MANAGING THE INDUSTRIAL MARKETING PROCESS

MANAGING THE INDUSTRIAL MARKETING PROCESS

André TOPE- ISCID - Université du Littoral - February 2004 This notes form the basic text for the given course. They are based on a patchwork of extracts from the books 'Industrial and Organizational Marketing' of M.H. Morris, 'Business Market Management' of J. Narus and J. Anderson, 'Business Marketing Management' of M.D. Hutt and T. W. Speh, 'Industrial Marketing' of E. R. Corey. Other contributions are issued from our own researches and experience as well as references token from 'Toegepaste Industriële Marketing' by P. Matthyssens & All, and 'Marketing Communications' by P. De Pelsmacker & All. We also would specially recommend the recent book on 'Business-toBusiness Marketing' by R. Wright which is a truly actual reference on this matter.

Table of contents

Chapter 1- Introduction: B-to-B marketing is different 1.1. product-related differences 1.2. customer-related differences 1.3. marketing role-related differences 1.4. what's changed in the latest decade? Chapter 2- Industrial buying behaviour 2.1. economic factors 2.2. general framework of decision 2.3. role related influences in behaviour 2.4. influence of organizational positioning 2.5. negotiating process 2.6. from purchasing to supply management 2.7. buying behaviour model 2.8. implications for the B-to-B marketers Chapter 3- Industrial marketing research & intelligence 3.1. major responsibility of marketing research 3.2. marketing research and M.I.S 3.3. establishing and operating M.I.S 3.4. from intelligence to D.S.S

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3.5. data sources 3.6. collecting data in the market place 3.7. trends in B-to-B market research Chapter 4- Industrial market segmentation 4.1. methods and bases for B-to-B segmentation 4.2. making product-market choices 4.3. concluding comments on segmentation Chapter 5- Managing industrial products & services 5.1. importance of product or service 5.2. product / service portfolio 5.3. importance of quality 5.4. concept of positioning 5.5. product strategies 5.6. conceptual product / service planning tools Chapter 6- Managing the industrial pricing function 6.1. industrial product pricing modes 6.2. product costs 6.3. customer value 6.4. competition 6.5. customer bargaining power 6.6. government intervention 6.7. bounds of fairness 6.8. pricing objectives 6.9. pricing process Chapter 7- Marketing distribution and logistics 7.1. define a B-to-B distribution network 7.2. channel design 7.3. need for a system view 7.4. distribution circuits in B-to-B 7.5. role of logistics Chapter 8- Industrial communication 8.1. integrated marketing communication 8.2. particularities of industrial promotion 8.3, personal selling as centerpiece 8.4. communication model Chapter 9- Crafting and implementing marketing strategy 9.1. crafting B-to-B market strategy 9.2. the B-to-B marketing planning process 9.3. strategic situation analysis 9.4. strategic choice 9.5. strategic implementation 9.6. concluding comments

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CHAPTER 1: INTRODUCTION B TO B MARKETING IS DIFFERENT!

Industrial marketing is the marketing of goods and services to commercial enterprises, governments, and other non-profit institutions for use in the goods and services that they, in turn, produce or propose for resale to other industrial customers. By contrast, consumer goods marketing is the marketing of goods and services to individuals and family units for personal consumption and forwarded through wholesalers and/or retailers in consumer goods distribution systems (fig .1.1). Fig 1.1 - The B to B marketing world

Thus, the distinction between industrial and consumer goods marketing is drawn primarily in terms of intended customers. It is essentially the differences in the kinds of products and in the nature of the customer that give rise to the characteristically different problems and marketing approaches one encounters in the two domains. Industrial customers buy materials, such as steel, plastics or aluminium, and component parts, such as motors, semiconductors, computer disk drives or packaging. They also buy capital equipment, such as machine tools, forklift trucks, or laboratory measuring instruments, and also construction, such as manufacturing plants, grain elevators or warehouses. They are consumers of services, such as consulting, food service or maintenance, and supplies, such as pre-printed paper forms, heat, light or power; cutting tools or lubricants. In short, they buy what they need to sustain the economic, social, and governmental functions they perform. In contrast, consumers are purchasers of end products intended for consumption and use rather than for further processing and resale. Some products, however, may concern 'both industrial and consumer markets: typewriters, calculators, mowers, clocks, PC's and furniture, for example.

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One can also distinguish between consumer and industrial buyers in terms of the nature of the buying decision-making unit and the decision-making process. In industrial purchasing, the decision-making unit is often quite complex; buying organizations may be highly structured and buying procedures highly formalized. In addition, industrial purchasing choices are more subjected to economic (cost/value) analysis. Finally, industrial buyers respond to job-oriented performance measures and often to formal procurement regulations and these influences tend to shape their decisions. But the most important basis for distinguishing between industrial and consumer market segments remains in the intended purpose or use of the purchase. What consumers buy they use for themselves or for consumption by members of a family. Industrial consumers buy to support the profit-making or non-profit functions in which the organization is engaged. Although some of the distinctions between industrial and consumer goods marketing may be matters of degree, industrial marketing is, indeed, different -so say those who have had experience in both areas-. Further, one finds that marketing managers, or sales people tend to have an affinity for one or the other. Often, but not always, those whose backgrounds include technical training find particular challenge in the problems of marketing more technical products. Fig 1.2 - Main differences between the B to B and B to C marketing approaches Product Nature Customer orientation Macro - social

Characteristic Development Driver Motivation

Decision `Two cultures' Cultural scope Analogies

Left brain Science Global Universal Legal Medical

B to C Cyclical Fashion Individual Wants / desires Subjective preferences Right brain Art Culture bound Politician Entertainer

Focus

Sales and application cases

Consumer characteristics

Selection

Professional approach

B to B Linear Technology Organizational Needs Objective Criteria

The main differences between industrial and consumer marketing are given in figure 1.2. We would like however to put the emphasis on product-, customer-, and marketing position-related differences. 1.1 PRODUCT-RELATED DIFFERENCES Because industrial products are often technical in nature and/or are described by a multiplicity of physical and performance specifications, the selling task tends often to be technical and educational in nature. This would be true for many products, such as numerically controlled machine tools, computers, heavy chemicals, motors, components, subassemblies, jet aircraft... The components and materials that industrial customers buy affect the quality and performance of what they, in turn, make and sell. The technology of the machinery and equipment they buy shapes the plant and office processes and the work environment in which the equipment is used. Thus, the design of products industrial customers buy must

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often be tailored to their use. To represent their companies and their products effectively, industrial sales representatives are often involved with customer company engineers as well as outside consultants in determining buying specifications, with purchasing personnel in negotiating terms and conditions, and with plant and office personnel in product-use training. Many industrial products have a wide range of applications. What it takes to make the sale may vary widely from one account to another because of the extreme variation in the customers' product lines, in their manufacturing processes and indeed, in the characteristics of the markets in which they, in turn, sell. Further working with such customers takes a lot of time. It is not unusual for the sale of some products to take one to three years between initial contact and consummation, and to require the sales rep's calling on a number of people in the buying decision-making unit. Industrial products often, if not always, require after-sale service. The availability, quality, and cost of field service may be critical factors in the original purchase decision. Further, the seller's ability to arrange financing for such major purchases as oil and gas pipelines, locomotives, civil engineering and construction equipment may be an important consideration in the negotiations for "big-ticket" transactions, and the successful competitor is the one who can arrange a global solution for the customer, with relatively better combination of attractive terms. Fig 1.3 - Business to market channel Industrial marketing Journey

Consumer / retail marketing journey

Raw material producer Primary conversion Transformation (elaboration)

-

Transformation

-

(adaptation)

Producer (assimilation)

-

Grosser / reseller Retailer Consumer

-

Crude oil extraction Refinery Petrochemical plant (polyethylene) Cork, stop material, cans... Soft drink juice...) Distributor Shop End user

(water,

fruit

There is one other product-related aspect of industrial marketing that makes it different. Industrial products are marketed at different stages of completion or market levels: (fig 1.3) as new, semi-processed, or finished materials; as components, subassemblies, or end products. From raw material to end product, the 'business to market channel' goes from a pure "B to B journey)) to a more and more "consumer journey» with a definite tendency towards a vertical integration strategy wherein a single business conglomerate controls more if not all of the transformation levels of the supply chain (i.e. the food & beverage industry). Often, industrial goods manufacturers elect to sell at more than one market level. A company such as General Electric manufactures and sells appliance motors and also makes appliances such as refrigerators, washing machines, and dryers. Many large paper companies sell paperboard, corrugated fiberboard, and corrugated boxes; each of these products is used to make the next one. Thus, some industrial marketers, selling at more than one market level, may find themselves in the sometimes-uncomfortable position of competing with their own customers. Firms, which buy from suppliers with whom they compete, resent having to sell against them in the same markets. Such conflict, if not carefully managed, may

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considerably complicate -if not sour- the field sales representatives' relationships with their customers. 1.2 CUSTOMER -RELATED DIFFERENCES Industrial customers are organizations. They vary greatly in size, technical sophistication, and buying expertise. They require a variety of services from their suppliers. Further, they can mostly be individually identified. These few facts have significant implications. The buying-selling relationship is often direct but, even when companies do sell through intermediaries; they need to maintain a direct relationship with the ultimate industrial customer and even with the end consumer. The concept of derived demand argues that the demand for the products sold by B to B enterprises is actually derived from the consumer marketplace. Thus, while industrial markets may be more sizable, economic activity is ultimately driven by the end consumer. Many industrial products are far removed from the consumer, and the linkage is difficult to see. Such is the case in the relationship between the demand for bauxite ore and sales of new homes, or the connection between production of some farm products and cosmetic sales. This separation becomes even greater as the number of steps or stages increases between a given manufacturer and the end user. In other cases, the linkage is quite clear, such as the impact of automobile sales on the steel industry. Thus, if consumers are not buying homes, autos, clothing, stereos, or educational or medical services, there will be less need for lumber, steel, cotton, plastics, computer components, and hospital forms. Consequently, industry will require less energy, fewer trucking services, and reduced numbers of tools or machines. In correlation, industrial marketers must be cognizant of conditions in their own markets, but also must be aware of developments in the markets served by their customers and their customers' customers. This can become quite complex when a manufacturer's output is used in a wide variety of applications, such as with petrochemicals (see fig 1.4). Fig 1.4 - End products that affect the demand for petrochemicals These petrochemical inputs... PLASTICS

SYNTHETIC FIBRES

SOLVENTS

SURFACE ACTIVE AGENTS

ADDITIVES SYNTHETIC RUBBER

Supply these industries... Coatings Construction Electrical House wares Packaging Transportation Apparel Carpets Home furnishings Tires Dry cleaning Toilet preparations Printing Soaps Detergents Mining Extraction Petroleum refining Mechanical maintenance Tires Fabricated rubber products

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To make these end-products Wire coating Plywood Engineering material Paints Containers Seat covers Clothing Rugs Upholstery fabrics Tire cord Cleaning fluids Personal care items Inks Household products Industrial cleaners Copper & Zinc Drilling mud Gasoline, gas oil... Lubricants Tires for cars, lorries, tractors... Belts, hoses, gloves, shoes...

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The relationship between sellers and buyers is often a close and continuing one. It tends to involve many "players" on both sides; engineers, sales representatives, procurement managers, product managers, plant managers, financial managers... They work together in resolving a lot of tasks and issues having to do with such matters as product specifications, product performance, delivery schedules, shipping arrangements, manufacturing process planning, financing the transaction, product service, product liability, etc... The quality of these continuing relationships and the benefits that each side gains from them are immensely critical to long-run success in gaining and holding customers. Industrial customers are often sufficiently large as to warrant considerable attention. They are most of the time sufficiently different from each other in their needs and buying behaviour as to require different treatment. Thus, marketing strategies are to be tailored to individual account characteristics. A further significance that derives from the nature of industrial customers and of the buying-selling relationship is that customer communication is carried out largely through personal selling. Advertising plays a role in industrial marketing, but a much less important one than in consumer goods marketing. Typically, advertising outlays as a percentage of sales are much lower for industrial companies than for consumer goods firms. Another significant particularity is that buying and selling firms are often very different in size one from the other. Smaller companies are sometimes at a disadvantage in negotiating with their large customer and the disadvantage may show up in price negotiations, conditions of sale, and profit margins. Firms that buy from large suppliers and sell to large customers find it sometimes difficult to maintain healthy profits unless they enjoy some unique technical or location advantage or find themselves in markets having an excess of demand over supply situation, which seldom happens. Tin can manufacturers, for example, which buy tinplate from the large steel companies such as USS or Arcelor and sell to the large food and beverage packers such as Coca-Cola, Heineken, Bonduelle... tend to operate on very thin margins. Finally, the close, multifaceted, and continuing relations that exist between industrial buyers and sellers must be based on trust and fairness. The qualities of trust and fairness are high values in industrial buying-selling relationships. Integrity, ethics and fair play are rewarded. On the contrary, perceived unfairness tends to be punished by the aggrieved party. This is true of both company-to-company relations and person-toperson relationships on both sides. 1.3 MARKETING ROLE - RELATED DIFFERENCES As for marketing managers' roles and internal relationships, industrial marketers tend to have greater involvement with other functional areas of the business unit such as research and development, purchasing, manufacturing and control. The reason goes back, once again, to the nature of the product and the customer. Industrial customers are often looking for products that are fitted and designed for their particular uses and manufacturing processes, and they want ongoing after-sales technical support. Thus, in representing the customer inside his company, the industrial marketing manager is often in close and continuing contact with those other functions of the business which do the work of developing and making the product, delivering it, and providing the technical customer support required. In addition, business units in large industrial concerns have a great amount of involvement with each other. They may sell to and buy from each other. In some cases, they compete against each other in the marketplace. One business unit -a pooled sales

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organization for example- may supply functional services to other units. Within their own functional units, industrial marketing managers work in complex organizational structures, relating, as they often do, to product managers, market managers, field sales managers, distribution managers, and marketing resource personnel doing market research, product and sales training, telemarketing and promotion. Perhaps, more than managers in any other function of the business, industrial marketing managers fill what is often referred to as "boundary spanning role" within a neuronal network as they work across departmental lines and with customers to assure that the firm is effectively serving its markets. The degree of power vested in the marketing function can vary, but if the company is really customer orientated, the place taken by the commercial department tends to be more and more a key function in the organisation. The marketing has priority of emphasis within the firm only by virtue of the fact that the market holds veto power over all other activities carried on within the systems. This places a tremendous premium on accurately defining market requirements and understanding purchasing behaviour and implies the control over certain units or departments whose activities impinge on the customer and his needs (R&D, Physical distribution, Pricing, PR). This gives a grater possibility to rationalize the structures of the companies, augmenting the 'span of control` of high placed managers and enhancing the internal neuronal networking. A typical organization chart for a client focused enterprise is given in figure 1.5 and shows the central position of the marketing. Fig 1.5 - The central place of marketing in the organization

The conclusion is that the chief marketing executive whatever his title, has to be the spokesman and herald of the 'marketing culture' that relies on 'customer satisfaction'. Indeed, all activities of the company must have the `marketing attitude of mind' and be closely integrated with the formal marketing function. Moreover, marketing does not necessarily require a strict adherence to a rigid integrated functional position, as it appears to be in small and medium-sized companies, but still the 'role' should be clearly taken by the manager's team as a whole.

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Industrial marketing is different from consumer marketing. The challenges are great and so are the opportunities for creative contribution, personal development, and individual fulfillment in industrial management careers. 1.4 WHAT'S CHANGED IN THE LATEST DECADES? A fair question may be: How has industrial marketing changed since the 80th? Indeed, it has changed and continues to do so. In fact, one gets the sense from both practitioners and academicians that, while our understanding of the field has grown, we find ourselves trying to keep our sights on a moving target. Major changes, for example, have come out of the increasingly sophisticated use of new CIT's (Communication and Information technologies) in industrial marketing. Computer interfaces are now in wide use for quoting prices, indicating product availability, receiving orders, shipping, and billing -often without human intervention-. Their use has enabled marketers to economize on inventories, fill orders more rapidly, reduce order-fill error rates, and provide customers with information on product usage. Computerized information systems have supplied the technology as well, to support just-in-time flows of product from manufacturers' stocks to OEM (original equipment manufacturer) production lines. Fuelled both by new computer technology, as well as by the versatile growth in industrial markets, the distribution infrastructure has changed dramatically. One development is the increasing concentration of the distribution sector of our economy. In almost every industrial product category, large resellers operating nationally are claiming increasing shares of distributor-served market segments. The large distribution houses serve their markets through national networks of stocking locations, stores, and mail order catalogues. Able to achieve scale economies in selling costs, many have grown by competing aggressively both on price and service, to the disadvantage of the smaller distributors with one or two sales locations and less favourable cost structures. The larger ones, as well, have integrated backward into manufacturing and many have developed their own private-branded lines sourced from outside suppliers. Inevitably, the balance of power between industrial distributors and suppliers has tended to shift as a result of these developments; on balance, it seems, resellers are gaining strength in the producer-reseller relationship. New distributor types have emerged. Most notably, there is the so-called value-added reseller (VAR) found in the computer or the textile industry. As such, VAR's buy or gather computer hardware elements from companies such as IBM, HP, or Honeywell Bull and combine them, adding the needed software programs for specific applications, on demand of the customer. Overall, specialized resale distribution is playing a significantly greater role in serving industrial markets than it did 20 years ago, as measured in terms of the relative percentages of sales volume going direct and through distributors. The new 'ecommerce' tends to limit this move towards intermediaries as it gives the opportunity of close and quick contacts at distance between producers and users while the role of distributors is more and more focused on the logistics and on the secondary production task (assembling, packaging, labeling...). Manufacturer's modes of distribution have also evolved considerably. Whereas in the past, many were distributing goods through monolithic channels structures -direct sales forces, or distributors, or agents- today the majority go to market through multichannel systems, using some combination of intermediary types. Underlying reasons for these more complex systems include the emergence of new market segments, the

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globalization of the economy and the development of new products, requiring different distribution modes. With these developments in market coverage, and the proliferation of market segments for many industrial products, sales force roles and organization have changed. Now, working at two market levels, many direct sales organizations serve the distributor network and use the CIT's to go beyond in order to asses or create demand at the user customer level. The past 20 years has also seen the growth of product/market specialization in the field sales organizations of large companies in particular. In addition, the businesses, which sell to large accounts operating on a national scale, have built national account management functions into their marketing organizations to coordinate account-selling programs across the customers' buying and using locations. Moving on, industrial marketing has become a more demanding field of practice than ever before as the pace of new product development has accelerated rapidly -especially in hi-tech industries-. Shortened product life cycles and the urgency of staying on the leading edge of product technology leave no room for error in anticipating customer needs, driving down product development time, shortening the time-to-market and getting new products to market in advance of competitive offerings. All of this, and at the same time, preserving the profitability of the product line as a whole, makes the marketing role more important. The marketing challenge is compounded, as well, by the increasing diversity of applications and of market opportunities for industrial product lines. Another factor is the rapidly developing globalization of competition and the customer environment. The proliferation of markets in terms of product applications, customer sets and geographical locations has had a profound effect on marketing organization. Many industrial companies find it essential to organize the marketing function along three dimensions product, market, and geographic area- and to coordinate the development and implementation of strategy through a three-dimensional matrix approach. Industrial marketing has become a more professional field of practice. Generally speaking, strong personal customer relationships are still a main factor in supplier- buyer relationships in order to ensure customer bonding & retention even if customerpurchasing practices have become less disciplined or formalized. In addition, we see a greater strategic emphasis on providing differentiated products or services, on price competition and on the use of industrial market research to understand customers' needs.

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CHAPTER 2. INDUSTRIAL BUYING BEHAVIOUR

"If you want to sell Johnny Green what Johnny Green buys, you have to see Johnny Green through Johnny Green's eyes.” So goes an old marketing jingle. Its point is that mutually profitable relationships with customers begin by understanding those who make purchase decisions; individuals, their needs and the organizational context in which they do their job. The first observation that may be made in actual B-to-B purchasing is that the buying decision-making unit includes not one purchaser, but several persons representing different functions in the user- and corporate division (engineering, heath & safety, finance, maintenance...). In many cases, buyer assurance may be derived from evidence of satisfactory product performance by other users of the product or by word of mouth at technical and at trade association meetings, or from conformance to industry codes. A major source of assurance could be the clarity and conviction with which the supplier presents its proposal. Based on the premise that the supplier should know its product, supplier certainty -based on careful analysis of the customer's needs- is essential in providing customer assurance. Uncertainty, signaled often by a series of proposal revisions, easily undermines customer confidence. Buying organizations also have other concerns. One is the fear of being dependent on one source of supply. Reliance a single source leaves the customer vulnerable to monopolistic price increases and also to the danger of supply disruptions due, possibly, to labour strikes or plant breakdowns. Customers may also have a fear of becoming unduly reliant on a single vendor's technology as that becomes integrated into the products the customer makes and sells. As for those persons who make the buying decision, they are concerned not only about the likely impact of any purchase decision on their performance measures, but also about building and maintaining their own reputations for competence in what they do. An engineer, for example, may be professionally threatened by a vendor's new technology, but willing to support change if he or she can be given some credit for a technical contribution. All this has significant implications for relating effectively in a selling situation to the customer environment. It suggests the importance of understanding the needs of customers for the product, the way the product will be used, and any potential changes that using the product will trigger in the customer's operating programs and practices. Further, it underscores the criticality of identifying those who will have a voice in the purchase decision and of understanding their roles in the DMU. It stresses the need to have an appreciation for their relevant prior experience and for their goals in the organizational context in which they work. The personal qualities, which contribute to the salesperson's effectiveness in dealing with customers, include skills in situation diagnosis both at the account and the individual decision maker levels. Since account diagnosis and the formulation of creative solutions to customer problems cannot often be done by the sales representative alone, his skill in

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negotiating internally for support from such resources, as engineering and customer service is often prerequisite to making a sale. Effective sales representatives often seem very good at helping individuals in the customer organization to gain credit for contributing to their business unit's mission. Finally, they salesperson's own reputation for fairness, trustworthiness, and personal integrity inevitably goes a long way in providing the assurance that underlies mutually profitable customer relationships. Thus, industrial marketing begins with understanding industrial buyers, not only those with .purchasing manager titles but those, as well, in other functions- manufacturing, engineering, marketing, and general management who strongly influence purchase decisions. In what follows, we consider first, the economic factors that shape purchase decisions and look then, at general framework of buying decision components and the role-related influences that affect buyers' choices. After that, we explore procurement organization as a relevant influence on buying behaviour. Finally, we consider the buyerseller negotiating process for what that may reveal about industrial purchasing. 2.1 ECONOMIC FACTORS Industrial buying behaviour tends to reflect the goals and purposes of the organization as a whole, and it responds strongly to the performance measures the organization imposes on itself. If the organization is in business to make a profit, purchasing managers are predominantly oriented toward buying at the lowest possible price without having to compromise on factors such as product quality, delivery, and technical service. For non-profit institutions and governmental units, buying at the lowest possible cost may still be essential since a primary restraint on these organizations is to operate within established budgets. Purchasing behaviour may reflect other, less quantifiable economic goals. A key concern is the long run development and nurturing of the organization's supply system to assure supply availability. Another concern is preserving the economic health of communities in which the firm has plants and offices in order to create a favourable climate for its operations. Industrial buyers, then, may not always buy at the lowest cost in the short term, but may award business in a way that fosters the development of dependable sourcing systems and the preservation of strong local and even, national economic environments. In buying materials and component parts for the company's products, a key economic factor is the impact of their cost on the price of the end product. Given the cost of required materials and components, can the end product be priced competitively in the marketplace? Does the difference between cost to manufacture and competitive market price amount to a satisfactory gross margin? In many, cases, the cost of critical materials will greatly affect the price at which the end product can be profitably marketed. Examples are the cost of flour in bakery products, or the cost of steel in automobiles, or the cost of petrochemicals in making plastics. In such instances, materials cost is a major factor in pricing the end product. Less quantifiable factors are the, quality of purchased materials and components and suppliers' delivery schedules as they affect manufacturing costs. Inconsistent quality of purchased materials and components will often result in decreased factory yield rates (high reject rates). In addition, interruptions in delivery schedules will cause costly line stoppages. A related economic concern is the avoidance of manufacturing risk. Thus, a purchasing manager may award a contract for a new piece of equipment to a supplier who has a reputation for high-quality products and dependable product service even though it might

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cost less to buy the equipment from another manufacturer. Suppliers' technical contributions are another consideration. For that reason, suppliers often compete for business by offering their customers technical assistance in improving their manufacturing processes, designing the products they make and sell, and suggesting cost-saving improvements in purchased materials and components In summary, economic factors that influence a firm's initial decision to purchase and then select one supplier over others vary considerably. Initially, lowest price is a key consideration, followed by the supplier's reputation for product quality, dependability, service, and potential for technical contribution. Availability of supplies, both short and long term, is also critical. Two other purchasing considerations are risk avoidance -in terms of end-product quality and manufacturing efficiency- and supplier technical contributions. Further, concern for the economic viability of the communities and countries in which a company has its plants and offices is often a compelling consideration in selecting suppliers. 2.2 THE GENERAL FRAMEWORK OF BUYING DECISIONS The problem, at this stage, is how to present something which is multi-dimensional and complex in a simple, coherent and meaningful way. The best answer is to divide the purchasing process or system into three main components parts (fig 2.1) • The sequential buying stages or elements of the purchasing process over time • Factors likely to affect the behaviour of individuals and groups involved in decision • Possible functional areas in a firm likely to be involved in a purchase decision 2.2.1 BUYING AS A PROCESS: THE BUY STAGES One of the most simple, yet far-reaching, insights into buying behaviour is that it is actually a process much more than the physical act of exchanging goods or services for an agreement to pay for them. There is a logical sequence of stages that collectively result in product and vendor choices. And, a number of purchasing-related decisions have to be made in each stage. These stages take place over time, frequently over weeks, months or years. Approaches to defining buying processes generally include five generic steps. This general framework may even well apply to both consumer and industrial buying. The list of main steps hereafter highlights the five-stage model describing the sequence of activities in organizational buying process. Of course, during the procurement process, many small or incremental decisions are made that ultimately translate into the final selection of a supplier. - Stage 1. Anticipation or recognition of a problem (need) and a general solution. - Stage 2. Determination and description of characteristics and quantity of needed item. - Stage 3. Search for and qualification of potential sources after the "make or buy" decision - Stage 4. Acquisition, analysis and evaluation of proposals. - Stage 5. Selection of supplier(s) and negotiation of an order routine.

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Fig 2.1: Framework of buying components

- In the first buy stage; someone in the buying organization becomes aware of a need that is currently not being met in a satisfactory manner, if at all. This recognition of a need or problem can originate in any number of places. A sampling of points of initiation for a industrial purchase decisions might include the following: a computerized inventory monitoring system automatically delivers a signal that it is time to reorder; production personnel recognize that plant machines are producing an inordinate number of defective items; R & D engineers encounter the need for a customized solution to a technical; the sales department receives a number of customer complaints regarding some component part in the company's product; or management anticipates new government regulations that will limit the organization's ability to use certain materials. The person who begins the buying process by identifying a need is not necessarily the one who ultimately decides what, if anything will be purchased to satisfy that need. Nonetheless, the marketer should recognize where and why the buying process was initiated. Among other things, this knowledge will provide a more complete understanding of the context within which the customer need exists. Furthermore, the industrial marketer can act as the initiator by helping the customer recognize a need. - In the second buy stage, members of the buying organization identify potential solutions to the needs recognized. Thus, they establish the types of products or services that conceivably could resolve the perceived problem. The marketer can play a key role in this stage by getting buyers to see solutions that otherwise might not be considered. That is, the marketer can help broaden the buyers' field of vision and suggest creative approaches to problem solving. Once a general solution has been established, the organization translates its needs into a more precise statement of the specific characteristics and quantity required of some

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product or service. Through this process of formally describing product characteristics, needs are better communicated to others in the organization, as well as to potential vendors. At this stage, product specifications are established-specifications that can range from a statement of the minimum cleaning power required of an industrial detergent, or the copy quality and run-length capability of a copier, to detailed blueprints describing some key components, or exact temperature tolerances for a machine tool. - In the second buy stage, people may look internally or externally for solutions, and frequently rely on alternatives that historically have been successful. Where the problem is novel, of course, the only reference point may be a competitor's experiences. If, after the “make or buy” process, the option is to look outside for a supplier, product requirements or specifications can be, and frequently are, written so that only one or two particular vendors can readily satisfy them. The message for the marketer, to this point, is that the marketing effort must begin early in the buying process. The marketer, in some instances, can not only help the buyer recognize a need, but he can also work to ensure that required product characteristics and specifications are written to include, if not favour, his company's product(s). - The third buy stage involves searching for, and qualifying, acceptable vendors. Using obtainable information sources, the buyer may first identify the universe of available suppliers, and then reduce this number to some subset of vendors who can meet the established quality and quantity requirements. The purchasing department will often maintain a cross-referenced index of vendors, orders, prices, and contracts. The first problem for marketers is to ensure that the buying organization is aware that their firm has a product offering in the area under consideration. Then, they must ensure that their firm satisfies the vendor evaluation criteria used by the buyer. - The fourth buy stage starts when the field of suppliers has been narrowed to an acceptable group of qualifying vendors of which the buying organization acquires and evaluates specific proposals. It is in this stage that the process of negotiation with vendors over price, inventory levels, contract dates, delivery requirements, warranties, trade-in policies... receives the sharpest focus. - In the fifth buy stage, the buyer may still be negotiating with selected suppliers, or requesting new bids, but he eventually will proposes final supplier choices. The actual selection of the sources of supply may also involve considerable negotiation within the buying organization among stakeholders with conflicting interests. The individuals involved in the decision often place different importance weights on various supplier attributes, and have differing perceptions of how well each vendor can perform on a given attribute. An ultimate buy stage should be added and concerns the performance feedback and evaluation, which permits a better decision as to continue or change suppliers' relationships. One should note that there is no one single pattern of buying stages that has universal applicability. The previous discussion has been largely exploratory because so little is known about aggregate behaviour of buyers. Wet will later give a few pointers on how to segment a firm's customers on the basis of the types of decisions to be made, by whom and when. 2.2.2 FACTORS AFFECTING PURCHASING DECISIONS Decisions taken during the purchasing process are made by individuals or groups of individuals. We now have to examine some factors that will not only play a part in determining which of these will be involved but also have some affect on the way they behave.

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- Reasons for Purchasing: One should first make the difference between a primary and secondary purchasing mix: The primary purchasing mix - Buying for production. - Buying for resale (manufacturer, distributor, contractor or wholesaler). - Buying capital plant and equipment. - Buying for maintenance and R & D. It may be necessary to explain purchasing behaviour by subdividing each of the primary mixes into an appropriate secondary mix. The secondary purchasing mix for production - Piece parts. - Bought in trade components. - Materials. - Sub-assemblies. - Consumables (e.g. energy, industrial lubricants...) When buying for production the methods used may vary depending on whether a company operates a one-off, hatch or flow operation or a permutation of these. The purchase of piece parts and some components often brings the design specialist into the process because the customer is drawing up the specification, but with much of the remainder of the mix specification may be dictated by the supplier of trade materials, components or consumables. - Novelty of Purchase: One will distinguish here three "buy classes": - the new task, - the modified re-buy, - the straight re-buy. The relative novelty of the purchase will affect the type of negotiations and the people who will be involved. The more novel the purchase then the lower the stock of experience that the customer has, the more information required to make a decision and the greater the number of alternatives likely to be given consideration. The more repetitive a purchase the more established and sophisticated the buying behaviour should be. - Product Considerations: We can include under this heading what can be referred to as Tertiary Mix. Particular items can be analysed in terms of the annual volume of sales, and the more important ones can be subjected to a much closer scrutiny. Most buyers are concerned with a range of purchases and must face the small-order problem. The higher the value of a purchase the more attention it is likely to receive. This leads us to the concept of degree of essentiality. Since goods may vary in importance to the customer the purchasing behaviour will vary. If the goods have great strategic significance there will be a tendency to play safe, be conservative, and minimize worry. In addition the more essential a purchase the more the number of people involved in the buying decision. The nature of the product itself may have significance in buying behaviour. The physical nature of the product -size, shape, complexity and the level of technology built into it- will determine to what extent technical people will be involved in the purchasing decision. - The Organisational Environment: The size of the' organisation may affect behaviour. We are in an age of mergers and globalization with predominant buyers when we have a growing number of multi-plant and multi-level enterprises where purchasing may be centralized or decentralised. Such a pattern, however, can easily be upset by the views of a few top executives and the introduction of the new CIT including intra- and internet. Other organisational factors that may be significant are: - type of ownership and objectives of company,

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- methods of controlling expenditure, - policies on inter-trading and reciprocal trading, - the techniques of buying employed - Psychological and Sociological Factors: All those involved in the buying decisions are human beings and have the same sort of emotional reactions as other people. They also work as parts of small functional teams in a network within the company. It has always been argued that the industrial customer will be completely objective in his decision-making, being influenced solely by tangible factors such as price, performance, delivery date and specification. Fortunately, from the marketing viewpoint, there is enough evidence that this is not fully true. 2.2.3 A MULTI-INDIVIDUAL CUSTOMER The fact that the buying decision made in an organisation is collective has emerged quite clearly. It has been generally and dangerously accepted that top management, both board and operating, are the main focus of purchasing decisions. But top management tends to dele- gate and decentralizes. Size as we have already seen may affect purchasing behaviour. The larger the company the less top management is involved, and even when it is, the information used in making a decision is compiled and presented by the lower echelons of management. Members of the buying centre or buying decision unit (BDU) assume different roles throughout the procurement process. They may be users, influencers, buyers, deciders, and gatekeepers. One person could assume all roles in a purchase situation or each individual could assume a different buying role. - Users: As the name implies, users are the personnel who will be using the product in question. Users may have anywhere from inconsequential to an extremely important influence on the purchase decision. In some cases, the users initiate the purchase action by requesting the product. They may develop the product specifications. - Gatekeepers: Gatekeepers control information to be reviewed by other members of the buying centre, and play the role of counselor or adviser as well by directing the accurate information. The control of information may be accomplished by disseminating documentation such as advertisements, articles, e-mails... or by controlling which salesperson will speak to which individuals in the buying centre. The purchasing agent might perform this screening role by opening the gate to the buying centre for some sales personnel and closing it to others. - Influencers: Influencers affect the purchasing decision by supplying information for the evaluation of alternatives or by setting buying specifications. Typically, technical personnel, such as engineers, quality control personnel, R&D personnel or the firm's doctor are significant influences on the purchase decision. Sometimes, individuals outside the buying organization can assume this role (e.g., an engineering consultant or an architect who writes specifications). - Deciders: Deciders are the individuals who actually make the buying decision, whether or not they have the formal authority to do so. The identity of the decider is the most difficult role to determine: buyers may have formal authority to buy, but the CEO or another manager of the firm may actually make the decision. A decider could be a design engineer who develops a set of specifications that only one vendor can meet. - Buyers: The buyer has formal administrative authority for selecting a supplier and for implementing all procedures connected with securing the product. More powerful members within the organization often usurp the power of the buyer. The purchasing

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agent often assumes the buyer's role, as he executes the clerical functions associated with a purchase order and the delivery modalities. Key influencers are frequently located outside the purchase department. If the products or services concerned are highly technical, people of R&D, engineers, scientist... will have the greatest level of influence in the buying group. Marketing efforts'-will depend upon which individuals of the buying centre are more influential for a given decision. Since engineering and manufacturing are more influential in product selection decisions, they may have to be sold on product characteristics. On the other hand, since purchasing is most influential in supplier selection decisions, they may have to be sold on company characteristics. 2.2.4 THE BUY GRID Combining the stages of the buying process with the types or classes of buying situations produces a matrix or grid, as shown in fig 2.2. This buy grid has important strategic implications for the marketing and sales attitude of the vendors (fig 2.3) As the buying process evolves, a number of decisions are being made, and the number of viable options open to the buying organization is effectively, being reduced. In other words, the combined effect of the formal (and informal) decisions made during the buying process is to eliminate some vendors, and create a growing commitment toward others. The vendor who gets involved too late in the buying process may never really have a chance, especially in the new task situation. Alternatively, with a straight re-buy, many of the decisions have been made in the past, and are automatically renewed. For items purchased on a repeat basis, the goal of the marketer should be to create a straight re-buy situation where his company is the specified vendor. Once this is achieved, the marketer's focus will be on the latter stages in the buying process. Because buyers in this situation know what they want and are not typically seeking new information or: proposals, the marketer concentrates on the negotiation, order routine, and evaluation stages. By contrast, where a straight re-buy exists, but the marketer is currently not the vendor (an out-supplier), the goal is to identify potential areas of buyer dissatisfaction, possibly creating dissonance. In this manner, the marketer is attempting to change the buying situation into a modified re-buy. Because of the concern by marketers with the identity of the key decision maker(s) in the buying organization, the buy grid is helpful for understanding the number and types of individuals involved at various points in the buying decisions. For example, more people might be involved in the early stages of the process, especially for a new task purchase. Similarly, engineers and production/operations managers might play the major role in the early stages of the new task and modified re-buy scenarios, while the purchasing department may be less a factor. Fig 2.2: Buy grid framework for Industrial buying. The (XXXXX) locate the start of negotiations Buy stages 1. Anticipation or recognition of a problem (need) and a general solution 2. Determination/Description of characteristics and quantity of needed item 3.'Make or Buy' - Search for and qualification

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Buy classes Modified Straight ReRe-buy buy

New Task XXXXXXXX XXXXXXXX XXXXXXXX

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of potential sources

XXXXXXXX XXXXXXXX

4. Acquisition, analysis & evaluation of proposals XXXXXXXX XXXXXXXX XXXXXXXX

5. Selection of supplier and of an order routine. Performance feedback and evaluation

The buy grid framework is a very rational, task-oriented approach to understanding industrial buying. The task of buying goods and services is undertaken to resolve some organizational problem. In other words, the buying task is problem-solving behaviour. From the buyer's perspective, a product or service consists of a set of benefits or attributes. Fig 2.3: Responding to Different Buying Situations: A Profile of Required Marketing strategies BUYING SITUATIONS New Task

SUPPLIER STATUS "In" Supplier "Out" Supplier Monitor changes in emerging purchasing needs of the organization. Isolate specific needs. Isolate specific needs. If possible, participate actively in early phases of the buying process by supplying information and technical advice.

Straight buy

Re-

Modified Rebuy

If possible, participate actively in early phases of the buying process by supplying information and technical advice.

Reinforce the buyer seller relationship by meeting the organization's expectations.

Convince the organization that the potential benefits of re-examining requirements and suppliers exceed the costs of doing so.

Be alert and responsive to changing needs of customer.

Attempt to gain a position on the organization's preferred list of suppliers, even as a second or third choice.

Act immediately to remedy problems with the customer.

Define and respond to organization's problem with existing supplier.

Re-examine and respond to customer needs.

Encourage the organization to sample alternative offerings; offer performance guarantees.

the the

The kinds of attributes on which industrial buyers base their decisions tend to be much more functional than those which are emphasized in consumer buying. Some of the key product-related attributes include technical specifications, performance reliability, newness of technology, supply availability, ease of installation, training time required, ease of operation or use, maintenance requirements, compatibility with existing equipment, necessary support services... Important vendor attributes include reputation, Scanned by PHAN Thanh Tu

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delivery reliability, financing terms, price structure, technical service offered, inventory policies, training provided, confidence in salespeople, and flexibility in adapting to buyer needs... 2.3 ROLE RELATED INFLUENCES AFFECTING BUYING BEHAVIOUR Depending on the nature of the purchase, the decision-making unit may involve any number of individuals. A routine reorder of a standard supply item may be done by one person, while the procurement of a newly designed component part or a piece of capital equipment may involve managers in purchasing, engineering, manufacturing, and, perhaps, finance and control. Marketing managers will often participate, as well, if the purchase has implications for product appearance, taste, shelf-life or other specifications, in ways that might affect its price and marketability. Understandably, the buying decision-making process is greatly affected by such personal factors as the goals and ambitions to which individual members of the decisionmaking unit respond. It is affected, as well, by the interpersonal relationships among those involved in the decision and by the interactions of members of this group and suppliers' representatives. The significant differences in the performance measurements of each intervener also greatly affect choices. The industrial purchasing manager may be evaluated in terms of how much money he or she saves the company and will be under pressure to accept the lowest bid. An engineering manager might be much more concerned with the vendors' past performance, working relationships, and the degree of confidence in the performance of the equipment, given the fact that he or she will be held accountable for the on-time start-up of new equipment and its subsequent trouble-free operation. This leads us into looking at the measures imposed on different members of the buying decision-making unit. We will first get an overview of day-to-day performance measurement systems typically imposed on purchasing managers and the ways in which these measurement systems influence their behaviour. Then, we will consider the influence of other functional managers, who may be members of the purchasing DMU (Decision Making Unit), and how their role perspectives and performance measures shape buying decisions. 2.3.1 PURCHASING MEASUREMENTS On a day-to-day basis, purchasing managers are usually evaluated in terms of the extent to which they • facilitate the missions of the user locations by assuring on-time deliveries of purchased parts and materials of the required quality • negotiate acceptable prices • conform to purchasing norms and regulations • manage the resources pertinent to procurement contracts, such as consigned tooling and materials in vendor locations • manage purchasing overhead expenses • conform to corporate policies in such areas as doing business with minority owned enterprises and equal-employment-opportunity employers Generally, the first three measurement dimensions seem to be of primary importance and are ranked in the order presented. The relevance of the next three is likely to vary from company to company depending on the nature of the enterprise and its purchasing measurement system. 2.3.2 THE INFLUENCES OF FUNCTIONAL ROLES IN BUYING DECISION MAKING

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Managers of certain functional areas are vitally involved in buying decisions. Their behaviour is shaped by substantially different sets of internal influences and role-related concerns. Moreover, their involvement in the decision- making process will vary considerably depending on the product or service being purchased as well as the relative stage -early, middle, or late- in the buying cycle. In the early stages of procurement, other functional areas typically become much more involved than later. In the early stages, critical decisions such as these are made: • Does the product meet our needs? • What will be the product's specifications and performance standards? • Will we make it or buy it? • What vendors are qualified to supply it? Once these decisions are made, other managers tend to have reduced involvement. Then managers in purchasing take over and work to bring down prices, develop additional qualified sources, and monitor vendor performance. In the following discussion, we consider the influences that managers in design & development, engineering, manufacturing, marketing and general management bring to bear on decisions about sources and assess the factors that give power and authority to each in the decision-making process. - Engineering Influences: In the early stages of a procurement involving the purchase of materials or components having different specifications from those purchased previously, engineering managers often have responsibility for (I) establishing product performance requirements and technical specifications and (2) formally qualifying both vendors and the products that are purchased from them, especially in companies making highly technical products such as computers or defense systems. The qualification process is the initial screen in vendor selection and establishes the pool of potential suppliers the procurement manager may count on for bidding and negotiating purposes. Engineers will be deeply involved, too, in the purchase of new capital equipment. They will be defining specifications, identifying potential vendors, and often making the final selection. - Production and Manufacturing Influences: Manufacturing tends to be especially influential in purchasing decisions involving parts and materials that go into the product being made. Manufacturing's continuing feedback to purchasing on the performance of existing suppliers will be a key determinant of which ones will be retained or discontinued and how purchase volumes will be allocated among suppliers. Production schedules will strongly influence the order pattern as well. Although purchasing would normally prefer stable ordering patterns in the interests of minimizing vendor costs, production control will tend to let order levels fluctuate as production expands and shrinks in order to minimize inventory investments. - Marketing Influences: As noted earlier, when procurement decisions affect the marketability of the company's products for reasons of product design, promotability, serviceability or price, the marketing people become interested and involved participants in sourcing decisions. As the authority on the impact of product design and price decisions on sales volume, prices, and profits, marketing may carry much the same weight as manufacturing does for product specifications. - General Management Influences: General management may strongly influence sourcing decisions that impinge on strategic or policy matters. This influence may be felt particularly in areas involving the company's relationships with the supply environment. Top management involvement in selecting steel suppliers at for a car-manufacturer, for example, reflects a long-run concern for having enough steel-making capacity locally to avoid being dependant on imports from foreign or less reliable producers.

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A second dimension of general management concern that has a direct effect on procurement decisions is that of maintaining a stable work force. This priority tends to align, general management on the side of manufacturing-management in make-or-buy decisions. - Procurement Itself as an Influence: Procurement seems to become the dominant functional area in purchasing decisions when a steady-state condition has been achieved, that is, when the design of the purchased item has been established and vendors have been qualified. Purchasing also tends to dominate procurement decisionmaking when intensive long-term relationships with suppliers involve vendor management matters primarily, as opposed to technical/engineering matters. This is particularly true of subcontract work. In negotiating internally, purchasing managers need information to help them assess procurement cost/product benefit trade-offs. Purchasing gains strength, as well, to the extent that it has a total overview of the supply industry while other interested parties have only fragmentary knowledge. The extent to which purchasing has top management support bears directly on purchase's internal strength. - The Ego Factor: The preceding discussion suggests that, depending on their organization roles, different members of the decision-making unit will exercise different kinds of influences on the buying decision. It suggests, as well, that the power of different functional managers to affect the decision will vary depending on the nature of the purchase. Further, it indicates that the way an individual functional manager behaves as a DMU member directly reflects the performance measures to which he responds. The rationality of this construct, however, does not give due consideration to other psychological factors that may be at work in a buying situation. These often relate to the ego needs of the buyer and/or user. Personal attention is often a critical factor in a buying situation whether it is at high management levels or simply at the salesperson-buyer level. And the "chemistry" of the relationship is similarly critical. 2.4 THE INFLUENCE OF ORGANIZATIONAL POSITIONING ON BUYING DECISIONS In large organizations, purchasing takes place at multiple points in the structure. In multidivisional companies, buying groups may be found at corporate headquarters, at the division level, and in plants or laboratories. Where purchasing is positioned organizationally affects its priorities in making purchasing decisions. At the plant level, purchasing decisions may be dominated by short-term cost efficiency and profit considerations, thus reflecting the performance measures that may be imposed on operating units. At central locations, the more important considerations may be long-term supply availability and the development of a healthy dyadic relationship with the vendor. It has been generally and dangerously accepted that top management, both board and operating, are the main focus of purchasing decisions. But top management tends to delegate and decentralise. Size as we have already seen may affect purchasing behaviour. The larger the company the less top management is involved, and even when it is, the information used in making a decision is compiled and presented by the lower echelons of management. Many functions may be involved in the purchasing decision depending on the whole host of factors already discussed. Pulling the many factors together, one can arrive at a very simple model that does give some idea of the involvement of the major functions. The framework is built on the idea that the buying responsibility is largely determined by both product complexity and commercial uncertainty. The degree of product complexity

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measures the relationship of the product technology and the extant technical knowledge of the customer. Commercial uncertainty relates to the degree of business risk and its impact on future company profits. Where product complexity and commercial risk are low the professional buyer (purchasing officer or agent) and his department are the key activity, at the other extreme many people may be involved at many levels. With high product complexity and low commercial uncertainty the technologist is dominant. With high commercial risk and low product complexity a specialist buyer and senior finance people become involved (see fig. 2.4). Fig 2.4: Determining involvement in purchasing decision PRODUCT COMPLEXITY Low High Standardized products Differentiated products Technically simple Technically complex Established product New product Previously purchased Initial, new purchase Existing application Easy to install No after sales service

New application Specialised installation Technical after sales service

COMMERCIAL UNCERTAINTY Low High Little investment High investment Small order Large order Short term commitment Long term commitment No consequential Substantial consequential adjustment adjustments Small potential effect on Large potential effect on profitability profitability Easy to forecast effect Hard to forecast effect

Product Complexity Commercial Uncertainty Low High

Low

High

Buyer emphasis Policy matter emphasis

Technologist emphasis Total mgt. Involvement

2.5 THE NEGOTIATING PROCESS The respective objectives of buyers and sellers are reconciled or compromised through the negotiating process. Each usually comes to the bargaining table with predetermined goals presumably shaped with some sense of what is optimum for the one and acceptable to the other. The relative skills of the negotiators for each side, their willingness to take risks, and their personal desires to win ultimately determine the outcome. Engaged in a continuing series of transactions often with the same suppliers, the industrial buyer seeks continuously to build positions of strength from which to bargain effectively. The buyer does this by • developing and preserving options • gathering and using information • building internal support • developing and practicing negotiating skills 2.5.1 PRESERVING OPTIONS A paramount concern of industrial buyers is preserving multiple sources of supply. Buyers are normally unwilling to become dependent upon a single source of supply for fear of becoming locked in on price and product availability. It is not enough that there may be more than one supplier competing for the buyer's business; it is important that this competition be effective. Alternative sources of supply must be perceived as being roughly comparable in quality of product, technical service, and availability of supply. The effectiveness of competition will be determined, as well, by how important the buyer's business is to prospective suppliers. Accordingly, buyers are inclined to work with a limited number of suppliers, so that the business they give to each one represents

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a significant volume. Those facts, and the hope of getting substantial future orders, are intended to motivate suppliers to quote low competitive prices and to provide good service. 2.5.2 USING INFORMATION The old adage, "Knowledge is power," succinctly expresses the situation when one party in a negotiation has relevant information that the other party does not have. Purchasing managers typically, and appropriately, withhold information from suppliers on their available sources-and their prices. In turn, they seek as much information as possible about supply conditions. How large are suppliers' backlogs? Do they have purchase commitments that will utilize their plant capacity for the coming year, or are they anxiously seeking orders? The supplier who needs orders to keep his or her factory running or to unload stocks in inventory, and who has no knowledge of what prices competitors are offering a prospective customer, may make larger price concessions than otherwise. 2.5.3 BUILDING INTERNAL SUPPORT In a real sense, the buyer's "customers" are the people served inside the buyer's own organization. The buyer has to satisfy the plant manager, technical personnel, and administrative staff by supplying them with goods and services with which they can perform their tasks efficiently. To a significant extent, the buyer's power in dealing with outside sources is derived from having inside support. If the plant manager, for example, agrees to test some new material or supply item coming from a new supplier, the purchasing manager gains increased buying options and thereby enhances bargaining strength. Alternatively, a purchasing manager at the corporate level may lose strength if contracts on supply items that he or she has negotiated are circumvented at the division level and other vendors are used instead. 2.5.4 PRACTICING THE ART OF NEGOTIATION Buyers build positions of negotiating power as they create effective competition for their businesses, as they gather information about their suppliers and supply conditions, and as they develop and nurture internal support. Accordingly, buyers develop, often intuitively, a sense of what power is and how it may be used with greatest effectiveness. For practical purposes power may be defined as the ability of a negotiator to influence the behaviour of an opponent. An essential negotiating skill, therefore, is the ability to assess the strengths and weaknesses of the opposing party and to understand fully what it has at stake 2.6 FROM PURCHASING TO SUPPLY MANAGEMENT With traditional sourcing patterns crumbling under the pressures of political, economic and technological change, no company whose profitability could be threatened by a sudden scarcity of an important raw material or the loss of a key supplier can safely continue to rely on reactive purchasing policies developed in times of stability and plenty. Threats of resource depletion and raw materials scarcity, political turbulence and government intervention in supply markets, intensified competition, and accelerating technological change have ended the days of no surprises. As dozens of companies have already learned, supply and demand patterns can be upset virtually overnight. How can a company guard against disastrous supply interruptions and cope with the changing economics and new opportunities brought on by new technologies? What

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capabilities will a profitable international business need to sustain itself in the face of strong protectionist pressures? Almost every kind of manufacturer will have to answer these questions. To ensure long-term availability of critical materials and components at competitive cost, manufacturers will have to reckon with the risks and complexities of global sourcing. Others that already source on a global basis must learn to cope with uncertainties and supply or price disruptions. Instead of simply monitoring current developments, management must learn to make things happen to its own advantage. This calls for nothing less than a change of perspective: from purchasing (the operating function) to supply management (a strategic one). Whenever a manufacturer must procure a volume of critical items competitively under complex conditions, supply management is relevant. The greater the uncertainty of supplier relationships, technological developments, and/or physical availability of those items, the more important supply management becomes. 2.6.1 DIAGNOSING THE CASE A company's need for a supply strategy depends on two factors: - the strategic importance of purchasing in terms of the value added by product line, the percentage of raw materials in total costs and their impact on profitability, and so on... - the complexity of the supply market gauged' by supply scarcity, pace of technology and/or materials substitution, entry barriers, logistics cost or complexity, and monopoly or oligopoly conditions (see fig2.5). By assessing the company's situation in terms of these two variables, top management and senior purchasing executives can determine the type of supply strategy the company needs both to exploit its purchasing power vis-à-vis important suppliers and to reduce its risks to an acceptable minimum. Attractive new options, or serious vulnerabilities, or both, may come to light as the assessment explores questions like these: - Is the company making good use of opportunities for concerted action among different divisions and/or subsidiaries - Can the company avoid anticipated supply bottlenecks and interruptions? - How much risk is acceptable? - What make-or-buy policies will give the best balance between cost and flexibility? - To what extent might cooperation with suppliers or even competitors strengthen long term supply relationships or capitalize on shared resources 2.6.2 SHAPING THE SUPPLY STRATEGY To minimize their supply vulnerabilities and make the most of their potential buying power, a number of companies have successfully used a four-stage approach to devise° strategies. The approach has given them a simple but effective framework for collecting marketing and corporate data, forecasting future supply scenarios, and identifying available purchasing options as well as for developing individual supply strategies for critical items and materials. Following this approach, the company first classifies all its purchased materials or components in terms of profit impact and supply risk. Next it analyses the supply market for these materials. Then it determines its overall strategic supply position. Finally, it develops materials strategies and action plans.

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Importance of purchasing Criteria: cost of material, total cost, value added profile, profitability incidence, etc

Fig 2.5: Stages of purchasing sophistication II. Materials management Procurement focus Time horizon Leverage items (e.g. Varied. Typically electric motors, 12 to 24 months heating oil, EDP hardware) Items purchased Mix of commodities and specified Key performance materials criteria Cost/ price and materials flow Supply Abundant management Typical sources Multiple suppliers chiefly local

Decision authority mainly decentralised

I. Purchasing management Procurement focus Time horizon Non critical items Limited; normally (e.g.. steel bars, 12 months or less coal, office supplies Items purchased Commodities. Key performance Some Criteria Functional efficiency specified materials Typical sources Established local suppliers

Supply Abundant Decision authority Decentralised

IV. Supply management Time horizon Procurement focus Strategic items (e.g., Up to 10 years; benzol, cyclo- hexane, governed by long term scarce metals, high- strategic impact (risk and contract mix) value components)

Key performance criteria Long-term availability Typical sources Established global suppliers

Items purchased Scarce and/or high value materials Supply Natural scarcity

Decision authority Centralized III Sourcing management Time horizon Procurement focus Bottleneck items (e.g. Variable, depending electronic parts, on availability vs. flexibility catalyst material, short-term trade-offs outside services) Key performance Criteria Cost management and reliable short term sourcing Typical sources Global mostly new suppliers with new technology

Items purchased mainly specified materials Supply Production-based scarcity Decision authority Decentralised but centrally coordinated

Complexity of supply market Criteria: supply scarcity, monopoly/oligopoly conditions, place of technological advance, entry barriers, logistics cost and complexity, etc...

Fig 2.6: Classifying purchasing materials requirements Procurement Focus Strategic items

Main task

Required information

Decision level

Accurate demand forecasting. Detailed market research. Development of long term supply relationships. Make or buy decisions. Contract staggering. Risk analysis.

Detailed market data. LT supply & demand trend information. Good competitive & economic intelligence. Industry cost curves.

Top level in purchasing, production and/or general management.

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Contingency planning. Logistics, inventory control. Volume insurance (at cost premium if necessary). Control of vendors. Security of inventories. Backup plans.

MT supply / demand forecasts. Very good market data. Inventory costs. Maintenance plans.

Higher level (e.g. department heads)

Leverage items

Exploitation purchasing power. Vendor selection. Product substitution. Target pricing negotiations. Contract l Spot purchasing mix. Order volume optimisation.

Good market data. ST at MT demand plans. Accurate vendor data. Price I Transport rate forecasts.

Medium level (e.g. chief buyers, production engineers...)

Non-critical items

Product standardization. Order volume monitoring. Efficient processing. Inventory optimisation.

Good market overview. ST demand forecasts. Economic order and stocks optimum.

Lower level (e.g. buying officers)

Bottleneck items

Phase 1: classification The profit impact of a given supply item can be defined in terms of the volume purchased, percentage of total purchase cost, or impact on product quality or business growth. Supply risk is assessed in terms of availability, number of suppliers, competitive demand, make-or-buy opportunities, storage risks and substitution possibilities. Using these criteria, the company sorts out all its purchased items into the different categories (fig 2.6) strategic (high profit impact, high supply risk}, bottleneck (low profit impact, high supply risk), leverage (high profit impact, low supply risk) and non critical (low profit impact, low supply risk), Each of these four categories requires a distinctive purchasing approach, whose complexity is in proportion to the strategic implications. The company may need to support supply decisions about strategic items with a large battery of analytic techniques, including market analysis, risk analysis, computer simulation and optimisation models, price forecasting and various other kinds of microeconomic analysis. Decisions about bottleneck items may require specific market analysis and decision models for resolution, while vendor and value analysis, price forecasting models and decision models may come into play on issues affecting leverage materials. Where non-critical items are concerned, simple market analyses, decision policies and inventory optimisation models will normally suffice. Phase 2: market analysis Next the company weights the bargaining power of its suppliers against its own strengths as a customer. It systematically reviews the supply market, assessing the availability of strategic materials in terms of both quality and quantity, and the relative strength of existing vendors. The company then analyses its own needs and supply lines to gauge its ability to get the kind of supply terms it wants. Of the contrasting criteria of supplier and company strength listed in figure 2.7, some are self-explanatory. But six call for special comment. - Suppliers' capacity utilization. This criterion indicates the risk of supply bottlenecks. In a cyclical upswing, with suppliers' production running at, 90 percent of capacity, the probability of a bottleneck in the supply of a strategic item is extremely high.

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- Suppliers' break-even stability. A supplier that achieves break-even at below 70 percent capacity utilization can ultimately deliver at lower cost than one who breaks even at 80 percent utilization. For the same reason, however, the first supplier will prove a tougher bargainer, for it can more easily delay negotiations and accept capacity underutilization. - Uniqueness of suppliers' product. This is a function of natural scarcity, high technological sophistication, and/or entry barriers in the form of high R&D or facility investments. If a product is unique, the probability is less that alternative sources or suppliers will appear or that supplier competition will force cost reductions. - Annual volume purchased and expected growth in demand. The volume remains the main determinant of the company's overall bargaining power. It is a critical item because economies of scale in purchasing often yield a decisive competitive cost advantage. - Past variations in capacity utilization of main production units. A company can judge the built-in flexibility of its supply coverage from past variations in demand resulting from sales strategies and promotions, changes in the order backlog, or overall economic conditions. If it plans a major expansion or an aggressive sales strategy for a product line where supplies are tight or suppliers' capacities fully used, it may cover the higher materials requirements only by paying a premium. In turn, projected profits may decline. Fig 2.7: Purchasing portfolio evaluation criteria Supplier strength

Company strength

1. Market size versus supplier capacity 2. Market growth versus capacity growth

Purchasing volume versus capacity of main units Demand growth versus capacity growth

3. Capacity utilization or bottleneck risk

Capacity utilization of main units

4. Competitive structure

Market share vis-à-vis main competition

5. ROI and 1 or ROACE

Profitability of main end products

6. Cost and price structure

Cost and price structure

7. Break-even stability

Cost of non-delivery

8. Uniqueness of product and technological stability 9. Entry barrier (capital and know how requirements) 10. Logistics situation

Own production capability or integration depth Entry cost for new sources versus cost for own production Logistic.

- Potential costs in the event of non-delivery or inadequate quality. The higher such costs and the greater the risk of incurring them, the less latitude the company has for rapidly shifting supply sources or delaying negotiations or contracts. Changing a source of supply might make it necessary to modify the production process. In the case of materials for highly automated production processes (such as certain alloy steels or carbide tools), the costs could be prohibitive. Phase 3 Strategic positioning In the next step, the company needs to position the materials identified in phase 1 as strategic in the purchasing portfolio matrix (see fig2.8). It can then identify areas of opportunity or vulnerability, assess supply risks and derive basic strategic thrusts for these items. The purchasing portfolio matrix plots company buying strength against the

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strengths of the supply market and can be used to develop counter- strategies vis-à-vis key suppliers -an approach sometimes called "reverse marketing or buyers marketing". The cells in the purchasing portfolio matrix correspond to three basic risk categories, each associated with a different strategic thrust. On items where the company plays a dominant market role and suppliers' strength is rated medium or low, a reasonably aggressive strategy ("exploit") is indicated. Because the supply, risk is slight, the company has a better chance of achieving a positive profit contribution trough favourable pricing and contract agreements. Even so, it has to take care not to exploit the advantage so aggressively as to harm long-term supplier relations or provoke counterreactions by insisting on low prices in times of market discontinuity. On items where the company's role in the supply market is secondary and suppliers are strong, the company must go on the defensive and start looking for material substitutes or new suppliers ("diversify"). It may have to increase spending on market research or supplier relations, or even consider backward integration through major investments in acquisition, R&D or production capacities. In short, the company needs its supply options. For supply items with neither major visible risks nor major benefits, a defensive posture would be over-conservative and costly. On the other hand, undue aggressiveness could damage supplier relations and lead to retaliation. In this case, a company should pursue a well-balanced intermediate strategy ("balance"). Usually, a company will find itself in different roles with respect to different items and suppliers. When it can bargain from a position of strength, it should press for preferential treatment. Bargaining from weakness, the company may have to offer inducements (longer term contract obligations, high prices...) in order to ensure an adequate supply. Fig 2.8: The purchasing portfolio matrix

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Phase 4: action plans Each of the three strategic thrusts has distinctive implications for the individual elements of the purchasing strategy, such as volume, price, supplier selection, material substitution, inventory policy, etc... In the short term, for strategic items where the supplier's strength outweighs the company's and the indicated strategy is diversification, the company should consolidate its supply position by concentrating fragmented purchased volumes in a single supplier, accept high prices, and cover the full volume requirements through supply contracts. POLICY ISSUES Volume Price Contractual coverage New suppliers Inventories Own production Substitution Value engineering Logistics

EXPLOIT

BALANCE

DIVERSIFY

Spread Press for reductions

Centralize Keep low profile

Stay in touch Keep low Reduce or don't enter Stay in touch impose on supplier

Keep or shift carefully Negotiate opportunistically Balance contracts and spot Selected vendors Use stocks as "buffer" Decide selectively Pursue opportunities Perform selectively

Ensure supply through contracts Search vigorously Bolster stocks Build up or enter Search actively Start own program

Minimize costs

Optimize selectively

Secure enough stocks

Buy spot

To reduce the long-term risk of dependence on a single source. However, the company should also search for alternative suppliers or materials, and even consider backward integration to permit in-house production. On the other hand, if the company is stronger than the suppliers, it can spread volume over several sources, exploit price advantages, increase spot purchases and reduce inventory levels. In this phase, the company should explore a range of supply scenarios in which it lays out; - its options for securing long-term supply and for exploiting short-term opportunities, - clearly define respective risks, costs, returns and strategic implications, - develop a preferred option with objectives, steps, responsibilities and contingency measures laid out in detail for top management approval and implementation. The end product will be a set of systematically documented strategies for critical purchasing materials that specify the timing of and criteria for future action. 2.7 MODEL OF ORGANISATIONAL BUYING BEHAVIOUR Decision-making is usually a joint process, something that can be shown in a framework of industrial buyer behaviour as proposed by J. N. Sheth (Fig. 2.9) The aims of the persons involved in buying decision vary, and consequently what they expect of suppliers and products varies also. These expectations are not only determined by their background (education and training, role within the company, life style), but also by the active search for information, available sources of information, biased perception (information, indeed, is consciously or unconsciously interpreted according to one's own experience and expectations) and the satisfaction given by previous purchases. Whether the eventual decision is now taken jointly or individually depends on a number of factors bound up with both the product (the time available for a decision to be made,

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the risk or uncertainty involved in the purchase, if an initial or repeat order is concerned) and the business (the orientation, size and degree of centralization of the company). A joint decision, because of the differing aims and perceptions, mostly gives rise to conflict which, depending on company hierarchy and organisation, is resolved by reviewing the problem, by convincing the others or by mutual agreement. For completeness' sake, it should be pointed out that situational elements (strikes, obstacles to trade, etc.), which are sometimes irrational, could also determine the eventual choice of supplier and brand. In developing a market strategy, the analysis of the buying behaviour of the target market is one of the first steps, whereby the decisionmarkets and their respective expectations need to be identified. In many cases, however (public sector buying, for instance), this is difficult to do because of a lack of information. Fig 2.9: The Sheth model for buying behaviour

2.8 IMPLICATIONS FOR INDUSTRIAL MARKETERS The complexity of industrial buying behaviour becomes obvious. In any one company, industrial buying is not a single behaviour pattern but a multidimensional syndrome of decision-making activity. In any individual procurement situation, buying behaviour will be a function of • the nature of the purchase, that is, supply item, product part, equipment, raw material Scanned by PHAN Thanh Tu

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• the stage in the procurement cycle, either early stages of formulating requirements or the later stages of meeting ongoing needs v; • the degree of interest and involvement of other functional areas, the expertise required of them, and their relative authority status in the decision-making process • the nature of the supplier/customer relationship, say, episodic or continuing, high or low level of technical interchange, arm's-length or mutual involvement • the extent of technical and managerial resources controlled by the procurement units • the extent of general management's support of purchasing in the decision-making process In addition, the discussion suggests that the following factors also affect industrial buyer behaviour: • the performance measures imposed on purchasing, as well as those of other operating functions and units • the ego involvement of those who will be influential in the purchase decision Using these parameters, it should be possible to map the decision-making process for any particular purchase, identify the concerns of different functional areas and operating units, determine the key influences at work, and facilitate the selling process by addressing, as well as possible, the multiplicity of objectives, concerns, and potential gains and risks within the customer organization.

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CHAPTER 3. Industrial Marketing Research and Intelligence

'A decision is the action an executive must take when he has information so incomplete that the answer does not suggest itself' Selling to organizational customers is quite complex, Added to the difficulties of understanding buyers and their changing needs is the unpredictability of competitor actions and reactions, as well as rapidly changing technologies and turbulent economic developments. The industrial marketer attempts to make strategic decisions and tactical moves in an environment filled with uncertainties. The best means for reducing uncertainty is to develop better information. In other words, without quality informational inputs, the marketing decision process becomes little more than guesswork. The formalized activities for generating this information constitute industrial marketing research, the objective of which is to obtain an optimum combination of useful information within accessible time and cost limits. Essentially, marketing research is responsible for supplying the facts, estimates, expert opinions, interpretations, and/or recommendations needed by managers to understand the marketing environment and to make intelligent decisions. In a relatively short period of time, marketing research could provide information that would help to clarify some of these questions. For example, the future business activity level of the target market can be judged by looking at the predictions of business analysts who have studied the industry over the past several years. The actions of competitors can be predicted by looking at their annual reports to determine financial reserves and current warehouse capacity. The attitudes of key customers can be evaluated by making telephone calls to purchasing agents, asking about the impact of missing shipping deadlines. In short, , industrial marketing research activities can provide data inputs on a number of questions in the marketing manager's mind, and help reduce the uncertainty in the decision-making process. Then, the marketing manager will have more confidence in his assessment of what will happen if the expansion decision is or is not implemented. However, even with the aid of good industrial marketing research, the manager is always faced with imperfect information for decision-making. Good as it is, the research function invariably represents a certain degree of error. Part of the error is due to the time pressures placed on the research function; part is due to the unpredictability of the industrial marketing environment; and part is due to the less-than-perfect tools that the marketing researcher uses. The true value of marketing research information involves a trade-off between the amount of uncertainty it eliminates and the amount of erroneous new information it introduces into the process. 3.1 MAJOR RESPONSIBILITY AREAS OF MARKETING RESEARCH

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What is the focus of industrial marketing research? Virtually any decision area in which the marketing manager requires more or better information inputs is a likely candidate for a marketing research project; the list of potential projects is endless. Let us examine the major areas where research is conducted. Most projects fall within one of the following categories: 3.1.1 ESTIMATION OF MARKET POTENTIAL. One of the most critical decision inputs needed by industrial marketing managers is the determination of sales and the profit potential of various product-market opportunities. The marketing research function is responsible for clarifying the magnitude and future growth prospects of specific markets. This information is crucial in determining which markets to enter and exit, and how much in resources should be allocated to a given market. 3.1.2 MARKET SHARE ANALYSIS Because marketing exists in a world of dynamic competition, marketing research is assigned the responsibility of determining the relative proportion of the total market that a firm can hope to attain. Historical market share distributions are balanced against anticipated future competitive actions. The entrance and exit of competitors, the market's reactions to changes in marketing strategies and tactics, and the persistence of loyalty to industrial suppliers all go into estimating the share of market for products in a firm's line. 3.1.3 DETERMINATION OF MARKET CHARACTERISTICS AND ATTITUDES Marketing research must supply data on the salient characteristics of markets and customers. Determining the nature of the purchase decision-making process, key role players in the buying organization, the importance of product and company attributes, the size of purchases, and the various specifications that must be matched in price bids are all part of the market characteristics which the industrial marketing manager must understand in order to compete effectively. Other areas of investigation include measurements of the firm's image in certain markets, and satisfaction' levels among various segments of the market. ', 3.1.4 SALES ANALYSIS Breakdowns of sales, cost and profit figures by product line, individual products, territory, customer segments, salesperson, and distributor type are all necessary for the industrial marketing manager to have a complete picture of the sales performance in his or her responsibility areas. These analyses are helpful in determining where the company is making money, detecting profit contribution differences, isolating high and low producers, and otherwise alerting the manager to emerging problems. 3.1.5 FORECASTING Predictions must be made of the velocity of the economy, the future actions of competitors, the anticipated purchasing level of customers, and conditions of supply and demand. Short term forecasts (six to twelve months) are vital inputs to the annual marketing plan and serve to update the planning process to allow continual, appropriate revisions. Trends in the economy, shifts in the business cycle, changes in the international environment, the pattern of growth in markets, and the possible impacts of technological change are all inputs to the long-term forecasts used in strategic planning.

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Industrial firms cannot set goals or define their-missions without expectations concerning the future business environment. 3.1.6 STUDIES OF BUSINESS TRENDS The dependence of industrial firms on derived demand necessitates special-purpose studies of industries, technologies, and demographic shifts. For instance, computer components producers must have an understanding of the market of home computers; building supply companies must have an appreciation of shifting population patterns and their consequences on business and household construction. The typical industrial firm is impacted by trends in a variety of different industries. 3.1.7 NEW PRODUCT ACCEPTANCE AND POTENTIAL The identification of new product concepts and their development into tangible products or services incur substantial resource commitment and financial risk. Marketing researchers are invariably assigned the responsibility of assessing the substitution rate for the proposed new product. Industrial marketing research must assess the size of the new product's market when the new product exists only in prototype form. 3.1.8 COMPETITOR ANALYSIS Marketing planning relies heavily on knowledge of the strengths and weaknesses of competitors and their products. Marketing research is often called upon to investigate customer reactions to competitors' products, and to uncover those strengths and weaknesses. Alternatively, the opinions of the sales force or of distributors are often obtained to identify weaknesses in competitors' marketing programs. Further, it is important that the marketer attempt to anticipate how competitors will respond to various moves on his part. 3.1.9 DETERMINATION OF SALES QUOTAS AND TERRITORIES Vital to the assignment and control of the sales force or the identification and assessment of distributors is information that breaks down market potential and expected market share into geographic designations and, further, specifies the level of sales which can be expected under certain market conditions. Territories must be examined to design equitable workloads for salespeople, quotas must be established to communicate performance expectations; and actual sales levels must be compared with quotas and potential to evaluate performance. As can be seen from the brief descriptions accompanying each of these responsibility areas for industrial marketing research, the gathering and interpreting of information on the market environment is a primary function of industrial marketing research. 3.2 MARKETING RESEARCH WITHIN THE "MIS" PROCESS. Now that some of the basic functions of marketing research have been described, let us turn to the issue of how marketing research is conducted. To appreciate the complexities of research, and the many decisions required in designing and implementing a research project, it should be approached as a process. The first column in figure 3.1 presents a series of interrelated steps that comprise the process for conducting survey research. To appreciate this process, some important introductory comments may be helpful. Marketing research is an interactive system of

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events. The decisions made at each step in the process are dependent on previous steps and have implications for subsequent steps. Op to this point, research has been considered an isolated activity undertaken to address a specific problem. Unfortunately, managers often feel that an occasional marketing research project is sufficient to take care of all the firm's marketing information needs. A more comprehensive perspective on these needs requires that firms move toward the concept of marketing intelligence, of which marketing research is one part. As figure 3.1 demonstrates, the narrow view relegates marketing research to a periodic data-gathering and analysis role. For instance, if a company is considering a change in its customer service policies, the alternatives might be: - increase the amount of service, - decrease the amount of service, or - maintain service at its current level Fig 3.1 Research Versus Intelligence Steps in the Marketing Decision Process RECOGNITION OF PROBLEMS AND OPPORTUNITIES PROBLEM DEFINITION I SELECTION OF PROBLEMS TO SOLVE I GENERATION OF ALTERNATIVES I GATHER DATA I EVALUATION AND CHOICE OF COURSE OF ACTION I IMPLEMENTATION I CONTROL I EVALUATION

The Narrow View: Research as a One-Shot Activity

The Full View: Intelligence as an Ongoing Activity

-

External Monitoring Assessment of internal performance measures

-

Impact analysis

-

Feasibility studies

Gather data

Gather data

Analyse and interpret data to address a specific problem -

Profitability analysis Payoff analysis Acceptance analysis Performance studies

-

Comparative studies Marketing audits

If a primary objective of the company were to maintain customer loyalty, a marketing research study would be undertaken to determine the impact of each of those alternatives, on customer propensity to shift to other suppliers. If the information gained revealed that increased service levels would increase the loyalty factor and, furthermore, that the increased service level would be cost justifiable, the decision would favour that alternative. Industrial marketing intelligence, alternatively, is an enlightened view of the role of information-providing activities in the industrial management process. Intelligence is a term that has its roots in the military and warfare situations. The parallel with a firm's marketing information needs is clear. Marketers require the same continuous flow of information. Although some of this data can be obtained with periodic marketing research studies, a more systematic and ongoing information gathering process is needed. A marketing intelligence system can be defined 'as an interrelated set of specialists, procedures, hardware, and software which accumulates, stores, interprets, and

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disseminates (usually in report form) raw data on the external and internal marketing environments. Its purpose is to provide relevant, accurate, and otherwise valuable information to marketing decision makers on a timely and ongoing basis. As indicated in figure 3.1, the marketing information system (MIS) serves as a partner to the industrial marketing manager. In the recognition of problems and opportunities, the MIS provides information by monitoring the environment and providing the marketer with information on shifts in the economy, changes in the regulatory system, competitors' actions and policy changes, technological breakthroughs, or the identification of new market segments. At the same time, the MIS maintains constant vigilance on the critical performance measures designated by the industrial marketing managers such as sales, market share, quota attainment, distributor accounts retained, stock levels, or service visits. The industrial marketing manager is also concerned with generating alternative courses of action that he might implement in order to capitalize on opportunities or to solve problems. Here, the MIS can perform feasibility studies that assess the appropriateness, cost, and viability of each alternative. The evaluation and choice stage of the industrial marketing management process is assisted through profitability analysis, payoff analysis, and other studies that help to evaluate the attractiveness of various alternatives to prospective buyers or distributors. Once the course of action is selected, the implementation stage takes place. This stage is the only one- where the MIS has no active role-sings it is a support function. However, once implementation is effected, the MIS monitors the actual performance measures used to gauge whether the course of action selected is generating sufficient sales or market share. Finally, performing periodic marketing audits assists an overall evaluation of the decision-making process through the MIS. 3.3 STEPS IN ESTABLISHING AND OPERATING AN MIS A marketing intelligence system must be planned and custom-tailored to the unique information needs of every industrial marketing firm. The steps involved in the development and fine-tuning of an MIS are illustrated in figure 3.2, which shows that the beginning point of the system design is the identification of the marketing decision makers in the company. Product managers, sales managers, advertising managers, strategic planners, in fact, all members of the organization who have marketing decision responsibilities are identified. Next, the information needs of these individuals are specified with special concern for the quality, scope, frequency, and timing of information required for them to operate effectively and efficiently. The available sources of information must be determined, and methods of obtaining the information from these sources must be identified and/or designed. The storage place(s) for information that flows into the company must be identified and maintained. The raw data inputs must be translated or grouped into categories that are meaningful in marketing analysis, such as expenses that are described as variable or fixed, or as direct or indirect. Methods of reporting information to executives must be established, and the format and routing system designed. Special-purpose access and retrieval methods must be provided. Finally, there is the evaluation and fine-tuning of the marketing intelligence system. The actual component parts in a marketing intelligence system can be seen in figure 3.3. The heart of an MIS is a centralized database; this is raw information that has been gathered, processed, recorded, and summarized. The database is usually organized into separate files, such as a customer file, a competitor file, a territory file, a product performance file, and a marketing activity file. Dedicated files could be set up for each

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marketing research project undertaken. The design of the database constitutes the basic structure of the MIS; it can range from very rough to elegant. Data in these areas, and others, is gathered from internal and external sources. These sources are labelled as 'data providers'. Fig 3.2 - Steps in the design of a MIS Identification of Decision Makers I Determination of Types of Information Needed I Determination of Quality of Information Needed (Scope, Frequency, Timing, Accuracy) I Identification of Sources of Information Design of Method of Information Procurement I Determination of Place(s) to Store Information I Identification-of Processing Methods I Format/Categorize Data and Create Data Bases I Determination of Report Format and Routing System Development of Special Inquiry and Retrieval Methods I System Evaluation and Fine-Tuning Fig 3.3 - Components of a simple Marketing Information System

The raw information is edited into usable form, and then entered into a storage device (at the simplest level on the file cards kept in a cabinet). A sophisticated system might

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involve storage on a central mainframe computer that can be accessed from a series of remote terminals and even trough intra- or extranet. The method used to input the data will vary depending on the amount, complexity of the information and the type of storage device. The input mechanism could range from a member of the marketing department simply keying in data, to the marketing analyst downloading data files stored in the company's central mainframe. The input process is continual, as files are constantly updated. Once in place, the MIS can be accessed to provide assistance in marketing analysis and planning. Basically, data users generate an information request. The desired information is then retrieved from the storage device, often simply by calling up a file on the computer terminal and having it printed out. Before retrieving the data, however, it may first be necessary to perform some manipulations or tabulations on the stored data. This is the data processing component. A standard feature of an MIS is a set of reports that are generated for management at periodic intervals. Over time, the MIS can evolve to become an integral part of the daily operations of the company. Both formal and informal company policy support its use. Salesmen are required to submit monthly reports with the detail of their activities: calls, expenses, sales invoices, account prospects, and observations of market conditions. Service representatives submit reports of service calls, types of problems solved, ages and configurations of machines repaired. Trade association reports, business periodicals, and financial analysts observations are scrutinized. Periodic telephone calls are made to major customers to gain insight into their expected business activity changes and intentions to purchase equipment. Business trends and population shifts are abstracted; market share studies are executed; literature from competitors collected; and trade shows attended to research new products and technology. All of this data is systematized into reports, which are issued at regular intervals and in the form required by the manager involved. For instance, the sales manager is given trend-line analyses of individual salesperson performance, along with comparisons to past performance. The marketing manager receives a summary of product line sales and profit performance with detailed breakdowns included for inspection. In addition newsletters can be issued to highlight national trends, competitors, product introductions, and other observations of the industry. 3.4 FROM INTELLIGENCE TO DECISION SUPPORT SYSTEM. Although an MIS provides a systematic approach for collecting, storing, and disseminating marketing information, its end product is primarily reports. In practice, the MIS is designed and used only for routine marketing decisions. As marketing managers develop their skills and knowledge base, and as marketing decisions grow in complexity, information needs exceed the capabilities of an MIS. It becomes appropriate, then, to move to a decision support system (DSS), which is the next logical extension of an MIS. Again, just as periodic marketing research was part of the MIS, the MIS is part of a DSS. An MIS is used in a regular, planned, and anticipated manner, often to generate standardized reports, but DSS is concerned with unstructured problem solving and decision-making. In other words, an MIS is purposely designed to complement the stepby step nature of the formal decision-making process. The DSS is designed to be available to the manager who breaks out of the routine and pasts imagination and personal creativity in the process. Thus, the DSS must be broader in content and more accommodating. It must have the flexibility to respond to unusual requests as well as provide the structure for the routine inquiries and reports relied on by the bulk of the company's managers.

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Users of an MIS are primarily concerned with retrieval questions. They want a system that is capable of quickly retrieving a piece of information, such as quarterly revenue in territory A, or average gross margin on sales of product x. But the manager who asks questions that require (often non-routine) various types of analysis on stored data may be better served with a DSS. Such non-routine questions might include "How much did the competition's price cut affect our sales of product X?" or "How will the replacement of distributors with our own direct sales force affect profitability?" A decision support system comprises data, statistics, models, and optimisation, as illustrated in figure 3.4. The database is equal to that provided through the MIS. Statistics are simple tools for manipulating the data. There are a number of complex multivariate statistical tools, but managers more often are concerned with simple ratios, frequency distributions, and basic descriptive statistics such as averages, ranges, and standard deviations. Models are attempts to examine relationships between or among variables; they could be based on the marketer's own hypothesis regarding how these variables are related. Optimisation refers to the development of a set of decision rules for determining the best alternative using the available database. So, the DSS may rank order sales territories based on the total contribution as a percentage of sales. Linear programming models might be used to determine the optimal level of sales support required. Fig 3.4 - Elements of a Decision Support System

Decision support systems play a growing role in marketing decision making, especially on the creative side of marketing strategy formulation. Some of the driving forces for its implementation include the increased focus by companies on total quality management (TQM) via cross-functional teams (e.g., marketing/engineering/ manufacturing), the growing use of electronic data interchange (EDI), efforts to achieve greater coordination in the production and distribution chain, and attempts to establish strategic alliances with customers.

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The biggest stumbling blocks to DSS implementation in industrial firms appear to be the limited availability of ordered market databases, and the lack of sophisticated modeling tools. With the use of DSS, firms are finding they are able to consider a greater number of decision alternatives, generate solutions more quickly, improve the sophistication of their marketing analysis, and reduce costs by enabling management to allocate resources to products and markets more efficiently. 3.5 THE USE OF DATA SOURCES IN INDUSTRIAL MARKETING INTELLIGENCE Marketing intelligence, when organized around an MIS or DSS, provides a living information system, which operates within the industrial firm and facilitates the marketing decision making process. If designed, implemented, and maintained properly, the intelligence system can become a significant competitive advantage for the company itself. Fig 3.5 - The various sources of information

A well-designed intelligence system is likely to rely heavily on secondary data sources. Industrial marketing situations are especially amenable to the use of secondary data because of its availability and the problems in collecting primary data. Normally, for example, it is possible to quickly identify any number of government or official reports, industry association studies, business periodical articles, or company publications that might, provide timely information useful in any one of a number of marketing intelligence

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functions. Typically, secondary data sources are divided into two basic types: internal and external. ¾ Internal Secondary Data Sources Internal sources are those reports and reservoirs of information which the company maintains as a normal part of its operations. For instance, sales records, salesperson's reports, annual reports, technical analyses, notes and memos from the new product evaluation teams, past marketing research reports, financial records, and all of the documentation maintained in the company's files constitute the internal secondary information pool. A wealth of internal secondary information exists in raw form. The difficulty arises in finding specific pieces of information, for they are invariably mixed in among a wide array of data. The value of a good marketing intelligence system is readily apparent in this case. If the MIS can accommodate inquiries and conduct searches of key words or other identifiers, the retrieval process will be much faster and more complete. ¾ External Secondary Data Sources Data sources that are considered external are those that originate outside the company. The list of possible sources is almost limitless, as the following brief description will indicate. - General Business Indices. A number of business source books are available that cross reference the locations of publications on various business topics (Press, magazines...) - Government sources. The governments and official bodies, local or international, publish a number of census and other documents that are used extensively by industrial marketing researchers. 3.6 TECHNIQUES IN COLLECTING DATA IN THE MARKET PLACE Although business marketers rely heavily on secondary data, primary data is often collected to gain firsthand knowledge of customer attitudes, motivations, and buying intentions. For all types of marketing research, the basic methods for gathering primary data are the following: 1. Surveys. Interviewers question people who are believed to possess the information desired. 2. Observation. People and behaviour are viewed and the information is recorded without asking questions. The salesman represents a repository of valuable marketing data usually held in an unusable and piecemeal fashion. This flow of information can be systematized, and greatly improved. 3. Experimentation. Researchers set up a controlled situation in which the outcome of some test is evaluated and in which one or more factors are varied to measure cause-and-effect relationships. Surveys are the most common research method in business marketing research, because they can provide the types of information business marketers seek. There are a number of techniques which industrial-marketing men could consider in collecting information from external sources. (figure 3.6) - Mailed and e-mailed questionnaires; problem of response and need for careful structuring. - Telephone interviewing; problem of response, difficulties of rapport, must be structured. - Personal interviewing; structured, semi-structured or unstructured, may be depth type. Effective but costly. The survey techniques are effective for gathering primary data of the following types

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- Awareness and knowledge - Attitudes and opinions. - Intentions - Motivations - Buying behaviour As this list suggests, the purpose of the survey is to understand the buying behaviour of present and potential industrial customers in order to formulate appropriate marketing strategy. The survey method may be the only way to gather specific data concerning attitudes, motivations and behaviour, as this material is usually not available in secondary sources. Survey data can also be essential in evaluating performance and adjusting market strategies. Fig 3.6 - A Comparison of Business Marketing Survey Methods Approach

Criteria Cost

Time

Information quality

Information quantity

Personal interview

Highest cost per respondent

Most time consuming

Can elicit indepth, complex information

Extensive

Telephone

Second highest cost

Least time consuming

Complex information if prior contact established

Limited

Mail & e-mail

Least cost

Moderate

Moderately complex information

Moderate; depends on respondent interest and effort required

Nonresponse problem Few problems as a result of face-toface contact Difficult to ensure that

Difficult to control who responds and how many will respond

Interviewer bias Hard to detect and control

Hard to detect and I contact is made control with correct respondent Possible control by rigorous pretesting

Gathering the information can be relatively complex and time consuming. A systematic and serious constant approach, however, may give excellent outcomes and offer good solution on marketing problems. The three basic constituents in the collection of external data are: - the desk research (secondary source) - the opinion leaders (for the basic trends) - the surveys (primary source, as explained above) The figure 3.7 shows a comparison of these methods with their significance on the present, past a future data. Fig 3.7 - A comparison of research methods to collect external data. Method Desk Research

Relative costs Very cheap

Present

Type of results Past

Usually very general statistics, not relevant to research in a direct way Often out of date when available

If method and presentation of statistics has remained unaltered then historical data is very useful when it is

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Canvassing Informed opinion

Relatively cheap

Sample survey

Relatively expensive

Often problems of reconciling statistics because of definitions Can yield mkt size and growth, also market shares, list prices and an indication of profitability. Also ratio of production to capacity. Typically lacks detail of regional sales, discounts. Variations in sales of alternative models Can be designed to yield highly detailed quantitative analyses of markets, e.g. regional performance of a company Model successes and failures, detailed description of channels of distribution including discounts operating

sufficiently detailed to be relevant Broad indication of growth and development of the industry in question is often possible

Judgment of future prospects often given but often biased

Detailed statistical data can be built up, although though accuracy is generally highly sensitive to how far back the data goes, i.e. the older the data, the poorer it is in quality

Generally useful only for deriving short-term forecasts

3.7 TRENDS IN INDUSTRIAL MARKETING RESEARCH & INTELLIGENCE SYSTEMS What lies in the future for industrial marketing research and marketing intelligence systems? This question can be answered from two perspectives. The first involves an observation of trends in the information management capabilities of businesses, including their abilities to collect, store, and manipulate data in an efficient manner. The second offers a synopsis of the trends in industrial marketing research. With respect to information management capabilities, the most profound change in corporate marketing departments is the move to computer-driven operations and research on Internet. With every passing day, personal and other workstation computers penetrate deeper into marketing analysis and decision-making. And, since these computers are the hardware of decision support systems, increasingly more marketing management decisions are made with more and better information than ever before. Continuing developments in research tools and methods hold promise for the conduct of industrial marketing research. Some of these developments are in areas where breakthroughs in industrial marketing research can have a significant effect on marketing strategy. In sum, the area of industrial marketing intelligence fills progressively a bigger role in the planning and implementation of industrial marketing strategy than in past years. While the acceptance level among managers of the importance of marketing research and intelligence activities has risen considerably, the years to come will witness rapidly growing expectations of what these activates ought to be contributing. Managers will not only grow in their dependency on marketing intelligence, they will demand more sophistication in the timeliness, modeling capability, analytical power, flexibility, creativity, and comprehensiveness of both the people and support systems involved in marketing research and intelligence.

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CHAPTER 4. INDUSTRIAL MARKET SEGMENTATION

"An organization that decides to operate in some selected markets ... recognizes that it cannot normally serve all the customers in those markets." Having defined the market, assessed buyer behaviour and established a research and intelligence methodology, the industrial marketer must determine if it is realistic to attack the entire market, or whether to focus on some subset or smaller part. Product I market positioning begins with an identification of possible markets and market segments. By way of definition, a market is a set of unfilled needs and wants which may be served in one or more ways. To define market in this way is to make no presumptions with regard to the specific nature of the products and I or services that may be used to satisfy those needs, or with. regard 19 the way in which any one firm may participate in serving that market. Markets exist for such broad and divergent categories of needs as housing, production equipment, transportation, information, safety equipment, packaging... These markets are divided into a wide range of sub-markets. Housing, for example, would encompass such categories as private residences, apartments, office buildings, industrial halls, sport infrastructure... One may compete in the housing market as a builder, architect, engineer, plumber, electrician, supplier of heating and air conditioning equipment, processor of building materials, lumberyard, industrial distributor, and more. A product-market, in concept, links an application with a product designed to serve that purpose, for example, metal containers for holding lubricating oils, electrical motors for major appliances, and computerized information systems for airline reservations. Aggregating individual customer units into segments, each of which features common needs and buying behaviour, provides the basis for developing market strategies delineated in terms of product offerings, pricing modes and policies, communications programs, and distribution systems. Within any segment, however, there are product requirements, information needs, and patterns of purchasing behaviour that are unique to individual customers. Such differences may be recognized in designing account strategies. Account strategies, in effect, translate and implement market segment strategies Into plans for serving the needs of individual customer accounts and even within those accounts for meeting the needs of individual participants in the buying decision-making process. 4.1 METHODS AND BASES FOR SEGMENTING INDUSTRIAL MARKETS Experts on the topic of market segmentation have made distinctions between different levels of segmentation bases available to the industrial marketer. A creative method for segmenting any market is to first identify subgroups that share common macro characteristics and to select target segments from among these subgroups.

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Rather than stopping at this point, the marketer then breaks down these so-called macro segments into subgroups that share common micro characteristics. In this manner, the marketer goes through a two-step process of breaking down markets. - Macro segmentation involves dividing the market into subgroups based on overall characteristics of customer organizations. Examples include their size, usage rate of the product or service being sold, the application made of the product or service, the NACE category (figure 4.1) in which they belong, company structure, geographic location, the end market they serve, and whether the marketer's product represents a new or repeat purchase to them. Macro bases share the distinctive feature of being relatively easy to use, because data are readily available for identifying the organizations that belong to a particular macro segment. Such information can usually be obtained from secondary data sources. Fig 4.1 - Basic list of NACE codes (Nomenclature of Activities in the European Community) Section A Section B Section C Section D

Section E Section F Section G Section H Section I Section J Section K Section L Section M Section N Section 0 Section P Section Q

Agriculture, Hunting and Forestry (01,02) Fishing (05) Mining and quarrying (10,11,12,13,14) CB Mining and quarrying except energy producing materials Manufacturing DA Manufacture of food products; beverages and tobacco (16) DB Manufacture of textiles and textile products (17,18) DC Manufacture of leather and leather products (19) DD Manufacture of wood and wood products (20) DE Manufacture of pulp, paper & paper product; publishing & printing (21) DF Manufacture of coke, refined petroleum products & nuclear fuel (23) DG Manufacture of chemicals, chemical products and man-made fibers (24) DH Manufacture of rubber and plastic products (25) DI Manufacture of other non-metallic mineral products (26) DJ Manufacture of basic metals and fabricated metal products (27,28) DK Manufacture of machinery and equipment.(29) DL Manufacture of electrical and optical equipment (30,31,32,33) DM Manufacture of transport equipment (34,35) DN Manufacturing n.e.c , furniture -recycling (36,37) Electricity, gas and water supply (40,41) Construction (45) Wholesale & retail trade; household ... (50,51,52) Hotels and restaurants (55) Transport, storage and communication (60,61,62,63,64) Financial intermediation (65,66,67) Real estate, renting and business activities (70,71,72,73,74) Public administration and defense; compulsory social security (75) Education (80) Health and social work (85) Other community, social and personal services (90,91,92,93) Private household with employed persons (95) Extra-territorial organizations and bodies (99)

- Micro segmentation is mostly based on the characteristics of the decision-making process and the buying structure within customer organizations. This includes such factors as the position of the buying centre in authority and communication networks, the

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amount of influence held by key departments, demographics and personality characteristics of key members of the buying centre, the perceived importance of the purchase, the relative importance of specific attributes in the organization's buying decisions, attitudes toward vendors, and decision rules used in selecting vendors. Micro bases can have many more direct implications than do macro bases. The fact that a customer resides in a particular geographic region, or belongs to a certain NACE category, can provide some general guidance in developing the marketing mix for a specific product. However, much greater insight can be obtained by knowing how buying decisions are made, or how much influence design engineers wield in comparison to production managers. When macro segmentation is used with micro segmentation, the result can be improvement both in the effectiveness of marketing programs, and in the efficiency of resource usage. If the target market consists of companies in NACE category DK which is the manufacturing of machines and equipment (a macro base) whose key decision makers are very price conscious (a micro base), then marketing programs can be customized accordingly, and even lead to a 1 to 1 marketing approach. Care must be taken, however, that the costs of serving a more and more narrowly defined audience do not exceed the benefits. The marketer may not always perceive that there are clear advantages to be gained from focusing on micro segments. He may stop after identifying macro segments, especially if this produces segments that are thought to be sufficiently well defined in light of the company's marketing resources. 4.1.1 THE NESTED APPROACH The use of macro and micro segmentation has been expanded into what is called a nested approach. This method assumes a hierarchical structure of segmentation bases that move from very broad or general bases to very organization-specific bases. Rather than a two step process, the nested approach allows up to five steps. An illustration can be found in figure 4.2. Here, macro bases are in the outermost boxes (e.g., company size), with micro characteristics in the innermost boxes (e.g., personal characteristics of members of the buying centre). The figure further suggests that a number of intermediate segmentation bases, such as situational factors or the general purchasing approach of the firm, lie between these two extremes. Situational factors could include the urgency of the purchase or the specific application of the purchased product. The purchasing approach might be the degree of formal structure in the customer's purchasing operations, general purchasing policies of the organization, or the decision criteria used to make a vendor or product choice. Moving from very macro through intermediate to very micro, each more specific segmentation base is contained within the one that preceded it. That is, the more specific customer characteristics are nested inside the broader situational or organizational characteristics. The end result is a very practical segmentation framework within which one can find virtually any imaginable base for breaking down an industrial market. To implement the nested approach, let us look at an example. A firm selling mail equipment (e.g., postage meters, weighing scales) to organizations may first segment the market based on broad organizational characteristics, such as company size. It may decide to focus only on companies with 1.000 or more employees. However, rather than stop here and focus on all such companies, the firm then further segments the market based on operating characteristics, such as whether the company has a mail department. Focusing only on those with a mail department, the firm goes one step

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further, and pinpoints only those companies that emphasize low price as a key attribute in the purchase decision, and so on. The marketer can move through all five nests if he wants that much specialization, or can stop at any point. Also, anyone level could be skipped over, such as where the marketer starts with purchasing approaches, and then goes to personal characteristics. Selected. macrolevel bases of segmentation are presented in figure 4.3. Recall that these are concerned with general characteristics of the buying organization, the nature of the product application, and the characteristics of the purchasing situation. Fig 42 - Major Potential Bases for Segmentation (Nesting) 4.1.2 Macrolevel Bases

• Macrolevel Characteristics of Buying Organisations The marketer may find it useful to partition the market by size of potential buying organizations. Large buying organizations may possess unique requirements and

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respond to marketing stimuli that are different from those responded to by smaller firms. The influence of presidents, vice presidents and owners declines with an increase in corporate size; the influence of other participants such as purchasing managers increases. Alternatively, the marketer may recognize regional variations and adopt geographical units as the basis for differentiating marketing strategies. Usage rate constitutes other criteria. Buyers are classified on a continuum ranging from nonuser to heavy user. Clearly, a great deal of market knowledge is required to implement this classification effectively, but the potential payoff for distinguishing heavy from light users is high. Fig 4.3 - Macrolevel bases for segmentation Variables Global Characteristics Size Geographical location Usage rate Structure & Organization Product / service use and application Customer and prospects needs NA CE category (kind of industry) Value in use Characteristics of buying situation Type of buying situation Stage in purchase decision

Illustrative breakdowns -

Small, medium, or large (Nr. Employees, Sales) Europe, France, UK, industrial concentration Nonuser, light user, moderate user, heavy user Centralized or not, private or state, national or multinational...

-

Product sector of activity Basic product, complementary product...

-

New task, modified rebuy, straight rebut'... Early stages, late stages

The structure of the procurement function constitutes a final macrolevel characteristic of buying organizations. Firms with a centralized purchasing function behave differently than do those with decentralized procurement. The structure of the purchasing function influences the degree of buyer specialization, the criteria emphasized, and the composition of the buying centre. Centralized buyers place significant weight on longterm supply availability and the development of a healthy supplier complex. Decentralized buyers emphasize short-term cost efficiency. Thus the position of procurement in the organizational hierarchy provides a base categorizing organizations and for isolating specific needs and marketing requirements. Many business marketers develop national accounts sales force to meet the special requirements of large centralized procurement units. • Product / Service Application Because a specific industrial good is often used in different ways, the marketer can divide the market on the basis of specific end-use applications. To illustrate, the manufacturer of a component such as springs may reach industries incorporating the product into machine tools, bicycles, surgical devices, office equipment, telephones, and missile systems. Exploring the value-in-use of various customer applications also provides strategic insights. Value-in-use is a product's economic value to the user relative to a specific alternative in a particular application. The economic value of an offering frequently varies by customer application. • Purchasing Situation First-time buyers have perceptions and information needs that differ from those of repeat buyers. Therefore, buying organizations are classified as being in the early or late stages

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of the procurement process, or alternatively, as new-task, straight re-buy, or modified rebuy. The position of the firm in the procurement decision process or its location on the buying situation continuum dictates marketing strategy. A key benefit of segmentation is that it forces the manager to search for bases that explain similarities and differences among buying organizations. 4.1.3 MICROLEVEL BASES Having identified macrosegments, the marketer often finds it useful to divide each macrosegment into smaller microsegments on the basis of the similarities and differences between decision-making units. Often, several microsegments -each with unique requirements and unique responses to marketing stimuli- are buried in macrosegments. To isolate them effectively, the marketer must move beyond secondary sources of information by soliciting input from the sales force or conducting a special market segmentation study. Selected microbases of segmentation appear in figure 4.4. Fig 4.4 - Microlevel bases of segmentation Variables Key criteria Buying strategy Structure of BDU Importance of purchase Decision specific conflict Attitude of purchase unit Acceptance of negotiation with vendors Organizational innovativeness Personal characteristics Demographics Decision style Risk

illustrative Breakdowns - Quality, delivery, supplier reputation -

Major participants and their position Technology, financial weigh and risks... Optimizer, satisfier

-

Favourable or... in favourable Innovator or... follower

-

Age, experience, education, background Bureaucratic, normative, conservative... Risk taker... risk avoider, careful, rashness...

• Key Criteria For some industrial goods, the marketer can divide the market according to which criteria are assigned the most importance in the purchase decision. Criteria include product quality, prompt and reliable delivery, technical support, price, and supplier's reputation. Service responsiveness is assuming an increasingly important role in many industrial buying decisions. Business market customers can be surprisingly sensitive to time and willing to day premium price for responsiveness. The marketer can benefit by examining the criteria employed by decision-making units in various sectors of the business market -commercial, governmental, and institutional-. • Purchasing Strategies Microsegments can be formed on the basis of the purchasing strategy employed by buying organizations. Two purchasing profiles that have been identified are satisfiers and optimizers. Satisfiers approach a given purchasing requirement by contacting familiar suppliers and placing the order with the first to satisfy product and delivery requirements. Optimizers consider numerous suppliers, familiar and unfamiliar, solicit bid and examine all alternative proposals carefully, before selecting a supplier. These purchasing strategies have numerous implications. They tend to give different emphasis on criteria as; continuity of supplies, optimisation of production, minimizing costs, or need for services. • Importance of Purchase

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Classifying organizational customers on the basis of the perceived importance of a particular product is especially appropriate when various customers apply the product in various ways. Buyer perceptions differ according to the importance of the product to the total mission of the firm. A large commercial enterprise may consider the purchase of an office machine routine, but the same purchase for a small family concern is "an event". The attitudes of decision-making units toward the vendors in a particular product class provide a means of microsegmentation. An analysis of how various clusters of buyers view alternative sources of supply often uncovers opportunities in the form of vulnerable segments being either neglected or not fully satisfied by competitors. • Personal Characteristics Some microsegmentation possibilities deal with the personal characteristics of decisionmakers: demographics (age, education), personality, decision style, risk preference or risk avoidance, confidence, job responsibilities, and related characteristics. Additional situational criteria can be useful; the complexity of the decisions form, the perceived risk level (technical or financial), the urgency of supply decision.... 4.2 MAKING PRODUCT /MARKET CHOICES Market selection, as noted earlier, is influenced considerably by the firm's assessment of its own strengths and weaknesses. It may count product design, possibly protected by patents, as an important asset. It may count as a critical strength, an established position and reputation with existing customers. It may regard size, financial strength, and production resources as strong suits. Limitations in any of these areas would be recognized as weaknesses. Over and against this assessment of strengths and weaknesses should be posted a list of feasible product/market opportunities, with an evaluation of buying behaviour, market needs, and the competitive environment for each one. Market selection is then a matter of choosing those product/market opportunities where the company has a meaningful edge and where its weaknesses will not be a critical deterrent. In assessing market opportunities, managers must ask and answer such questions as: 1. Does the market have high growth potential? 2. Do large and powerful competitors currently dominate the market, or is it still possible to claim a large market share? Yet the level of demand may support only a handful of suppliers. Such considerations would make it difficult for new competitors to enter a market, thus providing a measure of protection for those who can afford the higher stakes required. 3. For what particular customer sets does the product have value as compared with competing products? After objectively defining the product's performance characteristics, management should determine what applications maximize its advantages and minimize its disadvantages. Engineers and marketers often seem to get carried away with new technical innovations and to be insufficiently "hard nosed' in defining the 'window' in the range of competing products where they innovation has its real place. 4. Is the market segment of sufficient size to support new investments in plants, special designed products, and selling and distribution systems? For smaller companies, a "single-minded concentration" on, and commitment to, some sharply defined market segment may be a viable strategy for gaining and holding market share against large competitors. Larger companies tend to compete "across the board" with full product lines going into a range of market segments. Often, however, in market segment competition, the larger companies react defensively to the initiative of smaller firms.

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4.3 CONCLUDING COMMENT In considering problems of market selection and product planning, one should keep four key questions in mind. - What Markets do we want to serve? The most important decisions in planning marketing strategy are those related to the choice of a market or markets to serve. It implies a choice of a customer set and of the competitive, technical, political, and social environments in which the firm elects to compete. It is not an easily reversed decision; having made the choice, the company develops skills and resources around the markets it has elected to serve. Such choices are not made in a VA vacuum They are influenced by the company's history; by its marketing, manufacturing, and technical strengths; and by the fabric, of its relations with existing customers, the scientific community, and competitors. - What Form should the Product take? Products are planned and designed to serve markets. Marketing strategies should not be developed for products but for markets. The product, itself, is a variable, not a given, in the strategy. Market selection comes first, and the choice of product form follows. - What can the Product do for the User? The "product" is what the product does; it is the total package of benefits the customer receives when he buys. This includes the functional utility of the goods, the product service that the manufacturer provides, the technical assistance the manufacturer may give its customers, and the assurance that the product will be delivered when and where it is needed, and in the desired quantities. Another benefit might be the seller's brand name and reputation; these may help the buyer in its promotional activities. - For Whom does the Product have Value? The product, in this broader sense, will have different meaning to different customers. It is strategically advantageous for a supplier to concentrate on those prospective customer groups that will value the product the most. If, for example, technical service is an important part of what the seller provides, a promising market may be smaller companies that have no research and development facilities of their own. The business market contains a complex mix of customers with diverse needs and objectives. The marketing strategist who analyses the aggregate market and identifies neglected or inadequately served groups of buyers (segments) is ideally prepared for a market assault. Specific marketing strategy adjustments can be made to fit the unique needs of each target segment. Of course, such' differentiated strategies are feasible only if the target segments are measurable, accessible, compatible, and large enough to justify separate attention Procedurally, industrial market segmentation involves categorizing actual or potential buying organizations into mutually exclusive clusters (segments) each of which exhibits a relatively homogeneous response to marketing mix variables. To accomplish this task, the business marketer can draw upon two types of segmentation bases: macro- and micro-level. Macrodimensions are the key characteristics of buying organisations and of the purchasing situation. Microlevel bases of segmentation centre on key characteristics of the decision-making unit. Before a final decision is made, the marketer must weigh the costs and benefits of a segmented marketing strategy.

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CHAPTER 5. MANAGING INDUSTRIAL PRODUCTS AND SERVICES

"There is no such thing as a commodity. All goods and services can be differentiated and usually are. Though the usual presumption is that this is true of consumer goods more than of industrial goods, the opposite is the actual case." 5.1 IMPORTANCE OF THE PRODUCT OR SERVICE. The product or service is the lead element in the industrial marketing mix, while price, promotion, and distribution are the supporting elements of the mix. The product or service offering requires the greatest amount of effort in planning, development, and execution. Figure 5.1 gives an overall picture of the industrial goods, as they required by the users in their organizations. Fig. 5.1 - Classification of industrial goods A- Industrial equipment "All what is needed as infrastructure by a firm to make, transform, elaborate, and deliver the products or/and services" • Manufacturing halls; real estate, buildings... • Machines; furnaces, lorries, production units... • Equipment; computers, lift trucks, typewriters.... • Tools; clothes, safety gloves and shoes, brushes, hammers... • Furniture; tables, cupboards... B. Industrial materials "All what gets into production and is finally part of the finished product" • Raw material; wool, ore, crude oil, wood... • Half finished products; plastics, steel plate, glass, chemicals, plywood... • Components; lamps, wire, iron profiles, electrical motors... • Consumables; paper, paint, glues, welding rods... C. Industrial supplies “All what helps the manufacturing process and enhance the handling tasks" • Packing material: bags, baskets, containers... • Supplies; food, lubricants, solvents, energy, detergents... • Maintenance & repair material; belts, fuses, bearings... D. Industrial services

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"All what facilitates and organizes the production and selling activities" • Related to the equipment; mechanical & electrical maintenance, security, R&D... • Related to the organisation; training, consultancy, accounts, publicity... • Related to the handling and logistics; storage, transport, customs... The product or service offering also defines the quality position of a firm, the customer groups it is able to serve, and the competitors with which it must be concerned. Furthermore, distribution and logistical arrangements are directly related to the characteristics of what is being sold. In addition, a firm's ongoing cost structure and financial needs are strongly influenced by the design, production, and delivery requirements of its products or services. Unfortunately, there is a tendency among practitioners to downplay the product or service itself and to place much more emphasis on advertising and selling programs. This is a serious problem, in that industrial products and services are often fairly technical in nature, and the technical competency of customers is frequently high. Marketers must understand how a product or service works, and why. Furthermore, marketers must learn to recognize the creative ways in which products. and services can be modified or customized to meet a given customer's requirements. Otherwise, they will be less able to identify unmet customer needs in a given area or to communicate with those in production or R&D regarding marketplace opportunities. M0r8, The strategic implications of product/service decisions can be better understood by focusing on the distinct nature and underlying properties of industrial goods. Let us first examine the characteristics of products, and then look at services. 5.1.1 WHAT IS AN INDUSTRIAL PRODUCT? This might seem like an obvious question. The answer can vary significantly, however, depending on whether it comes from the person who makes the item or the person who is buying the item. The design engineer or production manager at the selling firm might see the product as a set of physical characteristics, ingredients, components, dimensions, design tolerances, and technical features that result from a formal design and development process. That is, they see the product in terms of how it was made. But, from a marketing standpoint, the product is defined in terms of what it does for the customer. Customers are less concerned with particular characteristics, ingredients, or components and more concerned with solving a problem or need. Accordingly, a product should be thought of as a bindle of problem-solving attributes. This distinction suggests that even the most standard or commodity-like products (copper wire, grains, primary metals, and screwdrivers) can be differentiated in the marketplace. A useful framework for recognizing the many dimensions of a product is illustrated in Figure 5.2. Here, products are defined at three levels: the core product, the tangible product, and the augmented product. At the core, or most basic level, the product is defined in terms of the primary benefit sought by a customer. Consider the example of oil filters, which are sold for use in plant equipment. The core benefit for such a product might be fewer machine breakdown and augmented lifetime value (LTV). The tangible product refers to any and all aspects of the physical product itself. At this level, products can be distinguished by quality levels, features, styles, brand names, and packaging. Again, using oil filters, a distinctive feature (higher-grade filtering paper) or brand name and reputation can produce, in the customer's view, an entirely different product. The tangible offering can then be augmented by a variety of support services, including installation, delivery, credit, warranties, advice, and post-sale servicing. This is the

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product at its broadest level. A warranty on an oil filter and its use is not part of the physical product itself, but the customer does not see the warranty as distinctively separate. Such services or benefits are an integral part of the total value the customer is purchasing. Post -purchase support is an excellent example of a product dimension frequently ignored by managers. Product support covers anything that contributes to maximizing a customer's satisfaction after the sale, such as parts availability, equipment loans during downtimes, operator and maintenance training, serviceability engineering, and warranty performance. Fig. 5.2 - The elements of a product

By relying on the three-circle framework presented in figure 5.2, the marketer is better able to realize the creative potential of the product variable. The core, tangible, and augmented product concepts provide a road map for identifying the many ways a product can be changed or customized to reflect market conditions and the needs of individual customer segments. This framework can also be used to successfully distinguish a firm's offerings from those of competitors. • Unique Characteristics of industrial Products When considering the nature of industrial products, it is easy to over-generalize. There is, in fact, considerable diversity among the many products purchased by organizations. The category of goods labelled "industrial" includes everything from clipboards costing under €2.00 and sold to schools, to multimillion-dollar generators sold to utility companies. To gain a more complete picture of these products, it is worth considering some of their major underlying dimensions. Eight of these dimensions are illustrated in Figure 5.3. They include customisation, complexity, unit cost, related system requirements, purchase volume, installation requirements, degree of completion, and rapidity of consumption. A large number of products exist at every point on each of the dimensions

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pictured in figure 5.2, and many combinations are possible among the various dimensions. For instance, laptop computers are fairly standardized, reasonably simple, relatively low cost, stand alone, finished goods which are typically sold on a per unit basis, come ready to use, and are consumed over a number of years. A communications network linking sales branches in a region can be characterized as a customized, somewhat complex, and fairly expensive system of finished products that requires installation, has a long life, and can be continually modified or updated. Each of these product dimensions has implications for the development of marketing strategy and tactics. For instance, the more an item is customized, complex, part of a system, or of high unit cost, the greater the likelihood that distribution channels will be shorter, a technically qualified sales force will be employed, prices will be used to reflect quality, and a heavy emphasis will be placed on customer service. Products that are standardized, simple, ready to use, consumed quickly, and that have low unit costs will frequently be part of a broad line, sold through distributors, and will utilize price promotions, while receiving higher expenditures for advertising. These are but a few of the potential implications of a product's underlying characteristics. While there are no universal rules regarding how to market a product, a careful evaluation of its characteristics can yield valuable insights for pricing, promotion, and distribution decisions. Fig. 5.3 - Underlying Characteristics of Industrial Products Managing the Industrial Marketing Mix

A large number of industrial firms sell both products and services, and many exclusively sell services. The growth rates for services as a whole have actually exceeded those for

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products in recent years. Services tend to differ significantly from products, and have distinct marketing requirements. We now turn to a discussion of services. 5.1.2 WHAT IS AN INDUSTRIAL SERVICE? While a product is an object, device, or physical thing, a service is a deed, performance, or effort. As with products, every industrial service represents a bundle of need-satisfying attributes. These attributes are provided to a buyer through the service experience. The term experience is used to connote all aspects of the person-to-person customer service interaction. In providing a particular need-satisfying experience to a customer, the marketer is said to be "delivering" a service. The success of service providers hinges on their ability to manage three highly interrelated areas effectively: service operations, service delivery, and service marketing. It is the interaction among these three areas that determines how much value a buying organization receives. Figure 5.4 illustrates this process. Service operations can be broken down into those components that are visible (front stage) to the customer and those not visible (backstage). The visible components include personnel, facilities and equipment (physical assets), and marketing programs to which customers are exposed. The invisible component includes internal operations (e.g., administration, purchasing, accounting, computer operations, maintenance, and employee training) that are responsible for managing and supporting the visible component. Fig 5.4 - The Delivery of Industrial Services

The service delivery system consists of the visible components of the operating system and integrates the individual customers being serviced. Of concern here is the means by which services are actually being provided. This includes the specific people and equipment necessary for each job, the methods used, the procedures followed, the time involved, and the extent to which customers become part of the service. Also of importance is the manner by which the service is taken to the customer organization, or the customer comes to the service organization. The arrows in Figure 5.4 suggest that industrial services are more frequently taken to the customer. There are also services that are delivered on an "arms length” basis, such as utilities or on-line data services. Service marketing is a subcomponent of service operations, and overlaps with service delivery. It includes all those activities that directly facilitate customer purchases from the

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firm. firm. Although it can be argued that marketing is a company-wide function in service organizations, the primary focus is on those activities that make customers aware of, and that influence their decision to buy, the vendor's services. Examples include advertising, sales calls, publicity, price schedules, billing... Also common is the tendency to view contact personnel, the equipment used to deliver a service, and satisfied clients (i.e., the major components of the service delivery system) as potential marketing tools. 5.1.3 SELLING BOTH PRODUCTS AND SERVICES Discussions of product versus service marketing seem to imply that there are "pure" products and "pure" services, and that the differences are clear-cut. This is usually not the case. Many companies find that their offerings have both tangible and intangible aspects (Figure 5.5). A commercial printing firm may sell graphic design, typesetting, and printing services, but also produce a tangible four-colour brochure for a client. Similarly, a software company that sells programming skills, which solve a particular customer problem, may also provide the customer with a tangible diskette containing the program. Fig. 5.5 - Service/Product Classification Based on Tangibility

The implication is that marketing programs must reflect degrees of tangibility. For instance, the more service-dominant the offering, the more the marketer may want to stress tangible evidence. Conversely, those with product-dominant offerings may find it worthwhile to emphasize intangible benefits.

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An additional complication is that firms often market products that are relatively independent of one another. AT&T sells long-distance services, but also electronic switches and personal computers. Petroleum companies sell lubricants but may also offer maintenance services and lubrication programs. Managers in such companies are apt to become frustrated if they use traditional product marketing approaches to sell services with, or vice versa. Alternatively, management may tend to emphasize one area over the other (e.g., products over services) depending on where their expertise lies. Some firms deal with this problem by organizing their efforts so that responsibility for products and services is assigned to separate managers. While this separation is not always necessary, it reflects recognition that product and service marketing are fundamentally different. This is not to say that products and services must be marketed separately. Not only should efforts in bath areas be coordinated for consistency with the firm's overall marketing strategy, but also creative efforts can sometimes be made to market them together. The possible linkages can be seen by examining the efforts of a company that sells security services (e.g., night watchmen, consulting regarding security procedures), as well as security products (e.g., alarms, locks, cameras, metal detectors). Management might find it effective to give price breaks on products to those customers who use the firm's services, or to otherwise bundle products with services. The firm's security consultants can recommend procedures and systems, which require the firm's products. Advertisements in trade journals might stress the fact that dependable security requires both people and equipment. The ability to engage in such joint marketing programs depends on a number of considerations. Chief among these are the extent to which the products and services are marketed to the same customers, and the same set of decision makers. Also important is the degree to which customers see the items as related, and especially complementary, to one another. 5.2 THE PRODUCT / SERVICE PORTFOLIO - ITEMS, LINES, AND MIXES A product portfolio reassembles the many references that a company can present and sell to the customers under whatever form or packaging. The products are ranked in product lines or families. • product line or range: usually refers to a set of products that are related in that they fall within the same product class (for example, the different motor oils of Castrol for the transport market); • product mix: refers to the set of product lines produced by one of the firm's businesses (for example, the various ranges of industrial oils of Castrol; compressor-, hydraulic-, turbine oils). The more product lines we have, the larger the breadth and the more different products in a same line, the greater the length of the portfolio. The depth is given by the amount of varieties a same product presents in a given line (the different viscosities references in compressor oil range of Castrol). Figure 5.6 illustrates this product portfolio. The task of product/service management is better understood by distinguishing among individual items, product and service lines, and the overall product/service mix (Figure 5.7). An item is any clearly unique offering sold to customers on a regular basis. From a product perspective, this definition includes all the dimensions highlighted in figure 5.2. With services, it includes the intangible service, plus any tangible evidence of service delivery. Individual items often have distinct requirements demanding special attention from the marketer. However, unless the firm only sells a single product or service, managing items in isolation is a mistake. Items can stand alone, but more typically are part of a line. For

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example, companies carry low-, medium-, and high-quality versions of the same item. They also sell items that are complementary to one another or that are used in basically the same application (e.g., different kinds of building materials). A product or service line can be defined as a set of items related to one another by technology, production processes, distribution requirements, or customer applications. Companies, including those in the same industry, will not necessarily use the same definition, with a given line consisting of completely different items. Figure 5.6 Product portfolio or product-mix.

Precise definitions depend on the organization's purpose in grouping items. The general aim is to simplify product planning, analysis, and control. Companies do not, as a rule, seek to maximize profits on individual items or lines. Instead, they attempt to achieve desired profit, market share, sales, and cash flow objectives for the entire product or service mix. This mix is the total set of items and lines offered by the firm. For service businesses, the mix often consists of different bundles or packages of items and tasks. As we have seen, some products and services may be used to support sales of others. A computer company may find overall profitability enhanced if computers are sold at a price barely above their cost, but then a premium price is charged for accessories or software. A copier company may attempt to establish a solid base of customers with aggressive selling and discounting of copier equipment, but with the real goal of tapping the very profitable market for after-sales service. In fact, marketers should regularly attempt to assess formally the relationships among the various items in the overall mix. • Breadth of the Mix / Length of the Lines / Depth of the Items After a product or service is first introduced, it is not unusual to add features, options, capabilities, and/or attributes subsequently. As the item moves through its life cycle, a normal strategy is to expand the offering into an entire line of related products or services. Management's focus is now on the breadth, length, and depth within the product or service mix (Figure 5.8). - Breadth is measured by the number of different lines carried by a firm. General Electric and 3M are examples of firms with extensive breadth. Managing breadth requires that attention be given to line consistency -the degree to which product lines are related in

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terms of technology, production or distribution requirements, and customers-. Industrial organizations should be wary of spreading themselves too thin, or getting into product areas that do not emphasize their distinctive competencies. Fig 5.7 - Examples of Items, Lines, and Mixes in the Communications Industry

- Length is the number of items in a given line. Lines can be overly shallow (too few alternatives) or overly deep (too many alternatives). A shallow line will appeal to fewer market segments. Unit costs of each item may be relatively high. Also, with fewer items, a direct sales force may not be justifiable or affordable. However, as the line proliferates (gets deeper), cannibalism becomes a bigger problem. That is, customers have difficulty distinguishing among items in the line. While the benefits of economies of scale can sometimes be realized with a deeper line, there is also a point of diseconomy. Also, deep lines can have so many individual items that some are likely to be ignored by the marketer and fail to receive sufficient sales support. Another possible result is customer confusion, where buyers find themselves unable to keep abreast of all the items in a vendor's line. - Depth refers to how many variations are available for a particular item in a line. A product might come in more sizes, and with or without a special feature. A service might be varied in terms of the number of individual tasks performed for the customer. By adding depth, the marketer is better able to tailor a firm's offerings to individual customer groups and needs. Product/service strategy includes long-term considerations of breadth, length, and depth. Correspondingly, the strategies of most industrial firms can be characterized as one of the following: full-line/all market, market specialist, line specialist, limited line specialist, single item company, and special situation company. • A full-line / all market company carries a group of related lines, each consisting of a fairly comprehensive set of items. The firm is attempting to satisfy the general needs of a wide range of customer segments in a broad product/service category. • Market specialists concentrate their efforts on tailoring a set of items to satisfy the unique needs of a particular market or segment. Scanned by PHAN Thanh Tu

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• Line specialists typically offer one line with considerable length and depth; selection within this line is more comprehensive than that found with other strategies. • Limited line specialists concentrate on a subset of items within a line, but may offer considerable depth for this subset. • Single item firms concentrate all their resources on a single product or service. • The special situation companies include those firms that tailor product or service solutions to the specifications or requirements of individual clients. Fig 5.8 - Breath, Length and Depth applied to 3M

5.3 THE IMPORTANCE OF QUALITY The single most important decision area in product/service management is that of quality. The level of quality provided in a product or service is its ultimate source of competitive advantage. Competitors may be able to match a change in price, promotion, or customer service quickly, but superior quality and ongoing quality improvements require considerable time and effort. In fact, there is an impressive body of support for the finding that quality is positively and strongly related to company profitability and product/service success rates. Traditional definitions of quality focus on how well an item meets or conforms to its design and delivery specifications. However, these specifications are technical details that mayor may not consider how well the product or service satisfies a customer's need. This problem led to define quality as the degree to which the relevant features and Scanned by PHAN Thanh Tu

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characteristics of a product/service satisfy all aspects of a customer's need, limited by the price and delivery the customer will accept. This definition has a number of key points. First, quality is a comprehensive concept referring to the totality of an item's features and characteristics, including all aspects of its performance and reliability. Second, quality exists in relationship to a customer's need. Third, comparisons of quality among items require that the items address the same needs. Also, the particular need in question is defined by the price and delivery requirements that a customer is willing to consider. This usually means that quality comparisons are made among directly competing products or services having roughly the same prices. Many companies have departments whose sole responsibility is quality management. These departments often have such names as quality control or quality assurance. A more appropriate name would be quality improvement. Quality is a moving target, not a fixed level of performance. The best-run companies are engaged in a continuous quest to raise quality levels, regardless of what they produce (i.e., to conform better to customer needs). Furthermore, while there may be a department that sets standards and measures, quality must be the responsibility of all employees. With this in mind, let us examine unique aspects of product versus service quality. • Managing Product Quality When producing and selling products, there are three major categories of quality: product quality, support quality, and delivery quality. Product quality deals with a number of issues. - First, how well do the product requirement specifications express the customer's need, and how well does the product design conforms to these requirements? - Second, how well does the actual product conform to the design at the time it is manufactured? - Third, how well does the product perform in terms of reliability, safety, durability, maintainability, and so forth, after it is purchased by the customer? Support quality is a question of how well the organization conforms to customer needs for product-related service at the time of and after the sale. Delivery quality has to do with specifications regarding delivery schedules and promised times, as well as conformance to those times. Fig 5.9 - Product-Related Quality and Departments with Prime Responsibility Main Categories Product quality

Support quality

Delivery quality

Subcategories Accuracy of product requirement specifications and conformance of design to specifications Conformance of product to design at time of delivery Performance after delivery (e.g., reliability, maintainability, durability, safety) Customer design support Customer service at time of sale After-sales service Assurance documentation Promised delivery schedules Conformance to promised delivery Response to emergency delivery needs

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Responsibility for Improvement Marketing/design development Purchasing/manufacturing Design development Design development Marketing Marketing Quality Manufacturing/marketing Manufacturing/purchasing Marketing/manufacturing

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Figure 5.9 summarizes the main categories and subcategories of product, support, and delivery quality, and identifies the departments within a company most responsible for making quality improvements in each area. While its role in support and delivery quality may be more apparent, the marketing department can also serve a vital role in product quality improvement. Marketers must continually stay on top of customer needs, translating these needs into specific features and characteristics of products. Unfortunately, customers do not always know their needs, and so the marketers must be well acquainted with customers' operations and the problems they have in attempting to accomplish particular tasks. Marketers must also strive to ensure that the quality being delivered is consistent with, or, exceeds, the quality expectations customers have been led to expect. A legitimate criticism b directed at those in marketing and sales is that they encourage customers to have unrealistic quality expectations, and/or that they promise features and. capabilities which make it difficult for the firm to deliver a given level of quality. The efforts of marketers and all others concerned with quality must ultimately have some sort of focus or goal. A satisfied customer is certainly the pre-eminent goal. A second, and related, focal point is termed quality costs. Operationally, firms need to identify and measure quality costs. Most of these will be variable costs. Management must set goals for these costs, perhaps as a percentage of sales. The ability to lower this ratio depends not on spending less on quality, but instead on regularly introducing new quality improvement projects. That is, quality costs are best lowered by producing fewer defects. These efforts on quality are better sustained by some form of 'quality assurance system', which can be provided by commitment to procedures and standards as ISO 9000 or EFQM methodologies. 5.4 THE CONCEPT OF POSITIONING Product / service strategy also includes decisions regarding how the firm wants products or lines to be perceived by customers. This is called positioning. Products and services are positioned with respect to (1) perceptions regarding their underlying benefits, and (2) perceptions regarding how they compare to competitive offerings. Customer perception is the key. The marketer must find out not only how the company is perceived by customers in a given product or service area, but also how competitors are perceived. Market research studies in this area can provide managers with a rude awakening regarding their own assumptions. What they "know" about their products or services is often quite different from what the customer believes. This is because customer perceptions are influenced by the consistent behaviour of vendors over time. Once in place, considerable effort is required to change these perceptions. There are many ways to position a product, most of which involve the establishment of an explicit segmentation and targeting strategy. Some of the more popular methods include positioning the various competitors along specific comparable attributes that characterize their products (technology, durability, performance, price, availability...). There is a mistaken tendency to approach positioning as a promotional strategy. Certainly, promotional efforts can go along way toward establishing, reinforcing, or changing an item's position, especially for consumer products and services. With industrial goods, product/service performance features, pricing arrangements, after-sale support, and the efforts of distributors can have a bigger impact on how items are perceived than does promotion. Remember that the product/service evaluation process used by industrial customers is much more detailed, and the buyer-seller relationship is often long term.

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• Perceptual- Mapping and Positioning Positioning can be illustrated with the use of a perceptual map (Figure 5.10). This is a pictorial representation of how a vendor or item is perceived by customers in comparison to other vendors or items. Although these maps can consist of any number of dimensions, a two-dimensional approach is easiest to work with. Fig. 5.10 - Two-dimensional perceptual map of the tire business in France

Perceptual maps can be generated by statistical tools available with a number of computer programs (ANAFACO), and are usually based on customers and prospects survey. Customers rank vendors or items on certain attributes or evaluate how similar or dissimilar different vendors or items are to one another. Three significant pieces of information result from perceptual mapping. First, the marketer identifies the global key attributes used by customers to distinguish among vendors or items. Second, the marketer determines how his or her product/service or firm is perceived with respect to these attributes. Third, the marketer is able to see the position of his or her product/service or firm relative to the competition. Note that maps can be used to demonstrate how the items in one company's product or service line are perceived relative to one another, and to compare the perceptions of different types of purchase decision makers, such as engineers and purchasing agents.

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5.5 PRODUCT STRATEGIES The investment objectives for the business and the thrust of the business are the major determinants of product policy and strategy, which in turn, relate to product goals (see Figure 5.11). Such goals are, in terms of the earnings, classified into one of the following objectives: - Immediate earnings; - Steady earnings; - Future growth (or future high level) of earnings. Fig 5.11 - Company Goals and1Product Strategies

If the goal is immediate earnings, the firm builds on known strengths and avoids projects that call for extensive technical development or necessitate substantial capital expenditure. The focus is on improving profitability by cost reduction and product improvement. Where more ambitious strategies are adopted, they are likely to be in response to competitive attack. Where a steady net cash stream is sought, the search for new products is- likely to be more passive than active -passive in the sense of being undertaken as a reaction to competition-. Line development and product improvement will be a major focus of such a reactive strategy.

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A proactive strategy, on the other hand, is based on pre-empting competition by being first to market a product, preferably with a critical advantage that competitors either cannot copy, are not disposed to try and copy or, if they do, cannot match. A proactive strategy suggests that the strategic goal is future growth (or future high level) of earnings. Such a strategy usually implies (depending on the product) an R&D (innovation) or a marketing thrust as the focus lies in developing new products and/or markets. (Figure 5.11) The main product strategies a marketer should consider are: - cost reduction; - product improvement; - line development; - new products. We should add the product-'repositioning'. If in repositioning a product the product remains unchanged, the problem is one of market segmentation. Otherwise it is covered by the strategies we just mentioned. 5.5.1 COST REDUCTION In the context of cost reduction, marketing has a responsibility to generate immediate earnings by: - eliminating products from the product mix; - determining variety within the product line. Before talking about product deletions and variety reduction, a few definitions are needed: • Product deletions: Certain products may need to be eliminated either by immediate divesting or more slowly via harvesting. The sales department often resists product deletions, where attention is frequently channeled more to revenue rather than to profits. If it is decided to eliminate a product or product line, this must not be done overnight. The more unprofitable items in the line can be deleted first and promotional support gradually withdrawn from the rest in a way consistent with a harvesting strategy. This is assuming that thought has been given to making the product profitable via product improvement; product promotion, price change, channel change, selling in bulk for others to market; licensing, etc. • Variety reduction: Variety or depth (for example, sizes, shapes, etc.) within a product line must relate to segment demands and justify the extra cost involved in the manufacture and marketing. But it is often difficult to measure the extra costs and losses involved. Note that sales of some particular product variations may be uneconomic but their mere presence in the line may facilitate sales on the remainder of the line. • Value analysis: Both value analysis and value engineering are standard techniques for reducing the cost of a product without sacrificing market appeal. The value analysis takes into account following steps: - Information collection stage (where information is collected on who is using the product and why, and on the other hand what does it cost to manufacture all the specific items in a given range)

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- Brainstorming and evaluation (what are the positive part and the negative part of having the products in the range? Can we support the product in the future?) Value analysis is generally applied to existing products. The techniques can also be applied at the design stage. Where the techniques are applied before the product is produced, the approach is known as value engineering. Where changes are made in a product to reduce costs, there is a need to check against consumer perceptions whether the product is still regarded as highly as before. 5.5.2 PRODUCT IMPROVEMENT AND ADAPTATION Product improvement involves changing the features, quality or style of a product to give a better fit to the demands of the market. It is difficult to draw a sharp line between an old product that has been improved and a new product. A feature is a 'physical and functional characteristic or component of the basic product that may be used to distinguish it from competing products of similar quality', including the company's other products. Features can evoke an intense preference from some group or market segment. They can give a progressive image to the firm. They must be considered as a flexible competitive tool, since they can be added, dropped or made optional. “Quality” is an evaluative term: defining a product on its quality is to rank it in relation to similar products. The ambiguity of the term arises from the different criteria used to do the ranking: - Technical criteria. A product made of more expensive materials than are typically used, constructed with more attention to detail... is regarded as a quality product. It is superior technically. - Commercial quality. If a product is perceived and ranked as a quality product by the market and commands a premium price as a consequence, the product is a quality product commercially. Generally in discussions on product quality, however, the focus is on those technical attributes of the product that make for a high, reliable, non-injurious performance in core use functions and in addition, the related services. Style preferences are usually intrinsic but need not be, in that certain styles might be perceived as more geared to use function. In particular, the ergonomic concepts of products take a large part and hold the role of 'style' that dominates the choice of consumer goods. 5.5.3 LINE DEVELOPMENT Users within a market segment more resemble each other in what they seek than they resemble those in other segments. However, they still differ and firms may have to provide a whole range of sizes, sophistication... This leads to more and more customisation of the products I services involved. Variety variation: This is the situation where resources are dispersed over a wide number of variations of a product. Such variations can proliferate unless controlled to govern costs. Individual modification on request or tailor-made; A' basic product may have to be modified to fit the specific, if not the unique, requirements of some individual buying firm. A supplier might also offer modifications on request as an additional service.

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5.5.4 NEW PRODUCTS Product improvement and line development are product strategies associates with market penetration and market development. But high earnings or even survival may depend on introducing new products. On occasions new products may be introduced to utilize excess capacity (in manufacturing or elsewhere) or to consume by-products currently viewed as waste. In these cases, there is a danger of entering a market without adequately exploring market wants and of under-estimating the additional resources that will be needed. 5.6 CONCEPTUAL PRODUCT 1 SERVICE PLANNING TOOLS In strategic product planning, marketers increasingly rely on a variety of conceptual tools. Included among. these are the product life cycle and the product or product-market portfolios. 5.6.1 PRODUCT LIFE CYCLE The product life cycle (PLC) is perhaps the most widely known of marketing concepts, and is a focal point of marketing planning. While there are drawbacks, the PLC is popular because of its intuitive appeal, and its direct implications for marketing strategy. Put simply, the PLC plots the sales volume and profit curves for an industry (or company) over the history of a product. The sales volume trend is generally shown as an S-shaped curve, as found in Figure 5.12. The PLC is divided into five stages: market development, rapid growth, competitive turbulence, maturity, and decline. Other versions use different names and/or a different number of stages, but these five are fairly descriptive of industrial products. Market development or introduction is a period of slow growth during which the marketer is attempting to encourage trial of a new product by customers. Unanticipated product problems are being worked out, and the company may be adding distributors. Profits and cash flow are usually negative. This stage can be lengthy for new products that involve considerable learning on the part of users. Conversely, market development will normally be short for low learning products that have a clear advantage over existing alternatives. Because many new industrial products are fairly complex, and involve a more complicated buying process, this stage will tend to be longer than that for consumer products. The rapid growth stage finds sales growing at an increasing rate from period to period. Customers are adopting the new product in large numbers just to maintain their own competitiveness. The marketer is attempting to establish and solidify a loyal customer base and strong brand preference. The product is expanded into a product line. Production may be approaching capacity with accumulating back orders. Competitors are showing up with new features and improved versions of the original product that appeal to certain benefit and user segments. Profits are now being realized and are growing. In the competitive turbulence stager' sales continue to. increase, but at a decreasing rate. Competitors have established a firm foothold in the market, and market leadership may be up for grabs. At the same time, this tends to be a shakeout period for many of the marginal competitors. The marketer is attempting to differentiate his product(s), while uncovering untapped market segment. Attention is being focused on keeping the established customer base satisfied, giving them little reason, to switch suppliers. Unit profits begin to decline, and total profit generally peak out.

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Mass medla Dealer prornollons Personal selllng lo dealers Sal6s promotions Publicity

Mass media Deal€r.orl€nted promolions

Cut down all media to the bonô-use no sales promotions ol any kind

lnlonsiveand extensive,wilh dealermarginslust high enough lo k€ep lherninterested. Close anentionlo rapidresupplyol distributorstocks and heaw inventoriesal all levels

Intensiveand erten. sive,and a slrong emphasison keepingdealer well supplied,but with minimuminventorycosl to him

Inlonsive and exlensive, with strong Bmphasis on keeping dealer well supplied, but el minimum invenlorv cosl to him

Phas€ out outlots as th€y become marginal

Detailedanentionto brand position,to gaps in model and markel coverag€,and to opponunitiestor market s€9mentailon

Close anenùon to producl improvom6nl needs, to market-broadening chancos, and lo possible lresh promolion lh€m€g

Intensiliedanonlion to possible product improvements.Shaç alerl lor potential new inter.product comp€titionand lor signsol beginnlngproductd€cline

Inlormation helping to identity the point at which th€ product should be phased oul

OISTRIBUTION POLICY

I I I I I I I I

In order ol value Publicity Personal sales Mass communicalions

Erclusive or s€lectiva, wilh distributor margina high enough lo iuslify heavy promotional sp€nding

INTELLIGENCE To identityactual developing FOCUS use-syslomsand lo uncoverany productweakness

Source: C, R Wasson,Dynanic Competithe Strate,gl'arul Product Life Cyclæ,3rd Ed. (Ausrin Press,1978), pp. 256-57. Reprinredwirh permission.

Fig 5.12 - The product{ifecycle

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MANAGING THE INDUSTRIAL MARKETING PROCESS

At the maturity, or saturation stage, sales begin to level off, and the strategic posture becomes more defensive. The competitive environment stabilizes, and is usually characterized as oligopolistic. As new prospects become fewer and fewer, marketers may attempt to stimulate existing customers to increase product usage and find new applications for the product. Limited revenue possibilities lead to a focus on the cost side of the profit equation. Management looks for efficiencies in production and distribution. Profits are stable or falling, and net cash flow peaks out. Decline tends to proceed fairly rapidly for industrial products, as new technologies or technological applications make an established product 6bsolete. Competitors are dropping out. Customers have little choice but to abandon such a product in order to maintain their own competitiveness. There are generally a few customers who continue to depend on the product, though, and their demand may be relatively inelastic. While the S-shaped product life-cycle curve is straightforward, in reality the curve is not smooth, and is different for virtually every product. Another major problem involves determining current position in the life cycle. Where an industry or company is (in terms of the stages of sales growth) may be difficult to determine until that industry or company has been there for awhile, A slowdown in sales may not mean maturity has arrived. Instead, this trend may be caused by a relatively temporary fluctuation in the environment. Generally, product life cycles are shorter for industrial products than for consumer products. Further, industrial product life cycles are getting shorter because of rapid changes in technology and the information systems that are available to companies and customers. The message of the product life cycle is that products do not last forever. Sales potential and profitability change over time; strategies for, product, price, promotion, and distribution must be modified to reflect these changing conditions. To be useful, however, the life cycle must be more than a plot of sales over time. The marketer needs to track changes in costs, cash flow, unit profitability, market structure, competitor activities, a d customer needs in each major stage of product evolution. 5.6.2 PRODUCT AND PRODUCT-MARKET PORTFOLIOS The product lines of industrial companies will include products at various stages of their life cycles. This diversity is logical, and can be quite effective if strategically managed. Each SBU has a role in contributing to overall objectives. Each may have different prospects for growth and profitability. Therefore, it is useful to consider the set of products, or SBUs, as a portfolio. The decision to develop a particular product-line or business area represents a type of investment for a company. It makes sense, then, to examine the firm's portfolio of products. To design a portfolio, management must have criteria by which products can be classified. • The BCG matrix Some years ago, the Boston Consulting Group developed a type of product portfolio called the growth-share matrix. Products or businesses are classified according to the industry growth rate and a product's relative market share. Figure 5.13 demonstrates the growth-share matrix. Products or businesses are classified within one of the four cells, based on management's assessment of their growth prospects and market performance to date. Depending on where products fit in the portfolio, management can determine which are the best investments, which provide the best cash flow potential, and which might be candidates for elimination. For simplicity, the cells have been given easily

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remembered descriptive names. The position of each product range is represented by a circle with an area that reflects the generated return or profit. A cash cow is a product with high relative market share (compared to the leading competitor) in a slow-growth industry. The name is appropriate, because these products generate considerable positive net cash flows for the SBU or company. These are generally well-established products in the competitive turbulence or maturity stages of the PLC. Strategies tend to emphasize defending market share while maintaining a market leadership position. Because of their advantageous market positions, cash cows do not require heavy investments in R&D, market research, and promotion. Excess cash can be redistributed to support other products in the portfolio, especially question marks. Stars are potential cash cows, but have yet to achieve a strong net cash flow. These products have a strong market position in a dynamic growth market. Although profitable, they require substantial investment, because the competition is intense. Many firms are attracted by rapid growth prospects, and the battle is typically over new customers and new product applications. Fig 5.13 - BCG Product portfolio trajectory analysis

A product is classified as a problem child or question mark if it is doing poorly in a rapidly growing industry. Profit margins are very low, but the investment required to remain competitive is sizable. If management is not willing to invest either the excess cash from other products, or money from other sources, these products become candidates for elimination. Another growth possibility is to increase market share by acquiring competitors and/or distributors. An alternative option would be a segmentation and niche strategy, where the firm concentrates on a specific customer group. A large percentage of the products on the market qualify as dogs. They have relatively small market share, and their industry is growing at a slow rate, if at all. The company may, be breaking even or losing money. The obvious conclusion would be to get rid of

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such apparent losers. However, there are other roles for dog products. They can be U ed to support complementary products that fit in other cells, or costs can be cut back while management harvests the remaining profit potential. The major benefit of portfolio thinking is that management is encouraged to move away from a narrow product mentality and toward considering the roles of products within a larger strategic framework. Also, effective use of resources across products is emphasized. The position of the product (or product-line) within a BCG matrix visualizes the actual scene and permits to formulate strategic and operating proposals for the planning periods to come. This is illustrated by the shadowed circles and the arrows going out of the proved position. • The Mc Kinsey / GE Business Screens The screen is a more elaborate portfolio developed by Mc Kinsey and General Electric. The concept replaces industry growth with industry attractiveness, and market share with business strengths. The underlying logic is to match attractive opportunities to current strengths. Fig; 5.14 - The Mc-Kinsey I GE Business Screen

Also, the classification grid uses a three-by-three matrix, permitting an average category. Figure 5.14 provides an example of the business screen, with sample industry attractiveness factors and business strengths. Each circle is a distinct product-market sector; the size of the circle may represent the contribution to overheads for each activity, and the pie-shaped area within the circle identifies the net contribution to profit after allocation of the overheads. The three cells in the upper left hand corner contain opportunities in which the firm should invest resources with an eye toward long-term growth. In the diagonal cells, moving from top right to bottom left, the sectors receive a medium priority in terms of investment. The strategy is to maintain position and selectively focus the firm's profit seeking efforts. The remaining cells in the lower right hand corner contain sectors, where the industry is not all that attractive, and the company has little real strength with which to capitalize on the market.

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The position of a product-market line, or SBU in the business screen can be quantified. The firm first determines importance weights for each of the factors on the industry attractiveness dimension of the screen. Only those factors thought to be strategically relevant are used. These weights should add up to 1.0. Then, product-market sectors are evaluated on each of the weighted factors. The importance weights are taken times the evaluation scores. The results are then added together across the factors, and an overall score on 5 can be determined for the industry attractiveness dimension. This process is then repeated for the company strengths dimension. In this manner, the marketer arrives at a product's position within the screen. • The ADL business life-cycle approach This alternative portfolio approach is illustrated in figure 5.15. Here, strategies are developed around a firm's competitive position in a given business area, and the degree of maturity of this particular business segment. The market leader generally is the firm that either is largest, has the biggest market share, or has the most favourable cost position. Challengers and followers are runnersup in terms of market share. However, the challenger is aggressively attempting to overtake the leader, while the follower is satisfied with the status quo. Followers may achieve satisfactory returns by imitating the successful programs of leaders and challengers. Marginal competitors are barely holding on to a piece of the market. A policy of specializing on a segment or niche may prove profitable for marginal types of firms. Fig 5.15 - The ADL life-cycle portfolio matrix

The criteria for classification of competitive position formulated by A.D. Little are described as follows:

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-

"Dominant” Dominant competitors are very rare. Dominance often results from a quasi monopoly or from a strongly protected technological leadership. - "Strong": Not all industries have dominant or strong competitors. Strong competitors can usually follow strategies of their choice, irrespective of their competitors' moves. - "Favourable": When industries are fragmented, with no competitor clearly standing out, the leaders tend to be in a favourable position. - "Tenable" A tenable position can usually be maintained profitable through specialization in a narrow or protected market niche. This can be a geographic specialization or a product specialization. - "Weak": Weak competitors can be intrinsically too small to survive independently and profitable in the long term, given the competitive economics of their industry, or they can be larger and potentially stronger competitors, but suffering from costly past mistakes or from a critical weakness. Positioning of the product-sector within the grid can be done on the same principles as in the Mc. Kinsey screen, making use of the correct attributes to evaluate the competitor's position and relying on economic sector indicators to situate the customer sector within its life cycle. The portfolio in figure 5.15 encourages management to objectively determine what its competitive position has been, as well as the competitive posture it is capable of assuming. Different objectives, strategies, and resource allocations are appropriate, depending on this competitive posture. But subsequent modifications must be made in these areas as product-market moves through the life cycle.

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CHAPTER 6. MANAGING THE INDUSTRIAL PRICING FUNCTION

"A bad manager or marketer is one who knows the price of all items but ignores the value of them" The struggle for market share among competitors focuses critically on price. Pricing strategies of competing firms are highly interdependent; the price one competitor sets is a function not only of what the market will pay but also of what other firms charge. Prices set by individual firms respond to those of competitors but may also be intended to influence their pricing behaviour. Pricing is an art, a game played for high stakes. For marketing strategists, it is the moment of truth. All of marketing comes to focus in the pricing decision. Price is the only one marketing variable that brings money into the kitty! This chapter will discuss the ways in which the seven main factors shape industrial product pricing strategy. • product costs • value of the product to the customer • competition • customer bargaining power • government intervention • the bounds of fairness • pricing objectives Before beginning on this agenda, however, it will be useful to understand industrial pricing modes and conventions. Then at the conclusion we will consider the pricing process. 6.1 INDUSTRIAL PRODUCT PRICING MODES There are three ways to set prices for industrial products: negotiating cost-plus contracts, using competitive bidding procedures, and observing published list prices. The choice of pricing mode depends largely on the nature of the product or service being sold and on buyer preferences. For example, cost-plus pricing is widely used on large contracts such as those for military equipment, unique machine tools, or specific projects. Large buyers often use competitive bidding for major procurements of either standard or customized products. Published list prices are used primarily for standard products that are often sold through distributors or agents to a wide range of buyers. 6.1.1 COST-BASED PRICING In contracts negotiated as cost-plus arrangements, the buyer agrees to pay the seller certain costs of filling the contract plus an amount to cover fixed overheads and profit. Typically, the costs that are directly paid include labour and material. Overheads-plus-

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profit may be charged to the contract at some labour-hour cost basis. In addition, any capital investments needed to do the work may be amortized as part of the unit price until they are completely written off. In a cost-plus contract the buyer usually negotiates audit privileges with the seller. This is the so-called "open book" negotiation. That is, the buyer obtains the right to inspect the contractor's cost records. Some contracts may provide for cost-factor escalation. These provisions allow for price adjustments as certain specified costs (e.g., labour and materials) increase. Contracts specifying cost escalation must specify which price indices will be used to determine the amounts of price adjustments. Finally, some contractual arrangements are intended to provide cost efficiency incentives to the contractor. These are target-incentive contracts. They specify a target cost, a ceiling price, and a profit-sharing formula. If actual costs are less than the target cost figure, the contractor and the customer split the savings according to a prescribed ratio. If the target cost is exceeded, the contractor pays part of the difference and the customer pays the rest. The customer is obligated, however, to pay no more than a stipulated ceiling price. In cost-based price negotiations, bargaining focuses on elements of the vendor's cost structure (such as labour, materials, overhead, and profit) for the item to be supplied. Generally, in cost-based price negotiations the seller's objectives are to get a fair return (on sales or investment or both) and to minimize cost-factor risks. Cost-based price negotiations are usually appropriate when cost is uncertain. In addition, these negotiations often take place between large buyers and small sellers. There are two reasons. First, the large buyer may be able to assume the risks associated with cost uncertainty more easily than the small seller. Second, many large sellers are unwilling to share cost information with customers, except, perhaps, on government contracts. They feel that to do so weaken their bargaining strength. 6.1.2 PRICE DETERMINATION BY COMPETITIVE BIDDING When suppliers do not set prices through discussions of their costs with customers, and when prices are not purely market determined, then they are likely to be set by competitive bidding. The use of competitive bidding is obliged for all public or state purchases and is strongly encouraged or may even be required of buyers according to company purchasing rules and regulations. For example, three bids might be required for all procurements exceeding a given monetary amount, unless reasons for not doing so are documented and filed for later audit. The competitive-bidding rule is a way of ensuring that buyers probe for lowest available price rather than routinely placing business with suppliers they know best. Competitive bidding may be either sealed or negotiated. Under sealed-bidding procedures, bids are due at a certain time and the award made to the lowest bidder if its specifications conform to the request for quotation. Federal, state, and municipal government organizations are required to use sealed bidding. Late bids are disqualified as a way of assuring that some vendors do not get information on competitive-bid prices before submitting their own offers, since in sealed bidding procedures quotations are usually made public. In negotiated bidding, the procedure usually calls for submitting bids by some specified date, to be opened at some appointed hour, with rules against accepting late bids. Further negotiations may be conducted with the lowest one or two bidders in an effort to get price reductions below the bid amounts. Negotiated-bidding procedures are more characteristic of buying behaviour in private corporations than in government agencies.

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6.1.3 PUBLISHED LIST PRICING In a broad range of supply industries or for industrial commodities, price is market determined in the sense that price levels are the result of market forces, prices are published, and all customers are requested to pay the same amount. There is less room for individual buyers to bargain on price, although large buyers are often able to influence general price levels and the timing of price increases or decreases. Such industries may be oligopolistic in nature (such as metals, chemicals, plastics, and heavy electrical equipment), where there is a recognized price leader whom other firms are inclined-to follow. Or they may be industries with many small sellers producing undifferentiated commodities such as wheat, soybeans, and other agricultural products where price is usually determined by supply and demand. Prices for industrial products are often discounted through published "multipliers" both for items sold directly and those marketed through resellers. The multiplier used may vary depending on the volume of the order and whether the purchaser is a usercustomer or a distributor. Industrial marketers appreciate book-multiplier pricing systems for their flexibility in making price changes, especially when a price catalogue lists hundreds or thousands of items. Price increases or decreases may be made immediately effective by announcing a change in the multiplier and disseminating price sleets with new multipliers for existing list prices. Further, the direction and size of price revisions may be more clearly assessed by customers and competitors alike through book-multiplier pricing systems than if prices are changed on every item in the catalogue. Such a review of pricing conventions cannot include every alternative. The variety of arrangements is limited only by the ingenuity of buyers and sellers negotiating daily with each other in the marketplace. They reflect the strategic objectives of sellers shaped by the needs and concerns of buyers. What ha$ been covered here, however, are among the most widely used practices. 6.2 PRODUCT COSTS Clearly, what it costs to make and sell a product sets a lower bound on price. Firms cannot and may not price below their costs for very long and stay in business. But, as we will see, calculating costs for pricing purposes is not a simple matter, and how to think about product costs for effective pricing decisions has strategic implications. Costs may be classified as fixed, variable (or out o pocket), and semi-variable. Fixed costs are constant and do not vary with the level of activity. Variable costs vary directly with activity levels. Semi-variable costs go up or down (not necessarily proportionally) depending on operating levels. A railroad considers the depreciation on the rolling stock it owns (or, alternatively, the charges for leased equipment) as a fixed cost. Depreciation on tracks, station facilities, other buildings, and equipment are also fixed charges. Semivariable costs include the pay of the driver and other train crew personnel because they may vary from one time period to the next depending on train schedules and work rules, but not necessarily with the number of miles traveled. Diesel fuel is a variable cost because it varies directly with the number of miles traveled and the amount of freight hauled. In a manufacturing plant making glass bottles, the fixed costs include the depreciation on plant and capital equipment such as furnaces and forklifts. The variable costs are what the glass manufacturer pays for energy to fuel the furnaces, sand and limestone to make the glass, and labour. (Labour is a direct function of the level of output in this kind of a manufacturing operation.)

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If fixed and semi-variable cost make up a large portion of total costs, then pricing for maximum capacity utilization is al. Until the seller covers fixed costs, he loses money. After the seller covers fixed costs, each incremental sale contributes proportionally larger amounts to profits. But, if variable costs are a high percentage of total costs, as they are for the glassmaker, then pricing to maximize unit con w6on (the difference between variable cost and price) on each unit produced will be critical to profitability. This brings in the principle of the Break-Even Point (BEP) as shown in Figure 6.1. Taking into account a given selling price, the revenue depends of the amount of items sold, as do the total variable costs added to the fixed cost which are constant. The total revenue curve is crossing the total cost curve in a specific point BEP where the amount of items produced and sold gives neither profit nor loss. Any wanted benefit imposes additional sales at the given price until the difference between revenue and cost curves generates the wished profit amount. Fig 6.1 - The Break Even Point (BEP) Principle

So a major objective of the railroad's pricing strategy will be to fill its trains at prices that make a maximum contribution to overhead. The glass company, on the other hand, will try to raise unit prices while lowering unit costs. Under certain conditions, companies may elect to price at less than global unit cost. In conditions of capacity under utilization, for instance, firms with high fixed costs may take business at prices that cover variable costs and make an incremental contribution to fixed costs (or overheads). The hope is to get through the bad times, keep the plants running, and retain a critical nucleus of managers, skilled technicians, and labour. Pricing temporarily at less than full cost may also be used as a strategy to get a particularly large order. The expectation is that by taking the business, the firm may be able to reduce its unit costs and/or raise its prices later to make a profit on subsequent orders. Taking business below cost in the hope of offsetting near-term losses with longer-term profits may be risky since there is no assurance that the losses can be made up. Pricing near or below cost may also be done to gain market share, a strategy called penetration pricing (which will be discussed later). Generally, pricing low to pre-empt

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market share is predicated on the assumption that unit costs will decrease significantly as volume increases. This may happen as the company gains manufacturing experience. In many businesses, a so-called experience or learning curve is used to project the effect of volume growth on unit costs. Experience that conforms to a learning curve will reduce the variable-cost component of unit costs. Labour becomes more efficient; purchases of materials and components in larger volumes result in lower factor prices, and improvements in the manufacturing process yield cost savings. Fig. 6.2- Industry price experience curve and product life cycle stages.

The fixed-cost component of unit costs may also decrease with volume increases. Bigger plants and larger sales and promotional programs may also be more cost efficient. These scale economies may be achieved more readily in certain cost categories than others, depending on the nature of the product, the manufacturing process and the level of marketing expenditure required to sell it. If significant scale economies may be realized, some competitors, hoping to emerge as low-cost producers with dominant market shares, may be willing to price low enough to gain volume, thus preventing other competitors from going down the same learning curve. The experience curve shows that costs (measured in constant currency) decline by a predictable and constant percentage (usually 10 to30 %) each time accumulated production in volume is doubled. This helps the marketer in projecting costs and prices. Moreover, the experience curve can be linked with the product life cycle as shown in Figure 6.2. In the introductory stage, the average industry price is equal or under the current costs. The demand stimulated by a low price (penetration price), together with experience-based cost declines, leads to a level of profitability much higher than would be generated by a price policy oriented to covering all costs immediately and generating profit at the very beginning of the product life (skimming price).

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Product cost is not a simple hard number. Calculating cost for pricing purposes requires managerial judgment. Cost may be construed as full cost or as out-of-pocket cost; it may be current cost levels or experience-curve estimates of future costs. The interpretation of cost factors for pricing will depend largely n product/market objectives. 6.3 CUSTOMER VALUE Some business managers set prices simply by adding a percentage over costs to yield an acceptable profit. That approach, called "mark up pricing» has two advantages: 1. Price is simpler to calculate. 2. If a firm is a low-cost producer relative to competitors, cost-plus pricing may seem to provide a degree of protection from competitive attack. The trade-off for simplicity and security may be lost profits. In theory, the amount of profit that is sacrificed is the difference between what customers actually pay and what they would have been willing to pay. Compared with cost-plus pricing, pricing according to the value of the product to. the customer is more difficult but more profitable. How then does one determine what the value of the product is in the customer's mind? Here are four relevant considerations. First, it is useful to distinguish perceived value from potential value. Perceived value is what the buyer now recognizes. Potential value is what the buyer can be educated to recognize in the product. Educating buyers is a marketing task, which may be accomplished through advertising, promotion, personal selling, and getting the buyer to try the product. Second, various customer groups may assess product value differently or market segments. Some groups may place different values on the elements that to comprise the product's attributes. (Product, in this sense, includes the product or service itself, its availability and convenience of purchase, the manufacturer's reputation, and the services that the seller provides.) A third factor influencing the customer's sense of product value may be the price itself. Buyers may interpret price as the seller's estimate of the products' worth. If the seller does not value the product highly, it is not likely that the buyer will. Therefore, pricing a product significantly below what the buyer might pay for its functional equivalent can be self-defeating. The buyer may choose a higher-priced alternative if he believes that value is connoted by price. The fourth factor to consider in establishing customer value is the options available to a potential buyer. Clearly, if the buyer can purchase a product at a lower price from one source than another, the lower price sets the upper bound in the marketplace. For the buyer to have effective options, however, he must know what they are. The options available to customers may vary widely. For example, a manufacturer of showerheads may have a choice of using chrome-plated brass or a high-performance plastic. Given the high cost of brass, the plumbing manufacturer is likely to choose the plastic alternative. The buy/not-buy decision may not be determined by calculating expected savings alone. Part of the value of the new forklifts may be the psychic satisfaction derived from owning modern equipment; part may be greater comfort for the operators. In some instances there may be no savings at all; for example, a buyer of antipollution equipment for wastewater treatment may be forced or required to make such an investment to meet environmental protection standards. A product's value, then, tends to be a function of • whether its value is perceived or potential • the utility of its several attributes to the prospective buyer • the extent to which the buyer perceives price itself as an index of product value

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•

other options of which the buyer is aware

6.3.1 PRICE DISCRIMINATION If the seller attempted to set prices according to customer value, he would charge different prices to different customer groups. The seller would negotiate each sale at the price each customer was willing to pay and the seller willing to accept. In the case of material goods, however, that may be an impractical strategy unless the product's form can be differentiated by market segment. A manufacturer of a heavy-duty cleaner could use different brand names and containers for cleaners intended for industrial uses, for hospital cleaning applications, and for hotels and restaurants and could charge three different prices for the same chemical formula. Price discrimination of this sort works only when 1. The products sold in one market are not, for all practical purposes, available to buyers in other segments. 2. Buyers in other markets are not aware that they can buy the same product under another label at a lower price. However, price differences based on actual variations in the design or formulation of the product, to adapt it to the needs of different market segments, are more easily sustained. In the marketing of services, though, price discrimination among classes of buyers is widely practiced. A railroad may alter its freight rates for different classes of goods and may vary these rates with time of year and location. A computer-based information service may have one rate for peak-hour usage and another for off peak, one for public libraries and another for business firms. The reason why price discrimination is easier to practice in the case of services, as opposed to material goods, is because services have high time utility and cannot be held in inventory. If each of these services is not sold when it is available, it is lost forever. Therefore, since services are consumed as they are offered and cannot be placed in storage for either consumption or resale; the service seller may vary the prices to different classes of buyers and in different time periods with relative impunity. 6.3.2 PRICE SENSITIVITY A relevant consideration regarding price, as an expression of product value is howsensitive the buyer is to price. Price sensitivity will vary considerably among purchasers, and for the same purchaser it will vary from one set of circumstances to another. Buyers who can pass on the cost of the purchase are less sensitive to price than those who cannot. Price sensitivity is also influenced by the performance standards by which the purchaser is measured. An engineer buying process equipment for a new chemical plant will be less sensitive to price than timely delivery, and trouble-free start-up service. The engineer will value performance over cost. Consequently, he is willing to pay a premium price to a supplier who has a reputation for high-quality standards, exceptional service, and on-time delivery. In other words, manager performance measures go far in establishing the relative worth of different product attributes for the person who has to make the buying decision. Hence, in industrial buying situations, purchasing managers are characteristically more price sensitive than engineers because the performance of each is measured along different dimensions. Price should be set in relation to a market offering's value, which is called value-based pricing; However, deciding upon a specific price is not simple, because there are other

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considerations. To help us understand these, we next develop a framework for valuebased pricing. Underpinning this framework is the fundamental value equation: (Valuef - Pricef) > (Valuea – Pricea) where Valuef and Pricef are the value and price of the firm's market offering (Offeringf), and Valuea and Pricea are the value and price of the next-best alternative market offering of a competitor (Offeringa). In practice, a rearrangement of this equation better captures how customer firm managers decide between offerings: (Valuef - Valuea) > (Pricef- Pricea) ∆ Value f,a > (Pricef - Pricea ) Often, value analyses or value assessments are performed on a comparative basis, where the differences in performance and total cost are ascertained for two market offerings of interest. Then these differences are expressed in monetary terms and summed to obtain ∆ Valuef,a. Given that Pricea is known, which after some investigation is usually the case, The latest equation then defines the feasible range of prices the firm could charge and still maintain the inequality. This equation also represents a natural way that customer managers decide between two offerings: "What is the difference in the worth of the two offerings to my firm and how does this compare to the difference in their prices? " However, understanding Valuef, Valuea, and Pricea says nothing about a specific price that the firm should choose for Offeringf. Selecting Price, depends upon some additional considerations. To begin, let's consider Figure 6.4. Because value is expressed as the worth in monetary terms, we provide a value continuum expressed in € per unit (€ I unit). For simplicity (and without loss of generality), we assume that the cost of Offeringf and Offering, are the same. The interval {Pa – Va } is the same as between { Pfmax - Vf } Fig 6.4 - A Value-Based Pricing Framework

Finally, a factor in price sensitivity is the uncertainty that may attend switching from one supplier to a lower-priced source. Modest price differences are often insufficient to overcome the purchaser's uncertainties about an untried supplier's product quality, reliability, and service. Moreover, there may be concern about being locked into a new arrangement and vulnerable to subsequent price increases. Thus, price differences between the "in" suppliers and the "out" may have to be significant to get the buyer to switch from a known and comfortable sourcing relationship to one that may be related to uncertainties. 6.4 COMPETITION Competitive market price levels are usually tightly linked with value pricing. They reflect not so much what the product is worth to the customer in some absolute sense but the availability of supply relative to demand: the greater the supply relative to demand, the lower the price.

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For so-called commodities (virtually undifferentiated products) all competitors generally charge identical prices. If one goes above the market price, its sales drop off sharply; if one goes below, all others are likely to follow or risk significant reductions in market share. Therefore, how much a firm is constrained by competitors' prices depends largely on how differentiated its product is. A product that is set apart from other market offerings by its functional design, appearance, brand image, and the supplier's reputation for service and availability can command a price premium. But there are circumstances in which firms will price above competitive levels even though the price differences may not be justified by superior product quality and service. A company may consciously elect to milk the business, that is, to let sales decline and slowly to withdraw from the market. It may continue to sell profitably for some time to its loyal customers, while gradually cutting back , on selling and promotion expenses until it eventually phases out of the market. Some companies may choose not to price competitively because to do so would mean selling below cost. These marginal firms eventually go out of business. Some large companies may elect not to meet the low price of a smaller competitor because that might mean giving up unit profits on a large sales base. It may be less costly in the short run to hold prices and give up some small percentage of market shares. In the long run, of course, the smaller competitor may encroach on the market positions of its major competitors until it becomes a major factor in the market. Under shortage conditions some firms may price opportunistically above prevailing market levels, knowing that demand far exceeds available supply and that some buyers will have to pay the high price. 6.4.1 PRICE LEADERSHIP In general, pricing strategies must be shaped with regard to present and future competition. There is a high degree of pricing interdependency among firms in a given industry, with each being heavily influenced by the others' strategies and tactics. Some firms follow price trends; others, often the larger ones, try to lead them. Accordingly, in contemplating price changes, the marketing manager will often seek to anticipate competitive responses. "If we do this, what are they likely to do?" Moreover, price leaders will plan their moves in ways that are designed to elicit certain anticipated responses from competitors. What is a price leader and what are the qualifications for filling that role? A price leader exerts a dominant influence on market prices for a class of products. By initiating price increases or decreases, the leader may give direction to market price patterns. It may lead without moving at all. For example, if others seek to raise prices and the leader does not follow, the higher prices cannot be sustained. This is not to say that other firms do not influence price levels. On the contrary, the smaller firms often undermine the prevailing price level by shading prices in a series of transactions. Fig. 6. 5 -The 'price leadership' PRICE LEADERSHIP Stabilization role in oligopolistic markets • Leader ship of the 'dominating company' : the strongest competitor • 'Barometric' leader : the most informed competitor • 'Agreed' leader : the most trustful competitor Functions of price leader

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• Stability and profitability of the industry sector • Recognized spokesman • Environmental intelligence • Regulator and middleman An industry may acknowledge a price leader through tacit recognition that the dominant firm's low-cost position and resulting high margins give it the resources for funding new product development and market development. The price leader may be recognized, as well, for having superior financial resources and thus so superior capacity for withstanding economic reverses: Finally, there is the implicit assumption among competitors that it is in the leader's best interests to act in the industry's overall best interests. The effective exercise of leadership depends on several factors. First, the leader must have a superior market information system for understanding what is on going on in the market and reacting in a timely way. Second, effective leadership requires a clear sense of strategy. Third, long-term measures applied to managerial performance are important. Managers in leadership firms may be required to act for the short term in ways that adversely affect market share and/or profitability. A strategic plan in which price is a key factor may take two or more years to effect a profitable outcome. Moreover, price leaders should want to lead and to act responsibly. They should have a broad concern for the health of their industries. What are some of the characteristic pricing goals and strategies of leader firms? First, in oligopolistic industries, the leader will tend to behave in a way that preserves short-run, market share stability. Pricing for market share gains is very likely to invite sharp competitive price reactions and a subsequent reduction in overall industry profit. Industry leaders at times may even yield market share to smaller, weaker competitors to discourage their cutting prices in an effort to utilize plant capacity. Some evidence shows a general tendency for individual firms in oligopolistic industries to seek market shares that approximate their shares of industry capacity. Because of this tendency, market prices in conditions of general capacity underutilization tend to be set by that firm that has the least favourable ratio of market share to share of industry capacity. Such a firm seeks to redress the balance by reducing prices to improve volume, and all competitors are forced to follow. So the leader may try to preserve price levels in economic downturns by yielding a fraction of its market share to competitors whose market share/plant capacity ratio might lead them to cut prices. The leader may then take that share back on the economic upturn by lagging slightly behind the rising price trend. Because price leaders are often technical leaders, their strategies also take into account the relationship between new product prices and current offerings. New products superior in performance to the ones they will replace, are usually priced at a premium over the old ones, commensurate with the increased value to customers. This tends to preserve price levels and margins in the old lines and less competitive pressures to cut prices to preserve sales volume. The strategy is a reinforcing one; the higher margins. on the new products provide overhead funding to support continued product development and a strengthened leadership position. 6.5 CUSTOMER BARGAINING POWER If the product may be perceived as a store of value to be shared by buyer and seller, how the "pie" is divided between them may be determined largely by their respective

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bargaining strength, with the outcome established through price negotiations. In considering pricing as a bargaining process, it is useful to know what basic factors confer power in the transaction relationship. They are (I) market supply / demand conditions, (2) the extent of the seller's product differentiation and the availability to buyers of acceptable substitutes, (3) buyer-seller interdependencies, (4) the ability and willingness of each side to assume risks, (5) the availability of cost information to the buyer, and (6) the buyer's expectations as to what the price should be. 6.5.1 MARKET SUPPLY / DEMAND CONDITIONS While market supply/demand factors for a product may not determine precise price points, they do establish a band within which firms set prices. To the extent that supply is limited relative to demand, producers gain in bargaining power vis-à-vis buyers. As noted earlier, competitive price relationships within the band are determined largely by the extent of product differentiation. The band may be narrower for a commodity, such as a particular grade of wheat supplied by many wheat growers, than for a highly differentiable product, such as trucks or commercial planes. Nevertheless, when the supply/demand balance for the product category shifts, the prices of all products are likely to be affected. Producers, then, may seek to influence price levels r by controlling supply. In a monopolistic or oligopolistic industry, that may be done by tacit' agreement among producers or by overt, collusion in parts of the world in which price agreements among competitors, often with government involvement, are accepted practice. OPEC (Organization of Petroleum Exporting Countries) is a familiar example of this. Another way of limiting supply within geographic markets to sustain or raise price levels is for firms to influence national governments to restrict imports. While businesses are concerned about price levels and profits, governments may act to protect employment, preserve or increase the tax base, and/or maintain productive capacity that may be critical for national autonomy. 6.5.2 PRODUCT DIFFERENTIATION Firms may control supply/demand relationships for their particular products through product differentiation. To the extent that buyers prefer one brand to others, the producer of the preferred brand has the freedom to price over competing products. The amount of a sustainable price difference will depend on the acceptability to the buyer of substitute products, that is, from the buyers perspective, how much of a premium over the price of competing products he is willing to pay for the preferred brand before settling for a substitute. The scope for exceeding competitive prices in the top band is quite enormous and is usually very profitable. Products are differentiated by non-price dimensions. This involves market segmentation and adequate global offering. The Figure 6.6 gives an example of segmented price levels for guillotines for the mechanical industry. Product differentiation and user preference is relevant in another respect. Strong product demand at the user level may allow the manufacturer to raise prices to intermediaries in the channels of distribution, that is, to negotiate for product distribution services at lower distributor margin levels than competitors may pay (whose brands are in lesser demand).

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Fig 6.6 - Variability of price for guillotines

6.5.3 BUYER-SELLER INTERDEPENDENCIES When a single customer accounts for a high percentage of the producer's sales revenues and plant loadings, the customer is clearly in the stronger bargaining position in price negotiations if that customer has other sourcing options. If the seller loses the customer's business, the producing firm may find it difficult to cover its fixed manufacturing costs, and may be forced to make mass layoffs. , Accordingly, the seller may be inclined to accept any price that covers its variable costs and all or even part of its fixed expenses, rather than confront the possibility of a substantial reduction in manufacturing throughput. Moreover, dependence on a single, large account sets the stage for buyer exploitation and may seriously jeopardize the long term health of' the seller's business. Procurement managers in the automotive industry, sourcing from many small companies and often accounting for a third or more of their output, have been known to exert intense pressure for annual price concessions, in effect bargaining away supply industry profits. On the other hand, buyers may be highly dependent on their suppliers and may not have opportunity to negotiate price concessions. A buyer might depend on an equipment producer for spare parts and service. If only those parts made by the equipment manufacturer can be used for repair and replacement purposes, then the manufacturer has the upper hand in setting the parts and services prices that machine owners must pay. 6.5.4 RISK ASSUMPTION In price bargaining, particularly on large contracts for customized equipment, where project costs may be uncertain, provision will often be made for sharing the cost risks between buyer and seller. Cost-based pricing in which the buyer assumes some level of

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the risks associated with cost uncertainty gives the buyer negotiating power in three respects. First, the expected compensation for taking such risks is pricing lower than if the price was decided as fixed, with the seller assuming the full costs. Second, cost-based contracts involve sharing cost information between the two parties, with the buyer typically having cost audit privileges. The final price is then established by bargaining for each project cost item, which forces the seller to defend the accuracy, legitimacy, and fairness of each one. Having cost information gives the buyer considerable power in structuring the negotiating agenda. Third, it follows that the seller gives up the opportunity to establish a price based on the product's value to the buyer. 6.5.5 BUYER EXPECTATIONS Buyers (and whose whom they serve) have some sense of price trends and underlying economic conditions especially for products that are purchased regularly. Therefore, buyers are likely to resist product prices that rise faster than the costs of materials and labour. In particular, this is true if the buying organization has current information on the market prices for the major materials, components, and labour, which its suppliers pay to their sources. 6.6 GOVERNMENT INTERVENTION Given the critical influence of supply/demand relationships on price levels generally and on individual buyer-seller negotiations specifically a major area of government involvement is import regulation. The government may set import quotas on specific product categories to protect domestic producers, eliminating or at least limiting the threat of foreign competition and restricting supply to domestic production. In the broadest sense, government agencies influence supply/demand relationships through actions that affect the local currency’s value relative to other currencies. A major influencer in the U.S. is the Federal Reserve Bank (FRB), If the FRB allows interest rates (and thus the value of the dollar) to rise, the U.S. market becomes more attractive to foreign producers who can manufacture products using low-cost labour and sell them in this country at or below domestic producers' prices. So supply may increase relative to demand. In addition, domestic industrial customers tend to cut back domestic manufacturing capacity and build plants in low-cost foreign countries, reducing their demand in the United States for the materials, components, and supplies they buy. When interest rates are held down through the actions of the central U.S. bank and the dollar declines relative to foreign currencies such as the€, European producers find it more difficult to compete in the U.S. against domestic producers, and the available supply declines. Similarly, demand increases as the industrial marketers' customers shift productive capacity back to this country. The stage is then set for price increases. Government agencies also strongly influence price levels in very specific ways. In various regulated industries such as public utilities and communications, state and federal commissions have the authority to approve or reject proposed price changes. Their mandate is usually to protect consumer interests but to allow the regulated industry a reasonable return on investment. Other, no regulated industries may be constrained on their pricing actions by government agencies. In times of shortages or high rates of inflation, government agencies may set price guidelines, monitor announced price changes, and act vigorously to get firms to roll back increases that exceed the guidelines. ,

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6.7 THE BOUNDS OF FAIRNESS. Because industrial buyer-seller relationships tend to be of long duration and be built on trust, both sides value fairness and ethics as a quality of exchange. Thus, the acceptability of price changes may be determined largely by whether the buyer deems that he is being treated fairly. While sellers may be tempted to "charge what the traffic will bear" when their products are in short supply or when buyers have no other sourcing alternatives, industrial marketers seem to exercise restraint in the interest of maintaining salutary customer relations for the long term. Buyers who must succumb to price gouging at the hands of opportunistic suppliers are typically quick to switch to other supply sources as soon as they are able. 6.8 PRICING OBJECTIVES Pricing is a key element in an overall business strategy, and to make strategic pricing decisions it is important to know what objectives are being served. The range of possibilities is quite large. One- is to gain market share or to yield it opportunistically with little concern for future consequences (milk the business). A seller may price to discourage some competitors and forestall others from entering the market. It may hold prices high (price umbrella) to avoid driving out less efficient competitors and possibly risking antitrust charges. Fig 6.7 - Objectives in price setting * Volumes Market share Turnover Growth * Profit Capital reward Maximization of profit Profitability

* Competition Leader/follower Peace/war Stabilization... * Others Social Ethics Prestige...

The seller may price low to meet a competitive attack, to take an order that offers an opportunity to gain a new customer, or to acquire experience in designing and making certain products. It might also price a product to break even or perhaps price some products at a loss in order to offer a full line to customers. Alternatively, one might price high on some new product to minimize its impact on the sales of old products in the line, thus avoiding cannibalization. Whatever the objective, it is important that it be carefully determined, lest pricing decisions become aimless responses to the moves of others. 6.8.1 SKIMMING AND PENETRATION PRICING Market entry situations and the development of new markets raise questions of pricing objectives and strategies. In the early stages of the product life cycle, marketers must often choose between pricing high (skimming) to maximize short-term unit contribution and pricing low (penetration) to maximize unit volume and pre-empt competition. A skimming strategy has the advantage of permitting an early focus on those customers for whom the product has the greatest value and who will pay the most. Then, theoretically, as the price comes down, new market segments open up in order of declining product value to different customer sets. In principle, a strategy of reducing price gradually to broaden the potential market maximizes total profits over the product life cycle. It may also serve the long-run development of the market by establishing early Scanned by PHAN Thanh Tu

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on a prestige image for the product. However, a skimming strategy used by the innovator may encourage competitors to enter the market and exploit the new product at lower price levels. Penetration pricing, in' contrast, incurs high risks and offers potentially high rewards. There are several conditions that must be met if the gamble is to Op y off. First, the product should be free of any defects; otherwise, the seller runs the risk of generating high demand with low prices and then facing extensive field service problems and/or product recalls. Fig 6.8 - The main pricing strategies and tactics

Second, potential customers should be able to adopt the product quickly without having to test it for long periods; otherwise, competitors will have time to prepare their own market programs. Third, sufficient plant capacity should be in place and adequate distribution channels already established to fill market demand quickly. Success in penetration pricing hinges on timing and on taking away from competitors the opportunity to react. Finally, a penetration pricing strategy is not likely to be effective in mature, slow-growth industries dominated by established competitors. Their capacity for fighting off the invader by reducing their prices to variable cost levels would hardly "make the game worth the candle" for the new entrant: The most current strategies and tactics in price setting are shown in Figure 6.8. 6.8.2 DEMAND ELASTICITY The consideration of penetration pricing brings up the matter of demand elasticity as it relates to pricing strategy. In economic theory, the lower the price, the greater will be the demand for the product. In developing pricing strategy, however, some modifications of the theory must be recognized. The demand for many goods, particularly in the industrial sector, is derived demand. For example, the demand for truck motors depends directly on the demand for trucks. Price reductions on this component are not likely to increase volume in the truck motor industry. In addition, price reductions in the early stages of market development for a product that customers must be educated to use are not likely to stimulate sales immediately. It will take more than attractively low prices at this stage to overcome inherent market caution.

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Fig 6.9 -Price-demand elasticity Nq.p=

Elastic demand Inelastic demand

%variation of demand (q) %variation of price (p)

High var.costs Low fixed costs Keep price Increase price

Low var. costs High fixed costs Lower price Keep price

Price elasticity for industrial products largely reflects the effect of users switching from one product to a substitute product to take advantage of significant price differences between the two. This is the basic principle of the "Maximum Acceptable Price". As oil prices rise relative to the cost of natural gas and coal, more companies will shift to these alternative energy sources. As zinc prices increase relative to those of high-performance plastics, more manufacturers will redesign their zinc products to use the newer, lowercost materials. In setting pricing objectives, therefore, it is important to ask several questions: What can we attempt to achieve? Where will sales volume come from? How will competitors react? What will be the impact of the pricing strategy for one product on other products in the line? How will potential customers react? But the most important question of all is: What are we trying to achieve? 6.9 THE PRICING PROCESS Although in economic theory prices are set at the intersections of supply and demand curves, this notion offers little help for the individual firm. Supply/demand analysis is broadly relevant for classes of products such as wheat or nucleopolyamides or caustic soda. But unless the product has no direct competition (as in a monopoly), the firm's price is necessarily a function of market price levels for that class of products adjusted for any differentiation between the firm's products and -those of its reference point competitors as customers perceive the difference. The pricing process seeks to establish the market value of the differentiated product over competitive prices. A second purpose may be to test and adjust for any shifts in supply/demand conditions and to determine the willingness of competitors to follow. Finally, the pricing process may serve to adjust price to reflect cost-factor changes and to .prevent cost escalation from eroding margins. The pricing process, therefore, should be one of continually adjusting prices to market and competitive conditions. As in game playing, each decision is seen as one move in a series of plays. Pricing strategies can be carried out effectively if 1. Pricing decisions are based on extensive current market information. 2. Competitive and customer responses to price changes are carefully monitored. 3. Pricing decision-making is centralized within a business and not delegated to field representatives (centralized control is critical for formulating and implementing price strategies). 4. Pricing moves respond to changes in market conditions, taking account of competitive behaviour. An important step in the pricing process, sometimes given insufficient attention by marketing managers, is preparing customers and competitors to accept price changes. Industrial purchasing managers must understand the purpose and significance of supplier price moves and are often asked to explain them within their organizations.

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Competitors, too, have to decide how they will respond; indeed, how price changes are made public may significantly condition competitive reactions. The great majority of price increases are publicly explained as adjustments for costfactor escalation, some are justified as being necessary to cover the costs of product improvements, and some are simply explained as reflecting general inflationary conditions. In any event, whatever power buyers have to resist short-term price increases, in the long run they must be convinced that price changes are fair if they are to remain as loyal customers. And if competitors are to respond prudently to price shifts, up or down, it is important for them to understand such, changes in terms of the price initiator's perception of economic and market trends and of technical developments. The explanatory information accompanying a price announcement is important to customers and competitors alike. How such information is announced and communicated is an important concern in the pricing process.

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CHAPTER 7. MARKETING DISTRIBUTION AND LOGISTICS

"Marketing doesn't only consist of taking a product from its concept until it reaches the customer but considerably further, in fact, until the end of the product life" Many customers buy a technological product not only because of its price or specification and performance but also because of its availability and the vendor's reputation for meeting delivery dates and conditions of after-sales service. It is necessary to touch upon the subjects of channel strategy and marketing logistics because both these areas impinge upon the customer and are related to various types and levels of services. Some manufacturing companies marketing technological products to the industry may use distributors, stockists and agents or may go directly to the user. Such channels will be inextricably involved in both the selling and service functions. 7.1 HOW TO DEFINE A DISTRIBUTION NETWORK IN B TO B MARKETS? The market considerations induce that the industrial distribution can take multiple structures and that the means and circuits used are not necessarily exclusive but may be diverse and even complementary. In the majority of the cases the producers use various distribution channels according to segments that they select and want to reach. In the same way the intermediaries can, at a time, act as exclusive dealers for a given type of product and be simple trader or agent for other parts of their activities. Which are the criteria that permit to classify the distribution channels and networks? 7.1.1 GENERAL CRITERIA SPECIFYING A DISTRIBUTION NETWORK: Various combinations of intermediaries and direct selling may be employed in the business marketing channel. In fact, one manufacturer could use several avenues shown in Figure 7.1. The wide array of options reflects the many tasks to be performed. The variety of channel arrangements conforms to the segments and niches the producer is looking for. A distribution network will be characterized by its global dimensions; extent, intensity and multiplicity • The extent The number of intermediate layers between the producer and the user defines the extent of a distribution network. The direct circuits are short as they just include one or two levels. In the most direct networks, the products pass straight from the manufacturer's site to the customer's premises. In an indirect network the products are distributed by one or more intermediaries, like authorized distributors, sub-distributors, service-shops, or multi-brand industrial resellers.

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• The intensity Distribution networks can count one or more intermediaries at the same given level of distribution and for a chosen geographical area. If there is only one, the distribution is said exclusive; if there are two or three, it is said selective; and if there are more of them, it is called intensive distribution. In the B to B, the first two types dominate. Fig 7.1 - Channel alternatives in the Business Market

• The multiplicity A simple network shows only one mode of distribution, whereas a mixed network counts several different channels working in parallel. Through a mixed or multi-channel network, a manufacturer can, for example, distribute its products directly to some local important customers (large accounts) and, at the same time, rely on indirect distribution forms for other customers or segments that he tries to reach via several intermediaries or mediators. 7.1.2 MAJOR TYPES OF INDUSTRIAL MIDDLEMEN: Besides the direct sales forces of the producer, channels for industrial goods and services can include manufacturers' agents, industrial distributors, dealers, brokers, jobbers, and commission merchants. Each is characterized hereafter while we put forward their main role and position. - Manufacturer's representatives (MR) or agents Independent salespeople who represent, on a long-term basis, a number of manufacturers whose products complement one another but are not competitive. The manufacturers' agent does not take title or possession of the products. These agents have expert knowledge on technical products and the markets for those products. They are paid on a commission basis. - Industrial distributors Local, independent sales organizations that take title and maintain inventories of specialized or diversified product lines, and resell these products at a margin above their

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cost. Distributors have long-term relationships with the manufacturers whose products they sell. In addition to selling, they also solicit new accounts, deliver products, offer credit terms, and sometimes provide assembly and repair services. - Jobbers Jobbers represent manufactures of products sold in bulk (such as raw materials) for which they take title but do not take possession. The relationship between jobbers and manufacturers is usually short-term. - Brokers Brokers bring together the buyer and seller to complete transactions involving large quantities of products that are usually highly standardized or seasonal. The broker may represent either the buyer or the seller, but the relationship is short-term and sometimes only a one-time arrangement. Brokers do not take title or possession of the goods and are paid on a commission basis. - Commission Merchants Commission merchants deal on a short-term basis with manufacturers of products sold in bulk (such as raw materials). They do not take possession of the materials. Commission merchants represent the manufacturer; they can negotiate prices and complete sales. Of these, the most prevalent are manufacturers' representatives or agents and industrial distributors. Let us elaborate on each. •

Manufacturers' Representatives or agents

The typical agent operates an independently owned business. The organization usually has fewer than ten employees, one to two offices, and represents from five to ten different manufacturers. These manufacturers should not be direct competitors with one another, but instead, tend to sell related kinds of products. The association is often longterm, lasting as many as ten or more years. Each representative or sales agency will tend to cover a large territory, and including over one hundred industrial customers. The principal function of an agent is selling. They do not take title to the product, and do not maintain inventories. Those manufacturer's representatives are professional salespeople, often with technical training, who have established contractual (agency) relationships with various manufacturers. The manufacturer establishes most of the terms of sale, although representatives may have limited authority to negotiate. Compensation comes in the form of straight commissions. There is no fixed financial burden to the manufacturer, as the representative is paid only when a sale is made. As a result, representatives are especially appropriate for small and medium-sized companies that do not have the resources to develop and maintain a direct sales force. Keep in mind the significant overhead costs (e.g., training costs, fringe benefits) involved with a sales force. As sales volume increases, the cost advantage of straight commissions begins to disappear. Agent representatives provide the manufacturer with a means of entering untapped markets, and with market coverage in geographic areas where the manufacturer does not deploy a sales force (e.g., territories with low market potential). Because of their extensive knowledge of customer needs and buying behaviour in the geographic region they cover, the representative offers the manufacturer immediate access to key customers and decision makers in the region. A key concern of the manufacturer is the extensive control that is sacrificed when opting for agent representatives instead of a direct sales force. Because they represent a number of companies, the representatives' time is a scarce commodity for which each manufacturer is competing. The manufacturer who provides higher commissions, better

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quality products, a more personalized relationship, or stronger sales promotional support is encouraging a more concerted effort from the representative. Manufacturers may also want representatives to increase the extent to which they specialize in a particular product area, Additional concerns include the tendency for representatives to provide poor market feedback and after-sale servicing, As an independent salesperson, the agent representative may not spend extensive time surveying problems that customers have with the manufacturer's product(s), or in identifying new applications or unmet needs the product(s) could fulfill. Similarly, the representative is paid to make sales, and so is not especially motivated to provide a quality service function after the sale, unless this action directly leads to further sales. Qualified agents do tend, however, to provide good technical advice to customer organizations. They seek an ongoing relationship with the manufacturer, and are anxious that the products being sold will not soon become obsolete. The enthusiasm an agent demonstrates toward a particular product or product line is also greatly affected by the quality of his relationship with the manufacturer. •

Industrial Distributors

The second major type of intermediary is the industrial distributor, defined as "a wholesaler who sells the majority of its goods and services to industrial, commercial, and institutional customers, the government, builders, and farmers". A distributor is an independently owned and operated merchant intermediary who takes title to products, keeps them in inventory, provides for delivery and frequently for credit, and may service products after the sale. Occasionally, a distributor will also become involved in final operation and manufacturing or product assembly. There are two main categories of industrial distributors: general line and specialized. A general line distributor is much like an industrial supermarket store, carrying a wide array of differing products: 'As a rule, no one product category generates over 49 percent of the organization's sales. In fact, the general line distributor may carry literally thousands of products either in inventory or available through catalogue sales. Specialized distributors, as the name implies, focus on a narrower range of related products, such as cutting tools and cutting fluids. A trend toward specialization in recent years has found this type of distributor growing in size and numbers, while general line distributors have introduced specialized departments. A third type of distributor, the combination house, sells in both consumer and industrial markets. The principal functions provided by industrial distributors include selling, local market coverage, holding inventory, and providing credit. The inventory function is important because it represents a means for the manufacturer to spread risks. Distributors can also provide the manufacturer with valuable information regarding local market trends. Because of their proximity to customers, industrial distributors are relied on to sell products for which rapid delivery and servicing is critical. Manufacturers can bring down sales and distribution costs through the use of industrial distributors. The key concern of the manufacturer in using industrial distributors is control, as was the case in using manufacturers' representatives. However, the problem is more critical with distributors, because they also carry competitor's product lines, and because of the sheer number of products they carry. And, some distributors are sufficiently large, especially compared to the size of the manufacturer, to create control problems. The manufacturer loses some or all control over variables such as sales effort, generation of new accounts, delivery reliability, service quality, returns policies, pricing, and customer feedback. Some of these variables, such as sales effort and service,

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require technical capabilities which the distributor may not have, and may resist developing or updating. And yet, distributor responsibilities are, if anything, growing. Their willingness to be cooperative depends on how easy they find the manufacturer to deal with, as well as the support and incentives the manufacturer provides. Also, some distributors are simply satisfied with the status quo They have an established customer base, are achieving stable sales and profit levels;; and are not especially motivated to develop new accounts. When manufacturers provide technical training programs, discounts, free merchandise, exclusive arrangements, or other incentives to the distributor, they should carefully evaluate what they are getting in return. Is training resulting in better service and more complete market penetration? Do exclusive arrangements result in distributors carrying and supporting only the manufacturer's brand? It is not unusual for manufacturers to provide a missionary sales effort for distributors. In such circumstances, are distributors maintaining adequate stocks and providing timely delivery in support of these sales? Distributors should be managed much the same as a direct sales force. All too often, manufacturers establish a relationship, and then provide costly incentives from which they receive little benefit. Motivation of distributors is the key. A popular approach is to provide direct incentives to the distributor's sales force, such as contests offering prizes or bonuses. Many of these are ineffective, however, because they are not well publicized, they're too complicated, too many occur at once, they do not meet distributor's goals, they last too long or not long enough, and they fail to reward the right people. Often these problems arise because the manufacturer designs the incentive program without any input from the distributor. Another frequent mistake is to offer one generic support program to all dealers. The most effective distributor support programs are tailored to different types of distributors. Beyond support programs, industrial distributors have a number of other concerns in their dealings with manufacturers. Complex ordering procedures, late deliveries, unwillingness to expedite orders, and unsatisfactory returns policies on unsold, defective, or discontinued products are some of the more common complaints. These and other problems confronting the modern industrial distributor are summarized in Figure 7.2. The problems perceived by both the manufacturer and the distributor point up the need for effective communication between them. The relationship is multifaceted for the distributor is a customer, a partner, and a hired hand. The success of either organization very much depends on the actions of the other. Fig 7.2 - Twenty Pressing Problems Facing Industrial Distributors Possible problems facing distributors 1. Customer purchases are off 2. Intense price competition 3. High interest rates 4. Late payment by customers 5. Customers switch distributors for slightly lower prices 6. High cost of outside sales force 7. High labour costs 8. Finding new employees

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9. Manufacturer's returns policies 10. Training new employees 11. Motivating inside sales force 12. Manufacturer discounts too low 13. Dumping by distributors 14. Keeping track of inventory 15. Keeping catalogues up to date 16. Setting prices 17. Slow delivery by suppliers

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18. Data processing 19. Dumping by manufacturers

20. Competition from owned distributors

manufacturer-

7.2 CHANNEL DESIGN Channel design is the dynamic process of developing new channels where none existed and modifying existing channels. The business marketer usually deals with modification of existing channels, although new products or customer segments and new markets may require entirely new channels. Channel design is an active rather than a passive task. Effective distribution channels do not simply evolve; they are developed by management, which takes action on the basis of a well-conceived plan that reflects overall marketing goals. Fig 7.3 - The Channel Design Process

Channel design is best regarded as a series of stages that must be completed so that the business marketing manager can be sure that all important channel dimensions have been evaluated (Figure 7.3). The result of the channel design process is to specify the structure that provides the highest probability of achieving the firm's objectives. Note that the process focuses on channel structure and not on channel participants. Channel structure refers to the underlying framework: the number of channel levels, the number and types of intermediaries, and the linkages among channel members. • Stage 1: Channel Objectives Business firms formulate their marketing strategies to appeal and select market segments, to earn targeted levels of profit, to maintain or increase sales and growth rates. These objectives should, in addition, be met within specified resource constraints. Thus, whether the business marketer is designing a totally new channel or redesigning an existing one, the first phase is to comprehend fully the marketing goals and to formulate corresponding channel and distribution objectives.

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Marketing and distribution objectives guide the channel design process and actually limit the range of feasible channel structures. Before the alternative channel structures can be evaluated, the business marketing manager must evaluate other limitations on the choice of channel structures. • Stage 2. Channel Design Constraints Frequently, the manager has little flexibility in the selection of channel structures because of trade, competitive, company, and environmental factors. In fact, the decision on channel design may be imposed on the manager. The variety of constraining factors is almost limitless and those factors are related to nature of products, tradition, financials, dispersion of markets, or availability of intermediaries. • Stage 3. Global Channel Tasks Each channel structure will be evaluated on its ability to perform the required channel activities effectively and efficiently. The concept of a channel as a sequence of activities to be performed, rather than as a set of channel institutions, is essential to channel design. The business marketing manager must creatively structure the tasks necessary to meet customer requirements and company goals rather than merely accepting existing channel structures or traditional distribution patterns. The backbone of channel design is the analysis of objectives, constraints, and channel activities. Once these are understood, channel alternatives can be evaluated. • Stage 4. Channel Alternatives Specification of channel alternatives involves five primary issues: - The number of levels to be included in the channel (degree of "directness" or channel extent) - The types of intermediaries to employ (specificity) - The number of channel intermediaries at each level of the channel (intensity) - The number of channels to employ (multiplicity) - The legal issues The decisions made for each are predicated upon the objectives, constraints, and activities previously analysed. • Stage 5. Channel Selection Most channel design decisions are only slight modifications of the channel structure in response to changing markets, expanding geographic coverage, new customer requirements, or new products. Selection of the appropriate modification in channel structure may be fairly straightforward; in fact, the range of choices may be quite limited. A useful approach to evaluating channel options takes into account all the elements of the channel design process as well as important customer requirements. The focus is to create an "ideal" channel system that fully addresses customer needs. Once this system is specified, it is compared to the "feasible" channel system created on the basis of management objectives and constraints. The critical element is to compare both systems on the basis of customer service performance, structure, and costs. The channel decision maker must consider qualitative as well as quantitative factors. Given two channels with nearly similar economic performance, the critical factor may be the degree of control that the business marketer can exercise over the channels.

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7.3 THE NEED FOR A SYSTEMS VIEW One the choice of channel(s) is made; the objective is to make it run smoothly and in the advantage of all partners. The importance of managing channels in a good way is rooted in differences in the objectives and needs of the different organizations within the channel. Such differences can lead to conflict among individual channel members, a fairly common occurrence. Conflict itself is not necessarily a bad thing, if each party involved recognizes the problem and act to correct the situation. Areas of disagreement are multiple as Figure 7.4 shows some frequent antinomies in their views. Fig 7.4 - Current Conflicts Between the Interests of Manufacturers and Industrial Intermediaries The Manufacturer may prefer:

The Intermediary may prefer:

Lower manufacturer inventories Higher distributor inventories Lower distributor margins Limited discounts to distributors Lower promotional expenditures Well trained field representatives Accepting few returns Timely customer feedback from distributors Continuous product improvements obsolete Product line extension Sales to new accounts Delivery by most cost-efficient means Sales support for its products over others

Higher manufacturer inventories Lower distributor inventories Higher margins Generous manufacturer discounts Strong manufacturer promotional support Salespeople in field, not in training Liberal returns policies Salespeople who sell, not market researchers Products that do not continually become A limited assortment of the products Sales to existing accounts Timely delivery Sales of those products with highest return

The intermediary may be frustrated with low-quality products, continue new product introductions, slow deliveries, manufacturers who keep the big accounts for themselves, and manufacturers who seem distant and not concerned about the intermediary's problems. In either case, the result can be arbitrary actions intended as retribution against the other party. The manufacturer may lessen support, or terminate the relationship; the intermediary may push the goods of other manufacturers. Industrial marketers not only must be cognizant of existing and potential conflicts experienced by intermediaries, but also must continually monitor such conflicts. They should seek to ensure that conflict has an outlet or a means to constructively express itself. Otherwise, conflict will only tend to escalate. This control can be achieved through an open and effective communication network between manufacturer and intermediary. Regular meetings, site visits, a complaint telephone line, distributor councils, and surveys of intermediaries are some possible steps to enhance communication. It is also important that channel members collectively look beyond their own parochial interests, and recognize that the channel itself is a system. As a system, the channel consists of a set of interdependent components that combine to produce value. The success of the overall channel, and that of the individual members, is dependent on how much value the members combine to deliver to end-users. Like parts of an engine, channel members are mutually interdependent, and the system falters if any component fails to perform its mission adequately. Because the members of the channel are usually independent organizations, the systems perspective becomes meaningful only when purposefully adopted by managers. Relationships must become less adversarial, with channel members dealing with one another as partners. One approach is to develop the channel as a vertical marketing

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system (VMS). With a VMS, the marketer attempts to achieve "technological, managerial, and promotional economies through the integration, coordination, and synchronization of marketing flows from points of production to points of ultimate use". The coordination and control necessary to realize such economies in a VMS can be achieved either through ownership, legal contract, or economic power. When the c ordination and control is achieved by buying out intermediaries (i.e., making them captive, a corporate VMS is established. If formal legal contracts are used to specify the roles and responsibilities of channel members, coordination and control are being achieved through a contractual VMS. Alternatively, channel members sometimes cooperate with one another because of their economic dependency on one of the members, often the manufacturer. For example, intermediaries may find a disproportionate amount of their sales are of one manufacturer's products. Or, they may find that customers are more receptive to them and the various products they sell because they carry a particular manufacturer's line. In such cases, the manufacturer is using economic power to achieve coordination and control in an administered VMS. 7.4 THE DISTRIBUTION CIRCUITS IN B TO B One can define the distribution circuit as the globalization of sequences with all the interfering agents between the availability of finished product at the manufacturer's premises, and that-same product as such or introduced in a complex combination of goods and services put at the disposal of the end user. 7.4.1 THE TRADITIONAL INTERMEDIARIES: They are different in nature depending of their roles, functions and relations; • The own integrated distributors They belong in all or part to the manufacturer who detains the control and the management; subsidiaries, branches, internal sales forces (sales representatives, sales engineers, before- and after-sales technicians... ) • Contractual intermediaries Their activities are not always bound exclusively to the manufacturer's product portfolio but their collaboration is managed by bilateral long-term contracts; independent authorized resellers, multi-cards agents, franchisees, brokers, dealers, license holders... • Free intermediaries They buy and resell under their own brand and logo, or integrate the product in their own production; specialized distribution chains, central purchasing groups, assemblers, original equipment manufacturers (OEM), installers... Figure 7.5 gives a simplified diagram of an industrial distribution network and puts the emphasis on the possible associations with complementary product manufacturers or with producers addressing the same customer segments. Such combination of channels permits, by trade-offs between the different possibilities, to have a better market coverage and to activate more or less one or another circuit in order to distribute and booster sales while - approaching new users segments - covering new geographical zones - controlling sales expenditures and communication efforts - stimulating and exploiting the brand and notoriety of the company

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Using a multi-channel approach permits to reach three objectives; - To contact distinct purchaser groups having different need and buying habits. - To have highly qualified intermediaries who are well introduced in specific markets - To create a synergetic emulation between the different circuits Fig 7.5 - Simplified diagram of a B to B distribution network

7.4.2 THE EMERGENCE OF NEW VIRTUAL CHANNELS: The third objective that one has just mentioned takes a more and more big importance due to the insertion and the use of the present Information and Communication Technology (ICT). The development of the e-trades business and the generalization of internet facilities permit a more direct and faster contact between the different partners, and this whatever their place in the distribution circuit The CRM models and software (Customer Relation Marketing) are universally available and help the manufacturer to know the final market better in order to improve his offering. This permits him to remain the most competitive possible while enhancing customer loyalty. The development of internet sites accelerates this movement while widening the range of possible contacts as well as speed, adaptation and accuracy of information. Is internet then a possibility to suppress or to oust the intermediaries? The answer is definitely no! If it is true that means and forms of collaboration between the different actors are in mutation, the internet adds non negligible advantages while increasing the service and therefore the added value; - The customers want more choice, more advices, more global solutions... and this more quickly. Scanned by PHAN Thanh Tu

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-

The price can become more transparent but remain one attribute only among the whole set of other variables of the formulated offering. - The stream of information, often more specific, requires new filters, interpretations, explanations... The mediator's role is larger than a simple 'contact' or 'encounter' function with the customer. It enlarges itself to a harmonization of the exchanges of queries and complex information between manufacturers and customers, often overreacting to the impulses of a technological universe in perpetual evolution. The middlemen become therefore a counsellor capable to present global solutions to the customers' expectations. They can aggregate elements of offerings from several suppliers and put themselves forward as structural guarantors for overall quality. This permits a real 'one to one marketing' that strengthens the relation with the customer. The manufacturer has, as for him, all advantage to shoulder the action of his mediators and dealers while working together with them via a clear and efficient communication network. The classic CRM enlarges therefore and is more and more reinforced in a Channel Relation Management. A 'multi-channels' structure remains the best solution while integrating the new possibilities offered by the developments of the ICT's; - No one manufacturer or intermediate can be present and efficient in the whole market - Different partners permit different offerings adapted each time to customers' desires - The interconnection permits new partnerships according to the new marketplaces (sites of intermediation, groupings of purchase, reversed auctions, cooptation...) - The middlemen who 'own' the customers are on their turn purchasers of services and auxiliary materials. The internet and the e-trade that are more and more integrated in the B to B distribution attempt to differentiate, lengthen or break-up the distribution chain but offer the advantage of widening the transaction possibilities while accelerating response time and while decreasing the costs of logistics. Rather than to create conflicts of interests in the distributive chain, the new technologies, if well understood and assimilated, offer the possibility to improve - communication between the different levels - control and management of the networks - productivity of the whole circuit. They must constitute a new support and tool to enhance the network productivity and not be conceiving to replace the middlemen. 7.5 THE ROLE OF LOGISTICS In addition to tackling the problems of design, evaluation, and motivation in distribution channels, the industrial marketer also must monitor the physical movement and storage of -goods. Customers are concerned that products are received in the right quantity, at the required time, using the desired mode of transportation, and in undamaged condition. The managerial decision area that deals with such concerns is physical distribution, or logistics. Physical distribution is of strategic importance, regardless of whether the manufacturer uses an intermediary, because it is a key f Actor considered by customers when selecting vendors. Problems in this area will undermine source loyalty with a customer who is basically satisfied with a product. Furthermore, the importance of physical

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distribution increases with the frequency that a customer organization purchases an item. The functions or tasks, which make up physical distribution, are many. They include warehousing, transportation, inventory control, materials handling, receiving, protective packaging, and order processing. Each task has important marketing implications, because of the way it affects the value or utility a customer receives. These implications are illustrated in Figure 7.6, which presents the tasks of physical distribution as controllable marketing variables. Fig 7.6 - Controllable Elements in a logistics System Elements Transportation Warehousing Inventory management Protective packaging Materials handling Order processing

Production planning Customer service Plant location Warehouse location Facilities planning

Key Aspects Represents the single most important activity in the creation of placevalues and time-values; the means of moving goods from the end of the production line to customers in the marketplace. Creates place values and time values by making goods available in the marketplace when needed. Insures that the right mix of products is available at the right place and at the right time, in sufficient quantity to meet demands; balances the risks of stock-outs and lost sales against the risks of overstocks and obsolescence; facilitates production planning. Ensures good condition of products when they arrive in the marketplace and maximizes use of warehouse space and transport equipment cube. Maximizes speed and minimizes cost of order-picking, moving to and from storage, loading of transportation equipment, and unloading at destination; relates to product protection. Assists in creation of place-time values by communicating requirements to appropriate locations. Relates to inventory management by reflecting demands on current stocks and changes in inventory position. Ensures realization of place-time values by making goods available for inventory. Permits planning of warehouse facility utilization, transportation requirements. Relates place-time values as seen by the company to place- time values as seen by its customers. Establishes levels of customer service consistent with marketing objectives as well as with cost limitations. Maximizes place-time values by relating plant and warehouse location to transportation services and costs in terms of markets to be served. Facilities planning ensures that capacity, configuration, and throughput of warehouse and shipping facilities are compatible with product flow.

The elements of a company's logistical system interact with one another in a variety of ways. A simplistic example is provided in Figure 7.7. Viewed from the customer's perspective, the system begins with a customer order and ends with the customer taking delivery of an item. Those responsible for this area must decide how easy to make it for customers to place orders, how long customers must wait to receive an order, how likely customers will receive incomplete or defective orders, and how customer complaints, inquiries, and special requests will be handled. Underlying these issues are decisions regarding the number and location of distribution points (e.g., warehouses), the mode of transportation to be used, the inventory levels to be maintained at each location, the communication linkages among locations and with customers, and the way in which products will be handled and stored. With the need for integration of service and supply activities, and for trade-off analyses, the concept of

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integrated marketing logistics is being propounded by most practitioners to eliminate downtimes or stocks throughout the global process. Fig 7.7 - The corporate logistics function

In business usage, logistic refers to the design and management of all activities necessary to make materials available for manufacturing and to make finished products available to customers as they are needed and in condition required. Business logistics thus embodies four phases and flows as illustrated in Figure 7. 8. 1. - Physical supply, or the flows that provide raw materials, components, and supplies to the production process. This is also called `purchasing or supply logistics'. 2. - Physical distribution or those flows that deliver the completed product to customers and channel intermediaries. This is also called the 'marketing or distribution logistics' 3. - Production handling and storage: Between the two foregoing flows one should also aim to optimize the inner materials and product flows through the control of 'production logistics'. 4. - Recycling flow: During the latest decade, the necessity and obligations towards the environmental legislation brings an additional material flow into the picture. This is the 'Reverse or waste logistics' which implies the recuperation and recycling of used or redundant products and goods.

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Fig 7.8 - Conjunction of the different logistic phases in a B to B environment

Only recently have business marketers begun to explore the use of logistics as a variable for creating competitive advantage. In contrast to all other elements of the marketing mix, logistics competency offers the potential to gain a unique differential advantage, as logistics system excellence is -not easy to duplicate and asks for a thorough integration of all functions of the enterprise. Business marketing managers should indeed be well advised to carefully evaluate the important strategic role that logistics competence can play in the overall success of their marketing plans. Organizational buyers are especially attuned to the logistical capabilities and performance of their suppliers. At the same time, the sales organization within a firm tends to place responsibilities for physical distribution with the production or operations. That tendency poses difficulties for the marketer, who must bridge the gap between the firm's manufacturing constraints and the customer's demands. Finally, what counts in logistics, is to really master the couple cost - quality of service. The constraints in terms of requirements and level of service in the present, always more fluctuating and uncertain, markets should evidently put an emphasis on mobilizing all the capacities to handle and manage the process at the lowest cost possible. 7.5.1 THE GLOBALIZATION OF MARKETING AND LOGISTICAL ACTIVITIES: Many unique features of global logistics must be factored into designing or engineering international supply chains. The key dimensions and characteristics of global logistics are distance, demand, diversity and documentation. The four D's are illustrated in Figure 7.0 and are further discussed and presented as a global challenge.

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Fig 7.9 - The four " D's " of global logistical participation

• Distance Distance is critical in logistics. In most developed countries, distance is managed as part of the domestic logistics strategy. In international situations, the impact of distance is so significant that it is the primary determinant of logistical system design. Firms that seek to do business globally can resolve distance requirements by: - Establishing a full service logistics network with facilities and inventory committed by all key geographical areas; - Creating logistical competency that can perform over extended lead-times. The cost and risk for successfully managing extended logistical lead-times is far less than the full local presence solution. Distance in global logistics equates to transport dependency. As a general rule, the longer the average distance moved, the greater the total cost of transport. Increased expenditure on transport results from firms seeking to maintain flexibility while, simultaneously, reducing or avoiding extensive inventory commitment. Improved flexibility and lower average inventories translate into an increased demand for small shipments moving in positively controlled logistical environments. The distances involved and the specialised nature of required support in global operations has created dependence by shippers on transport suppliers to provide a broad range of value-added services. As a result, full-service, reliable transport could well be more critical in the global arena than the typical domestic logistics system. • Demand The nature of demand for each specific global business depends on the countries selected to do business in and between. Most products and services require tailoring to satisfy country-specific demands. Most products, tools or machines must be fine-tuned in adaptation, presentation or labelling to conform and satisfy local requirements. Therefore, the product complexity, and its impact on logistical requirements in global business, is greater than typical domestic situations. Global complexity extends to operating structure and the range of logistics services. This complexity boils down to uncertainty, degree of control, level of required inventory commitment and flexibility. Uncertainty, on its turn, is directly related to distance. While it is .possible to eliminate some aspects of extended lead-times, using advanced information technology, the physical transport of products necessitates long transit times characterized by uncertainty. Another feature of distance and complexity is reduced operating control, which frequently requires commitment to larger pipeline inventories. These many facets of

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complexity combine to constrain rapid response to unexpected logistical requirements (flexibility) and force increased reliance on planning and forecasting. The diversity of the global arena provides an ideal scenario for introducing and mastering postponement strategies. • Diversity A key to global business is understanding the far-reaching impact of diversity. Local laws, infrastructures, cultural paradigms, user expectations and buyer behaviour are examples of differentials that must be considered to enjoy effective logistics performance in any given geographical environment. Customer expectations of logistical requirements are often based on local customs. As such, global logistical practices must accommodate local diversity, while maintaining economies of scale. Such accommodation can be as basic as opening hours of typical business operation. Diversity typically increases the number of products necessary to support a successful global marketing strategy. Local differences may, be integral to the product; such as safety, performance, styling and power supply. These very real differences translate the diverse nature of each country in terms of marketing and logistics requirements! Simply stated; "doing business in the European Community will not be like the United States" regardless of negotiated trade agreements. • Documentation A final aspect of global logistics is the sheer complexity and magnitude of documentation required to facilitate multiple cross-border movements. Local practices concerning payment, terms of sale and shipment liability generate unique documentation requirements. The reduction of documentation and cross-border movement simplification are major forces underlying free-trade agreements. Despite substantial progress, documentation of international movement remains sufficiently complicated to stimulate growth among a broad range of specialised service suppliers. Brokers, forwarders, agents and third party distribution services all play a crucial role in facilitating cross-border commerce. The four D's of global participation create a unique and challenging environment for logistical planning. These key forces generate specific practices and paradigms that characterize global logistics. 7.5.2 THE “JUST-IN-TIME” PRINCIPLES Just-in-Time stockholding JIT is a Japanese management philosophy that has been applied in practice since the early 1970s in many Japanese manufacturing organizations and subsequently adopted by the industries in the west. It was developed and perfected as a means of meeting consumer demands with minimum delays. Under the JIT inventory principle, all suppliers must carefully coordinate delivery of parts and supplies with the manufacturer's production schedule-often delivering products just hours before they are to be used. The objective of a JIT system is to eliminate waste of all kinds from the production process. It requires the delivery of the specified product at the precise time, and in the exact quantity needed. Importantly, the quality must be perfect because there is no opportunity to inspect products in the JIT process. This implies the acceptance of TQM (Total Quality Management) systems and set-up of ISO 9000-type of procedures. Because JIT attempts to relate purchases to production requirements, the typical order size shrinks, and more frequent deliveries are required. Increased delivery frequency presents a challenge to the business marketing production and logistics system.

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A significant effect of JIT purchasing has been the drastic reduction in the number of suppliers utilized by manufacturers. Suppliers who are able to meet customers JIT requirements will find their share of business growing with the JIT-oriented customer. Meeting the JIT mandate represents a marketing edge, if not an outright survival tactic, for suppliers. The relationship that emerges between JIT suppliers and manufacturers is unique and often requires extensive integration of their operations and IT systems. As a result, suppliers find that the relationships are longer lasting and are usually formalized with a written contract that may span up to five years. The JIT concept introduces a new philosophy of supplier-customer inter-organizational linkage which has significant implications for marketing management. The linkage has many of the attributes of a (positive) marriage relationship, including careful choice of marriage partner, extended time horizon, partner interdependence, intimacy of partners, openness of communications, and provision of support activities to maintain the positive relationship. Some business marketers effectively capitalize on the JIT concept, gearing their production and logistical systems to match customer needs and shifting more and more to the 'build to order' processing. As the JIT delivery requirements become industry standards, those business firms with effective and efficient logistical systems already in place will enjoy significant marketing advantages. Gradually simple just-in-time control systems become more sophisticated as buyers demanded better and better stock control management. As fast as one organisation gained competitive advantage by more planning and cooperating with a supplier, another organisation would fight back and so improve the process. The rapid growth in ICT brought many more options and future possibilities look endless. The following inventory management techniques ensued. Fig 7.10- Advantages and Disadvantages of the JIT inventory system y Advantages Buyer advantages - Close relationship enables continuous discussion leading to more accurate benefits. - Keeps stock of raw materials and component parts as low as possible. - Saves costs until the stock is needed. - Saves on timings and space. - Lower security and insurance costs. - Less opportunity for pilfering, write-downs and spoilage. - For the wholesaler and retailer less storage space and more selling space available. - Smaller transports system. Supplier advantages - Guaranteed contract. - Learning associated with a close working relationship. - Close relationship can build loyalty, trust and long term contracts

Disadvantages Buyer disadvantages - High set-up costs - Goods not available when wanted. - Higher costs in not ordering in bulk delivery. - Delivery and transport problems associated with frequent deliveries.

Supplier disadvantages - Continuous up-dating of ICT systems - Payment spread over a longer period according to the contract - Possibility of erratic ordering if buyer sales and needs fluctuate. - Higher storage and delivery costs. - His her insurance and security costs.

• Continuous replenishment

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Building on the beliefs underpinning JIT is the concept of continuous replenishment. This is the practice of partnering between supply channel members that changes the traditional replenishment process from distributor-generated purchase orders, based on economic order quantities, to the replenishment of products based on actual and forecasted product demand. This will require even closer contact between supplier and buyer. • Direct procurement Direct procurement is the purchasing of raw materials and parts needed for the manufacturing of finished goods. Automating direct procurement can enable faster cycle times, making a manufacturer more responsive to the market. Significant savings can be realized by optimizing the process of order submission and confirmation, as well as improved vendor collaboration. This results in fewer shortages of essential materials, thus reducing the need for large inventories along the supply chain. • Materials requirement planning (MRP) Materials requirement planning (MRP) was developed during the 1980s, brought about by the realization that materials requirements should be planned from forecast demand and purchasing through to inventory control, production scheduling and usage to invoicing and payment. It has since been superseded by enterprise resource planning (ERP). • Enterprise resource planning (ERP) ERP developed with the realization that no one part of the business could be seen to act in isolation from all other business processes. Using the power of developing computer software systems, ERP is being positioned as the foundation and integration of enterprise wide information systems. Such systems will link together all of a company's operations, including human resources, manufacturing, finance, sales, purchasing, inventory management, and distribution, as well as connecting the organisation to its customers and suppliers. These systems usually have extensive set-up options that allow their functionality to be allied with CRM systems and thus be customized to meet specific business needs linked to the actual demand of the end-users. • Vendor managed inventory (VMI) Building on the above techniques and use of the extranet, vendor managed inventory (VMI) is a just-in-time technique whereby a supplier of goods is able to manage the inventory process more comprehensively. The supplier can access the inventory records of a customer to determine whether to make a shipment to that customer. They can look into buyer stock levels and identify shortages and are then able to refill stock automatically without the buyer initiating the order. The customer can be notified electronically when goods are to be sent and their inventory records updated accordingly. The supplier can even enter a selective part of the buyer's bank account and take payment when due. As these processes highlighted cost savings, we gradually see an evolutionary building of trust and a more cooperative way of working between buyer and seller, leading to the value chain relationships. 7.5.3 WIDENING THE ROLE OF LOGISTICS OR "VALUE ADDED LOGISTICS": The globalization of commerce ensues the liberalization and harmonization of local or national conditions and legislations. This allows the transport and logistic companies to fully exploit the possibilities of multi-modal transportation and break-bulk techniques, in

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order to reduce costs, increase capacities, decrease equipment downtime and widen their services proposed either to the manufacturers or to the users. The diversity of the global arena provides an ideal scenario for introducing and mastering 'postponement' or 'value added logistics' strategies. Using those strategies, a premium is placed on reducing risk by minimizing anticipatory inventory allocation prior to receiving customer orders. However, the distance factor discussed previously serves as a counter-force requiring anticipatory commitment of inventory to strategic locations. Failure to commit anticipatory inventory to a forward staging location can result in the need to expedite prohibitively high-cost shipments over long distances. In such situations, logistics effectiveness and efficiency can be improved by postponing the final product customisation until customer orders are received. Final product customisation can be performed in forward central distribution centers. To illustrate postponement, assume a firm produces basic hardware PC components in Mexico that can be sold in various European countries. However, the product must be adapted, labelled, packed... to satisfy local demand, content and language requirements for each national market. A strategy that prepositions large quantities of non-finished product in a regional distribution facility introduces the flexibility of postponement. Basic products held in this facility can be used to satisfy a broad range of specific countries within the region with product only being differentiated when actual customer orders are received. Thus, a basic undifferentiated inventory can be used to serve multiple countries as contrasted to multiple dedicated inventories for each country. The key to effective postponement is to develop customizing capacity at distribution facilities so that final product presentation can be completed at the time of order processing. The postponement arrangement serves to reduce inventory and risk, but most important, to service customers better. The end result of introducing the complexity associated with postponement is increased operating flexibility. Currently, the carriers and transport companies look for other ways of development. As for example the integrated logistics, while enhancing quality and level of services they take in charge the postponement. Their role becomes larger and their activities include upstream; the packaging, labelling, customs clearance, grouping of orders, storage... and downstream; the routing, distribution, adaptation, installation, or even the invoicing. They also offer their service for advice and consultancy on logistics and distribution organization. The objective overall is to create a real added value. This principle of extension of pure transportation activities, combining and adding elements of secondary production and essential marketing distribution tasks, permits to reduce costs, increase the rate of occupation of stores and staff, and to increase service. This is the objective of the so-called 'Added Value Logistics' or VAL, as illustrated in Figure 7.11. The VAL permits shorter delivery times. The central distribution platforms are located close to a highways network-not with direct connections to railway and waterway facilities and aside an airfield. This is the case of the EDC's = European Distribution Centers that most often located in Belgium or in the Netherlands. Such a kind of infrastructure gives the possibility for the producers to deliver their goods in all the European countries out of a single dispatching centre within one or two days. The differences of language, regulations, culture and habits already evoked make it necessary to adapt goods and products very quickly within the premises of the distribution centre according to the delivery destination. VAL gives the producers a possibility to shift their problems and worries of conforming their offering and delivery, downstream on to the logistician, whatever the country where the product must finally land.

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Fig 7.11 - The appliance of VAL concept

With regard to the advantages of the VAL, we will mention at least three that immediately ensue of the basic concept. - The distribution centers are managed in order to take a minimum of risks regarding the variety of products and stocks. - Taking on secondary production tasks the VAL allows a better answer, more direct and accurate, to local demands without inflating stocks. - The `time chain' is much shorter and the “time to market" is more optimal. The generated secondary production is centered completely on the desires and requirements of the customers. The products are adapted to the specificities and constraints, while preserving logistical flexibility. The carriers and transporters find a new value added and remunerative dimension to their logistical activities. This added value can cover a . large variety of tasks: assemblage, finishing, packaging, sorting, control, repair, regrouping, collecting, dividing, labelling... This industrial service conceals important advantages for the multinationals in reduction of storage costs, growth of product range variety, reduction of delivery time, better production planning...

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CHAPTER 8. INDUSTRIAL COMMUNICATION

'Those in the advertising industry have a vested interest in prolonging the myth that all advertising increases sales! But it does not' Industrial communication consists of a set of personal and impersonal communications directed toward various audiences, including direct customers, indirect users further down the channel, industrial middlemen, and the general public. Promotion serves a number of functions, but its ultimate purpose is to stimulate and maintain demand for the company's products, product lines, and services. The major components of industrial promotion are personal selling, advertising, sales promotion, PR and publicity. These combine to form the communication and promotional mix that has to fit within the global communication platform of the enterprise, the so-called 'Integrated Marketing Communication' (IMC). 8.1 THE INTEGRATED MARKETING COMMUNICATION Integrated marketing communications is the integration of specialised communications functions that previously operated with varying degrees of autonomy. IMC is defined as; 'A concept of marketing communication planning that recognizes the added value of a comprehensive plan that evaluates the strategic roles of a variety of communication disciplines, which are to be interrelated to provide clarity, consistency and maximum communication impact'. The major benefit of IMC is that a consistent set of messages is conveyed to all target audiences by means of all available forms of contact and message channels. Communications should become more effective and efficient, as a result of the consistency and the synergetic effect between tools and messages. IMC may therefore also be defined as the communications in which the receiver is offered sources, messages, instruments and media in such a way that an added value is created in terms of a faster or better comprehension of the messages. Integration occurs at the consumer or perceiver level. It is the task of the communicator to facilitate this integration at the consumer level by presenting the messages in an integrated way. In fact, there is a need to manage each point of contact between the consumer and the product or organisation. In Figure 8.1, an overview is given of various elements of the communications mix, and the potentially integrating role of marketing communications. Integrated marketing communications do not happen automatically. All the elements of the communications mix have to be carefully planned in such a way that they form a consistent and coherent integrated communications plan. As a consequence, IMC can only be implemented successfully if there is also a strategic integration of the various departments that are responsible for parts of the communications function. Indeed, advertising, public relations, sales promotions and personal selling in most companies are traditionally managed by separate divisions that rarely communicate with each other,

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let alone take account of each other's priorities or integrate their efforts. Successful IMC rests on the existence of one communications manager who has the authority to supervise and integrate all the specialised communications functions of the organisation. Often this will imply, a radical change in the structure of the organisation, and that may be the most important reason why IMC has not been implemented in most companies. Figure 8.1 - The marketing mix and integrated marketing communications

(a) Corporate advertising (b) Sales force and channel communications, trade shows, packaging, direct marketing, sales promotions, etc. (c) Distribution, logistics, pricing, new-product development, etc. (d) Investor relations; community relations; employee communications; public affairs/government relations; most media relations; crisis communications and corporate identity; executive communications; charitable contributions, etc. (e) Product publicity; brochures and other collateral materials; parts of media relations, crisis communications and corporate identity; sponsorships, etc. (f) Traditional mass-media advertising Integrating the various tools can lead to synergies in a number of ways. Here are some examples: - The sales team has an easier job if their product or company is well known as a result of sponsorship or advertising. - In-store or point-of-purchase communications that are consistent with advertising are much more effective. - A promotional campaign that is supported by advertising is generally more successful. Direct mailing is more effective when prepared by an awarenessincreasing advertising campaign and supported by a sales promotion campaign. - Public relations, corporate advertising and sponsorship can have synergetic effects on company image building. - Websites will be more frequently visited when announced in mass media advertising. Advertising for a trade show will be more effective if an incentive to visit the stand is offered. As a mix, all individual forms of promotion combine to accomplish the organization's communication goals, and this particularly during the stages of the organizational buying process. Personal selling, usually the cornerstone of the promotional effort, involves

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direct contact with potential and present customers, either in person or by telephone. Advertising has the capability to reach a much larger number of potential buyers, users, influencers, deciders, and gatekeepers than does personal selling. Sales promotion is a catchall category of personal and impersonal communication tactics usually directed toward specific purchases. Trade shows, samples, premiums, rebates, trade-in allowances, calendars, and customer entertainment are familiar examples. They are generally short-term in nature. The role of public relations (PR) in an organisation into creates and maintains a favourable image for the company on a continuous basis with regard to both internal and external stakeholders that include personal within the enterprise. This will require PR personnel to communicate with all interested parties seeking to build and maintain harmonious relationships. Publicity attempts to influence target groups without actually paying to do so. It involves the release of company or product information to print or broadcast media with the hope that it will be disseminated. Impersonal in nature, publicity is perceived by the target audience as objective information. 8.1.1 CORPORATE STRATEGY, CULTURE, PERSONALITY AND IDENTITY Any B-to-B communication program should be in line with the imperatives of the mission, vision and culture of the enterprise. Those basic elements are made visible through the corporate identity and communication (Figure 8.2). Corporate communications have three main objectives: - To establish joint strategic starting points of the organisation that will have to be translated into consistent communications, in other words, to define a corporate identity that is in line with corporate strategy. - To reduce the gap between the desired identity and the image of the company (corporate image) that exists with its argot, groups. - To organize and control the implementation of all the communication efforts of a company, in line with the two abovementioned principles. Just as individuals have personalities, so do organisations. Corporate personality is derived from strategic priorities on the one hand, and corporate culture on the other. Corporate culture an be defined as' “The deer level of basic assumptions and beliefs that are shared by members of an organisation, that operate unconsciously and define in a basic "taken for granted" fashion an organization’s view of itself and its environment”'. Put more simply, corporate culture can be defined as 'the way we do things around here'. It is a set of norms that guide the behaviour of all employees. Corporate culture consists of a number of levels. The first level includes the physical aspects of the company, such as the atmospherics of the buildings (look and style) and the way visitors are treated. The second level consists of the values held by employees, such as the importance of honesty in doing business, the service-mindedness of the sales staff and the responsiveness to customer complaints. The third level is achieved when everyone in the company develops a firm belief in the corporate culture characteristics, and behaves accordingly without questioning them. The corporate identity is commonly translated and visualized in forms, design, colours slogans and name which forms the 'logo' of the company that underlines the whole lot of communication techniques and realizations. Fig 8.2 - Corporate strategy, culture, personality, and corporate identity and its components

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8.1.2 MARKETING COMMUNICATIONS IN A B-TO-B ENVIRONMENT In looking to the difference between consumer marketing communications and business communications it becomes immediately clear that the two major consumer marketing communications instruments (advertising and sales promotion), are relatively unimportant tools in business communications. Personal selling -is by far the most important tool, together with the technical documentation the salesperson brings along. Trade shows, although only marginally important, nevertheless play a much greater role in business communications than in consumer marketing. It can be expected that the role of direct mailing and data base marketing will have increased in recent years. In Figure 8.3 the most important distinctive characteristics of business communications are summarized. Fig 8.3 - The distinctive characteristics of business communications

As already indicated, personal communications tools, and primarily the sales force that call and/or visit customers and prospects, play a very important role in business marketing. In fact, to a large extent even trade shows can be considered to be a relatively 'personalized' means of conversation. Business communications are not only personal; they are to a large extent also personalized or individualized. Direct mailing, but also trade shows and certainly personal selling, provide the opportunity of communicating directly with individual customers and prospects. Moreover, business

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communications are interactive and this interactivity is to a certain extent a common characteristic of direct mailing, personal selling and trade shows. Customers can be approached individually, but they can also respond to the communications. Furthermore, communications in a business environment are usually much more tailor-made than in consumer markets. Customers often have specific needs and effective communications require tailor-made solutions being offered and communicated. Finally, business products are often technically complex, and lead to high involvement decision-making processes, the consequence of which is that marketing communications will be more rational and more objective attribute-oriented. Brand images and emotions play a less important role in business communications. Business advertising and direct mail often pave the way, laying the groundwork for the sales-force, by creating awareness and interest in the company and its products, and as such often has a supportive role in the communications process. 8.2 PARTICULARITIES OF INDUSTRIAL PROMOTION The first rule of advertising is to get noticed and, as such, it might be seen as the first of the communication and promotional tools in B to B. Advertising is making it publicly known that an organisation has benefits, usually products and services, it wishes to offer to an identified company or group of companies in return for some other benefit, usually money, in both the short and long term. Advertising can be used for many communication purposes, at both corporate and product level, to create away ness and move the customer eventually to purchase from the supplier. It can be used to inform about a new technology a supplier has patented and to educate about its intricacies and how it might work. It can be used to bolster the corporate image and its products and so reinforce buyer loyalty. It can be used to persuade the trade to take in extra stock during a time of plenty. The major forms of advertising, TV and radio as well as daily press, tend not to be used for selling B-to-B products but because of their national and international presence they are good at creating corporate and product brand awareness and in this way work well with personal selling. Buyers are usually very busy and will seldom see representatives from unknown companies. If a buyer is aware of a company, however, then the salesperson has at least a chance of an interview; the better known the company, the more likely the chance of getting past the gatekeeper and demonstrating the seller's products and services. In some cases advertising is also good at encouraging buyers to send for information (perhaps a leaflet or catalogue) and, if-the advertiser is really lucky, to ask for a representative to call. There are, however, some forms of advertising that will be used to sell products and services as we will discuss further in this chapter. Let’s remind here that, in a nutshell, B to B advertising objectives are: - Informing - Educating - Persuading - Reinforcing - Selling. Those five duties will have to be taken in account in each action step, process and used tool. Traditionally, B-to-B advertising has been described as 'heavy, ponderous, deadly serious and boring'. This qualification can be attributed to the specific characteristics of the business environment, i.e. the importance of technical aspects of products and services, the importance of the products for the economic performance of the buyer, and the complex decision-making units. Business ads, for that reason, tend to be more

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factual and rational, and tend to emphasize the company name rather than its products, because customers are also buying reliability, after-sales service and technical support, in other words, a relationship with a trustworthy partner. All in all, studies show that the content and format of business ads are significantly different from consumer ads in a number of ways. The most striking differences seem to be that - fewer people are depicted in business ads, the proportion of advertising space devoted to copy tends to be greater in business advertising, product characteristics are more frequently , mentioned, and psychological -as opposed to functional- appeals are rarely used in business advertising. Fig 8.4 - Types of Promotional Alternatives Available to the Industrial Marketer GENERAL BUSINESS PUBLICATIONS Large circulation magazines are aimed at a wide variety of markets and buying influences (e.g., Fortune, Business Week, Forbes, Bizz, Usines Nouvelles, Trends...). TRADE PUBLICATIONS -VERTICAL AND HORIZONTAL - Vertical publications are directed toward a specific industry and its members (e.g., Modern Plastics, Iron Age, Logistics...). - Horizontal publications are directed toward a specific task, function, or area of concentration across multiple industries (e.g., Purchasing, Modern Materials Handling, Production Engineering, Electronic Design). INDUSTRIAL DIRECTORIES A compiled list of known suppliers within a large variety of product areas intended for use as a reference group for industrial buyers. There are general directories covering most industries, directories for specific countries, and private directories (e.g., Thomas Register, Kompass, ... TRADE SHOWS A formal exhibition at which a supplier rents space to introduce and display its products and eventually make sales. Competitors' products are also demonstrated at these exhibitions. Personal contacts with a large number of prospective and present customers in the industry can be established in a short period of time and in one location. CATALOGUES Printed material containing information describing a supplier's products, their applications, and other product specifications, distributed among organizational buying influences for use as a reference and buying guide. Catalogues often contain enough information so the buyer can purchase products direct from them. DIRECT MAIL Letters or brochures sent to selected buying influences to provide information on a supplier and its products or services. This type of media enables a marketer to relay personalized messages to these influences. VIDEO'S A film aims to illustrate the use and benefits of a company's products or services. These are given to customer organizations for viewing in-house. TECHNICAL REPORTS Written, detailed descriptions of product design specifications and performance capabilities. Results of product testing are summarized, including data on quality and reliability.

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SAMPLES Products may be given to certain customers on a trial basis for the purpose of promoting and demonstrating a supplier's product. PUBLICITY An indirect presentation of company and product! This is information for which the marketer does not pay and does not control. These presentations appear in media forms (e.g., newspapers, trade journals) that can increase public awareness and can develop a favourable image for an organization. NOVELTIES Free gifts such as calendars, pens, paperweights... that are imprinted with a company's name and possibly carry an advertising message. These small useful items are given to customers as a reminder of a supplier and its products or services. TELEMARKETING Using the telephone to find out about a prospect's interest in the company's products, to create an awareness or understanding of those products, and even to make a sales presentation or take an order. COMPANY WEBSITE Many companies build and design their own sites, which integrate and fit in with corporate image. It is used to present the enterprise, its product portfolio and its general activities. A successful business ad should score on four dimensions: characteristics of the ad, the reader's feelings about his or her relationship with the ad, the selling proposition and the company's orientation or visibility. To score positively on each of the dimensions, business ads should clearly use a rational approach. The ad should explain the product and the benefits of the product, its quality and performance. The information should be presented in a logical order. On the other hand, the size of the text should be closely monitored. Too much text and too much information decrease se ad effectiveness. On the other hand, the use of illustrations and pictures, as long as they are relevant to the target group, enhances ad effectiveness. Including too many people in the ad reduces its impact, and when people are shown, the target group should be able to identify with them. In fact, business ads differ and should differ from consumer ads, but there is no reason to assume that business ads 1 should be dull, and packed with text and information overload. A promotional mix that works effectively with industrial products and services is likely to be quite different from the appropriate mix for most consumer goods: This is due to the technical nature of industrial products, the smaller relative number of potential buyers, the geographical dispersion of customers, and the complex nature and length of the organizational buying process. A strong personal sales effort is a vital ingredient in successfully communicating the technical merits of the vendor's product or service. The salesperson plays a key role in the negotiation process with key members of the buying centre. Furthermore, the ongoing relationship between the salesperson and representatives of the buying firm can help engender long-term source loyalty. Advertising, when used in industrial markets, relies very little on mass media vehicles such as television and radio. Mass media is not only/ expensive; it doesn't permit the marketer much opportunity to specifically target efforts toward different types of industrial customers. In addition, use of the mass media results in extensive wanted exposure, since many of the individuals reached are not part of me firm's target market. As a result, the primary vehicle used in industrial advertising is print media, with trade journals, general business publications, direct mail, industrial directories, and technical literature

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the most heavily used advertising outlets: The advertising message will tend to emphasize factual information and functional product or service benefits. Figure 8.4 gives the most currently used and available promotional tools. The various promotional alternatives can be distinguished in terms of what each is capable of accomplishing, and how effectively. Figure 8.5 presents a partial illustration. The extensiveness of the message and personal involvement possible with personal selling can be contrasted with the high cost per customer contact. By contrast, print advertising offers only a brief message and less involvement, but the cost per contact can be quite low, given the number of people reached. Industrial buying poses a number of specific complications for the promotional effort. Even if two members of a buying centre receive the identical message, they are likely to selectively distort or modify the message to make it consistent with their own goals, values, and expectations. This phenomenon is called perceptual distortion. In addition, many decision participants are not reachable through promotion, except perhaps at exorbitant cost. To better understand the role of promotion in communicating with organizational customers, it is helpful to consider two perspectives on the buyer: a micro approach, and a macro approach. Fig 8.5 - Comparing components of the promotion mix on Cost and Performance

8.2.1 PROMOTION AND THE BUYER: A MICRO APPROACH An individual involved in organizational buying goes through a mental process in selecting a particular vendor or product. An examination of the steps that take place inside the mind of a decision maker can shed some light on promotional strategy. The buyer first must be made aware of the vendor and what is being sold. Next, the buyer develops a knowledge and understanding of the vendor or product, including technical characteristics, performance capabilities, and selling requirements. Following this, if the buyer is sufficiently interested in the vendor or product, favourable or non-

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favourable attitudes are developed. Favourable attitudes can then create a predisposition to buy from the vendor; such conviction or intention to buy may translate into an actual purchase if conditions are right. This process is called a hierarchy of effects. There are alternative versions of the hierarchy, but the basic idea is that the customer moves from cognition (or awareness) to affect (or attitude) to behaviour. This sequence is especially the case for highinvolvement purchases, including many industrial products and services. The AIDA hierarchy of effects: awareness → interest → desire → action (trial or purchase) - Awareness is created when the potential buyer is introduced to the company and/or its products - Interest happens if the buyer sees some benefit and wants to learn more - Desire occurs when the buyer recognizes that this, will be the company to deal with or product to buy when and if the need arises - Action is obtaining an agreement to buy or try the company or the products The marketer, through effective promotional programs, - can affect the buyer's progress through the hierarchy. This movement can be accomplished by directing promotional efforts at specific stages, such as creating awareness, educating the buyer, or changing attitudes. Figure 8.6 - Relative effectiveness of 4 promotional tools at different stages of the buyers attitude

A common error in promotion management is for the marketer to expect a direct relationship between expenditures for advertising or sales promotion, and product sales. It may be more appropriate to examine the impact of such expenditures on customer awareness levels or on customer attitudes. Furthermore, a strategy that does a good job of creating awareness may have no effect on the customer's understanding of the product, or on the amount of customer interest generated. The hierarchy of effects model, correspondingly, provides the marketer with some direction in the establishment of promotional objectives. Each stage in the hierarchy presents a distinct communications objective. As demonstrated in Figure 8.6, the relative importance of the elements contained in a company's promotional mix change over the hierarchy of effects. Advertising and other impersonal forms of communication, especially effective in creating awareness, have a

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smaller impact as the buyer moves toward conviction and actual purchase behaviour. At the same time, the role of personal selling increases in importance, and is paramount in achieving conviction and getting the customer to place an order. 8.2.2 Promotion and the Buyer: A Macro Approach Not only should the marketer consider the mental processes that take place within individual decision makers, he will also find it useful to take a more macro approach, and examine the overall buying process of the customer organization. The buying process for a product or service is evolutionary, involving a series of decisions as explained in chapter 2 of this course. Customers or people involved in the DMU have particular information requirements in each of the decision stages. The reliance on internal versus external sources, on objective versus subjective information, and on personal versus impersonal contacts will vary along the stages of the decision process. (Figure 8.7) In the early stages, the research for information by the DMU is more concentrated on impersonal data available through the media. There is, however, heavy concentration on personal contacts in the middle and later stages of the buying process. In these stages, it is necessary to provide specific detailed communications concerning the product that usually cannot be conveyed through the normal media and documentation. All these situations require direct personal contact between potential supplier seller and specialists and the buying organization. Fig 8.7 - Types of Industrial Communications INTERNAL Information provided by sources within the buying organization (e.g., company vendor files, using departments) OBJECTIVE Information from a source not controlled or strongly influenced by the vendor (e.g., publicity, consultant's report, wordof-mouth, a technical report) PERSONAL Information directly communicated between two or more individuals (e.g., sales calls, word-of-mouth from colleague, trade show, and personal letter)

EXTERNAL Information obtained from a source outside the organization (e.g., trade shows, advertisements, colleagues in other companies) SUBJECTIVE Messages paid for and controlled by a vendor attempting to influence buying decisions (e.g., sales calls, direct mail, advertisements) IMPERSONAL Information communicated through some formal medium (e.g., trade journal or radio advertising, catalog, rating services, technical reports)

The challenge is to allocate promotional expenditures,/to the key decision points and persons in the buying process, within the budget constraints and according to the chances of success. Finally, in the post-purchase stage, the communication task is to reassure customers, encouraging source loyalty and positive word-of-mouth publicity. Let us keep in mind that messages must get through to all people within the buying organisation who might be able to have an influence of some kind on the purchasing process. Identification of those who are able to influence buying decisions can be a very real problem when the number of people might vary from very few to as many as 10 or more. Just to find out who they are can take considerable time and ingenuity, even for the best of marketing or sales personnel. To add more complications, the composition of the DMU, in terms of both function and individuals, might possibly change from product to product. Separate members might

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also have their own priorities and agendas on types of benefits wanted, suppliers that are favored, and price and value levels expected. Level of awareness by the buying centre about the supplying company, its market ethos, products, services and long-term view on forming close relationships must all be part of the equation. Only when all this information is known can realistic communications programmes be constructed. 8.2.3 THE 'ABOVE THE LINE' VERSUS `BELOW THE LINE' COMMUNICATION-MIX The media mix, known as 'above the line communications', consists of the major methods of advertising used by both B to B and B to C advertisers. Its role is 'pulling' the customer toward the product or the vendors. These are TV, print, outdoor, radio and cinema. They tend to be used together -TV to create the awareness and newspapers and magazines to add more detailed information and encourage the buyer to make further investigation. The principal goal of advertising through large media is to establish a distinctive and memorable identity for the product or the company in the consumer's mind. All communication methods other than the 'main media' are collectively known as 'below the line' media with the emphasis put on direct marketing and direct response or coupon offers. It includes however all methods of sales promotion intended for the intermediaries and representatives with a collection of incentives used periodically to stimulate sales. Those methods are aiming to 'push' the products or brands through the distribution channels (trade promotions) or intend to push the customers decision (consumer promotions) Fig 8.8 - Major Sales Promotion Consumer Sampling/no cost Free samples Trial offer Price deals Coupon offers Price offers in special packs Branded offers Premiums external to the basic offer Self-liquidating premiums Contests Collection items

Trade Sampling/no cost Sale or return Trial Price deals Cash incentives Promotion discounts Delayed invoicing Credit facilities Premiums Dealer contests Staff contests

Offering the buying centre an extra incentive to try a new product or service is a wellestablished practice in business markets. It is an added weapon in the marketing and sales departments' armoury, allowing the sales manager to offer something special that in some way might lessen the risk for the buyer in trying a new company or product. So a lower price or extra product value might be offered on the first order; it might be a free trial of some sort, or the supplier being willing to take back the products if they do not sell. It might be the offer of extended credit, perhaps 60 days instead of 30 days, or free installation and operating advice or extended warranties. Care should be taken not to use a sales promotion too often, as the added incentive will come to be expected rather than discretionary. In some cases it could be offering the individual buyer some kind of personal incentive such as redeemable points on products that are purchased, entry into a competition or holiday vouchers. Care must be taken

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with this option as many buyer companies now frown on and actively discourage such practice. This is because they insist that purchases should be made for objective, pragmatic reasons and not because of personal reward. The role of a B-to-B promotion includes: - To persuade the buyer to make an appointment to see the supplier representative. - To lower buyer risk and encourage trial of a new company, product or service. - To encourage larger purchases and so block out the competition. - To shift stock from the supplier warehouse so more or new can be bought. - To motivate sales staff. Disadvantages of a 13213 promotion include: - Sales tend to increase during the sales promotion and then decrease as soon as it stops. - It can encourage 'cherry picking'-only buying sales promotion stock. 8.2.4 PUBLIC RELATIONS AND PUBLICITY The role of public relations (PR) in an organisation is to create and maintain a favourable image for the company on a continuous basis with regard to both internal and external stakeholders. This will require PR personnel to communicate with all interested parties seeking to build and maintain harmonious relationships. Never forget that it is the process of strategically communicating with the people who are important to the business. Keeping the trade informed is as important as targeting the public. In addition there are whole groups of industry and professional services that have no need to talk to the end consumer but do need to talk to suppliers and customers. We will refer here to sponsorship and corporate hospitality: Sponsorship can be seen as 'the giving of some form of support, usually money, to an event, organisation or person in return for some form of association and communications opportunity'. Widely used in B to C, it is applied selectively and in a smaller way in B-to-B markets. Under certain conditions a supplier will find it profitable to pay to have its name linked and associated with an organisation, event, or happening. This could be on a short promotional campaign or on a more long-term basis. (i.e.: sports or cultural events, education...) Corporate hospitality, 'the entertainment of customers and other important stakeholders at staged events in order to reward and encourage loyalty and to seek out new customers' is currently used in B-to-B markets. It will include inviting selected guests to events such as the Open golf tournament, Wimbledon tennis tournament, Grand National ho sang, as well as trips to tie-factory to view new production methods. There might, be hospitality tents set up in the grounds and guests given food and drink. It can be a freestanding event or part of a sponsorship arrangement. There is the hope that by invitations such as these profitable relationships can be built and business between buyer and seller increased. 8.3 PERSONAL SELLING AS CENTREPIECE OF B-TO-B COMMUNICATION Few sales are closed solely as a result of advertising or sales promotion. Unlike many consumer decisions, the complexities of organizational needs often demand personal forms of communication before, during, and after a purchase decision. Where the buyer in consumer markets will frequently seek out the supplier's product by going to a particular store, the industrial seller often must seek out the customer. The vendor's own sales force, and/or the selling efforts of intermediaries; play the central role, while other forms of promotion till a supporting or supplemental role.

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The sales force is the physical link between the selling and buying organizations. Not only are salespeople communicating information regarding the attributes of the vendor and its products or services to customers, they are also communicating information regarding customer problems or changing needs back to the vendor organization. In this manner, at least ideally, those in R&D, production, quality control, shipping, order processing, collections, and other key areas can adapt their operations to better serve the customer. Sales force inputs are also valuable in sales forecasting. In addition, the salesperson frequently serves to negotiate price and delivery terms including discounts, returns policies, shipment quantities and supplies, and transportation forms. Furthermore, the sales force will often service customer accounts, as well as provide demonstrations and training in the use of the vendor's products. A salesperson can persuade, cajole, stimulate, encourage, and entice, but cannot force customers to buy. Selling is simply a more direct, immediate, and personalized form of communication, but one that requires an immediate response of some kind from the buyer. In industrial markets, personal selling is a more expensive but more effective form of communication. Personal selling is an integrated part of the integrated marketing communications effort. As a result it should reinforce the effects of advertising, PR, sales pr motions, exhibition, direct marketing, etc. Considering the hierarchy of effects model (AIDA) discussed before, one can state that advertising and PR are well suited for building awareness and appreciation, while the objective of personal selling is rather to assist consumers in learning about the product and to try to advance them to the active and conative or behavioural phase. In other words, personal selling's goal is to find potentially interested people, to inform them, to illustrate by means of demonstrations how the product works, to persuade them to buy the product and to offer after-sales service. However, selling is no longer the central issue; customer satisfaction is. Therefore, the objective of persuasion has shifted to building and maintaining customer relation. Because of the personal contact personal selling involves, it is ideally suited to fulfill this purpose. Especially in a B-to-B context, customers often have contact with the salesperson only. In these situations, the salesperson is the company, and the way he acts, the way he dresses, and the car he drives, form the company image. Representing the customers is equally important; by collecting information and feedback from them and passing it to the organisation. Personal selling has some unique advantages. However, as with all communications tools, some disadvantages can be noted. Figure 8.9 gives an overview of both. Fig 8.9 - Advantages and disadvantages of personal selling Advantages - Impact -Targeted message * Information * Demonstration * Negotiation - Interactivity * Amount of information * Complexity of information * Feedback - Relationship - Coverage

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Disadvantages - Cost - Reach and frequency Control - Inconsistency

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The role of the sales force has changed. In the past their main responsibility was seen as obtaining orders and getting sales; in other words, the sales force's main task was revenue-generation. More recently, the main responsibility of the sales force has changed to satisfaction generation. Establishing a relationship of trust is the key factor here. Furthermore, the sales force need to act as the customers' advocate by informing the company of the current and future needs, and which aspects of a selling proposition are most valued. In this way, the sales force becomes a resource for the company management to guide policy and strategy formulation. Moreover, due to changes in technology, the communications activities of the sales force have drastically changed. Nowadays they spend, for example, quite a lot of their time answering e-mail or voice-mail messages, and looking for information on customers on the internet. Selling has changed in a similar way: new technology has led to preparing PowerPoint presentations, for example, while data bases are a great help in setting up appointments. Reflecting the customer-oriented and customer satisfaction approach, the sales force now has to listen to customers, read body language and ask a lot of questions to understand better the customers' needs. Another task component is identifying and targeting key accounts, reflecting the importance of directing selling efforts on a cost-benefit basis, and putting more emphasis on communications with really hot prospects that are of importance to the company. Relationship selling consists of, amongst others, building a rapport with the buying centre, building trust and hand holding customers and networking. Team selling means that accounts are no longer serviced by just one individual, but someone makes the sale, turns it over to someone else and then coordinates with sales support personnel. Databases have become very important for updating customer files and entering information (reports, market analyses, observations, etc.) for the company management or sending information to customers. 8.3.1 THE PERSONAL SELLING PROCESS Although every sales call will be different depending on the type of business, the type of customer and the specific customer needs, the personal selling process in general consists of the stages, shown in Figure 8.10. Fig; 8.10 - The personal selling process

Preparation Phone for appointment Investigating prospect's business Background research

Handling objections/resistance Direct answer method Compensation method Demonstration "Yes, but" method Case history method Closing the sale Direct close Summary close Single obstacle close

Presentation - Action Approaching a prospect Consumer-benefit approach Curiosity approach Complimenting Actual proposition Asking questions

Post-sale follow-up Customer training Reassuring the customer Follow-up Consulting Billing Adjustments / returns

Prospecting Personal observation Phone/mail inquiries Inquiries to advertising Cultivate visible accounts

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Help prospect visualize offering Demonstrate product / service

Installation maintenance Consumer-benefit approach Curiosity The compliment

In structuring the sales forces, the economic aspect is not the only one important factor in deciding. The marketing environment, product sophistication, sales range and reach, relationships with customers, control, competence, costs of hiring and training good salespersons, and channel access, must be considered as well. The importance of all these factors has to be assessed in order to be able to make a sound decision on the type and size of sales force. In general, a company has four broad alternatives to structure its sales force, although a combination or hybrid form also occurs: - Geographically-based. In this case a salesperson is assigned to a geographic area in which he or she sells all the products of the company. - Product-based. Due to large differences between the different products, salespersons are assigned to a product or product line in which they can specialize. - Customer-based. The salesperson sells the entire product line to a specific type of customer or segment, for example banks, schools, steel companies, etc. - Function-based. The sales job is broken down into different functions in which different people specialize. The customer is then served by a team of specialists: one taking care of the initial contact, another responsible for the installation, another for servicing, etc. Advantages and disadvantages of the different structures are summarized in Figure 8.11. Fig 8.11 - Advantages and disadvantages of alternative sales force structures Geographic

Product

Consumer

Function

Advantages

Disadvantages

∎ Lower travel time leading to lower costs

∎ Salesperson has to sell the whole product line.

∎ Clarity in who is responsible for whom: one salesperson for one customer

∎ Difficult for dissimilar, complex products: no specialization.

∎ Experts in the products and the needed selling processes.

∎ High traveling costs.

∎ Better control of selling effort. ∎ Better understanding of customer's needs.

∎ Customer-oriented.

∎ Perhaps too much attention to easy-to-sell products. ∎ Duplication of calls. ∎ Higher costs.

∎ Salesperson has to sell the whole product line, but needs of different customers are more similar. ∎ Duplication of calls.

∎ Specialists.

8.3.2 TYPES OF SALES POSITIONS There are five basic types of sales positions (based on the activities performed), any combination of which a given salesperson might II. That is, they are not mutually exclusive, and most sales jobs involve some of the same activities. Virtually all sales positions require some degree of selling, working with orders, servicing the product,

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information management, account servicing, conferences, meetings, training, entertaining, travel, and working with distributors. The five types are trade selling, missionary selling, technical selling, new prospect selling, and customer servicing - Trade selling is used when the vendor is using intermediaries such as industrial distributors. The sales force attempts to ensure that distributors are supporting the company's marketing strategy and working to achieve the organization's sales goals. Toward this end, salespeople will call on distributors to explain how bath they and the manufacturer will benefit from specific advertising, sales promotion, inventory, pricing, or product-assortment policies. The sales force will also provide service to the distributor, helping in such areas as product training, arranging financing, information requests, preparing job specifications and bids, expediting delivery, handling complaints, and processing goods the distributor wishes to return to the manufacturer. Occasionally, trade sellers will supervise product installation and employee training at customer locations. - Missionary selling is when the sales person doesn't actually attempt to close the sale. Rather, customers are called u n and encouraged to purchase the vendor's products or services, but the purchases are actually made from a distributor, or ordered direct from the company. Missionary salespeople are concerned, then, with providing information and promoting goodwill. - Technical selling is one of the most common types of selling in industrial markets. This type of salesperson has technical expertise, and often holds a degree in the sciences or engineering. Frequently, however, such technical sales personnel have limited formal business training. Their focus is on providing customers with extensive technical information and advice, helping with product applications, and solving problems in the use or adaptation of the vendor's product to customer needs. One approach to technical selling is to put together a sales team, which might consist of a non-technical salesperson who makes the formal sales presentation, a financial expert, a production specialist, and the technical sales expert. This team approach allows the technical sales expert to concentrate on the product and its complex specifications and applications. - New prospect selling focuses on the generation of new customers, as opposed to increasing sales to existing ones or to supporting distributor sales. In new prospect selling, the salesperson makes cold calls on potential buyers, or follows up on unsolicited inquiries and inquiries generated through other promotional efforts. - Customer servicing, involves activities that facilitate and complement the selling process. Here, the salesperson works directly with the end-user to ensure effective and satisfactory usage of the vendor's product. Not unlike the service function provided in trade selling to distributors, customer servicing includes handling complaints, assisting in training, installation, repair and, maintenance, and developing positive personal relationships. Service reps will also work trade shows and gather intelligence on customers and competitors. 8.3.3 EMERGING INDUSTRIAL SELLING STYLES Industrial selling is becoming increasingly professional, and selling styles reflect this increased professionalism: - Consultative selling. The salesperson assumes the role of a consultant helping to improve the profitability of the client. The consultative salesperson, by becoming an expert on the client's business operations, providing analytical expertise, and solving problems, attempts to offer a level of value beyond that offered by competitors.

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- Negotiative selling. The negation style is designed to maximize the benefits of a transaction for both the buyer and the seller. The goal is to form a salespersoncustomer partnership with common objectives, mutually beneficial strategies, and a common defense against others outside the partnership. - Systems selling. The systems style has evolved to meet the rising sophistication and increased materials management concerns of organizational buyers. The salesperson for a business forms supplier might begin by defining a prospect's record and information needs and then prescribe a package of machines and forms, offer a recommended layout of facilities, establish a training program for employees, and finally design operating procedures and maintenance arrangements. - Team selling. The industrial seller assembles a team of personnel with functional expertise that matches the specialized knowledge of key buying influences within the customer firm. The mode of operation adopted by the selling team varies by selling situation. On occasion, the entire sales team will take part in the presentation to the buying centre, whereas in other cases, the members of the team may be called separately according to their specialty and expertise. 8.3.4 GOALS AND ROLES OF SALES A sales strategy can be defined as a broad conception of how sales resources are to be deployed to achieve objectives by; - calling on certain target customers - promoting certain lines of products - by making certain types of appeals - - by servicing or collecting information all within certain budget constraints. The sales strategy must be linked to higher-level planning. All too frequently, coordination between sales force planning and higher-level plans is neglected; with the result that field selling is out of line with business planning. As a consequence, top management intentions are nullified. With the sales force, usually the only revenueproducing unit of the business, it is the salespeople- that finally wins or loses the battles that relate to corporate goals. Setting goals for the sales force in terms of sales seems to run counter to the argument that sales result from all elements of the marketing mix, not just one element like personal selling or advertising. If we cannot evaluate advertising on the basis of sales, how can we justify using sales to evaluate the sales force? The main reason for setting goals for the sales force is to stimulate individual performance and to evaluate relative performance rather than the absolute level of sales force performance. The ranking of salespeople on the basis of their performance on quota can give a fair measure of relative performance even if the level of quota, in absolute terms, is either generally too low or too high. Revenue or sales goals constitute standards against which to assess performance but they provide little guidance for sales force direction. We need to think in terms of the role or functions to be carried out by the sales force and to set goals for each function (Figure 8.12). Fig. 8.12 - Higher-level plans, Sales Force plans and Sales Force functions Higher-level plans Sales force plans Sales force role Corporate profit goals Revenue goals and cost Communication goals Training Market share goals Sales quotas Service Liaison Investment objectives Allocation of selling effort Intelligence

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- Communication function Personal selling, like advertising, is concerned with communication. Sales force, communication goals will vary with the marketing strategy's competitive objective and the want-states of the target audience in the awareness hierarchy. - Training function Many forms of training are undertaken by sales people -for example, training customers how to sell or how to use equipment. More and more large manufacturers are starting programs designed to improve dealer efficiency: programs covering, say, inventory control, store layout, systems and procedures, accounting and promotional methods. The sales representative can be involved in all such training, and goals can be set to measure his or her performance in that role. - Service function. Salespeople are called upon to perform all sorts of service functions, from the design of some total system of which the firm's product is a part, to the monitoring of some past installation in case problems have arisen. Service goals can be set and performance assessed by examining samples of service work. - Liaison function Salespeople are engaged in communicating forward to the customer and backwards to management. In certain industrial markets this liaison role is key. If some production modification is required, the salespeople may be obliged to liaise between the firm's production personnel and customers. If the product is to be individually designed to fit the buyer's needs, the salespeople may have to liaise with design personnel on behalf of the buyer. Finally, if extensive development work is required, the salespeople may have to liaise between the firms R&D and the customer's technical staff. Goals should be set to reflect the quality of that liaison. - Intelligence function Every representative is expected to report customer reactions to the firm's offering. But an important though neglected function is that of collecting market intelligence in industrial markets. Salespeople are closest to the customer and can spot changing attitudes. Similarly, they are the first to suffer from renewed competitive activity and the first to notice its significance. Of course, salespeople may be tempted to distort the 'facts' (as people tend to when their interests are involved), but ways can usually be found to reduce such bias. In any case, goals can be set for intelligence work. Whichever of these functions is appropriate, we need to ask about the conditions that exist when the function is satisfactorily carried out. A definition of these fun conditions forms the basis for set ting goals for the function. 8.4 THE COMMUNICATION MODEL To conclude on the communication function and its role within the B-to-B marketing activities it seems good to position the whole process in a broader approach in order to reconcile all the possible tools in a single frame: the communication model. Communication requires at least three elements: a source, a\message and a destination: - A source may be an individual (speaking, writing, gesticulating) or an organisation such as a government, a firm or an association of people. In the field of B-to-B marketing the source is normally a seller of a product or service. - The message may be in the form of a written note, radio wave, a gesture, a flag, a whistle or any other signal that can be interpreted meaningfully. In marketing, the message normally takes the form of a description of the product coupled with a eulogy of its unique selling points.

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- The destination of a communication effort may be a specific individual listening, reading or watching; or a member of a group such as an audience of a seminar or in the cinema, or an unspecified individual of a mass audience such as a person watching television. The destination in B-to-B markets may be a number of potential buyers who work in many different sectors or countries and probably belong to different cultures and speak a myriad of languages. In order to attain commonness, which is the ultimate an ejective of communication, the source of a message must encode it into a form of which he knows that the destination is capable of decoding. "The destination and the source must be in tune". Failure occurs where the destination decodes the message in a manner which does not correspond to the intention or objective selected by the source. This in turn means that the source must have adequate or clear information as to how the destination behaves and his decoding capabilities. Fig 8.13 - Model of the communication process

The source of the sender must possess a full understanding of how the destination will respond to a specific message. Will the message be decoded or interpreted in accordance with our objectives or will it be distorted? This means that a sender must find out in some detail what the destination is able to decode or comprehend. Using professional jargon without prior verification of its decodability is the essence of poor communication. All the cultural, political and economic factors that make an environment must be looked at with great care when the message is prepared. What are the channels used to transmit the messages? How is the message transmitted? The Figure 8.13 schematizes the process and shows the principal communication flows. In the marketing world, the available channels are those that we have discussed in detail here above and which can be resumed in four headings; - Advertising: Any paid form of non-personal presentation of products, services or ideas placed in one or more of the commercially available media by an identified sponsor. - Sales promotion: These have been defined as the so-called 'below-the-line' activities such as demonstrations, sampling, display, shows and exhibitions that do not utilize media. - Publicity: The stimulation of a mention in the media of significant news items about the firm, its products and its activities without actually paying for such a favourable presentation.

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- Personal selling: Oral presentation with one or more prospective buyers, deciders or influencers. These channels can be used as part of a communication mix or the marketer may choose to concentrate his effort on one or two of them depending on circumstances. The ability to select the most appropriate message channel for a given set of objectives is one of the most skilful tasks of marketing. Such a selection depends on the external elements of the mix, (namely the environment itself, competition, institutions and legal systems); differ enormously from market to market and country to country. Their influence is not only significant on the message but also on the choice of the transmission channels Fig 8.14 - The communication part of the marketing profile analysis

This is where the marketing profile analysis is a useful tool. If assembled with care it should provide the marketer with the basis for identifying pertinent data not only about the message and its contents but also about the channels available and their appropriateness to the firm's communication objectives. Figure 8.14 illustrates the kind of questions that this type of analysis should yield.

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CHAPTER 9. CRAFTING AND IMPLEMENTING MARKETING STRATEGY

"The nature of business is to organize as to make your own product obsolete... ...If you don't plan it yourselves, the competitors will do it for you." "Many large companies with sophisticated control systems are, in fact, fully out of control" The business market processes of market sensing and understanding firms as customers provide supplier managers with an understanding of what particular market segments and customer firms value. These managers understand that the variation in requirements and preferences across market segments and customer firms means their firm will not be able to serve all segments and customers equally well. Crafting market strategy is the process of studying how to exploit a firm's resources to achieve shortterm and long-term marketplace success, deciding on a course of action to pursue, and flexibly updating it as learning occurs during implementation. 9.1 CRAFTING MARKET STRATEGY Because business market management regards value as its cornerstone, crafting market strategy is about understanding how the firm can be meaningfully different in ways that targeted market segments and customer firms value. This requires understanding what the firm does, or is capable of doing, to fulfill the requirements and preferences of targeted market segments: Fig. 9.1 - Crafting Market Strategy

We portray considering understands fundamental

the process of crafting market strategy in Figure 9.1. We begin by business strategy as the context for market strategy. The firm first what resources it has, and how it can best exploit them in one or more value-based business strategies. We than consider how the firm plans its

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market strategy. The discussion of market strategy is organised around three fundamental questions that firms must meaningfully answer. Planning the market strategy and implementing it provide the firm with gains in deliberate as well as emergent knowledge that is used to update its views and actions. Although business strategy often is seen as setting the constraints for market strategy, the market strategy and tactics should, on their turn, inform and significantly influence business strategy. The nature of the changes in the updated strategies can range from orderly advances to radical change. 9.1.1 A RESOURCE- BASED VIEW OF THE FIRM The resource-based view of the firm "sees companies as very different collections of physical and intangible assets and capabilities. No two companies are alike because no two companies have had the same set of experiences, acquired the same as sets and skills, or built the same organizational cultures". Resources are anything that firms (as collective actors) explicitly value, such as technical know-how, equipment, personnel, or capital, which can generate greater value for them and others. The resource-based view combines and builds upon the internal perspective of the firm, associated with concepts like core competencies and capabilities, and the external perspective of the firm, associated with customers, suppliers, competitors, out- and income off alternative products and services. Resources are the building blocks for strategy. To be a source of competitive advantage, a resource must pass five external market tests of its value. - The first test is inimitability, which is how difficult the resource is to copy or the length of time it will take for a competitor to replicate the resource. - The second test is durability, which is how long a resource will last in providing value before it is overtaken by innovation either within the industry or outside of it. - The third test is appropriability, which is the extent to which other firms or individuals can capture the value that the resource creates. - The fourth test is substitutability, which is the ability of a different resource to provide similar functionality or performance at the same or lower cost. - The fifth test -is competitive superiority, which refers to a market assessment of how a resource compares to those of the firm's competitors. Management applies these tests to resources using empirical assessments in the market-place, such as value assessment. Core competencies and capabilities are resources that are complementary building blocks of a value-generating strategy that provides competitive advantage. The firm need not own all of the resources it requires to actualize its strategy, though. It may decide instead to engage those resources through alliances with partner firms. 9.1.2 FUNDAMENTAL VALUE-BASED STRATEGIES At the core of every successful strategy understands what targeted market segments and firms regard as superior value and how to provide it to them. Though, not all markets or firms within them value the same things, which means that there are multiple ways for a firm to provide superior value. Although prescriptions for fundamental strategies based on value vary somewhat, we consolidate them into three for discussion: product leadership, customer intimacy, and operational excellence. These basic value strategies are not mutually exclusive, and a firm that surpasses its competitors on two of them will have an extraordinary advantage. Those value strategies bring the firm to position itself in a changing competitive market where in it has to cope with mutation or adaptation due

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to the normal constant evolution. In certain circumstances, the business environment will even force an organization to face radical changes in its market or relationships. The impetus for change may come from within the firm, such as bringing innovations to the market. It may come from the market, such as competitors or major customers enacting strategy as revolution. It may come from the dyadic interaction between internal and external events. In any case, to prosper, the film must pursue dramatically different ways to enact a fundamental value-based strategy. 9.1.3 PLANNING MARKET STRATEGY IN B-TO-B MARKETS "Chance favours the prepared mind." This quote by Louis Pasteur captures the essence of what one should attempt to accomplish with planning market strategy. Planning is a mechanism for learning. It should afford managers the time to validate their market views. Planning provides a way for the firm to build its institutional learning, "Which is the process whereby management teams try to exchange their shared mental models of company, markets, and competitors". Through planning, members of the management team compare, revise, and update their individual ideas, with the intent of having them converge on a shared view, which serves as the basis for discussing alternative courses of action for the firm to pursue. In many firms, though, planning as practiced has little to do with learning. Pressed for time and with little or no market research results to draw on, managers produce plans that are uninspired, straight-line extensions of the previous year's plan. In many cases, the plans are little more than the financial performance targets for the upcoming year. Such plans contribute little to running the business or reacting to changes that inevitably occur. Fortunately, there is growing recognition of the need for meaningful planning of strategy. A number of firms have reinvigorated their strategic planning to settle ways to grow their businesses and improve their profitability. The particular planning process and plan format are not what is important. What counts is the thinking that goes to the plan and the learning that results out going round three fundamental questions: - What do we know? - What do we want to accomplish? - How will we do it? Regardless of planning process and plan format, firms that can meaningfully answer these three questions will have constructed a market strategy that is worth pursuing. 9.2 THE B-TO-B MARKETING PLANNING PROCESS Different definitions of marketing can be identified, but it is, in fact, a management process that anticipates, identifies and satisfies customers' needs and wants at a profit (or cost effectively). Marketing could also be seen as a strategic process 'developing and matching the resources of the organisation to meet the needs of the target market while taking into account the demands of the market environment'. This definition lends itself more readily to the idea of B-to-B strategic marketing planning and control. So marketing planning is about taking all the areas of marketing within the organisation and combining these resources in such a way that products and services are offered that meet the current and future needs and demands of the business marketplace better than the competition. This will include such factors; as marketing research, understanding organisational behaviour, R&D, innovation and product development, the use of technology, pricing, distribution and channel relationships, promotion, etc... To be able to do this successfully the whole marketing process must be rigorously planned, taking into account the state of current organisational resources and the

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present and future market and environmental direction. This is why marketing planning must begin with an investigation into prevailing company and market circumstances before any decisions can be made about long-term strategic direction. All relevant members of staff should be involved in the discussion process from senior management down. The investigation should begin with the collection, classification and analysis of all information that would be relevant to the company's present (and perhaps past) market position. It would be impossible, for argument's sake, to make decisions about selling existing products into new markets without knowledge of the company's product portfolio mix and present financial situation, or the level of competition and potential sales growth in the selected new market. Most organisations realize the importance of strategic thinking, looking ahead and attempting to understand how market conditions might change, how the levels of demand might alter and what the reaction of competitors might be. Imaginative and entrepreneurial thinking unguided by a strategic perspective is much more likely to fail than to succeed. Innovation, the use of new technology and new product development are all meaningless if not linked into an idea of future customer wants and needs. 9.2.1 STABLE AND DYNAMIC PLANNING ENVIRONMENTS Business and market environments around the world are, to a lesser or greater extent, always in some kind of change process that will have ramifications for the organisational planning process. The change might be environmental, economic or social and affecting all markets at the same time or, as is more likely, the change will affect one part of the world or one country at different times. Global companies might be affected in all markets at the same time, as in a world recession, or only in one trading bloc or country because of relatively localized factors. Fig. 9.2 - The strategic planning challenge

Different management styles needed for environmental states. These might arguably be identified under the following:

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1. Harmony/unpredictability = paternalistic management. 2. Turbulence/unpredictability = complexity/entrepreneurial management. 3. Harmony/predictability = bureaucratic management. 4. Turbulence/predictability democratic management. Although most world market environments are more liable to change than in the past, markets in some sectors will be more susceptible than others. In some industrial markets change is constant almost month after month, e.g. information technology, while others barely change from year to year, e.g. pharmaceutical markets with long-term patents. In some industries, such as cars and lorries, the lead time (planning horizon) for producing new products and introducing new processes will be much longer than in other industries such as publishing because of the resource implications involved. Although the pace of technology now makes it easier for most industries to adapt more quickly to market circumstances than in the past, it will always be quicker to change direction in some sectors because of products, and services offered, design times, skills training, financial commitment and risk, level of competition, etc... 9.2.2 PLANNING IN TURBULENT ECONOMIC TIMES Strategic planning is much easier when major economic forces; inflation, interest rates and employment levels are stable and relatively predictable. It is much more difficult when times are turbulent and economic factors fluctuate. Under these circumstances long-term planning has to be constantly revised, perhaps every year, and so becomes a series of shifting short term plans. The strategic planning challenge will be governed by the speed of relative change and/or stability of the global environment. This leads to shifts in management attitudes and styles. (Figure 9.2). 9.2.3 SCOPE OF STRATEGIC PLANNING Therefore the first stage of the planning process consists of asking questions, collecting and analyzing as much information about the current situation as is considered both manageable and relevant. This we call the strategic situation analysis or the strategic audit. Once the audit has been conducted we can move on to the second and third stages in which the analysed information is used to decide both the marketing objectives and the strategic methods that must be employed to achieve these objectives. 1. Strategic situation analysis: Where are we now? 2. Seeking to understand the organization’s internal and external strategic situation. Strategic choice: Where do we want to go? Choosing between the strategic courses of action and setting objectives. 3. Strategic implementation: How are we going to get there? Putting the chosen course of action into effect. We can now look at each of these areas in more detail, beginning with the marketing audit. 9.3 STRATEGIC SITUATION ANALYSIS: WHERE ARE WE NOW? There exists an infinite amount of information both within an organisation and in the outside world where it operates. The difficulty that faces the B-to-B marketing manager, business consultant or marketing student is where and how to start this information gathering process: how to decide what information is relevant and should be collected. 9.3.1 THE EXTERNAL ENVIRONMENT: MARKET ATTRACTIVENESS

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ƒ

Wider or macro environment.

Those factors to consider here are identified under the acronym 'PEST' which stands for; Political I legal - Economic I demographic - Social I cultural - Technical I physical. Information that might be needed at both national and global level would include the following: - What laws are relevant or could be relevant in the future? How far does the ecology imply new regulations? - What is the political climate? What are the organisational demographic movements? - How stable is the market region under investigation? What is the economic level and trend of activity? What is the disposable income? - What are the interest I exchange / inflation / employment rates? - How important is social class? - How important is innovation and technology? - What infrastructures are in place? Are global markets changing? • Immediate or micro environment:: The factors to be considered here can be identified under the acronym 'SPICC', which stands for: Suppliers -Publics -Intermediaries -Competition -Customers and markets. The types of questions that might need to be asked here are for example: - Who has the power along the supply chain -the producers, the intermediaries or the buyers? - How many buyers/suppliers are there? How efficient are they? What are the pricing and delivery policies? How is value added along the supply chain? - How active or strong are pressure groups, local communities or the media in any particular industry? - What is the structural role of the intermediary? How much control do they have over distribution channels? - Who is the competition? Who are the major players and market leaders in the relevant market? What are the competitors' product portfolios and product advantages? How easy is it to enter and leave a particular industry? - Who are the customers? What is their size, spending power? How might they be distributed across the country or global market? Is the market growing or declining and are new markets opening up? - Which customers are the most/least profitable? Can lifetime customer value be ascertained? This is just a very small indication of the types of questions that might be asked across the B-to-B macro and the microenvironment. Of course in reality the questions to be asked and the answers to be obtained would need to reflect the particular circumstances of each industry and organisation. It should be recognized that in reality there is no dividing line between the macro and microenvironments, between PEST and SPICC, as both are in the organization’s external environment. The division is artificial and the separation is purely to help understanding. 9.3.2 THE INTERNAL ENVIRONMENT: COMPANY COMPETITIVENESS We can now look at the business organization’s internal environment. This information was identified using a model that incorporated the acronyms of the seven S's and the seven P's.

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The seven S's It is impossible to look in isolation at the conventional marketing mix without consideration for other back-ups such as structures and systems; satisfactory product and service delivery are so dependent on other organisational factors. For example, a good product that is offered through a substandard system is bound to lose competitive advantage. We want to look at these so-called 'back-up' factors under the acronym of the seven S's, which consist of the following: structures, strategies, systems, staffing, skills, shared values, style: (Figure 9.3) Fig; 9.3 - The Seven S's framework McKinsey

-

What sort of structure does the organisation have? Is it bureaucratic? Is it tall and hierarchical or flat and flexible? Is it centralized or decentralised? Which structure will be more conducive to the company's marketing effort? - What systems and processes (MIS, communications, finance, training, customer complaints, etc.) are in place? Are they adequate and sufficiently customer orientated? What control mechanisms are in place? - Is there evidence of long-term strategic thinking across marketing areas or is short term thinking dominant? What are the core assets of the organisation that might help it build and maintain sustainable competitive advantage? - Are staffing levels sufficient to meet the needed customer service levels? - What skills, or lack of skills, exist and what training and development programmes are in place and also might be needed? - What is the culture (shared value) of the organisation? Is it customer orientated? Is the staff happy, innovative and enthusiastic? - What is the style adopted by the company? Is it democratic, autocratic or patriarchal? Is it consistent across the whole corporation and how does it affect the corporate image from the customer's standpoint? The job of the audit is to unearth answers to these and very many other questions. • The Seven P's At the heart of the B-to-B marketing audit is the extended marketing mix. This will cover an examination of the use of marketing research, the company's product portfolio (including people, especially if there is a large service input), its supply and distribution channel relationships, pricing policies and the amount and type of communication and promotion carried out. The marketing mix win also be concerned with costs, profit levels

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and cash flow ratios. We will look a little more closely at the type of information needed, beginning with marketing research and moving on to look at the other factors identified under the acronym of the seven P's. - Product: analysis of the product/service portfolio and all synergic components - Place: determine the most favourable distribution channels used - Price: what are the pricing methods? Does the company handle in 'trading-up' or 'trading-down' principle? What are the costs? - Promotion and communication: Which communication platform has been implemented? What are the levels of corporate-, brand- or product reputation? What is the effective presence of the firm in the market? - People: How is the company structured? Who is representing the firm? What are the skills of the sales forces? What is the management style? - Profit: Is the company making any profit? Is this in line with the expectations? Is there scope for improvement? - Processes: What is the technological reputation? What is the ability to respond to new demands? 9.3.3 ANALYSIS OF THE INFORMATION COLLECTED Once all the relevant information has been collected and classified, it can be discussed, argued over, examined and analysed. Information will continue to be collected as discussions and suggestions throw up more options and open up; other areas for investigation. • SWOT analysis Probably the most popular model to analyse the overall situation is the SWOT process, which stands for strengths, weaknesses, opportunities and threats. Opportunities and threats are used to analyse the external informational factors collected (PEST and SPICC factors). Strengths and weaknesses are used to analyse the internal factors (the seven S's and seven P's). It is important not to confuse internal and external factors because if this happens it might also confuse both the management approach and decisions eventually taken. With the SWOT information being brought forward and refined through argument and discussion there should eventually be some form of agreement on which to reject and which to retain so that the final situation report. This situation report (Sitrep) will contain only the major strategic marketing external opportunities and the major strategic organisational internal strengths and weakness. This leads in fact to the isolation of the CFS's (Critical Success Factors), which are those vital elements to be considered as priorities. It should be recognized that the SWOT is a matching process. Ideally the organisation would like to match its strengths to the opportunities in the marketplace. However, this is not always immediately possible because of the circumstances pertaining to the organisation and the state of the market environment. Therefore it can be the case that the weaknesses of the company are such that it cannot take advantage of the external opportunities. In this case it might have to seek some form of outside resource investment (e.g. financial investment or even a merger) so that it can take advantage of these opportunities. The SWOT analysis might show the company to be in the unfortunate position where the threats from the external environment are so large and the weaknesses internally so dire that the only organisational strategy possible might be to divest or liquidate, depending

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on the seriousness of the situation. Figure 9.4 lists a number of SWOT situations with possible options on how to rectify the position. As with the whole planning process, the value of the audit process and SWOT exercise is in the 'doing' rather than in the final document that might be arrived at. So practitioners should not be afraid to argue, discuss, adjust and readjust before coming up with the end product. The important thing is that debate takes place and involves all interested parties. Fig 9.4 - The SWOT strategic options SWOT position

Possible strategies

Strengths > Weaknesses Opportunities > Threats

Match strengths to opportunities for success

Weaknesses > Strengths Opportunities > Threats

Seek help to eliminate weaknesses and take advantage of opportunities

Strengths > Weaknesses Threats > Opportunities

Move to new markets where strengths can be optimized and threats eliminated

Weaknesses > Strengths Threats > Opportunities

No hope, divest or liquidate

9.4 STRATEGIC CHOICE: WHERE DO WE WANT TO GO? A choice now has to be made between the strategic courses of action and setting objectives. At some point in the B-to-B planning process the company mission should be clearly defined and overall corporate objectives set. The importance of the B-to-B organisational mission statement and its corporate objectives must not be forgotten as marketing planning will need to take place within the framework set by both the mission statement and the corporate1ob'ectivese The need for common overall objectives cannot be over-emphasized because experience has shown that disaster can occur when all or some departments within the same organisation ignore, confuse, or seem to be unaware of overall company direction and behavioural policy, preferring instead to implement their own aims and objectives. The end result of this could be each department or area going its own way, causing the company to perform its corporate function in an inefficient and uncoordinated fashion, promising eventual bankruptcy. 9.4.1 THE COMPANY MISSION STATEMENT The mission statement (vision statement, corporate values, etc.) should lay down the long term corporate aims and values and answer the following questions: - What business are we in (in broad terms)? - What constitutes value to our shareholders? - Who are our customers? - How should the company conduct its business with regard to customers, employees, all other stakeholders, and the environment? The answers to these questions should be understood by all, hopefully believed by all members of the organisation and should be the overall guiding principle that gives direction and moves the company forward. For mission statements to work, it should be offered in a simplified form, have meaning for all employees and be in use continuously

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in the day-to-day running of the business. The mission statement can be imputed at the beginning or end of the business process depending on the level of organisational change that might be taking place. 9.4.2 CORPORATE OBJECTIVES The corporate objectives are the business objectives for the whole organisation (including production, human resources, administration, finance, marketing...) and should spell out for all stakeholders the exact purpose of the organisation. As with all business objectives, corporate objectives should be quantified over time so that results can be monitored and controlled. If the organisation is in the private sector then the corporate objectives will most probably be set in financial terms, this being the return to the owners of the company, the shareholders, for the use of their capital (e.g. ROACE, ROI). This can then be broken down, if necessary, by division. If the organisation is in the notfor-profit or public sector, then the corporate objectives may be set in ways that reflect the guiding principle of the organisation as well as in financial terms. All B-to-B planning will take place under the umbrella of the corporate objectives. All business objectives should be SMART -specific, measurable, achievable (agreed), realistic, time-based. 9.4.3 MARKETING VERSUS CORPORATE OBJECTIVES The planning process discussed up to now would apply to all functions of the organisation, each making its contribution to the overall corporate objectives. Although discussion will take place across the whole of the company, the B-to-B marketing role in the planning process really begins with the setting of marketing objectives. The ProductMarket objectives are the overall performance targets for the whole of the marketing function and will tend to be set in terms of sales volumes, units, market share and profit. Those objectives should integrate the ground corporate decisions on financial and production capacities as well as on human resources involved. The time period will vary depending on the company and industry, but would usually be about three to five years and then broken down to cover short, medium and long term. It is worth mentioning here that there are closed and open objectives. As stated earlier, all business objectives should be closed, SMART. However, an organisation will sometimes use open or secondary objectives, usually for consumption outside the organisation. These objectives are less defined and not capable of clear measurement: 'to create greater customer satisfaction'; 'to develop more innovative products'; 'to contribute to a safer environment'. Although having meaning to some stakeholders, they would have to be quantified over time to be of use to managers within the company. 9.4.4 THE STRATEGIC STATEMENT AND THE CHOICE OF OPTIONS Strategy is the combination of methods used by the company to obtain its long- term corporate and marketing objectives. Corporate objectives are, hopefully, obtained by corporate strategies involving the integrated use of finance, production, administration, HR, marketing, etc. working together in harmony. Likewise marketing objectives will be achieved through the use of marketing strategies, bringing together all the marketing areas. The strategy statement requires making basic choices among the strategy alternatives. It is a summary overview designed to state 'how' the objectives for the business unit will be met. The strategy statement will govern not only marketing planning, but the

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manufacturing, financial and R&D functions. It is the mainstream guidance from which all subsequent planning functions flow. The strategy statement should not exceed two or three pages of text. At this point, general management should review and approve the objectives. A certain number of simple rules, inspired by military strategy, should be followed in selecting a strategy. - Feasibility: assess skills and resources constraints. - Strength: always try to have a strength advantage. - Concentration: avoid scattering of efforts. - Synergy: ensure coordination and consistency in efforts. - Adaptability: be ready to respond to the unexpected. - Parsimony: avoid waste of scarce resources. In the 2000s environment, forward thinking is a dynamic exercise that requires adaptability and flexibility. An important function of the B-to-B marketing manager is to identify demand and forecast future sales potential and of course marketing objectives cannot be set without this taking place. The importance of reliable predicted sales forecasting cannot be overestimated, as it is on this figure that all other budgets are based. Once the sales forecasting has taken place and marketing objectives have been set, strategies must be developed to show how these objectives are going to be achieved. This introduces us to the model and concept of gap analysis Fig 9.5 - Gap analysis

Gap analysis In summarizing the strategies and objectives of each business unit, it is instructive to project the current performance trends to verify whether the projected performance is satisfactory. Gaps will appear between the current and the desired performances and strategic changes will need to be considered. If there is nothing done to improve the market position, competition will actively outrange the company. The graph presented in Figure 9.5 illustrates the contribution of growth opportunities under two growth scenarios: - A 'normal marketing effort and continuity scenario where growth is achieved through a penetration strategy based on existing products and existing markets, assuming no dramatic change in the current strategy, but making active use of the marketing tools to maintains a good position.

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A 'desired performance', where growth is the outcome of the proposed strategic programmes and of different growth opportunities. As shown, the gaps between these two performance levels can be seen as: - An “operational gap” which reveals the improvement potential of existing businesses that could be achieved through a market and product rationalization strategy, i.e. reducing costs and/or improving marketing effectiveness, while keeping the structure of the product portfolio unchanged (conservative measures) - A “strategic gap”, which requires new growth opportunities, i.e. new products, new markets, international development, diversification or integration (strategic decisions: aggressive, experimental, contractive, defensive) These growth opportunities should be listed in order of priority and their potential financial contribution to the desired performance evaluated. Marketing strategic options : The Ansoff matrix approach Having decided on the overall marketing objectives, another model known as the Ansoff strategic option matrix can be used to define the way to go. Like all models, the Ansoff matrix is a method used to encourage argument and debate and to simplify a very complex situation. It should not be judged as an ultimate reflection of reality. In very simple terms, through the use of the Ansoff matrix it can be argued that there are four major strategic alternatives that a marketer could use when looking for ways to fill the planning gap,--identified earlier, and so achieve marketing objectives (Figure 9.6). Many different strategic approaches can be used within these four options and these will be discussed in more detail below. Fig 9.6 - The Ansoff matrix approach

The four basic methods are: 1. Existing products in existing markets -market penetration. 2. New products in existing markets -product development or range extension. 3. Existing products in new markets -market development. 4. New products in new markets -diversification or exploration. One should add that, in certain circumstances, the decision can be geared towards either

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a "specialization" on the 'core products', avoiding loss of time and energy or money in promoting a too large product portfolio a "concentration on preferred markets, turning down, quitting or selling the markets shares or locations that are run at a loss or to difficult to develop.

9.5 STRATEGIC IMPLEMENTATION: HOW ARE WE GOING TO GET THERE? We can now move on to look at the last stage in the planning process -the implementation of the B-to-B strategic plan. All stages of the planning process are important, but making certain that the strategic plan is implemented and actually works is probably the most difficult and most important part. There is little point in the marketing management team spending hours, weeks and months on the planning process if the strategic plan ends up gathering dust in a boardroom cupboard and no- action is taken. Problems can still arise even as an attempt is made to put the strategic plan into operation. Departmental or personal agendas, fear of change, cultural differences across functions and strategic partnerships and lack of senior management commitment to see the process through can all impair or negate the successful running of the strategic programmes. 9.5.1 PUTTING THE CHOSEN COURSE OF ACTION INTO EFFECT The implementation process begins with taking the three-to five-year strategic marketing plan and then developing every strategy adopted in detail over a shorter period, usually the first year to come. This must be written out in intricate details because this is the working document that everybody within the organisation is going to work with on a dayto-day basis. This can be caned the marketing tactical or action plan. There is often confusion about the terms 'strategy' and 'tactics'. This is not surprising since the meaning shifts as we move down the organisational hierarchy. What is seen as strategic at corporate board level can be viewed as tactical when given to the level below for further development. To add to the confusion, whether a factor is strategic or tactical win depend to a certain extent on management opinion. Basically, the differences between tactics and strategy can be summed up according to the following: - Marketing strategy is long term; marketing tactics are short term. - Marketing strategy is a broad description of what needs to be done to achieve marketing objectives; marketing tactics show how resources are to be garnered and tailored so as to implement strategies. - Marketing strategy gives an organizing and coordinating framework providing the same direction for all company functions over the long term; marketing tactics spell out detailed action in terms of the marketing mix to be implemented. 9.5.2 FROM MARKETING STRATEGY TO MARKETING TACTICS The overall marketing objectives (e.g. over three years) need to be broken down into the short, medium and long term (perhaps years 1, 2 and 3 sales objectives). The short-term objective, the tactical marketing objective, is then taken and broken down into a detailed description. This is the plan to be used for the implementation and will become the working document for most employees, senior and junior managers, supervisors and individual workers. • Detailed target segment and organisational profile

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The target segment will have been outlined in the strategic plan but it is at this level that more detail will be added. This will consist of such facts as the number of organisations, their size, growth rate, product benefits wanted, and even, if relevant, a description of the DMU and buying policies. • Timing The tactical plan will be broken down into realistic and relevant time periods over the 12 months (e.g. every week) across all programme areas, detailing clearly what needs to be done by whom and by when. Rolling marketing tactics consist of taking each strategy and detailing the plan, rolling it out over the first 12 months and determining what has to be completed month by month and, in this way, integrating all strategic decisions that have been taken. • Allocation of responsibility Crucial to effectiveness and efficiency of the marketing planning process is the allocation of responsibility The managers who have to implement the plan must be adequately empowered and will need to have personal and interpersonal skills in organizing, allocating resources, monitoring progress, and communicating and interacting with others, both inside and outside the organisation. Staff should be assigned clear responsibilities so that everybody is aware of who is responsible for every task and no area of possible confusion exists. Every management control area should have a monitoring back-up system so that checks can be made across important areas. Care should be taken to ensure that monitoring and control structures and systems do not become too bureaucratic and inflexible, thus restricting the smooth running of the marketing programmes. The higher up the organisation, the greater will be the level and importance of the decision-making process. Ultimately there has to be a certain amount of trust if the process is going to work efficiently and effectively. • Budgeting All elements of the planning process, both strategic and tactical, will involve some degree of costs. To a certain extent, the sales forecast figures, the expected revenue for the year, will decide many other budgets as it will determine what needs to be spent to achieve a certain level of sales. Many budget amounts will be more or less decided because of the tasks that need to be undertaken. For example, cost of sales win include such things as the purchase of raw materials, production and distribution costs and be linked directly to the projected year's revenue figure. Other budgets, however, are more speculative and the amount can be decided in different ways. For example, the advertising or marketing research budget will not be linked directly to sales but will be decided more by managerial discussion combined with prevailing circumstances. 9.5.3 THE MARKETING CONTROL PROCESS Monitoring and control, 'making certain that what is expected to happen, happens', are crucial to the successful running of any business, whether in the profit or not- for-profit sectors. To set goals and performance indicator targets, whether for the long or short term, and then not effectively monitor and control them is a recipe for disaster. As such, a regular feedback system is to be installed that will mostly be run through redundant reporting periods. Control approaches can be broken down into financial and non-financial terms

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Financial controls look at costs and profits across a whole range of indicators comparing the planned budgets with the actual, outcome. Non-financial controls should be implemented to cover important areas such as production and delivery times, product availability and product returns, customer satisfaction and complaints, competitor activity, etc...

Fig 9.7 - The three main phases in Marketing Planning

9.5.4 CONTINGENCY PLANS Once business marketing strategy is formulated and implemented, the B-to-B marketing manager must continually evaluate the target segment/individual organisation response in order to ensure that any discrepancy between planned and actual results is kept to a minimum. Contingency plans allow resources to be made available to take into account changes in market circumstances. No organisation, however, can really make Scanned by PHAN Thanh Tu

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contingency plans for totally unexpected events. This might be where crisis management planning comes into play. Many organisations (usually large) now have a crisis management planning programme in place so that broad management tactics and strategies to major unexpected events can be discussed and put into place. Proactive crisis management activities include forecasting potential crises (often by scenario planning) and planning how to deal with them, not in detail but in general terms. These plans are then translated into document form, outlining areas of responsibility and alternative courses of action in both the short and long term. As we have seen, the elaboration of a marketing plan forces us to take a step by step approach that brings us through three mains phases as illustrated in Figure 9.7 where in the normal progress of elaboration of a marketing plan is illustrated. This follows, of course, the primary definition and acceptation of vision, mission, and values. - The analytical phase of the situation producing a conclusion under the form of a SWOT grid - The strategic phase which is formulated on the base of vision and mission of the enterprise and produces a strategic plan incorporating the main functions of the company in a MT and LT view - The operational phase which allows to set proposals form a ST period articulated around the marketing tools (4 Ps) and is translated into a practical budget. Fig 9.8 - The planning cycle and Corporate Management in the B-to-B marketing context

This planning cycle is a real corner stone for the corporate management and should result in a set of guidelines permitting a control and a FU at any time, integrating when

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and where needed the results of specific projects and studies embarking the enterprise in new directions according to the formulated strategy. One should not ignore that inside and outside the firm, each decision and the progress of business should be submitted, either contractually or legally, to a series of bodies who are charged with control, advice or agreement for each action or direction taken. Those bodies are in many cases representatives of the stakeholders. (Board of Directors, HSE committee, Works council, Fiscal Control, Comptrollers...) The latest Figure 9.8 hereunder illustrates the place of the planning cycle in the corporate management and closes perfectly our journey throughout the multiple data and particularities of the B-to-B marketing development. 9.6 CONCLUDING COMMENTS Because strategic management and planning are processes of determining where the organization wants to go and how it will successfully compete, they are critical managerial functions. The logic that senior managers must understand the strategic management process and have the ability of crafting market strategy is self-evident. Yet it is equally important for entry-level managers to understand the process. Entry-level managers may not be involved in strategy formulation, but they must implement the strategy for it to succeed. Furthermore junior managers, and operational managers, need to know what the corporate-, business-, or functional-level strategies are to make decisions that support overall goals. Managers make many daily decisions, and those decisions can have a complementary or conflicting impact on the overall direction and performance of the organization. So, it is important that they make informed decisions; it is too costly to monitor all managers to determine whether they are consistent with the overall strategy. Rather, they can be more effective and efficient when they are guided by a clear understanding of strategic management process in general and the strategy of the company in particular. André TOYE- January 2004

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Question

CHAPTER 1 Discussion Questions 1. Du Pont, one of the largest industrial producers of chemicals and synthetic fibres, spends millions of dollars annually on advertising its products to final consumers. For example, over one million dollars was invested in a 1 V advertising blitz that emphasized the comfort of jeans made of Du Pont's stretch polyester-cotton blend. Since Du Pont does not produce jeans or market them to final consumers, why are large expenditures made on consumer advertising? 2. What are the chief differences between consumer goods marketing and business marketing? Use the following matrix as a guide in organizing your response: Consumer-Goods Marketing

Business Marketing

Customers Buying Behaviour Buyer-Seller Relationship Product Price Promotion Channels 3. Explain how a company such as '3 M' might be classified by some business marketers as a B to B user customer but by others as an OEM customer. Some people even pretend that 3M is a B to C producer, why is this? 4. Using a product with which you are familiar, illustrate the concept of derived demand. 5. Identify and discuss the different industrial or organisational markets. Give real-live examples of each of them and explain why you think this is so. True- False Questions 1- The fundamental key behavioural component of a market-driven organisation is to be shareholder oriented 2- Private associations as unions, sports clubs, orchestras... are to be considered as organisational markets and thus belong to the B to B 3- A derived demand means that your sales potential depends of the industries who are supplying you with raw material or components 4- The B to B marketing process is based on understanding, creating and delivering functional value

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5- In B to B, the 'product-market driver is technology

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Multiple Choice Questions a) The subjective aim for a successful B to B company is to develop a marketing pressure in order to 1. Create workplaces for the population 2. Act against the competition 3. Make profit 4. Propose products and services which fit the demands and needs of the customers b) In B to B marketing, the "Business to Market Channel" is: 1. The distribution intermediaries between producers and users 2. The logistics and transport organisation 3. The process going from treatment of raw material to the product sales of consumers goods 4. The marketing-mix elaborated to convince the industrial buyers c) The "trade unions" are considered in B to B as customers that can be classified under 1. State organisations 2. Industrial or commercial enterprises 3. Non-for-profit organisations 4. Socio-political consumers entities d) In B to B marketing, the "derived" or "joint" demand specifies that: 1. The demand to the industrial producer is function of what is available on the supply market 2. The demand upstream depends of what is consumed and used by the end consumers 3. The demand for industrial components and machines is derived from the willingness of entrepreneurs to invest 4. The demand for semi-elaborated products is linked to the demand for the byproducts available at the same time. e) The elaboration and preparation of a marketing mix in B to B has as focal point 1. The potential users and their needs 2 The potential profit to be made 3. The productivity of the manufacturing department 4. The satisfaction of General Management

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CHAPTER 2 Discussion Questions 1. Harley-Davidson, the US motorcycle producer, recently purchased some sophisticated manufacturing equipment to enhance its position in a very competitive market. - First, what environmental forces might have been important in spawning this capital investment? - Second, which functional units were likely to have been represented in the buying decision unit? 2. Fuel economy, exhaust emission, and safety standards are creating changes in the purchasing requirements of automobile manufacturers. In what way will such changes influence the demand for aluminium, steel, rubber ... and other related materials? 3. An organization that centralizes procurement decisions at regional, division, or at headquarters level will approach purchasing differently than will a company that is decentralised with purchasing decisions made at individual user locations. Explain. 4. Identify and evaluate the major differences between the consumer buying process and the organisational buying process. Explain and give examples 5. What factors determine whether a particular buying situation will be a group or an individual decision? When decision is an issue of group's discussion on whom or which function will the accent be put? True- False Questions 1- In B to B, most of the purchasing decisions are made by the official buyer who is signing the order document 2- Whatever the situation, each order for supply should be processed through all the different buying stages 3- The level of buying decisions depends of two main factors: the product complexity and the commercial uncertainty 4- When buyers strengths is high and there is no scarcity in the supply market, the purchaser should secure stocks and ensure sources 5- By the introduction of the new ICT's, the role purchasing unit is going to disappear as each user will do it on its own

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Multiple Choice Questions a) In industrial buying behaviour, the 3 key points are; 1. The role of DMU, the uncertainty/risks avoidance, the reason of use & appliance of goods 2. The role of DMU, the strength of supplier, the reason of use & appliance of goods 3. The reason of use & appliance of goods, the nature of decision (personal or collective), the technology involved 4. The uncertainty / risks trade off, the role of DMU, the place in the businessmarket channel b) The 5 buying stages are: 1. Needs recognition/ Search for solution/ Choice of supplier/ Order routine/ Performance assessment 2. Needs recognition/ Definition of need/ Search for suppliers/ Evaluation of bids/ Selection, order routine & performance check

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3. Needs recognition/ Make or buy/ Search of suppliers/ Order policy/ Performance control 4. Needs recognition/ Product-service availability/ Negotiation 09 delivery/ Order procedure/ Payment modalities c) The buy-grid shows that in case of modified re-buy, the buying process shall 1. Go through all the 5 buying stages 2. Resume to performance check and reordering routine 3. Push for a research of other alternative supply sources 4. Appeal to redefine the characteristics of what is needed before looking for new bids d) Nature and level of buying decisions are function of 1. Commercial uncertainty versus product availability 2. Personality & function of decision maker versus product complexity 3. Importance of product delivery versus technology of supply 4. Commercial uncertainty versus product complexity e) The trade-off between company strength & supply market strength positions buying strategies under 3 possibilities 1. Exploit, Balance, Assure 2. Assure, Risk, Diversify 3. Exploit, Balance, Diversify 4. Diversify, Assure, Proceed to reverse auctions

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CHAPTER 3 Discussion Questions: 1. Why are market surveys favoured over statistical series method in measuring the market potential for new industrial products? 2. How could a marketing manager use the NACE information to determine the market opportunities for selling ink for use in all types of printing operations? 3. What are the main differences between market research or survey and the business-, economic- and competitive intelligence? What are their roles? Do we need them both? 4. What is it that transforms a normal MIS into a DSS? What is the benefit and what skills should you develop or hire in to perform well with DSS? 5. What are the limitations of mail surveys in industrial marketing research? Describe a problem that would lead itself to a mail survey. True-False Questions 1. MIS is an acronym which stand for "Manufacturing Integrated System' 2. The process of market survey for a specific problem at a particular moment in time is considered as an `ad hoc' market research 3. Using the basic of MIS and incorporating statistical and econometric Models brings us to the Decision Support System (DSS) 4. The 'Intelligence Process' is a continue survey of the environment in which the company has to play 5. A market research by telephone is the best method for gathering extensive and in depth and information at low cost on a secure base

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Multiple Choice Questions a) The `Intelligence Process' follows 4 successive phases in treating information 1. Collection, Classification, Communication, Application 2. Planning, Classification, Analysis, Diffusion 3. Planning, Collection, Analysis, Diffusion 4. Planning, Collection, Classification, Analysis b) The `primary data collection' in market research offers the 3 following possibilities 1. Market survey, desk research, official statistics 2. Desk research, market observation, opinion leaders 3. Market survey, feed-back suppliers, official statistics 4, Market survey, market observation, experimentation c) The acronym `MIS' in B to B stands for: 1. Marketing International Service 2. Market Introduction Sequence 3. Marketing Information System 4. Manufacturing Insurance Specification d) The MIS is a regular, planned information process, but DSS (Decision Support System) adds on possibilities of 1. Implementing sales objectives 2. Answering unusual and not routine requests 3. Conducting a specific customer behaviour analysis 4. Integrating shareholders demands

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CHAPTER 4 Discussion Questions 1. Explain why the industrial market segmentation is different from the B to C approach? Give examples for both processes. 2. List some potential macro-level and micro-level bases of segmentation that a specialist in lubricants (oils, greases and special products) might employ 3. Sara Lee Corporation (coffee, tea, soft drinks...) derives $1,5 billion of sales each year from institutional market (e.g. hospitals, schools, restaurants...). Explain how a firm as Sara Lee might apply the concept of market segmentation to the institutional market 4. Explain why entry into a particular segment for a industrial company might require a longer strategic commitment than a comparable decision made by a fast moving consumer goods manufacturer like Danone 5. Yage Corporation, a producer of `safety nets' for use in high rise construction, is planning to introduce an improved polyurethane-coated nylon net to the construction industry, consider the basic market strategies, which makes more sense for Yage: relying more on undifferentiated marketing, or more concentrated marketing? Why? What, in your opinion should be the market coverage they would have to aim for? True - False Questions 1. In a `differentiated marketing' the products and services are adapted to each specific market segment 2. The `nested' segmentation approach integrated the Macro- and Micro- processes 3. The NACE activity codes allow a micro-segmentation approach 4. The characteristics of buying situation (type and stage in purchase) are elements of the micro-segmentation process 5. A 'product-market coupling' defines a market coverage wherein the product is proposed to different markets with adapted marketing mix

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Multiple Choice Questions a) The NACE codes which give a systematic frame for the classification of activities and economical statistics in the European Community are: 1. a way to approach the micro-segmentation 2. an obliged route for market sector positioning 3. one of the best ways to start macro-segmentation 4. a reference for appraisal of DMU actions b) The basic marketing strategies stipulate three categories 1. international-, national- & local marketing 2. undifferentiated-, differentiated- & focused marketing 3. consumer-, industrial- & service marketing 4. capitalism, marxism , and consumerism c) In any segmentation process the basic rule to end up with market groups that are 1. pertinent, permanent & efficient 2. broad, global & interesting 3. specific, recognizable & profitable 4. measurable, identifiable & accessible d) The strategic segmentation tripod stipulates three dimensions: 1. market size, geographical location , economic potential 2. customers, function, technology

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3. technology, availability, delivery 4. Users, producers, introducers e) A product-market coupling is a form of market coverage where 1. a product range covers a series of different markets 2. a series of products is available for any given market 3. the products and technologies are adapted to serve several different markets 4. one concentrates on a specific product range for a specific market

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CHAPTER 5 : Discussion Questions: 1. Classify following products in the category to which they belong. Use the following matrix to help your decision. (If some are considered as being in more categories, explain why) Industrial Fruits Cement Motors Accountancy Machine tools Crude oil Lubricants Typewriters Airplane Paints Window cleaning

Equipment

Materials

Supplies x

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2. identify and evaluate the different roles that packaging might have in B to C when compared with B to B. Give live examples to illustrate the points that you might want to make 3. Traditional accounting systems don't capture the true benefits of automated manufacturing equipment. The usual systems emphasize the costs of doing something (per-unit product costs), whereas the main purpose of automation lies in eliminating -or at least minimizing- cost of not doing something (not producing unacceptable quality parts). Explain how producers of automated equipment, taking as base the 'quality control might employ a value-in-use argumentation to sustain his offering. 4. Would portfolio thinking be useful in developing marketing strategies for a small company that sells video production services (e.9. infomercials, training films, PR corporate films, convention supports) but also sell and leases video equipment (e.9. monitors, cameras, recorders) as well as video accessories (e.9. cables, switchers, tripods, tapes, jacks, plugs...)? How would you tackle the problem? 5. Any particular product strategy adopted by the industrial marketer will stimulate a response from the market, and a corresponding response from competitors. Which specific features of the competitive environment should be evaluated by the industrial marketer? True - False Questions 1. The 3 product dimensions are: Core, Tangible & Augmented 2. Even the "industrial traditional services" are more and more going to be outsourced and entrusted to specialised firms 3. The ISO 9000 is a normalized system which proves that the offered products and services are of better quality than competitor ones 4. The perceptual mapping and positioning permits to situate the products or services versus the competitors on the base of a series of selected attributes and features

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5. The Mc Kinsey grid gives a position of products based on the market growth rate and the relative market share

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Multiple Choice Questions: a) The 3 different, but complementary, product dimensions are: 1. Functional-, adapted- & optimal product 2. Basic-, physical- & immaterial product 3. Manufactured-, proposed- & expected product 4. Core-, tangible- & augmented product b) The classification or typology of Industrial products is mostly under 4 headings 1. industrial equipment, -materials, -services and -projects 2. industrial equipment, -materials, -supplies and -services 3. industrial machines, -services,-consumables and -investments 4. industrial commodities, -investments, -components and -services c) The success of pertinent and efficient industrial services hinges on 3 interrelated areas: 1. service operations, -delivery and -marketing 2. service contacts, -proposals and -delivery 3. service marketing, -delivery and -appraisal 4. service factory, -front stage and -back stage d) In the BCG portfolio analytical model, the `stars' define product groups with 1. high competitive value in profitable market segments 2. high relative market share and high added value 3. high market growth rate and high relative market share 4. highly profitable sales and high technical value f) The choice of a pertinent product strategy in the elaboration of an industrial marketing mix is function of the global objectives and goals of, the enterprise. The possibilities are generally listed under 4 headings 1. reduce costs, divest harvest, prune 2. new products, line extension, market penetration, price adjustment 3. new products, product improvement, sales promotion, variety reduction 4. cost reduction, new products, line development, product improvement

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CHAPTER 6 Discussion Questions: 1. Define the experience effect (costs behaviour) and explain why it occurs. Explain also how this experience or earning process relates to strategic pricing decisions. 2. Explain how a change in the price of one item often contributes to the need for a change in the price of other items in the product line 3. Why do you think cost-plus approaches are so prevalent in industrial markets? How does this approach limit the marketer's flexibility? How is it possible that this approach could be costing the firm some potential profits? 4. What does it mean to say that price is a measurement of value? What different sources of value might a customer perceive in purchasing a Caterpillar shovel? 5. Why is it easier to use price differentials or discriminations (charging different customers different prices) when selling industrial services than selling industrial products? True - False Questions 1. Price decisions should be taken by management based entirely on accounting information 2. Price elasticity means charging different prices to different consumers segments 3. In price-sensitive markets, price cutting is always leading to increase profits for the producing company 4. The price is playing a leverage role vis-à-vis the other marketing mix components 5. A "going rate" price is a price which fluctuates permanently with the growth rate and the cyclic changes of the economy

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Multiple Choice Questions: a) The price-elasticity of a given demand for a industrial product is a number which signalizes 1. The breadth of price range within which one has to fix the price 2. The amplitude of the modification in % volumes sold for a given % price modification 3. The speed of reaction of competitors to the price modification 4. The maximum of price modification in % one is allowed to apply without disturbing the hole market equilibrium b) Pricing a product or service is linked with the desire to make profit. The best method is 1. Calculate the total unit cost and adding the unit profit imposed by the management 2. Multiply the direct cost by a given factor allowing the coverage of overheads and profit 3. Test the market price acceptability and manage to produce at unit cost under this limit while still allowing a certain margin. 4. Deliberately allocate a great deal of the overheads to another product line and position your price on the sole base of direct variable costs c) Whatever the method of calculation adopted, the only reality is that price level 1. Is based on costs plus profit 2. Is set by what the customer is willing to pay

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3. Is fixed once for all by the ministry of economic affairs 4. Only depends of the competitors pressure d) In B to B, buyers are opting for products that, for a certain price and access cost, are giving an optimal balance between 1. Functional-, economical-, physical- and collective benefits 2. Functional-, operational-, financial- and personal benefits 3. Economical-, promotional-, physical- and personal benefits 4. Functional-, emotional-, operational- and reciprocal benefits e) The competitive bidding procedures are an obliged way of offering products or services for State or assimilated organisations. This procedure tend to 1. Focus the choice of suppliers on a pure price negotiation 2. Broaden the number of suppliers and sources 3. Limit the numbers of suppliers to the only specialised firms 4. Allow variation in offerings by differentiation in the proposed products and services

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CHAPTER 7 : Discussion Questions 1. Since both industrial marketers and distributors are interested in achieving profit goals, why are manufacturer-distributor relationships characterized by conflict? What steps can the marketer take to reduce the level of conflict and improve channel performance? 2. How is an industrial distributor a source of value within the distribution channel? 3. Choosing for an indirect distribution channel can be of great importance to the manufacturer. Explain in short what are the role and functions of distributors. 4. The logistics is 'transfixing' the whole industrial production and commercial activities; explain. What are the main phases and their impact on the business to market process? 5. The importance of outsourcing of logistics is enhanced nowadays by the so-called `Value Added Logistics' principles. What is it? What is its importance for the manufacturers in their response possibilities to local and changing markets? True - False Questions 1. The intermediaries in a distribution channel allows the producer to reduce his number of sales contacts 2. The `virtual channels' or e-commerce permit to bridge over one or more distribution channels and to handle customers more directly 3. A `broker" is a distribution middleman who usually doesn't take on the ownership of the products 4. The JIT application supposes agreements on TQM (ISO 9000) principles and mostly LT contracts 5. A vertical marketing system attempts to integrate the value chains of suppliers, producers, distribution channel and users

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Multiple Choice Questions a) The distribution is characterized by taking a major part in the main commercial `flows' or `fluxes'. Which of the following flows is not concerned by the distribution function? 1. the flow of products 2. the monetary flow 3 ` the flow of people 4. the flow of information b) The "Franchising" is a distribution system which is in full expansion and covers FMCG's as well as industrial products . The basic principle is: 1. a long term supply contract between producer and distributor for specific products and /or services. 2. a manner for the producer to let all liberty to the distributor who sells products and services under whatever brand 3. a partnership between two separate & independent companies by which the one, called franchiser, gives to the other, called franchisee, the right to exploit a commercial system and sell products and services under well defined conditions, supported by a proved marketing know-how and granted follow-up 4. the ability for the distributor to use a given 'shop-sign' or corporate image in a free way c) The "Vertical Integration" in a business to market channel means: 1. a merge of two or more distributors to get a better grip on the market

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2. a distributor having different sales departments located at different floors of a same building 3. a movement by which a distributor is taken over by a grocer or by the producer 4. a distributor whose marketing decision levels are concentrated in the headquarters d) The global business logistics system integrates 4 sub-systems: 1. materials-, marketing-, distribution- and retail logistics 2. supply-, production-, distribution- and waste logistics 3. marketing-, transport-, retail- and waste logistics 4. supply-, internal-, external- and retail logistics e) The "4D's" of the global logistical activities are 1. distance, demand, diversity & documentation 2. distance, drive, delocalization & designation 3. delocalization, demand, diversification, dedication 4. delocalization, diversification, dedication, determination

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CHAPTER 8 Discussion Questions 1. What is the industrial communication mix? Why are personal selling, advertising sales promotion, and publicity grouped together? How do these four areas affect one another? 2. The sales function is considered the most important communication strategy in B to B marketing where in B to C the accent is put on advertising. Why might this be so? Examine and evaluate the role of the sales representative in B to B communication. Give some live examples; 3. It is generally a mistake to use strong emotional appeals in B to B advertisements (i.e. humour, fear, sex...). Do you agree or disagree? Why? Is there an evolution on this matter in the latest decade? 4. Discuss how innovation and technology is affecting all aspects of B to B communications. Give live examples and attempt to speculate on what the future will hold. 5. The industrial selling styles are progressively changing and there we see new styles emerging. What are those styles? Explain why those new forms tend to develop quickly. True - False Questions: 1. `Below the line' publicity means all what is written at the bottom of an advertising 2. The `Push' communication globalizes all the techniques that pushes the buyer to contact the producers or distributors in their selling places 3. The 'media advertising' is the best way to achieve the internal communication 4. The 'personal selling' is the most important form in B to B communication 5. The AIDA hierarchy of effects stigmatises that communication is aiming to bring the prospective client to move from cognitive to affective and decision stages

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Multiple Choice Questions a) The 'industrial advertiser' is: 1. The company that is proceeding with an advertising campaign 2. The advertising agency who has created the message 3. The owner of the media support 4. The media planning agent who has selected the space and timing in the medias b) The 'headline' of an advertising message corresponds to 1. The image and atmosphere created in the message 2. The promotional promise made to the prospective client 3 The central and most evident argument used in the message 4. The most important support or media used to communicate c) The efficiency in communication to the buyers or potential buyers goes through a hierarchy of effects that brings them from cognition to behaviour: the so-called AIDA' steps. This stands for: 1. Awareness, Introduction, Decision, Acceptation 2. Action, Investment, Dedication, Application 3. Attention, Interest, Desire, Action

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4. Attention, Impression, Deliberation, Action d) The four usual sales forces structures are: 1. Geographical, per product line, per consumer segment, per functional role 2. Per region, per product-service line, per suppliers group, per users functions 3. Per industrial section, per official regional entities, per market segment, per importance of customers 4. Per geographical sectors, per vendors specialty, per market segment, per official or state industrial entities e) The particularities of B to B promotion are linked to the following five specific functional objectives: 1. Informing, convincing, helping, deciding, selling 2. Informing, explaining, educating, suggesting, selling 3. Informing, educating, persuading, reinforcing, selling 4. informing, persuading, helping, deciding, selling

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CHAPTER 9 Discussion Questions 1. Discuss the relationship between the company mission statement and the hierarchy of objectives identified in the B to B strategic planning process. Why must business objectives always be quantified over time? 2. Describe the five external market tests that value the resources and skills of a company in order to stipulate them as 'competitive advantages'. What are in your opinion the competitive advantages of Caterpillar, Boeing, or DHL explain why. 3. How can management control business if no annual marketing plan has been prepared? The marketer must be wary of both undercontrol and overcontrol. Explain this statement and give examples. 4. In certain companies, the business plan and marketing plan are pure intellectual exercises, as they don't really implement them in practice! Why do you think this might be? What should be done to overcome this problem? 5. In the decade 1980-90, the diversification was considered as the strategic way to go, but in the decade 1990-2000 the gross of the industrial companies reconsidered their strategy with a strong tendency to concentrate again on 'the core competencies'. Why, in your opinion is this? What are the consequences for the industrial and global economy? True - False Questions 1. Any planning cycle should start with an global audit giving an answer on the question: where are we now? 2. In a step by step marketing planning, The PEST factors give the situation of the firm's macro-environment 3. The budget is in fact the financial translation of the operational marketing plan 4. According to the course, the 'internal environment' analysis is best made on the base of a combination of the 7 S and 7 P approach 5. A `contingency' plan give in short the fallback situation in case of changes in critical factors touching the survival and continuity of the company

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Multiple Choice Questions a) The three main phases in the elaboration of a marketing plan are; 1. Analysis, action plan, budget 2. Strategy, action, control 3. Audit (analysis), strategy, tactics (operation) 4. Audit, tactics, action b) The gap analysis determines a difference between normal and desired performance levels which can be filled by: 1. Operational and strategic decisions 2. Competitive and pro-active measures 3. Buying in and enhancing competence and know-how 4. R & D and additional services c) In a step-by-step marketing planning system, the first phase is the `audit' which embraces: 1. Environment-, market-, technology and consumer behaviour analysis 2. Environment-, competition-, business-, and technology analysis

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3. Environment-, market-, competition-, and internal analysis 4. Environment-, competition-, financial-, and stakeholders analysis d) The SWOT grid is the outcome of the audit phase that gives a clear situation report (Sitrep). The acronym SWOT stands for: 1. Sweet, Willing, Open, Tender 2. Severe, Wishful, Ordinary, Traceable 3. Strengths, Weaknesses, Orders, Transactions 4. Strengths, Weaknesses, Opportunities, Threats e) The marketing strategic options are given by the Ansoff matrix approach. The basic two dimensions grid (product development / market development) gives the 4 following directions and possibilities 1. Adaptation, renovation, modification, diversification 2. Adaptation, confrontation, sophistication, diversification 3. Acceptation, renovation, optimisation, exploration 4. Penetration, acceptation, realisation, diversification

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