Industrial marketing


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Industrial marketing

  1. 1. McDonaldTexas Tech University
  2. 2. Industrial MarketingAlso called: Business-to-Business (B2B) and Organizational Marketing.Definition: the creation and management of mutually beneficial relationships between organizational suppliers and organizational customers.Customer can be private firm, public agency, or nonprofit organization. 3
  3. 3. The Marketing ConceptCreating value for customers with goods and services that address organizational needs and objectives. 4
  4. 4. Marketing ConceptThree major components: All company activities should begin with, and be based on, the recognition of a fundamental customer need. A customer orientation should be integrated throughout the functional areas of the firm: production, engineering, finance, R&D. Customer satisfaction is viewed as the means to long-term profitability goals. 5
  5. 5. Strategic Focus Grid High Follower InteractCustomerFocus Isolate Shaper Low Low Technology Focus High 6
  6. 6. Market OrientationAcquire intelligence from the external environment.Disseminate that intelligence throughout the organization.Respond to the intelligence: take action. (Kohli and Jaworski 1990, Journal of Marketing) 7
  7. 7. Marketing Mission StatementState in terms of meeting customer needs, not in terms of products or technologies.Marketing Myopia (Levitt 1960 HBR) 8
  8. 8. Marketing ActivitiesIdentify customer needsResearch customer behaviorDivide market into manageable segmentsDevelop new products/servicesEstablish/negotiate pricesDeliver, install, service productsEnsure adequate and timely supply of products at correct placeAllocate resources across product linesCommunicate with customersEvaluate/control marketing programs 9
  9. 9. Marketing MixLimited number of variables under Marketing’s control to create position that is attractive to the target market segment.Four Ps Product Price Promotion Place (Distribution) 10
  10. 10. External EnvironmentCharacterized by: Degree of Stability Complexity Diversity Hostility 11
  11. 11. External EnvironmentSix Environments Technological Economic Social/Cultural (Customer) Political/Legal Natural/Climatic Competitive 12
  12. 12. So what’s different about B2B?Marketing ConceptMarketing MixMarket SegmentationProduct Life CycleAll apply in both B2C and B2B. 13
  13. 13. So what’s different about B2B?The technical characteristics of the product are important.These products directly affect the operations and economic health of the customer.The customer is an organization rather than an individual consumer, or family. 14
  14. 14. Five Major Differences Between B2B and B2CProducts/Services being marketedNature of demandHow the customer buysCommunication processEconomic/Financial factors 15
  15. 15. Products/ServicesMore complexFunctional vs. Symbolic AttributesLarge unit dollar value/Large quantitiesCustom/TailoredVarious Stages from raw material to finished goods.Foundation, Entering, Facilitating Goods 16
  16. 16. Raw Material Extraction Material Processing Manufacturing Parts/Subassembly Facilitators Assembly DistributionWholesale/Retail Trade Final Consumers Firms in Production Chain 17
  17. 17. Nature of DemandDerivedJoint/SharedConcentratedInelastic 18
  18. 18. How Customer BuysGroup ProcessFormalLengthyLoyalDecisions based on risk and opportunity 19
  19. 19. CommunicationPersonal selling more important than mass paid advertisingSupport sales with other promotional activities: advertising in trade journals, catalogs, trade shows, direct mail, WWW.Message focused on technical, factual, and descriptive content.Multiple audience members. 20
  20. 20. Economic/Financial FactorsCompetition oligopolisticPower/Dependency relationshipsReciprocity:Doing business with companies that do business with them.Economic variables: interest rates, inflation, business cycle 21
  21. 21. PurchasingUsually the main point of contactBoundary spanning functionChecks and Balances Purchase requisition Written purchase order Negotiated/bid prices and terms Contract Receiving report Invoice
  22. 22. Major Tasks of PurchasingIdentify/evaluate suppliersNegotiate prices and termsPurchase contractMatch delivery and production schedulesExpedite ordersHandle returnsMonitor changes in prices, markets, and regulations
  23. 23. Strategic ImportanceHistorically, not a top-level functionNow seen as: a major source of cost savings, contributor to operational efficiencyMaterials Management Concept: Buying Storing Moving
  24. 24. Life-Cycle CostingInitial Costs Purchase price to vendor, freight, insurance, trainingStart-up Costs Paid to other than vendor: modifying facilities and complimentary/support infrastructurePost-purchase Costs Maintenance, repairs, power, financing, inventory costs, and space requirementsSalvage Value Recovery amount: resale, trade-in, scrap
  25. 25. Value AnalysisReducing cost without reducing quality or effectiveness. Also called value engineering.Cost/Benefit trade-offRedesign, standardization, less expensive manufacture, substituteFive stages: information gathering, speculation, analysis, execution, reporting.Reverse engineering/absorptive capacity
  26. 26. Time-Based Buying StrategiesSpeculative BuyingBuying in excess of foreseeable requirementsInflation or short-term price dropAdded inventory/carry costsRisky May buy too much Prices may not go up
  27. 27. Time-Based Buying StrategiesForward BuyingBuying in excess of current needs, but not foreseeable needsTake advantage of quantity discounts or volume freight ratesProtect against temporary shortages or delays due to unreliable vendors or transportation
  28. 28. Time-Based Buying StrategiesHand-to-Mouth BuyingShort-term strategyMinimize inventories Falling prices Changing technologies Cash flow problems
  29. 29. Time-Based Buying StrategiesJust-in-TimeParts and materials arrives as neededNo luxury of excess inventory against: Human error, machine breakdowns, or defective partsRequires cooperative relationships Substantial investments (e.g. computer systems), short lead times, reliable deliveries, intensive communication, long-term purchase commitmentReduced cost, quicker response, fewer delays, simplified administration, and higher quality
  30. 30. Technology Impact(TLA, or Alphabet Soup)Materials Requirement Planning (MRP)Electronic Data Interchange/Internet (EDI)Web-Based Procurement (WWW)Enterprise Resource Planning (ERP)
  31. 31. Materials Requirement PlanningSystematic determination of current and foreseeable needs for materials and parts.Uses economic order quantity (EOQ) models, probability theory, and statistical demand forecasting.Three Inputs Production schedule Bill of materials Inventory record fileDoesn’t work well for large volume, long lead times, or irregular/infrequent purchases
  32. 32. Electronic Data Interchangeand the InternetComputers communicate without regular involvement of managers.Not the World Wide WebLarge investment in equipment and software. Can use third parties.Timely, accurate, simpler, cheaperDis-intermediation vs. Sales ProductivityMarketing intelligence: Can track customers, order quantities, purchase frequencies, and prices over time.
  33. 33. Web-Based ProcurementQuick, low-cost access to get data on suppliers and their offerings.On-line catalogs and purchasingSearch engines help gather informationThree procurement models: Catalog-based Auction-based Bid-based
  34. 34. Enterprise Resource PlanningInternal software-based systemTies together all basic processes of the business Order taking, inventory control, production, financial systems, etc.Lengthy implementation (Years)Return on Investment questionable Costly to convert data, modify procedures, overhaul networks.
  35. 35. ValueMay not be tangibleValue is PERCEIVED by the buyerCan enhance value: Packaging Support services Reliability Warranties Training
  36. 36. Selling to Organizations ISocial as well as economic dimensionIndividual behavior contributes to the mission.Formal reward system for individualsBad purchasing decisions Interruptions in production/operations Reduction in product quality Slowdown in distribution Dissatisfied customers Wasted resources Higher costs/lower sales and cash flow/lower profit
  37. 37. Selling to Organizations IIUsually formal contractsExtensive search for suppliersNegotiationLong buying processMultiple suppliersLong-term, loyal relationships
  38. 38. Why?Reduce risk of mistakesFormal policies and informal culture
  39. 39. Business CustomersFewerConcentratedNeed long-term relationships because they are not easy to replace
  40. 40. Technical ComplexitiesProducts and services, and their applications can be complex.New technologyInterface with existing technologyCustomHigh standards (e.g. clean rooms, surgical suites)
  41. 41. Commercial ComplexitiesSo much is open to negotiation Product, price, terms, discounts, warranties, delivery, training, service, returns, etc.Liability, nonperformancePOWER$ize of deal, characteristics of parties, the deal, # of parties involved, complexity of products
  42. 42. Behavioral ComplexitiesNegotiating not just with purchasing agent, but multiple parties from multiple functional areas in the organizationThe more people involved, the more complicated it getsTechnical and commercial complexity can exacerbate the behavioral complexity
  43. 43. Who’s on first?Key decision maker(s)Important Product/Vendor attributesAccess to key decision makersCustomer purchasing policies and procedures
  44. 44. The Buying Center RolesInitiatorBuyerUserInfluencerDeciderGatekeeperNot really a center at all. Group decision process.
  45. 45. Rational Decision-Making?Purchasing for business, not selfPurchaser being judged on performanceFiduciary responsibilityFormal structure and procedures # bidders Evaluation criteria Multiple signatories
  46. 46. Rational Decision-Making?Emotional and Social Factors Friendship Like/Dislike vendor/rep Personal/Professional Favors Influence of others in organization (+/-)Personal/Departmental Needs & Objectives may not match those of the organization.Conflict
  47. 47. Rational Decision-Making?Manage process to control social & emotional influences.Need to have good decisions being made.
  48. 48. BuystagesNeed recognition (May not be decider)Solution characteristics/quantity (Specs)Describe solution in detail (Make/Buy)Find qualified sources (product +)Receive/analyze proposals (price +)Evaluate proposalsSelect supplierEstablish order routineFeedback/Evaluate (FOLLOWUP)
  49. 49. Buying ScenariosNewness and past experience with productAmount/Type of information needed by influencers/decidersNumber of alternativesCommon buying situations (buyclasses) Straight rebuy Modified rebuy New task purchase
  50. 50. Structural PerspectiveVertical Involvement: # levelsLateral Involvement: # functional areasAbsolute Size: # peopleConnectedness: Direct communication among buying center membersCentrality: Degree of communication regarding purchase flowing through purchasing department
  51. 51. Power PerspectiveAbility to influence or make buying decisions; often situation specificTypes Reward: $, social, political, Ψ Coercive: punish, penalty Referent: personality, charisma, persuasion Expert: specialized knowledge Legitimate: formal position/title
  52. 52. Risk PerspectivePurchase decision is risk reducing behaviorProbability of Loss x Magnitude of Loss (What about consequences?)Risk mitigation strategies may help to make the salePERCEIVED uncertainty
  53. 53. Problem-Solving PerspectiveRoutine orders: little riskProcedural: How to use product. Learning/trainingPerformance: Can product meet need?Political: Internal politics, departmental squabbles (legitimate and petty)
  54. 54. Reward PerspectiveIndividual motivationInfluenced by evaluation & rewardIndividual values and objectives; brought from department to buying centerAgency Theory
  55. 55. External Environmental Organizational Influences Influences Buyer Center Dynamics Individual InfluencesBuyer Center Model
  56. 56. From Single Sale to SymbiosisDiscrete Repeat Brand/Source Dyadic StrategicTransactions Transactions Loyalty Relationships Partnerships Perspective Short-Term Long-Term
  57. 57. Shifting ObjectivesSales Revenue: “Close the Deal.” Transaction PerspectiveMarket Share: “Own the Market.”Operating Profit: “Generate ‘acceptable’ rates of return on product, segment, channel investmentCustomer Equity: “Capture desired portion of Customer’s Lifetime Value
  58. 58. LoyaltyTechnologyProduct CategoryParticular BrandVendorPerson
  59. 59. Industrial LoyaltiesTake longer to establishLast longerMore difficult to dissolve
  60. 60. Loyalty FactorsTask Concerns Quality, Delivery, Service, PriceOrganizational Concerns Politically safe, minimal benefit for changeWork Simplification Concerns Makes it easier, too much trouble to changeAttitudes Toward Source Buyer’s attitude toward company and people
  61. 61. Relationship MarketingStrong, Lasting TiesEarned TrustSuccessful Long-Term ExchangesStructural and Social BondsCooperation/CollaborationLong-Term, personalized, mutually beneficial, based in deep understanding of customer needs and characteristics
  62. 62. Relationship MarketingStrategic OrientationBoth Buyer and Seller are committedLong-TermMutually BeneficialCollaborationWin-Win
  63. 63. Relationship Marketing: Reality or LipService?Requires more commitment than most are willing to make.Most take tactical steps rather than strategicShortcomings observed:  Locking in the customer: Needs to be win-win  Informality: legal, strategic, outcomes  Primarily non-financial investments: Capital equipment is important  Avoiding Dependency: Flexibility over commitment  Unilateral: Buyers should initiate  Not all customers are worth the investment  One size never fits all
  64. 64. Relationship Strength Affected By:Volume of purchasesFrequency of contactExtent of collaboration in product developmentTechnical distancePhysical distance(See Table 4.1)
  65. 65. Relationship ClassificationsOn/Off TransactionsRepeat TransactionsSource Loyal AccountsRelationshipsStrategic Partnerships
  66. 66. Variables Affecting RelationshipRelationalSocial/StructuralSocial ActorNormative
  67. 67. Some Helpful Criteria for SelectingPartnersHigh risk of losing accountImportant customerCustomer open to partnershipCan improve relationshipCultural match (Not Gateway/IBM: cows and suits)Potentially mutually beneficialCan add benefits in serviceGood competitive position
  68. 68. Market SegmentA group of existing or potential customers sharing some common characteristic that is relevant in explaining or predicting their response to a company’s marketing program.
  69. 69. Market SegmentationIdentify sub-markets within marketDecide which one(s) to pursue (target)Design marketing mix(es) to be attractive to targeted segment(s)
  70. 70. Segmentation Strategies Undifferentiated Mix 1 (A-E) A B Mix 2 (C) C Differentiated Mix 2 (E) D Concentrated Mix 3 (E) E
  71. 71. Segmentation BasesCompany sizeCompany locationIndustryTechnology (used)Policies (purchasing)Product applicationBenefits soughtBuying center characteristics
  72. 72. HomogeneityKey to successful segmentation: everyone in the segment is the same on segmentation basis, not necessarily on multiple bases.Can think in terms of the “typical” segmentation member, and create the marketing mix that positions your company in the most attractive place.
  73. 73. Segment Selection IAttractiveness Long-term profitability +Judgments Use market research and forecasting Size Likely market share/segment Long-term profits
  74. 74. Segment Selection IISelect and prioritize based on: Time (Sales force) Effort (Customer service) Money (Promotions)
  75. 75. Segment Selection IIIStress profitability +: Sales volume Ease of penetration Image enhancement
  76. 76. Segment Selection IVAfter selection, study deeper Patterns in buying behavior Assess strengths and weaknesses of competitors Identify areas of competitive opportunity
  77. 77. PositioningDesign marketing program(s) to cater to distinct needs or problems of target segment(s).Marketing Mix Product Price Place Promotion
  78. 78. Degrees of SegmentationUndifferentiated: One marketing mix for the entire market.Reality Differentiated Concentrated NicheOne-to-one: The ultimate segmentation Every customer is a market segment.
  79. 79. Why Segment?Efficiency Optimize firm resources Target most promising customers Rifle vs. ShotgunEffectiveness Match capabilities to needs/wants/problems Pinpoint prospects Identify/Exploit competitor weaknesses
  80. 80. Usefulness CriteriaDoes the segmentation fit firm’s strategy?Are there homogeneous sub-groups in the market? Needs Buying behaviorsCan the segments be measured? Potential?Are the segments accessible? Reachable via unique marketing mix
  81. 81. Selecting Target Segment(s)Fit with company image and experienceResponsiveSubstantialCompetitiveProfitable
  82. 82. How to allocate resourcesQuantitative Financial: Revenue & Profitability  Marginal return  ContributionQualitative Non-financial, strategic benefit  Image  Insulation from competition  Access to technologies  ControlCost-Benefit
  83. 83. Macro StrategyGroup by customer organization characteristics Size Usage rate Industry Organization structure Location End Market New/Repeat purchase
  84. 84. Micro StrategyCharacteristics of decision-making process and buying structure of customer organization. Perceived importance of purchase Relative importance: product/vendor attributes Attitudes toward vendors Vendor selection rules Buying center structural Power of key departments in buying center Key member: personality, demographics
  85. 85. Nested ApproachHierarchical structureStart with macro and work down to microSee Figure 5.6, page 144
  86. 86. Why do research?The external environment is dynamic.Knowledge becomes outdated.To gather more informationBetter Information  Better Decisions
  87. 87. LimitationsManagers NEVER have all of the relevant information that they need.Constraints of time and money Desired information is often more costly than it’s worth. Decisions are time sensitive. Can’t wait for all of the information.
  88. 88. When NOT to do researchGood research has already been done.When decisions have been made and won’t be altered by new information.When management does not understand scope necessary and won’t commit $.Don’t have talent, won’t hire.Uncertainty reduction justifies cost.
  89. 89. Marketing Research TasksEstimate market potentialAnalyze market share/share of customerTrack competitorsIdentify market characteristics & trendsAnalyze sales dataSales forecasting: Existing/new products
  90. 90. Key ConcernsReliability: measures/methods yield consistent results Xt1 ≈ Xt2 ≈ Xt3 ≈ Xt4Validity: research measures what it says it measures; i.e. little or no error XA ≈ XM; or XA = XM + Є, and Є ≈ 0
  91. 91. Types of DataPrimary New information generated for specific task. Can be expensive/time consuming. Gather by survey, tests, observation, focus groups, interviews.Secondary Existing information. May not be in useful form. Sources: government, trade/professional associations, company records
  92. 92. Sampling IssuesSample vs. CensusProbability Random, equal chance Random, stratifiedNon-Probability Convenience Judgment
  93. 93. QuestionnairesAsk what you want to knowWatch lengthAestheticsEasily understood; watch vernacularSocial desirability biasNon-response biasQuestion order effects
  94. 94. Coding-Analysis-InterpretationData entry tedious. Mistakes are made Need to clean dataUse statistical tools to analyze data. SPSS/SAS Can data mineImportant to understand analysis What results means Limitations of method
  95. 95. B2B vs. B2C Research ITechnology Need to understand technical needs of customersDirect economic effect Quality/Price trade-off very importantOrganization, professionals Understand multiple players, in socio-political setting
  96. 96. B2B vs. B2C Research IISmaller #s of buyers to studySmaller sample sizesSecondary data often existsTough to get buyer’s attention for researchNeed to know which buyer(s) to studyNeed technical knowledge for researchSurveys take longer, cost more
  97. 97. Marketing IntelligenceContinuous flow of information Strategic and Tactical Systematic and periodicBetter understanding of environment over timeCollect from variety of sourcesCustomers, competitors, regulators, etc.Constant vigilance
  98. 98. Marketing Intelligence System IPeople, Procedures, ComputersAcquires, Disseminates, Interprets, Stores information about internal and external environments
  99. 99. Marketing Intelligence System IITransform raw data to useful informationCan organize information by customer, competitor, product line, territory, activitySources Internal: sales, service, accounting External: government, trade associations, competitor literature, customers, publicationsOutput Periodic reports Special information needs
  100. 100. Decision Support SystemsComputer-aided decision-makingInvolve analysis, not just retrievalDatabase: Repository of dataStatistics: Analyze dataModel: Patterns in the data; relationshipsOptimization: Decisions leading to best outcome given model
  101. 101. What is strategy?Recognize and interpret opportunities (and threats) in the environment.Capitalize on these opportunities (and threats) in a timely fashion.
  102. 102. Characteristics of StrategyBased on clearly defined objectivesTake comprehensive approach to organization problemsAdopt long-term viewFlexible Planning is everything. The plan is nothing.  Dwight D. Eisenhower
  103. 103. Why have strategy?State where company wants to be and how it plans to get there.Ensure long-term prosperity.Coordinate efforts throughout the organization.Have an idea what to do when things don’t go according to plan.
  104. 104. Goal of strategyMatch organization’s core capabilities to its environment to gain/maintain competitive advantage.Strategies at multiple levels Overall corporation SBU Product Lines/Markets
  105. 105. Strategy vs. TacticsStrategy Long-term overall plan = Σ TacticsTactics Short-term Action-oriented Narrow, immediate goal
  106. 106. Strategy QuestionsDoes it match environment?Assumptions valid?Basic elements consistent?Feasible?Risk mitigated?Rewards adequate?
  107. 107. Strategy TypesGrowth strategy: Product/Market-BasedPrimary/Selective Demand Growth (Product Category vs. Own Brand)Strategic Target/Advantage (Porter)
  108. 108. Growth Strategies Existing New Market ProductExisting Penetration Development Markets Market New Diversification Development Products
  109. 109. Demand Development Market Potential Industry Sales Sales Company SalesPrimary Secondary Time
  110. 110. Porter’s StrategiesOverall Cost Leader CostDifferentiation ValueNiche Own Target SegmentMiddle-of-the-Road Road-Kill
  111. 111. Strategic Marketing ManagementEmphasize a continuous search for competitive advantage (lower cost or higher perceived value).Maximize portfolio or product line rather than every product. Product strategies:  Build for future profits  Reap profits  Fill product line (RTE Cereal)  Defend against cheaper competitors  Support other products (ink jet printers)
  112. 112. Strategy PlanningSWOT Analysis Strengths Weaknesses Opportunities ThreatsObjectivesStrategyTactics
  113. 113. Price ChangeLow Long-Term ImpactLow InvestmentLow RiskEasy to implement quicklyEasy for competitor to respondHigh chance of similar competitive response.
  114. 114. Reengineer Existing Products/ProcessModerate Long-Term ImpactModerate InvestmentModerate RiskModerately easy to implement quicklyModerately easy for competition to respondHigh likelihood of competitor responding with similar action
  115. 115. New Products/Major Process ΔHigh Long-Term impactHigh InvestmentModerate-High RiskDifficult to implement quicklyDifficult for competitor to respondLow chance of competitor responding with similar action
  116. 116. Potential Pitfalls of PlanningLow motivation to plan Justification; HabitPoor planning abilities Art (creativity) and Science (analysis) “Plans are nothing, planning is everything” (Eisenhower)Unanticipated environmental changes Contingency Plans and Continuous Updating Goldilocks Forecasting
  117. 117. Planning ToolsProduct Life CyclePortfolios BCG Matrix GE PortfolioExperience CurvesTechnology Life Cycles “Killer Aps” Creative Destruction
  118. 118. Strategy: Planned or HappensIntentional vs. Emergent Planned Strategy Crafting Strategy
  119. 119. ConceptsKiller ApplicationsMoore’s Law (Intel) (2X Transistors/Chip or 2X speed every 18 – 24 monthsMetcalfe’s Law: Network externalities and complimentary products (Telephone, www)Coasian Economics: Transaction costsFlock of Birds (not seagulls) Technology is nonproprietaryFish Tank Phenomenon: Startups compete
  120. 120. Closing ThoughtsStrategy cannot be discussed separately from marketing.Marketing is an integral part of the process of developing and implementing strategy.
  121. 121. Why innovate?Maintain/Gain competitive advantageCustomer needs & wants changeCompetitors’ offerings changeNew products are a significant portion of many companies’ revenues.
  122. 122. Dynamic Theories of CompetitionDickson 1992, 1996Hunt 2002Hunt and Morgan 1995, 1996, 1997Innovation is central to gaining and holding competitive advantage.
  123. 123. Root of TheoriesJoseph Schumpeter 1934, 1942Some firms are always innovating, looking for an edge over competitors.Not satisfied with status quo.Creative Destruction World-Changing Innovation: telephone, automobile, airplane, television, computer, Bakelite
  124. 124. InnovationRadical/IncrementalProduct/ProcessTechnical/AdministrativeProactive/ReactiveEfficiency Enhancing/Value Adding
  125. 125. Decreased Cost Increased quality Lower cost & lower cost & lower quality Increased Quality Higher cost & lower quality Increased quality & higher cost“Innovations” in this Decision Linequadrant wouldhurtthe organization’s McDonald and Srinivasan 2004competitive
  126. 126. Types of Innovations IDiscontinuous Fairly revolutionary Disruptive impact on buyer patternsDynamically Continuous Some disruptive effects Generally same ways to satisfy needs
  127. 127. Types of Innovations IIContinuous Most common Little or no disruptionImitation Replicate someone else’s idea  Cheap, no R&D $
  128. 128. Innovation Dilemmas IUnknown vs. ControlBreaking/Following Rules (Skunk-works)Freedom/Discipline Constraints, Deadlines
  129. 129. Innovation Dilemmas IIAnswering needs that customers are not aware of (MOPRO)Innovating and Not Innovating RiskyRevolutionary vs. Evolutionary
  130. 130. Innovation Dilemmas IIIInnovation  Obsolete Products (Intel)Infrastructure may become obsoleteInnovation generally comes from small entrepreneurs, but is costly
  131. 131. Innovation Dilemmas IVPerfection vs. “Good Enough”Technology-Driven  Market? (Iridium, Ricochet, Dot-Coms)Customer-Driven:  Competition? (Dig. Cellular)
  132. 132. Innovation Dilemmas VGenius vs. Persistence Inspiration vs. PerspirationBreaking the rules of the game vs. playing a different game Discontinuity; Creative Destruction
  133. 133. Innovation Dilemmas VIFirst to market does not equal success Need complimentary assets (Teece 1988) Market needs to be ready
  134. 134. Risks INatural tendency to resist change Don’t want to learn new things Threat of taking resourcesHigh failure rates Hasn’t been done beforeExpensive
  135. 135. Risks IIEconomic FailureEffect on company imagePsychological well-being of company after failure (also myopia of success)Drain on company resources Cash FlowDistraction of managementCannibalism
  136. 136. Reasons for FailureNo marketToo much competitionCompetitor leap frogEnvironmental myopiaCan’t deliver on promisesPrice
  137. 137. Necessary ResourcesFinancialEngineeringR&DMarketing ResearchProductionSales
  138. 138. Internal IncompetencePoor technical assessmentLoose screening criteriaMarket potential over/under-estimatesSloppy financial analysisWeak quality control in productionUnder-estimating competitor’s strengths & customer loyaltyBias in marketing research
  139. 139. Dimensions of Success IKeys to success Product Uniqueness/Superiority Market Knowledge/Proficiency Technical and Production Synergy
  140. 140. Dimensions of Success IISuccess Facilitators Marketing Resources Strength of Communications and Launch Large, Growing Market with Need
  141. 141. Dimensions of Success IIIBarriers to Success No Economic Advantage Extremely Dynamic Market Customers Already Satisfied
  142. 142. Dimensions of Success IVFactors of Unknown Impact Market-entry order Pre-commercialization proficiency Dominant Competitor in Market Production Start-up smoothness Newness of product to company Project magnitude/technical complexity Clear product demand Customer Attitudes
  143. 143. Innovation CharterInnovativeness How radical How riskyProactiveness (Offensiveness) Lead vs. followSynergy Compatibility with current products and resources
  144. 144. Characteristics of InnovativeCompaniesOrganizational commitment to innovationEntire organization involvedAttention to MarketingEffective design/developmentGood Communication (Internal/External)Management Skills/Professionalism
  145. 145. Process of InnovationIdea GenerationScreeningTechnical Feasibility AnalysisProduct TestingProfitability AnalysisTest MarketingMarket LaunchLife-Cycle Management
  146. 146. Organizing for InnovationSee Table 8.6, pp. 260-1Notice that each has certain advantages and disadvantagesThere is no one right wayTask DependentResource Dependent
  147. 147. Marketing-R&D InterfaceHouse of QualityIt takes both sides of the organizational brain working together to be successful.Each has talents and knowledge that compliments the other.
  148. 148. Corporate EntrepreneurshipIntrepreneurshipChampion/Marketing Subversive Skunk-worksCharacteristics Proactive Risk Taking Innovative
  149. 149. ProductsMarketing is exchange, and the product is what the company is offering.
  150. 150. TimeNew industrial products can take years to develop. Technologies Patents Packaging From prototype to reliable commercial productStrategies for the supporting parts of the marketing mix (price, promotion, and distribution) take weeks or months to develop.
  151. 151. Marketing Mix ElementsThe product/service offering determines Appropriate quality position Target markets Competitors Appropriate distribution/logisticsFurthermore, cost structure/financial needs influenced by design, production, delivery requirements.
  152. 152. Product vs. ServiceTangible/IntangibleCaterpillar Tractor vs. Federal Express DeliveryCustomers are really buying “solutions.”Caterpillar provides intangible services to support products.FedEx uses tangible products to support services.
  153. 153. ProductsEach product should be thought of as a bundle of problem-solving attributes, or a package of benefits.Each product can be evaluated on four levels. Core Product Tangible Product Augmented Product Communicated Product
  154. 154. Core ProductThe primary benefit sought by the customer. An engine would provide the power to make an automobile run. A tractor will enable a farmer to till the field. A computer will allow an organization to keep records, and communicate. A desk will provide employees a place to work.
  155. 155. Tangible ProductThe physical aspects of the product. Quality Features Options Styling Color Packaging
  156. 156. Augmented ProductServices/extras that support the product. Warranties Delivery Installation Training Service Tech Support
  157. 157. Communicated ProductThat which the company uses to present the product to its customers Brand name Logo/trademark: Identity Positioning Image
  158. 158. StrategiesGenerally we think of moving out from the core benefit as the best strategy.However, a competitor’s product advantage might be diffused by moving back in.
  159. 159. Uniqueness of Industrial ProductsBroad range of products: trucks, factories, staples.The type of product has implications for the development of the marketing strategy and tactics.Can qualify products along 8 dimensions.
  160. 160. Eight Product DimensionsStandardized/CustomizedSimple/ComplexLow/High Unit CostSystem Part/Stand AloneSold in Volume/Per-Unit BasisReady to Use/Requires InstallationUnfinished Good, Component/Finished GoodConsumed Quickly/Over Many Years
  161. 161. ServiceDeed, Performance, EffortService Experience  delivery of service attributes to customerVisible Components: Front Office, Customer sees Personnel, facilities, equipment (Quality Cues)Invisible Components: Back Office Internal Operations, Customer does not see Administration, purchasing, accounting, computer operations, maintenance, employee training
  162. 162. Dry dock: Boat building and boat repairs (Ketchikan, Alaska)
  163. 163. Unique Characteristicsof Industrial ServicesIntangible (Most distinguishing characteristic)Perishable (can’t inventory)Often consumed at purchase (simultaneous)Difficult to gain production economiesCustomized more frequently than productsConsumed in irregular patterns typicallyGenerate less customer loyalty than products
  164. 164. Industrial vs. Consumer Services INon-convenience type: Custom, impact $, searchTransportable Brought to customer (Auditing, Legal)Not as conducive to mass production/marketingCustomer (as individual) does not become part of the service. (Janitorial vs. Haircut) Often service is performed on facilities, equipment, or end products.
  165. 165. Industrial vs. Consumer Services IIPeople intensive (capabilities, experience, background), but also expensive equipmentSophisticated, knowledgeable customers with specific expectationsFormal buying process; tangible evidence of ability (cues, referrals)Longer term, more stable relationshipsDemand patterns more stable/predictable
  166. 166. Classifying Products and Services Based on TangibilityConsulting Corporate FurnitureIntangible Retreat Tangible
  167. 167. Most Companies Sell BothFew pure products or pure servicesOften companies sell complementary products and servicesConsultants may sell software to implement their recommendationsSecurity service might also install equipmentAdvertising medium might also design ads
  168. 168. Product/Service Line DecisionsCannot make decisions on isolated products or servicesDecisions must be made holistically.Some products/services support othersSome might protect market shareMight use one to set up demand for more profitable after-sale service or products
  169. 169. Mixes, Lines, and ItemsMixes are largest group: Total set of items/lines Nokia Mobile CommunicationsMid-level are lines: Related Items Tech, production, cost, distribution, customer aps Can have sub-lines by P/Q Nokia Cellular TelephonesItems are within lines: Specific Offering Nokia 3210 Cellular Telephone
  170. 170. Assess Item RelationshipsCross-Elasticity Effect of one product/service on anotherPositive Cross-Elasticity Substitute one product for another Product from lower end lineNegative Cross-Elasticity Complimentary products Computer and Printer
  171. 171. Breadth, Length, & Depth IBreadth is the number of different lines carried by the company. Not just #s, but Consistency: tech, production, distribution, customersLength is the number of items in a given line. Shallow (few items) or Deep (many items)Depth is the number of variations of a particular item in a line.
  172. 172. Breadth, Length, & Depth IISee example of 3M, Figure 9.5, pg. 288.Do not spread company too thin, or offer products that do not capitalize on core competencies.Shallow lines may appeal to fewer segments; deeper lines may be inefficient.Depth may grow with PLC, until decline stage
  173. 173. Breadth, Length, & Depth IIIStrategies Full Line/All Market (GE) Market Specialist (Kidder Peabody Financial Services) Line Specialist (TRW Valves) Limited Line Specialist (ACI) Single Item Company (ADD Systems) Special Situation Company (Pilko, Boots & Coots)
  174. 174. Managing Product Quality IPRODUCT QUALITYHow well do the product specifications meet customer needs? How well does the product design conform to these specs?How well does the product conform to design?How well does the product perform?: Reliability, Safety, Durability, Maintainability
  175. 175. Managing Product Quality IISUPPORT QUALITY How well does product meet customer’s needs at and after sale?DELIVERY QUALITY Timely delivery
  176. 176. Managing Product Quality IIIMarketers need to ensure that delivered quality meets or exceeds customer expectations.Goal is a satisfied customer.Tracking cost of quality; benchmarking. Negative costs: of defective products Positive costs: of eliminating defects
  177. 177. Managing Service QualityMatching service features/characteristics to customers’ needsMore difficult to do with intangible services vs. tangible productsEstablish formal service standards
  178. 178. Service Standards IFocus on the major components of the service experience (people, equipment, tangibles)Technical Quality What the customer receives: audit rpt, market rpt.,… General know-how, equipment, abilitiesFunctional Quality How the customer receives service: professionalism Reflects attitudes and behaviors of contact employeesNeed both functional & technical working together
  179. 179. Service Standards IIDifficult to measureSubjective measures easier to administer than objective measuresObjective: On-time deliver %Subjective: Customer judgment of sales performanceSERVQUAL (See Table 9.4, pg. 295)
  180. 180. Positioning IHow the firm wants the product/service lines to be perceived by the customers. (Not where the store is located!)Perceptions about underlying benefitsPerceptions about how they compare to competitors’ offeringsUse the marketing mix (4 Ps) to create position
  181. 181. Positioning IIAttribute (Reliable: UPS)Price/Quality (Cheap: USPS)Competitor (Away/Against)Product Application (Medical, Transportation)Product User (Medical, Finance, Trucking)Product Class (Locks as security: Schlage)
  182. 182. Perceptual Map High QualityPoor Service Excellent Service Low Quality
  183. 183. PricePrice is unique among the 4 Ps in that it directly affects the company’s revenues and profits.Pricing is both a science and an art.Diligence and creativity are both necessary.Pricing seems to be the one “P” that has been dramatically affected by the use of the Internet.
  184. 184. Characteristics of Industrial Prices IIncludes more than list or quoted price Delivery & Installation Discounts (quantity, promotion, remit time) Training costs Trade-in allowance Promotions: 2 for 1 Financing costs
  185. 185. Characteristics of Industrial Prices IINot an independent variable. Pricing interacts with: product, promotion, and distribution strategiesMust consider complementary or substitute products when establishing price strategy
  186. 186. Characteristics of Industrial Prices IIIPrices can be changed by: Changing price paid by buyer Changing quantity/quality offered by seller Changing premiums or discounts Changing time and place of payment  Carry  Tax/Cash Flow implications Changing time and place of transfer of ownership  Delivery
  187. 187. Characteristics of Industrial Prices IVPricing often set through competitive bidding on a project-by-project basis Don’t know competitors’ prices Negotiation may be used instead (some insist)Emphasis on fairness Need to justify price increases Also justify higher prices
  188. 188. Characteristics of Industrial Prices VAffected by economic factors outside company’s control: Inflation  Long-Term contract (escalation clauses) Interest Rates Currency Exchange Rates  Affects cost of materials  Affects price of exports
  189. 189. Price = f(Value)Need to set an initial price that is neither too high (hurts sales) or too low (lost profit)Value has two major dimensions: Customer’s subjective estimate of product’s capacity to satisfy a set of goals Objectively established by the competitive market. “What the market will bear.”
  190. 190. Economic Value to the CustomerPurely economic sources of valueNeed to compare life-cycle costs of your product and substitutesIf incremental value is high enough to justify a higher price, then there is EVCSometimes it takes a convincing sales effort to help customer see the value
  191. 191. What’s it worth to the customer?How much money can customers save by using our product?Can the product help them increase sales or reach new customers?Does the product provide a competitive advantage?Does the product improve the safety of the products the customer sells? ( Value)How much time can customer save by buying product vs. making themselves?
  192. 192. Strategic Pricing Programs:Objectives IROI; Market ShareLT/ST ProfitSales GrowthStabilize MarketConvey Desired ImageDesensitize customers to priceBe Price LeaderDiscourage entry & push out weak competitors
  193. 193. Strategic Pricing Programs:Objectives IIAvoid Government interference (Anti-Trust/Regs)Perceived Fairness Customers, Distributors, SuppliersCreate interest & excitementSell other items in lineDiscourage competitors from dropping priceRecover investment quicklyGenerate sales volumeEncourage quick payment
  194. 194. Strategic Pricing Programs:StrategyCost-Based Fixed and Variable costs/Unit Markup/ROIMarket-Based Competitor Prices Customer Demand
  195. 195. Market-Based Pricing StrategiesFloor: just cover costsPenetration: lower than marketParity: match marketPremium: skimmingPrice Leadership: everyone plays follow the leaderStay Out/Keep OutBundle: Multiple products/servicesValue-Based: Segment pricingCross-Benefit: “Gotcha” (Razors, Ink Jet)
  196. 196. Strategic Pricing Programs:StructureBasic: One price, no discounts, everyone pays the sameLacks flexibility, limits salesLow Cost  competitive advantage in pricePrice moves toward costs in PLC, until endCreative Pricing: empty seats, box filler, late cancellations, season, demand, advance purchase, customer loyalty
  197. 197. Strategic Pricing Programs:Levels/TacticsActual price charge w/discountsAcceptable range that conveys valueOdd ($2,999) vs. Round ($3000)Ensure adequate price gaps between itemsModify for costs, competitors, market ΔsTiming: not arbitrary, justify to customerSends signals to customers/competitorsRebates, 2/1, trade-in, etc.
  198. 198. Pricing ProgramStrategy, structure, level, and tactics all work together. They must be coordinated.Strategy may be long lived (several years).May need to modify structure periodically. Offer special price deals.Levels and tactics need to be monitored closely and changed as needed. Address competitor changes In response to cost changes As demand changes
  199. 199. Pricing Decisions: What Lies Beneath?Most companies use multiple pricing strategies.If the firm sells complimentary or substitute products, they are more likely to use product line strategies (e.g., bundling).ObjectivesCostsDemandCompetition
  200. 200. Objectives/StrategiesDifferentiation  Higher Margins Fewer competitors are substitutes Increased brand loyaltyMoving to low price from premium-quality position can hurt sales, not helpRecoup development costs over longer period of time. Otherwise run risk of sales numbers that are too low to ever recoup costs.
  201. 201. CostsEstablishes the minimum priceSet price based on target margin or returnCan price below cost to: Keep employees and facilities working during downturn Support other products in the line Low bid to establish relationship. Make $ in long term, or on extras Experience or reputation New skills
  202. 202. Standard Cost ApproachTarget Return Pricing Need accurate sales forecast: standard volume Variable costs and fixed costs/unit: standard costs P = DVC + FC/Q + rK/Q P: Price DVC: Direct Variable Cost/Unit FC: Fixed Cost r: Rate of Return K: Capital Used Q: Standard Volume (units)
  203. 203. Standard Cost ApproachCan include interest rates on debt, tax rates (perhaps different countries for mfr and sales), or inflation factors.Don’t raise prices to counter weak sales; Don’t drop prices too quickly eitherNeed reliable standard volume estimateInitial low price may increase volume, which in turn lowers per unit fixed costs
  204. 204. Contribution AnalysisTrade off between price and units soldTotal Revenue – Total Variable Cost = Variable Contribution MarginFixed Costs ÷ Contribution/Unit = Break Even Sales Volume (minimum sales)Estimate change in volume for changes in price and compare to break even (Maximum sales/profit
  205. 205. DemandSets the upper limit of priceNeed to understand customer’s reasons for buying product; how they use itHard Benefits Physical Attributes: hp, productivity, durability, error rate, performance tolerances Soft Benefits Warranty, service, other augmented productBalance benefits to customer against the costs (price +)
  206. 206. CostsPrice + (delivery, modifications, financing, maintenance, operation, less salvage)CT machine $500K-$1MM to purchase Also costs ~ $100K/year to operate and maintain Cost to prepare facilities to houseRisk (defect, poor performance)  CostWhat trade offs are the customers willing to accept? Slower delivery; Low service priority Higher, chunkier inventory Larger purchase commitment
  207. 207. Elasticity of DemandSensitivity of customer’s quantity demand to changes in priceUsually demand has a negative slope (higher price  lower demand)Issue is how steepSometimes must hit a threshold level before there is a change in elasticity  Substitutes become more palatable as prices rise
  208. 208. $ Elastic Inelastic Quantity
  209. 209. Elasticity% Δ Quantity ÷ % Δ PriceIf > 1, elasticIf < 1, inelastic
  210. 210. Determinants of ElasticityAvailable substitutesNecessity of productRelative size of purchase $$$Differentiation of product/StandardizationCustomer switching costsEase/Difficulty of comparison (Complexity)Third-Party Payer (Pass-Through)Price/Quality AssociationTime (Payment due, need for product)
  211. 211. Industrial ProductsTend to have inelastic demandEspecially if technically sophisticated, customized, or crucial to operationsRoutine purchases more elasticSituational elasticity: customer and market circumstancesIncumbents push uniquenessChallengers push substitutabilityElasticity can vary across segments
  212. 212. Cross ElasticityCompliments Lumber and nails, drill presses and bits Negative cross elasticitySubstitutes Shipping by train vs. truck, Company B vs. A Positive cross elasticity
  213. 213. CompetitionNeed to monitor continuouslyAnticipate changesRelatively easy because there are relatively few suppliers and few customersTends to be oligopolisticStructure: concentratedPrice Leader Sets the tone for pricing Usually the organization with the best cost structure (competitive advantage)
  214. 214. Four Strategic Pricing OptionsPressure PricingOpportunistic PricingGold-Standard PricingNegotiated Pricing
  215. 215. Pressure PricingMarket leader maintains fairly stable price levelPrice not dictated by demand fluctuationsPrice increases controlledControls market entry
  216. 216. Opportunistic PricingFollow the swings of the marketRaise prices as high as elasticity will allowRaise prices as high as customer goodwill or loyalty will allowLower prices as demand drops
  217. 217. Gold-Standard Pricing William Jennings Bryan Cross of Gold Speech
  218. 218. Gold-Standard PricingShort run policyQuote all customers the same priceIgnore specific circumstances
  219. 219. Negotiated PricingTailor pricing to each customer (or segment) based on Elasticity Competitive Alternatives Type of Customers
  220. 220. PLC Pricing ICritical at Introductory StageSets the tone for future pricing decisionsPenetration pricing (low) Higher sales, lower margins Can leave too much on the tableParity pricing (match)Premium/Skimming pricing (high) Can get highest margins Risk competitive entryAlways easier to lower prices than to raiseDon’t try to recoup R&D costs too quickly
  221. 221. PLC Pricing IIGrowth: New competitionMore specialized need segments developProduct extensions developedScale economies and experience curve start to come into playPrice ranges narrow; convergence on market priceDownward pressure on pricing
  222. 222. PLC Pricing IIIMaturity: Market more saturatedCompetition aggressive and entrenchedProduct may be cash generator (Cash Cow)Focus is on repeat sales/internal cost efficiencyCompetition more heavily priced based; but stop short of price warMaximize short-term direct product contribution to profit
  223. 223. PLC Pricing IVDeclineMay raise price to capitalize on remaining, inelastic demand, orLeave prices stable, cut expenditures, let product die, orCut price, toward break-even, use as loss leader to sell complimentary products
  224. 224. Competitive Bidding IMost common with public projects governmental agencies custom, technically complex products long manufacturing cyclesUsually the low bidderNot always in private sector Consider bidder qualifications (See AGC form)
  225. 225. Competitive Bidding IIInvitation to Bid: RFP published Newspaper Private Publications: Dodge ReportsUsually very precise plans and specifications that become part of the purchase contractMay have to provide a performance bond to ensure that the product/service will be completed. Bid bonds less common.
  226. 226. Competitive Bidding IIISealed/Closed Bids Due at same time Open all at once One time pricingOpen/Negotiated Bids Iterative process Combines bidding and negotiating Web bidding has facilitated this process
  227. 227. Competitive Bidding IVQuestions to consider: Is project large enough to bid? Are the specs precise enough to do an accurate bid? How will successful bid affect our other jobs, products, and customers? Who else may bid? How hungry are they? Do we have time to put together quality bid?  (Courtesy Bid)
  228. 228. Competitive Bidding VBidding StrategyProbabilistic Bidding (Value????) Assumes profit maximization is goal Assumes lowest bid selected Focus on size of bid, expected profit if win, and probability that bid will win E(X) = P(X)Z(X) X = Bid Price Z(X) = Actual profit if successful P(X) = Probability of bid acceptance E(X) = Expected profit at this bid
  229. 229. Competitive Bidding VIBidding models are only toolsManagerial judgment is criticalSet price to achieve a good winBids are not always fixed Might have an escalation clause Might have a pass-through clause (cost+) Post-Bid negotiation (by customer) common Extras (not addressed by bid) PROFITABLE
  230. 230. Negotiation
  231. 231. Price Negotiation INeed good interpersonal skills, persuasion skills, judgment, conflict resolution skillsNegotiation is the result of two sides coming together to decide how much gain each will have by working togetherIf not win-win, won’t happenEach side has minimums that it wants to “win” and needs to “win”If < “need”  No dealIf << “want”  No repeat deal
  232. 232. Price Negotiation IINeed to understand risks and rewards for both sides of negotiationEstimate settlement ranges for self and other partyBargaining zone: Seller’s minimum price to Buyer’s maximum price
  233. 233. Seller Buyer’s Max Buyer Opens Price WantsHigh Bargaining Low Zone Seller’s Min Buyer Seller Price Opens Wants
  234. 234. Negotiation StylesAvoidant: Relatively rare Avoid confrontation. Out for self.Collaborative: Good long-term strategy Win-Win. Try to satisfy self and other party.Competitive: Short-sighted Win-Lose. Get all you can from other party.Sharing: Common Both parties partially satisfied.Accommodative: Rare Satisfy other party, at own expense.
  235. 235. Other Issues on NegotiationOne time deal, or repeated negotiation?  Repeat  more cooperation  Have longer term viewWhat else besides price is important?  Guarantees  Return Policies  Volume  Quality  Financing  ServiceTime constraints?
  236. 236. Discounts and IncentivesCommon point of negotiationCan use to attract new customers, or keep existing onesCan offer on select products, and to select customersPrepaid freight, drop-shipping, financing, post-dating, returns, rebateDiscounts: Cash Quantity Trade
  237. 237. Cash DiscountsIncentive to pay quicklyHelps cash flow2/10, n30: 2% off if paid w/in 10 days, otherwise, full amount due in 30 daysMight offer discount for prepaying, prior to delivery, or even prior to productionMany companies need cash, and will discount for up- front $ (+ no risk)Prepaid expenses can provide payer tax benefits in addition to discounts offered
  238. 238. Quantity DiscountsCheaper by the dozen theory Seller gets guaranteed sales Can plan production better Smoothes out production, inventory, delivery Helps with financing, & getting other businessCan offer discounts on $ or unit levelMight spread out large purchases over a period of time, but commit up front
  239. 239. Trade DiscountsAlso called functional discountsUsually given to distributors for performing certain functions for the manufacturer Storage, warehousing Sales Transportation PromotionCommon with automobile dealers
  240. 240. Leasing IContract to use an asset that is owned by someone else (renting) for a period of timeAvoid cash payment up frontSometimes avoid maintenance and ops costsCan expense for taxes (not amortize)Does not reduce debt capacityHedge against technology obsolescence
  241. 241. Leasing IIFinancial Lease  Longer term  Σ lease pmts > Purchase price of asset  Lessee (buyer) responsible for maintenance & operating expenses  Can apply some of lease pmt to purchase @ endOperating Lease  Shorter, cancelable  Not amortized  Lessor (seller) responsible for ownership expenses  No purchase option  Lease price > financial lease price
  242. 242. Transfer PricingInternal sales price from one division to another within the same companyNeed to cover costsNeed to be cheaper than marketExact price subject to negotiationBoth sides usually profit centersMay need to be determined by higher-upSet formula (cost + 2/3 of margin to market)
  243. 243. WWW & PricingFacilitates information search by customersAuctions: buyers set prices, not sellersBuyers control transaction, on-line biddingCan get spot pricing on everything and can take competitive bids on lots of purchasesForces even strong brands to be treated like commodities
  244. 244. What to do about WWWUse differential pricingOptimize pricing by using customer data: increases customer switching costsDe-Menu pricing; can adjust pricing almost instantly as needed; remove lumpinessPush differentiation even more: can use web to provide pleasing aesthetics, entertainment, education, or escapismDon’t assume customers will not pay moreEstablish electronic exchanges, barter excess suppliesMaximize revenue, not price: Yield Management
  245. 245. What is distribution?Set of companies involved in the flow of products from the manufacturer to the ultimate customer.Sometimes called a “value-added chain”Involves intermediaries (“middlemen”)Joins makers and buyers
  246. 246. Channel FunctionsTransportationStorage & InventoryBreaking bulk into sellable sizes & SortingCreating assortmentFinancingSellingPromotingFeedback from marketTrainingService
  247. 247. Channel FlowsGoods and ServicesAssignment of risk also movesTitles are transferredMoney/Financing flowsInformation flows
  248. 248. Purpose of ChannelsProvide goods to the right customersIn the right quantitiesOf the right qualityAt the right timeIn the right placeTo maximize profits
  249. 249. Value of IntermediariesYou can eliminate intermediaries, but not their functionsThe reason that intermediaries exist is that they provide these functions more effectively and efficiently than the manufacturer can on its ownEconomists have noted fewer intermediaries at intro/growth and decline phases of PLC
  250. 250. B2B ChannelsFewer customers, larger purchases, complex delivery requirements, tech support/serviceMeans B2B channels are shorter and more direct than B2CB2C uses wholesalers and retailersB2B uses industrial distributors, manufacturers’ agents, jobbers, & brokers
  251. 251. Manufacturers’ Representatives IIndependent business, usually 5-15 clientsLong-term relationship, a decade or moreUsually a large geographic areaOften > 100 customersPrinciple function is SELLING.Established contacts and tech knowledgeOnly get paid when making sale
  252. 252. Manufacturers’ Representatives IIEspecially helpful for small and medium-sized manufacturersCan use instead of or to supplement sales force, esp. in remote areasWhen sales get large enough, manufacturer may choose to use own sales force. Need to anticipate this conflict.
  253. 253. Manufacturers’ Representatives IIIUse of reps  loss of control by manufacturerConflict often occurs because rep carries products from multiple manufacturersAgency theory suggest that rep will push: Better quality products Products with higher commissions Products of mfrs they have better relation with Products with stronger promotional support
  254. 254. Manufacturers’ Representatives IVReps sellCare less about market information or customer serviceThey want reliable, quality products, mfr support, reasonable commission rates, training, and good mfr reputation and image
  255. 255. Manufacturers’ Representatives VSelection Criteria History, Growth/plans Territory Facilities, personnel, management Other lines Reputation Services
  256. 256. Industrial Distributors IAn independent wholesaler who sells the majority of its goods and services to industrial , commercial, and institutional customers, the government, builders, & farmers.Independently owned/operated merchantTakes title to merchandise, keeps inventory, delivers, extends credit, may service after the sale
  257. 257. Industrial Distributors IITwo major categories General (Grainger) Specialized (Caterpillar)Heavy reliance on short-term debtMost assets tied up in inventory and ARUse inside and outside salesStock small ticket items: Spare parts, lubricants, power tools, small machinery, bearings
  258. 258. Industrial Distributors IIIPrinciple functions: selling, inventory, creditCan provide important feedback to manufacturer about the local market, about problems with sales, service, etc.Sell popular parts, small quantitiesDistributor may carry competitor product lines, and many different products.
  259. 259. Industrial Distributors IVExclusivity Agreements: 1-Way, 2-WayMFR can provide: training discounts service missionary salesValue?
  260. 260. BrokersBring buyer and seller togetherFacilitate transaction, including negotiationsNo ownershipShort-term relationship, transaction-specificCommissionCan represent seller or buyer
  261. 261. Commission MerchantsShort term relationshipDeal with bulk products like raw materials, commoditiesNever take possession of materialsRepresent manufacturerNever take titlePaid on commission
  262. 262. FacilitatorsImproves the efficiency of the channelCan provide financing, credit, market information, grading/certificationNever take titleDoes not negotiate sale or purchase
  263. 263. JobbersManufacturers’ repBulk products (raw materials, commodities)Take titleDo not take possessionShort-term relationships
  264. 264. Sales AgentsIndependent salespeopleHandle entire marketing function of a single producerMay design promotions, establish prices, determine distribution policies, and recommend marketing strategies.
  265. 265. Channel ConflictOnly an issue when it becomes dysfunctionalConflict can arise over many issues: inventory levels, margins, competitors, promotional expenditures, trainings, returns, product obsolescence, delivery, sales support, commissions (See Table 13.4, p. 448)Monitor conflicts and resolve/manageCan address through Ownership Contract power
  266. 266. Channel Strategy
  267. 267. Channel StrategyTo intermediate or not to intermediate. That is the question.Distribution objectives Sales, profits, market share & coverage, control, costs, service, imageConsider buyers, product, competition, available channels, legal environment
  268. 268. Why Adjust Channels?Number of buyers and specialized needs change during PLCBuyers’ change and their buying changesChanges in customer demands Price, order size, delivery times, etc.Some options become available, while other options become feasible over time
  269. 269. Why Adjust Channels?
  270. 270. Why Not Adjust Channels?Long-term commitment Legal, moral, socialInertia: Change is difficult. Takes time and much energy.Competitors may tap abandoned channelsNeed data to justify changeResistance to change company and channelChange is disruptive
  271. 271. Evaluating IntermediariesNeed to periodically review channel members’ productivity, profitability, and effectivenessContribution Analysis MethodWeighted Factor Method
  272. 272. Contribution AnalysisObjective measureEvaluate intermediaries based on their contribution to indirect fixed costs and profitability, after covering fixed costsSee Table 13.6, pg. 457
  273. 273. Weighted FactorsSubjective measureIdentify evaluative criteriaAssign weights based on importanceEvaluate each intermediaryWeight x Evaluation = ScoreSee Table 13.7, pg. 459
  274. 274. Logistics
  275. 275. LogisticsTransportationWarehousing Order ProcessingInventory Management Production PlanningProtective Packaging Customer Service Plant, WarehouseMaterials Handling Location (Traveling salesman problem)
  276. 276. Ketchikan, Alaska Barge Traffic
  277. 277. Logistics Performance MeasuresTotal CostOn-time Delivery Customer ComplaintsCost Trends Inventory LevelsCustomer Satisfaction Inventory TurnsActual vs. Budget Cost/UnitStock-outs Delivery Consistency
  278. 278. Newark
  279. 279. Industrial Promotion MixFour More Ps: Personal Selling Paid Advertising Sales Promotion Publicity
  280. 280. What’s different aboutindustrial promotion?Differences due to: Products are more technical Fewer buyers Buyer location Long, complex buying processTherefore, advertising, sales promotion and publicity play support roles to sales.
  281. 281. What else is different aboutindustrial promotion?Not much mass media.Mostly print advertisingMessages logical/factual, vs. emotionalMay need different promotion to different organizations, or even people within a single organization.
  282. 282. Available Promotional Tools IGeneral Business Publications: ForbesTrade Publications (See pg. 362) Horizontal: Job/Function focused: purchasing Vertical: Industry focused: steel, agricultureIndustrial Directories: Thomas RegisterTrade ShowsCatalogs
  283. 283. Available Promotional Tools IIDirect MailVideosTechnical ReportsWeb Sites/InternetSamplesPublicityNoveltiesTelemarketing
  284. 284. Spending Promotional DollarsSpecialized business pubs: 23%Trade shows, exhibits, displays: 18%Direct Mail: 10%Electronic Media/Internet: 9%Publicity/Public Relations: 7%General Magazines: 6%Dealer/Distributor Material: 5%Directories, Yellow Pages: 5%
  285. 285. Cost/Effectiveness of Promo MixCost/Contact Effectiveness High Field Salesperson High Inside Salesperson (Telemarketing) Medium Trade Shows Medium Direct Mail Catalogs/Manuals Low Low Trade Journals Other Advertising
  286. 286. Micro Look at BuyingCognition  Affect  BehaviorAwareness: Publicity and AdvertisingComprehension: Education and AdvertisingConviction: Personal Selling, some Adv.Ordering: Personal Selling
  287. 287. Macro Look at BuyingProblem Awareness: Sr. Mgmt/Current Users; use Trade Shows and Trade Publication AdvertisingSolution Identification/ Information Search: Techies; use Catalogs, Samples, Trade Journal Advertising, Sales Force (defense)Evaluate Alternatives: Purchasing Mgrs.; use Comparative Adv., Testimonials, Sales, Tech Reports, PublicityDecide/Purchase: SALES: negotiate, persuade, adaptPost-Purchase Evaluation: Advertising, inside sales, direct mail
  288. 288. Implications for MarketerCan influence buyer’s decisionNeed to determine: Most critical stages for product/market Which promo tool most appropriate for stage Balance cost/benefit of promoAs risk increases, the buyer seeks more infoMore conflict, the buyer seeks more info
  289. 289. Does B2B advertising make sense?
  290. 290. Should businesses advertise to businesses?Yes, but focus on print mediaNeed to reach specific industries, organizations, and individuals within organizationsCan use some TV and Radio, but usually for products with broad market appeal (insurance, computers)
  291. 291. Print MediaAdvantages Not fleeting like broadcast Can include technical information Buyer can go back and see again Buyer can go through at own pace & focus on what she/he is interestedDisadvantages Can’t possibly include all pertinent information May not be seen Difficult to assess effectiveness (like all adv.)
  292. 292. Why businesses should advertise.Can reach people in the buying center that sales can’t reachGood tool for prospecting (1-800; reply card)Can lay groundwork for salesperson’s call  Creating awareness  Providing general informationCan reduce cost of sales callMotivate/support intermediaries/distributorsCan create pull for customer’s products, leading to increased derived demandCan convey desired image
  293. 293. Advertising Objectives IExpress as sales or market share (easy to measure)Could also use awareness levels or changes in attitudes, beliefs, or perceptionsMight just be reminder (esp. in decline)Post-sale reassurance (reduce cognitive dissonance)BE SPECIFIC: Time and AudienceUnfortunately, most managers don’t know or understand their objectives
  294. 294. Advertising Objectives IIObjective Strategy CharacteristicsAwareness Corporate Diffuse, LT Benefits; Low Persuasion Generic Informative, not comparativeKnowledge Preemptive Establish superiority. Informative, moderate persuasionLiking Brand Image Focus on benefits, not competitors Emotion, moderate persuasionPreference Positioning Focus on differentiation vs.Conviction competition. High/moderate persuasionPurchase Unique What comp. Does not do. Hi Appeal to action persuasion Incentive to act. High persuasion
  295. 295. Budget% of sales: Easy, bad if sales decreaseLast year’s budget + %: Easy, not rigorousCompetitive parity: Are competitors right?Product/Service profitability: Low Π needs adv.Productivity judgments: Cost/Benefit analysisTask & Objectives: Complex, best method
  296. 296. How much to spend? High LowStandardized Products Customized ProductsBroad product line Narrow product lineSuperior product quality Lower product qualityHigh price Low/Average price
  297. 297. The Message INeed visual magnetism: get attention Color, contrast, angles, straight lines, oddities, …Select the right audienceInvite reader into the scene: identify with adPromise reward (benefits, good performance)Back up promise: support claim Testimonials, tech standards, …
  298. 298. The Message IIOrganize ad to present message in logical sequenceSpeak to reader as an individual, personalize, keep simple, ACTIVE VOICE Avoid ClichésEasy to readWhat vs. where or who: Focus on product or service first, not the company (except…)Reflect company’s character & personality Be consistent, takes long time to develop and maintain image
  299. 299. Choosing Media IGeneral B. Pubs (Forbes, Business Week) Good for products with broad appeal to large # of customers, who are geographically dispersed. Good to project image to business community. May be best to reach upper level management. Cost up to TEN TIMES price of trade journal ads.Trade Journals (Modern Metal, Purchasing Today)  Special Interest. Knowledgeable readers.  Vertical vs. Horizontal.  Useful for directing specific, technical messages  Can reach technical people who read these journals
  300. 300. Choosing Media IIIndustrial Directories (Thomas Register) List suppliers of variety of product types Also Catalogs, like Sweet’sTelemarketing WATS, incoming and outgoing Complaints, inquiries, orders, service requestsWWW Catalogs, orders, email, phone directories, information on company and productsDirect Mail: Brochures, Intro letters, LISTS
  301. 301. Evaluating AdvertisingCompare outcomes to goals.Look at bottom-line increases in sales. Be sure to account for other factors (pricing, sales efforts, competitor actions)Nonlinear relationship, diminishing returnsTime lag can be monthsWas target audience reached?Which medium was most effective? $/saleEffect of adv on audience attitude, awareness, recall, behavioral intent (to buy)
  302. 302. Sales PromotionSupplements and complements salesSamplesContests for distributorsAdvertising Specialties: Trinkets and TrashTrade Shows, conventionsCatalogsTechnical Reports
  303. 303. Trade Shows IFormal exhibition of productsOpportunity to make lots of contacts at onceGood for customers to ask questions and compare competitorsIntroduce/demonstrate productsBuild awarenessMake personal contactsParity with competitors (Keeping up with Joneses)Recruit employees, reps, and distributors
  304. 304. Trade Shows IINeed to identify goalsMeasure effectivenessKnow which shows to focus onDisplays and Literature: Location, Quantity/QualityStatic Displays: Well trained salespeople.Attention-Getters: Contests, Shows, Games, GimmicksAudiovisual Presentations: Tapes, Computers, FilmsLive Product Demonstrations: 10 Minutes ±Be on MUST SEE listTake-Aways: Literature, brochures, samples
  305. 305. CatalogsContain information on the company’s line of products.Might include price lists & warranties.Can customizeUse Direct Mail, Trade Shows, Sales to distributePut on-linePublish in industry directories, like Sweets
  306. 306. Technical ReportsDescribe product and its useGives fairly detailed specifications (customer understanding, no trade secrets)Cut-Sheets: Graphs, charts, illustrationsMay give results of product testingDistribute via direct mail, trade shows, sales
  307. 307. Publicity“FREE” (or at least less than advertising)Credibility: Objective 3rd PartyEvents: Chili cook-offsSponsorshipsPress releasesPress conferencesPublic speakingArticle Writing in trade journalsSupplemental Role: Inform about new products; Generate inquiries; Increase awareness
  308. 308. Personal SellingThe most important promotional tool in B2B marketingTransaction/relationship is often too complex to consummate without personal interaction between marketer and buyer.Physical link between partiesBoundary Spanner
  309. 309. Salespeople as Boundary SpannersRepresent the company to customersRepresents the customer to companyBring info back to company Sales forecasting, product suggestions, competitor impressionsNegotiates prices and termsSolves problems
  310. 310. Personal SellingNOT manipulationMight persuade or entice, but cannot force the customer to buy.Sales must be professional. Not fast-talking, shiny- suited, slick liar.Customers are sophisticated and you need a long-term relationship to be successful.B2B sales cost more than B2C selling.Account for more $/saleMore direct, shorter channels
  311. 311. Training and SkillsMore technical knowledge in B2BNeed to know customers’ businessesBuild relationships over a long period of time before reaping rewardsNegotiate effectively Price, payment terms, delivery, quantities, returns, post- sale training and service
  312. 312. How salespeople spend their timeSelling: 32%Waiting, travel: 21%Telephone: 19%Administration: 15%Service: 13%
  313. 313. Four Types of Selling JobsTrade Selling B&D to HDMissionary Selling DeWalt to contractorsTechnical SellingNew Prospect SellingCustomer Service (Non-Sales, Selling) Post-sale satisfaction
  314. 314. Selling AidsSmall Gifts Useful, permanent, quality, tasteful, relevant Not substantial; Not to Gov’t customersPlant Tours Customer’s attention, seller’s turf, best way to educate customer about company Chaparral SteelEntertainment Lunch, dinner, drinks (careful), leisure (sports, golf), parties for clients
  315. 315. Sales Process StepsProspecting Identify QualifyPreparation Research: prospect, industry, market, competitorsPresentation Approach, Presentation, Objections, CLOSEPost-Sale Delivery, Installation, Training, Billing, Returns, Relationship Building
  316. 316. Sales ManagementSales Plan Planning Implementation Control/EvaluationResponsibilities Recruiting Training Organizing Motivating Evaluating Compensating
  317. 317. RelationshipsIndustrial sales: develop and maintain relationshipsPower: Who is dependent on whom?Effect of power on negotiationSources of conflict and cooperation
  318. 318. Structural PositionsCentral and Formal buyingLevel of key buying decisionsFunctional areas participating in buying processFit between our salesperson and buyer reps May be an issue if mismatched
  319. 319. PeopleDemographics and personal characteristics of buyers and salespeople Age, experience, education, lifestyle, race, gender, personal goalsBetter fit might lead to better relationship, but differences may be productive too. Need to determine if relevant If so, which dimensions?
  320. 320. Roles, Norms, and Rules of the Game
  321. 321. Roles, Norms, and Rules of the GameMostly unwritten Some (gifts) writtenAcceptable/Unacceptable tactics for both buyers and sellers.Perceived roles played by buyer and seller representativesAre both sides seeing same thing? Do perceptions match?
  322. 322. RolesRole Ambiguity: Unclear understandingRole Conflict: Role partners want different things from sales personRole Accuracy: MisunderstandingRole Consensus: Buyer/Seller agree on rolesRole Fulfillment: Buyer/Seller satisfiedCan improve some with training, supervision, and experience
  323. 323. Managing Sales ForceSales force sizeSales force organizationRecruiting and selecting salespeopleTrainingMotivation and CompensationStandardsEvaluation
  324. 324. Sales Force SizeBreakdown Method Forecast Sales Estimate Salesperson Productivity Calculate Number of Salespeople NeededWork Load Method (in text) Number of accounts (current/potential: ABC) Call Frequency Call Length
  325. 325. Methods of Forecasting• Subjective – Users’ Expectations – Sales Force Composite – Jury of Executive Opinion • Delphi Technique
  326. 326. Methods of Forecasting• Objective – Market Test – Time Series Analysis • Moving Averages • Exponential Smoothing • Decomposition – Statistical Demand Analysis
  327. 327. Organizational Structure• Geography: States/Regions, Downtown/Suburban• Product Type: Yard Equipment vs. Power Tools• Customer Type: Industrial/Consumer, Hospitals/Schools, Wholesalers/Retailers• Selling Function: Prospecting, presenting, servicing
  328. 328. Recruiting and Selecting SalespeopleJob analysis and description Sales jobs are different: e.g. inside/outsideCharacteristics: Enthusiasm, education, flexibility, stability, past performance, goalsTests: Intelligence, aptitude, psychologicalInterviews and ReferencesSourcesLegislation
  329. 329. Training TopicsProduct KnowledgeMarket/IndustryCompanyTime/Territory ManagementLegal/Ethical IssuesOther: Computer program, Relationship building, Selling procedures, Decision Support System (DSS)
  330. 330. Training MethodsOn-the-job: most commonExternal seminars: top three, major toolHome assignments: least favoriteIn house classes
  331. 331. Training Costs/TimeNew Hires $4,000+ to nearly $10,000 4± months averageExisting Salespeople About $4,000/year Nearly a week (32.5 hours) per year More emphasis on product vs. skills
  332. 332. MotivationExpectancy Theory Expect that effort will lead to performance Reward is instrumental in achieving reward Salesperson Valence for reward Need all for motivation.
  333. 333. Rewards and CompensationExtrinsic and Intrinsic Money, awards, recognition, travel, promotions Personal Growth, sense of accomplishmentLower/Higher Order NeedsCompensation Salary Commission Bonus Contests Benefits
  334. 334. Standards: QuotasGoals assigned to salespeople for specific time period.Three Purposes Motivate salespeople Evaluating performance Controlling salespeople’s effort
  335. 335. Characteristics of Good QuotasAttainable Motivation requires reasonable chance of attainmentEasy to understand Too complex  suspicion and mistrustComplete Cover all criteria to avoid imbalance
  336. 336. Types of QuotasVolume Units, Dollars, PointsActivity # cold calls, proposals, displays, service calls, meetings, collections, demonstrationsFinancial Expenses, Gross Margins, Net Profit
  337. 337. How to Set QuotasVolume History Territory PotentialActivity Sales reps and managers; sales reports; researchFinancial Based on financial goals of firm Adjust to meet needs