different features, the decision to purchase this or that is greatly influenced by consumer’s preferences. As a result of it we should not expect the cross-price elasticity to be high. We certainly can estimate it to be less than one.
As a result of what was said, we can estimate the market of pastas to be stable and to be a subject for seasonal changes in a low degree.
3) Long life-cycle of the product.
4) As a result of all this, high economic efficiency.
In 1995 the LBS Corporation started manufacture of pastas. Since the biggest part of its capital was in the financial market, the LBS Corporation considered the foods manufacture business to be the secondary source of income, to be on the safe side. There were alternatives, such as potato chips, ketchup and others. But the fact that it was possible to buy inexpensive equipment of low capacity and use the manual process of packaging to see how it goes than to tie up much money at once was of the highest importance.
The LBS Corporation bought the necessary equipment and started pastas manufacture.
Thus, at this moment the LBS Corporation manufactures about 50 tons of pastas a month. It is a small manufacturer and we cannot talk about the market share it has in the market. The management would like, however, to increase production.
The nomenclature of pastas being manufactured by the LBS Corporation are:
· Vermicelli
· Macaroni of different shape:
- Horns
- Shells
- Spirals
The LBS Corporation plans to deepen the nomenclature by starting manufacture of spaghetti.
The LBS Corporation uses the manual process of packaging. The management of the LBS Corporation must decide weather it should use the automated process of packaging instead of the manual one. It also wants to know how the last crisis in Russia affected the market of pastas and what is its present state. It needs it because it knows the crisis had a strong effect on the market and the secondary data available is now out of date. It is not sure though, what particular information it needs to make the decision. It feels it is unable to predict customer’s reaction and other consequences of such a change in technology. It also has several different options of performance of this decision. These options are different in costs and quality of packaging.
Since I have already worked for the LBS Corporation and I am the only person here who has some formal education in marketing, I was offered to do this job.
Since 1995 the LBS Corporation used the manual process of packaging only, it used match-the-market or expenses plus pricing and didn’t ever think about the questions like these. The idea of having the process of packaging automated had not been discussed seriously, in the sense that it was thought to be mainly the way to increase the labor productivity, but it really was more connected with marketing. When I told them about this they looked a little surprised. Saying it another way, the decision to automate the process of packaging meant use of marketing for the LBS Corporation.
Since the secondary data was difficult to find and absolutely useless after the financial crisis, I had to make a marketing survey to collect the preliminary data to solve the problems of the company.
The first task I had to accomplish was, so to say, to formulate my task more precisely.
The research is to help to solve the problem of the company discussed above. We can formulate the problem of the research more precisely:
1) Due to inexpensive labor in Russia, the automated packaging process will increase the cost of product.
2) Since it is a mean of marketing, we should identify where it is reasonable to use it. It will require efforts of the economists and accountants of the corporation. I have to collect the necessary marketing information to make them able to answer the question: . “will offering an automatically packed product create enough incremental preference and profit to justify its cost against the other possible investments that could be made?”. This information must also be helpful for the further analysis and design of necessary marketing mixes.
3) The necessary information is information about the situation in the market, about people’s attitude towards automatically and manually packed pastas.
To do this I need to:
(I) Formulate the research objectives sharply.
(II)Analyze the history of the market of pastas of Saint Petersburg and its present state.
(III) Segment the market of pastas and develop profiles of resulting segments.
(IV) Evaluate the attractiveness of each segment.
(V)Evaluate preferences of the buyers and their attitude towards such factors as price, quality of the core product, quality of packaging, etc.
(VI) Having known the preferences and attitude towards packaging, quality and price, identify conditions upon which an automatically packed product will not fail.
(VII) Identify the necessary positioning concept for automatically packed pastas that will be offered to different segments.
I had formulated the following specific research objectives:
1) Evaluate attractiveness of each segment.
a) What kind of people would be the most likely to purchase pastas in high quality packaging?
b) Which segment do the most heavy users belong to?
2) Define the preferred form of pastas (corns, shells, etc.).
3) Define the most important factors which influence the consumer’s subjective probability[2] concerning the quality of the product.
a) Does the consumer usually estimate the quality by appearance of the product?
b) Is there a stereotype that a quality product can be packed only in a high quality package?
c) Is there a stereotype that imported pastas are better than the domestic ones? How strong is it?
4) Define the importance of quality packaging for the buyer.
a) Does the quality of packaging correlate with the quality of the product in consumer’s mind?
b) What must be the quality of the product which is automatically packed?
c) How much will a buyer desire to pay for packaging?
d) What are the main factors which make packaging important (estimated quality of the product, precise weight, other)?
5) Define the desired characteristics of the package.
a) Which size of the package will be the most popular? Shall we offer packages of different size?
b) What should be the packaging be made of and what shape should it have(plastic or polyethylene packet, cardboard box)?
6) Define the loyalty status of the consumers.
7) Define the “patriot” status of the consumers.
a) Do they feel unsatisfied that most of the high quality pastas are imported?
b) Does the fact that Russia substitutes natural gas and oil for “colonial” goods?
As can be seen from the goals and objectives, the research combines the features of both exploratory and casual research.
Since the company:
1) has lack of information about the market in general;
2) needs some specific information ;
3) does not want to spend money on purchasing the available secondary or primary data;
4) thinks that the secondary data available can be outdated due to the last crisis; primary data must be collected.
The most reasonable research approach in this situation is a survey research. It will allow to gather more information in less time, and some information needed can be acquired only directly from the purchaser’s answer. As a consequence, a questionnaire should be used as a research instrument.
I have two basic sources of information:
1. The buyers of pastas.
2. The salesmen who sell pastas .
Of course it is much easier to talk to salesmen than to the buyers, since the seller knows his market and he can give you a complete idea about what the situation in the market is like. But for this ease we have to pay:
· This information can be not so accurate because the salesman though can give you information about how much of this or that good had been sold, probably will have difficulties with determining such things as percentage of buyers of different age, sex, etc. Here a problem of selective remembering may arise.
· There are questions which can be answered only by the buyer himself and about which the salesman can have no idea at all. It regards to, for example, such things as the expected reaction for a price change, attitude towards packaging and the “reasonable” price of it in the consumer’s eyes.
As may be seen, this source of information could not satisfy our needs, but I decided not to neglect it for that reason but leave for the purposes of control. It is reasonable to expect that the results from the both sources must correlate.
The consumer survey was made by me and two other employees of the LBS Corporation between the 5th and the 10th of November at outdoors markets of Primorsky district of Saint-Peteersbug. About seventy customers were asked. The results of the survey are shown and discussed below in the appropriate section.
Before and during the Perestroika the market of pastas of Saint Petersburg was offering only the products of the Soviet manufacturers. There were no imported pastas at all. Due to the system, the market of pastas of the city was actually offering something. In the province it did not. There was a deficit of everything. Since there was no competition between the manufacturers, the quality of pastas was extremely poor. The technology of pastas manufacture itself was of interest: it was a so-called “double technology”. A double technology is one that can be used both for manufacture of civil and military products. In the USSR the equipment used for pastas manufacture could be used for manufacture of ammunition. I think it did not affect the quality of pastas positively.
In addition to this, high quality pastas can be made only of high quality durum wheat flour. And of course, there was a deficit of this kind of wheat in the USSR.
The consequence of all these plus bad management was the poor quality of the pastas manufactured in the USSR.
When later the market was open for foreign manufacturers of pastas the native ones were pushed out of the market since they were non-competitive.
For several years the market of pastas was saturated with imported products. Only in the last few years the situation began to improve for native manufacturers. This was because the difference in prices between them and the foreign manufacturers they could achieve became more significant and the quality of Russian pastas improved. The industry began to develop.
In this section some information that had been available for us before the research was made is given.
We can say that the Russian manufacturers use and have used price methods of competition mainly. The reasons why they have to do it are the following:
· Often the product is of low quality;
· The product is manually packed in most of the cases;
· The reason which in my opinion is of the highest importance: Russian people have a stereotype which was, as we say, absorbed with the mother’s milk: made in the USSR means made badly. That is why Russians have negative attitude towards products manufactured in Russia or Post-Soviet area. It makes people think that anything imported is better. And that is why English on the packaging is a mean of marketing in Russia. We have to break this stereotype if we want to succeed.
We can divide all pastas available into three major categories:
1. Low quality pastas. They are cheap, manufactured in Russia or Byelorussia, made of flour which is not actually for pastas manufacture. [3] Their poor quality can be easily identified by their appearance. They are not smooth and their color is a kind of whitish, not the ultimate specific yellow-gray color of good pasta. Their packaging is always manual.
2. Middle quality pastas. This category will include domestic pastas made of good durum wheat flour but packed manually. As a consequence, the only possible method of competition is low price. The low price influences the position of these pastas, though they are more expensive than the ones from the previous category, approximately by 20-25%[4].
3. High quality pastas. This category includes pastas made of high quality durum wheat flour and packed automatically. Most of the high quality pastas are imported. The strongest position in the market belongs to Italian and Finnish pastas. Domestic offerings of these pastas are rare. The best known domestic manufacturer of high quality pastas in the city is “Panna”, the former “First pasta factory”.
During the last crisis after August, the 17th, the foreign manufacturers of pastas had to face problems in Russia. If before the crisis Russian pastas were approximately 20-30 % cheaper than imported ones, after the crisis when the economic situation became relatively stable again (in October-November), the imported pastas were two times more expensive than the Russian ones. This relates to all or almost all imported pastas since they cost approximately the same nevertheless they are made in different countries- from Italy to Iran. In addition to this, the price level in Russia increased dramatically during only a few weeks. Many imported goods became 2-3 times more expensive than they were. This means a decrease of real income. Since attitude towards Russian pastas comparatively with the imported ones is negative, we can assume that Russian pastas are inferior goods. This means that even if only the people’s income had decrease without any change in price, the consumption of the imported pastas would have reduce in favor of the Russian ones.