Business to Business MarketingWaldemar Giglierano Solution Manual

Type:

Solution Manual

Resource:

Business to Business Marketing

Edition:

1st Edition

Author(s):

Robert Vitale Waldemar Pfoertsch Joseph Giglierano

Instructor’s Manual to accompany

Business-to-Business Marketing: Analysis and Practice By Robert P. Vitale, Joseph J. Giglierano, and Waldemar Pfoertsch

Instructor’s Manual to Business-to-Business Marketing

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Preface This edition of Business-to Business Marketing: Analysis and Practice (BtBMAP) continues the approach initiated in our prior textbook in Business-to-Business Marketing. Additions and revisions have been made based on feedback from adopters and students from around the world. Elements of the conceptual grounding continue−the value chain, the Marketing Concept, the Product Life Cycle and the Technology Adoption Life Cycle. Each chapter benefits from observations made in real world situations, connecting the theoretical material with its real-world interpretation.

Waldemar Pfoertsch, our new third author and an international adopter of our book has provided heartening feedback and critical suggestions. Waldemar’s book with Philip Kotler, “B2B Brand Management” was new, and his work in brand management was an excellent verification of the brand concepts we espoused. His contributions include the new Chapter 13, as well as classroom-tested case studies.

Our experience continues to show that students’ assumptions about business-tobusiness marketing are often based on their familiarity with consumer marketing. We include many comparisons and contrasts between the two fields throughout the text to clarify the most important differences and give weight to the distinguishing characteristics of business-to-business principles and practices.

Changes from the first book include: • The addition of a new Chapter 11, focused on Business Development • The shift of forecasting from Chapter 6 into this new Chapter 11, acknowledging its importance to business development efforts as well as feedback that Chapter 6 in our first effort was overcrowded • A discussion of Sarbanes-Oxley and its global offspring and the Foreign Corrupt Practices Act, as well as increased discussion of licensing, crosslicensing and joint ventures • An expanded ethics chapter (16), including increased coverage of crisis management and examples of ethical decision making in business

©2011 Pearson Education, In. publishing as Prentice Hall

Business-to-Business Marketing

Instructor’s Manual to Business-to-Business Marketing

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Features of this Manual In this Instructor’s Manual we have attempted to integrate and support a classroom approach that utilizes many of the features of the book. The pedagogical style includes consistently previewing and reviewing concepts and approaches. Learning objectives from the text serve as the primary framework throughout this manual.

Each chapter in this manual includes: • Authors’ comments followed by a brief discussion of the opening vignette. These vignettes are useful as “mini-cases” for discussion, to aid students’ understanding of chapter content • Commentary regarding classroom discussion and presentation • Reference to related PowerPoint slides • Answers to end of chapter review questions Additional support items include • Tips based on our classroom experience. These are identified by a “ ” at the beginning of those sections.

• “Solutions” to case studies for both analysis and discussion. All are original and reinforce text materials with practical experience, based on real world situations. Sensacon, (a composite of the experiences of many Silicon Valley companies that we have worked with) is a “continuing case” first presented as an example in Chapter 8 and then again in following chapters. It is presented among cases at the end of the book in a consolidated format, pulling together the examples of each chapter. “Sensacon” follows the development of a startup company as it crosses the chasm and moves into the growth stage, presenting many of the challenges faced in these situations.

• Sample course syllabi based on 16- and 12-week semesters. (Our experience has been with 16-week-long semesters, meeting twice each week.)

©2011 Pearson Education, In. publishing as Prentice Hall

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Instructor’s Manual to Business-to-Business Marketing

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TABLE OF CONTENTS I. Preface

ii

II. Features of this Instructor’s Manual

iii

III. This Table of Contents

iv

Teaching Notes Each Chapter includes: a. Authors’ Comments b. References to PowerPoint slides c. Tips for use in the Classroom d. Answers to End of Chapter Review Questions Chapter One Chapter Two Chapter Three Chapter Four Chapter Five Chapter Six Chapter Seven Chapter Eight Chapter Nine Chapter Ten Chapter Eleven Chapter Twelve Chapter Thirteen Chapter Fourteen Chapter Fifteen Chapter Sixteen IV. Typical 16- And 12-Week Syllabi With Application Notes V. Authors’ Commentary Regarding Case Studies Includes classroom experiences, list of other useful cases

©2011 Pearson Education, In. publishing as Prentice Hall

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VI. Case Studies Included in this Manual–Summary VII. LastMile Corporation VIII. B2B e-commerce in China: the Strength of Alibaba.com IX. Dow Corning Success In China X. Marketing Plastic Resins: BW and GE XI. Automotive Headlamps II XII. Makrolon–The High-Tech Material XIII. Sensacon Incorporated

©2011 Pearson Education, In. publishing as Prentice Hall

Business-to-Business Marketing

Typical Syllabi with Instructor Notes Introduction to Business-to-Business Marketing Different semester/quarter schedules necessitate some selectivity of materials from Business-to-Business Marketing: Analysis and Practice (BtBMAP). Below is a standardized syllabus based on a 16-week schedule as well as a typical 16-week schedule, a 12-week, 3 class meetings per week schedule and a 12-week, 2 class meetings per week schedule. The logic behind these schedules is included in the notes that accompany each schedule. Obviously, these schedules are not set in stone, as each instructor will have preferences related to student interests, the local business community, and personal experiences.

BtBMAP, both this and the prior edition, have been extensively “classroom tested” in Bus131A, Business-to-Business Marketing, our upper-division undergraduate marketing elective at San Jose State University. SJSU operates on a 16-week semester plan. Classroom development of this book has been based on the 16-week schedule.

Thus, the comments and suggestions associated with the 16-week schedule are provided in the greatest detail but often apply to the shorter schedules as well.

Typical 16-Week Syllabus Bus 131A - Business to Business Marketing Tuesday & Thursday, BBC 320

(Note that general items that are required by San Jose State University policy have been removed for clarity.)

Instructor Information

Robert P. Vitale Office: 760BT: Phone: 924-3532 www.cob.sjsu.edu/facstaff/vitale_r/index.htm

E-mail: vitale_r@cob.sjsu.edu Office Hours: T/Th, 1030-1130, 1500-1600 M 1700-1750 & by appointment

Course Objectives: Business-to-Business Marketing requires recognition of the needs of a complex customer organization, knowledge of how to approach this complexity and creation of an organization that supports this effort.

In this course we will examine the nature of business-to-business markets, the organizational buying process, and strategic alternatives to approach these markets. The theoretical approach will be developed and contrasted to practical viewpoints and applications.

Required Materials:

Vitale, Giglierano, Pfoertsch, Business to Business Marketing; Analysis and Practice, Pearson/PrenticeHall

Recommended Materials/Required Reading: The Wall Street Journal (pay particular attention to the 2nd section - "Marketplace").

Marketing Is Everything, McKenna, HBR Jan-Feb 1991, & Marketing Myopia, Levitt, HBR June 1975

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Typical Syllabi with Instructor Notes

Course Requirements & Grading Criteria 1. Two exams, 100 points each

200 points

29%

2. Case Study Assignments. There will be three written case assignments during the semester. Points assigned and tentative due dates are as follows: First Written Case Analysis: - Group Effort: 50 points 300 points Second Written Case Analysis: - Group Effort: 100 points Third Written Case Analysis: - Group Effort: 150 points

43%

3. Final exam: Note that this is a comprehensive exam.

150 points

21%

4. Class participation/preparation, quizzes, readings and cases that you are expected to have prepared for discussion, chapter review questions, and other class activities.

up to 50 points

7%

700

100 %

TOTAL POSSIBLE POINTS

Case Study Assignments

All written cases are group efforts and must include an Executive Summary followed by a Table of Contents. The 1st case length should not exceed 5 pages, the 2nd – 7 pages, and the 3rd – 8 pages. The Executive Summary, the Table of Contents, and any appendices are not included in these page counts.

Additional information for cases and working in groups will be discussed on Feb 17. For additional information, particularly if you have not done any case work, refer to the Case Study Guide at http://www.cob.sjsu.edu/facstaff/vitale_r/CaseStudyGuide.pdf Grading Standards: The tests and assignments in this course are designed to be administered with a “curved” grading process. Grades are, to some extent, dependent on the overall performance of the class. Thus, it is difficult to predict grade ranges in advance. Observation of several semesters’ results has shown that the following grade range is typical for this course. This is, however, no guarantee that this class will experience the same results.

A 85-100% B 72-84% C 60-72% D 50-59% F <50%

Policy on Professionalism, Participation and Class Conduct

You are expected to conform to generally accepted notions of professionalism typical of the business world. The following is an illustrative list of items to which you explicitly agree upon remaining enrolled in the course. Failure to conform can be grounds for appropriate action, including but not limited to expulsion from the classroom and an “F”in the course.

Electronic Devices: Turn off all electronic devices (headsets, MP3 players, pagers, cell phones, etc.), before entering class. If a pager, cell phone, or other such device goes off during class the class may receive an unannounced quiz. Students whose devices disrupt the course and do not stop when requested by the instructor will be referred to the JAO. Use of PDAs, electronic dictionaries and other personal electronic aids are not allowed during exams and quizzes. Please note that recording of lectures is strictly prohibited.

Computer Use: Students are expected to use computers for class-related activities, taking notes on the lecture, following the lecture on slides that the instructor has posted, and finding web sites to which the instructor directs students during the lecture. Students who use their computers for other activities, distract other students, or who abuse classroom equipment in any way, at a minimum, will be asked to leave the class, and, at a maximum, will be referred to the JAO for disrupting the course.

Academic Integrity: Faculty make every reasonable effort to foster honest academic conduct, secure exams and their answers so that students cannot have prior access to them, and proctor examinations to prevent students from copying or exchanging information. Faculty are on the alert for plagiarism.

Students who are suspected of infractions will be reported to the JAO. The SJSU policy on academic integrity can be found at the Web link noted below.

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Typical Syllabi with Instructor Notes Assignments: Class Discussion: You are expected to have read and be prepared, on the date indicated in the schedule of assignments, to discuss the assigned chapter/s, readings, and cases; and any additional readings assigned or as required for the full development of classroom and case discussions.

Writing Format: (Note that format will be graded!) All written assignments, unless otherwise indicated, must comply with the following guidelines: $ Written case assignments that do not follow the noted format may not be accepted for credit or may be subject to at least a one-letter grade penalty. $ Unless otherwise noted, electronic copies of assignments are NOT acceptable. $ Assignments should be printed double spaced, on 8.5" X 11" paper with uniform margins (1"). $ Handwritten papers are not acceptable. $ Font size should approximate 12 points. $ Papers need only be stapled in the upper left-hand corner. Folded corners, paper clips or loose papers are not acceptable. $ Spelling, grammar, and “typos” will be considered in your grade. Papers that evidence a lack of proofreading or professional presentation may be penalized one (1) letter grade. $ All case studies will require an Executive Summary placed before the Table of Contents. $ Include the due date and actual date handed in, if different, as well as the name and last four digits of student ID numbers for all contributors to the assignment. Without this information, no credit will

be given for the assignment.

Additional Information: $ Use ink for all in-class writings and essay exams. $ There are no makeups for quizzes, papers or other class exercises. $ Cases and other assignments are due when collected in class on the date indicated. A late assignment will receive a minimum of a one (1) letter grade penalty, which may be increased for each session and/or if the late period includes weekends or holidays. $ In no circumstance will any written assignment be accepted after it has been discussed in class. $ If you need course adaptations or accommodations because of a disability, or special arrangements if the building must be evacuated, please see me as soon as possible. $ You are expected to take care of personal needs (restrooms, phone calls, etc.) between classes and are not expected to leave and return to the classroom during class sessions.

Exams: $ During exams, if you have a need to leave the room, you must hand in your exam before leaving.

That will conclude your exam session. $ Only documented illness/extreme emergency will justify make-ups. $ All make-up exams are cumulative, essay format and will be given either at the end of this semester or during the next semester. $ If you arrive late to an exam, you will not be granted additional time beyond the end of the class session and, if a student has finished the exam and left the room before your arrival, you will not be allowed to take the exam.

Final Exam: Must be taken on the day assigned. Note the date and time of the final exam now–avoid early holiday departures that may conflict with the schedule.

Prerequisites and grade regulations: Prerequisites will be enforced. Grade regulations (A, B, C, D, F, I, W, WU) are as described in the University catalog. The “+/-“ grading alternative will be used.

Office hours: Student visits are always welcomed. You are encouraged to communicate with me on individual matters primarily during scheduled office hours or by appointment as necessary.

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Typical Syllabi with Instructor Notes

Comments Regarding the Syllabus Above: This syllabus is somewhat conventional with two possible exceptions: • Grading is Curved This latitude is provided because business-to-business marketing is often culturally “foreign’ to many students. Additionally, at San Jose State University, this is one of the first courses in which students will experience case study analysis.

• Additional readings include Marketing Myopia and Marketing Is Everything.

The opportunity is taken to review and reinforce Levitt’s Myopia. McKenna’s Marketing Is Everything is repeatedly discussed in the text, particularly as it relates to Market Ownership. Both papers, though written decades apart, support the same principles of effective marketing. Students are reminded that the foundations of the discipline are timeless.

You may note that the provision for makeup exams for missed class exams is strict. All makeup exams are cumulative and given at the end of the semester or during the next semester. This firm policy has reduced the number inadvertent/unfortunate family calamities and other incidents that always seem to occur the evening before an exam.

Comments & Suggestions Regarding the 16-week Schedule–Below Weeks 1 & 2: Combined with administrative items, Chapter 1 usually takes two class sessions. The concept of the Buying Center, Chapter 3, is essential to the understanding of rest of the text.

Week 3: Our experience is that most Business Law courses do not cover antitrust and pricing, so we have two days assigned for discussion. If your situation is different, you may be able to expand coverage of prior chapters.

Weeks 4 & 5: Business strategy (“resource allocation”) is emphasized in our course. The linkages between the product life cycle (our anchor–see chapter notes) and matrix analysis tools are discussed. Myopia and Marketing Is Everything are discussed, with an emphasis on Market Ownership, a strategic foundation for the rest of the book.

To give adequate time for students to prepare for both the first exam and the first case study, you might consider introducing case study analysis at this time.

Weeks 6 & 7: Our experience has been primarily with essay exams. A typical exam will consist of six short essay questions (one of which may be a page of multiple choice questions, depending on the anxiety level of students regarding essay exams). Many of the questions are sourced from the end of chapter review questions, in whole or part.

Students must answer four of the questions (25 points each) for full credit. “Extra .

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Typical Syllabi with Instructor Notes

Credit,” by answering more than four questions, is not available. It is also valid to put word limits on certain essay answers. This avoids the rambling of business jargon in an attempt to “hit the right words.” Depending on the number of students in the class, this can be a very effective strategy.

Students may find case analysis intimidating. For the first analysis, much of the analysis occurs in class (see week #5, class #9) as a coaching opportunity, with students responsible for completion (50 points). For additional details, see the Case Studies chapter of this manual.

Weeks 8 - 10: Ample time is provided to complete integration of product development and innovation. Of particular importance is a thorough understanding of marketing’s role in the product development process. Now that students have a better handle on xcase analysis, the second case is worth 100 points.

Weeks 11 & 12: You may find some of the material in Chapter 11 more suitable for graduate classes.

Our experience has shown that a thorough understanding of the role of Field Market Development and the Marketing Operations Forecast sets the stage understanding marketing organizations’ evolution over time as well as the essential role of marketing in a modern organization. Additionally, we have found many companies here in Silicon Valley struggling with their inability to fully understand their marketing operations because of inadequate and/or timely information.

The second exam is the same format as the first. The concentration in the first exam was on fundamentals while this exam begins to connect the various pieces covered.

Weeks 13 - 15: Chapters 12 and 14 and Chapters 13 and 15 contain many common themes and are closely related. Depending on how effective the schedule has been maintained, much of this material can be comingled. The third case analysis can be strongly related to class topics. The due date of the third case analysis can be flexible, depending on whether or not you feel it is necessary to get it graded and returned to students before the final exam. There are several cases that can be utilized as “capstone” cases, both in the text and elsewhere.

Week 15 - End: The schedule flexibility offered by the topics covered in weeks 13 to 15 assist in the avoidance of running out of time before Business Ethics can be discussed.

Our college (and many others, we believe) is putting greater contextual emphasis on Business Ethics.

Adopters of our first BtB text frequently questioned the need for an Ethics chapter, though those who supported its inclusion felt strongly about its importance. During the review period for this book, we found a similar division of opinion, however the number of supporters far outnumbered those that did not see a need. We believe that this chapter is important and hope we have provided materials for a practical and effective discussion. .

Business-to-Business Marketing

Typical Syllabi with Instructor Notes

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Final Exam: Our final exam is a “generally” cumulative exam. By that we mean, without an understanding of the earlier materials, a complete understanding of the later chapters is not possible. Students are advised that the material from the first two exams will be “generally” covered, while the new chapters will be specifically covered. Obviously, your philosophy regarding examinations will rule how you apply this policy.

Typical 16-Week Schedule 16 Chapters, Three Case Analyses, Two Exams plus Final Exam Week Class Chapter Topics, Cases and Reading Assignments 1 1 Introduction to Business-to-Business Marketing 1 2 3 2 Classifying Customers, Organizations and Markets 2 4 3 Organizational Buying & Buyer Behavior 5 4 The Legal and Regulatory Environment 3 6 7 5 Concepts And Context of Business Strategy 4 8 9 Read McKenna, Marketing Is Everything, HBR Jan-Feb 5 HBR 1991 & Levitt, Marketing Myopia, June 1975 10 11 Exam 1: Chapters 1-5 6 12 Market Research and Competitive Analysis 6 13 First Case Analysis Due 7 14 7 Segmenting, Targeting and Positioning 15 8 8 Developing The Product, Service and Value of The Offering 16 17 9 9 Innovation and Competitiveness 18 19 Pricing In Business to Business Markets 10 10 20 Second Case Analysis Due 21 11 11 Business Development and Planning 22 23 Exam 2: Chapters 6-11 12 24 12 Business To Business Selling 25 13 26 13 Business To Business Branding 27 Channel Relationships and Supply Chains 14 14 28 Third Case Analysis Due 29 15 Communicating With The Market 15 30 16 Business Ethics and Crisis Management 16 Final Exam

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Typical Syllabi with Instructor Notes

Comments & Suggestions Regarding the 12-week Schedules–Below The number of class sessions in each 12-week schedule impacts the way the schedule is compressed. The following comments highlight the differences from the 16-week schedule. While we are not suggesting that there are parts of the text that are not important, your limited class time may require some hard choices. (If we were faced with this alternative, we would strongly consider a two-part course, Part I for 12 weeks followed by another 12-week session with Part I as a prerequisite.) Again, these schedules are not set in stone, as each instructor will have preferences related to student interests, the local business community and personal experiences.

12-Week, 3 Class Meetings/Week–Below Chapter 2 – Reduce discussion of customer types, economic competitive forms Chapter 4 – Reduce discussion of political framework, Sarbanes-Oxley Act Chapter 6 – Cover only qualitative interviewing Chapter 10 – Reduce discussion of negotiations Chapter 11 – Focus on forecasting and marketing operations Typical 12-Week Schedule, 3 Class Meetings/Week 16 Chapters, Three Case Analyses, Two Exams plus Final Exam Week Class Chapter Topics, Cases and Reading Assignments 1 1 Introduction to Business-to-Business Marketing 2 1 3 Classifying Customers, Organizations and Markets 2 4 3 Organizational Buying & Buyer Behavior 5 2 6 4 The Legal and Regulatory Environment 7 8 3 9 5 Concepts And Context of Business Strategy 10 11 Read McKenna, Marketing Is Everything ,HBR Jan-Feb 4 HBR 1991 & Levitt, Marketing Myopia, June 1975 12 Exam 1: Chapters 1-5 13 Market Research and Competitive Analysis 6 14 First Case Analysis Due 5 15 Segmenting, Targeting and Positioning 7 16 8 Developing The Product, Service and Value of The Offering 17 6 18 9 Innovation and Competitiveness 19 20 7 10 Pricing In Business to Business Markets 21 22 Second Case Analysis Due 23 8 11 Business Development and Planning 24 25 9 Exam 2: Chapters 6-11 .

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Typical Syllabi with Instructor Notes

10

11 12

26 27 28 29 30 31 32 33

12

Business To Business Selling

13

Business To Business Branding

14 15 16

Channel Relationships and Supply Chains Third Case Analysis Due Communicating With The Market Business Ethics and Crisis Management Final Exam

12-Week, 2 Class Meetings/Week–Below Consider the following reductions: • If your students have access to a Marketing Law course, or your program of study covers pricing and antitrust regulations in another course, you may eliminate Chapter 4. While we consider this to be an important chapter, if the material is covered elsewhere, this provides an easy exclusion.

• Chapter 11 is a difficult chapter for undergraduates. The portion of Chapter 11 dedicated to Business Development is new and not generally covered in other texts. You may consider limiting your discussion to a definition of business development and the value of forecasting.

• Chapter 13 is almost entirely new. While business-to-business branding is becoming more important than branding in consumer markets, the context of a brief survey course may allow at best only a cursory discussion.

• Chapter 14, Channel Relationships and Supply Chains, could be further reduced from the above schedule by focusing only on supply chain issues.

Notre that many students haven’t had any exposure to manufacturers’ representatives, a very important sales format in business-to-business marketing. This topic should probably be covered regardless of other reductions.

• Consider eliminating one or all of the case studies.

Wee k 1 2 3 4 5 6 .

Typical 12-Week Schedule - 2 Class Meetings/Week 14 Chapters, Three Case Analyses, Two Exams plus Final Exam Class Chapte Topics, Cases and Reading Assignments r 1 1 Introduction to Business-to-Business Marketing 2 3 2 Classifying Customers, Organizations and Markets 4 3 Organizational Buying & Buyer Behavior 5 5 Concepts And Context of Business Strategy 6 7 Exam 1: Chapters 1-3, 5 8 6 Market Research and Competitive Analysis 9 First Case Analysis Due 10 7 Segmenting, Targeting and Positioning 11 8, 9 Developing The Product, Service and Value of The Offering; Business-to-Business Marketing

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Typical Syllabi with Instructor Notes

7 8 9 10 11 12

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12 13 14 15 16 17 18 19 20 21 22

Innovation and Competitiveness 10 11

12 14 15 16

Pricing In Business to Business Markets Second Case Analysis Due Business Development and Planning - portion Exam 2: Chapters 6-11 Business To Business Selling – portion Channel Relationships and Supply Chains - portion Communicating With The Market Third Case Analysis Due Business Ethics and Crisis Management Final Exam

Business-to-Business Marketing

Case Studies to accompany

Business-to-Business Marketing: Analysis and Practice

By Robert P. Vitale, Joseph J. Giglierano, and Waldemar Pfoertsch

Authors’ Comments It probably comes as no surprise to many instructors that using case studies, particularly in undergraduate courses, is more of a challenge than it once was.

Notwithstanding this, we continue to believe that case studies that present real-world situations for student analysis and discussion are an excellent instructional tool.

We do not necessarily subscribe to what may be known as “standard operating procedure” in case analysis. Too often, when a student completes a first reading of a case they jump to what they think is an obvious answer. When this is combined with a web search of the principle companies and markets discussed in the case, the student analysis becomes a regurgitation of first impressions mixed with search results. In light of this, we believe that a good case is a case that can’t be ‘solved” with a web search, that presents instructive situations, is of reasonable interest to students, and if possible, doesn’t have a “standard’ solution. With this framework in mind, here are our considerations in the application of case studies in business-to-business marketing.

Consumer Perspective of Students It is very difficult, at least initially, for students to view circumstances as other than the ultimate consumer. Not only is there difficulty breaking away from the mindset of being “the target,” many companies and channel designs are just unknown to students. To get in the “middle of a case, a cultural shift is often necessary.

Reinforcement of the buying center concept is critical to recognizing that the businessto-business buying process is a collaborative effort with many external and internal stakeholders to satisfy.

We also find that we must remind students (particularly here in Silicon Valley), that the ultimate solution is not always a web site.

The “Newness” Of The Case We continue to hear from many of our case-oriented colleagues of the difficulty finding appropriate new cases for business-to-business marketing. We tend to believe that the value of a teaching case is not always limited by its age. Principles of good marketing haven’t changed, though the business environment evolves, often requiring different recommended actions in a market. A business situation that is not current often cannot be “googled” for the correct answer.

Note: This is not to say we don’t see value in current business situations.

Throughout the semester we seek current business items to reinforce .

Business-to-Business Marketing

Case Study Teaching Notes

classroom theory. The Wall Street Journal is a particularly good source, and students appreciate its online version.

With regard to older cases, here is a list of some that we have found useful−you will likely recognize some of them.

• Dominion Motors and Controls This is an excellent case to demonstrate the influence of external stakeholders and the impact of standards organizations on product development. You can also use this to show that 10 years in a market should not be the same as one year 10 times!

• Titan Controls • Huntington Electronics Presents an opportunity to demonstrate how R&D can lead to business diversification.

• Steel Products Company Short case about “what business are we in and what value do we create.”

• Omni Automated Systems Though one of the more difficult to use today, this case presents differing views of sales cultures–glad-handing versus value creation.

• Sealed Air Timeless in many ways, this case demonstrates international segmentation, value from customer perspective, and life cycle issues.

Students call this the bubble case–“how big is your bubble?”

Author’s Solution Is Not The Only Solution Your experiences may provide a different perspective than that of the author’s. You may want to emphasize different aspects of the case. An older case may have an entirely different solution in today’s business environment than what the author envisioned. While we certainly have attempted to provide good teaching notes with the cases presented, you may have another view.

Technology versus Purses and Shoes Students can find the somewhat technical nature of many business-to-business cases intimidating. A student once remarked “can’t we have cases about things we know about, like purses and shoes instead of chemicals and motors?”

To help defer this bias, reinforce the value aspect and solution potential of the product/offering rather than the technology that makes it valuable.

Example: Ask students to consider a hypothetical customer that wants a box that “when you kick it, it yells.” The customer specifies how hard it must be kicked before it yells, how “big” of a kick it must withstand, how fast it must yell after kicked, how loud, what pitch ... and so on. The customer doesn’t specify the technology that creates the yell−it can be a sophisticated motion sensor/electronic amplifier or a trained gerbil yelling into a megaphone (usually brings a good chuckle).

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Business-to-Business Marketing

Case Study Teaching Notes

Teaching Notes Included in This Manual A full discussion is provided for each case in the textbook. Below is a summary of the topics and issues that can be addressed with each case. Note that, as mentioned above, you may have different learning points or may use a case in an entirely different manner than we anticipate. If you are particularly successful with a unique approach, let us know!

LastMile Corporation–Choosing a Development Partner Issues: Crossing the Chasm Protecting Intellectual property−technology Creating a successful joint venture, value network, or partnership B2B e-commerce in China: the Strength of Alibaba.com Issues: Strategic plan implementation throughout an organization Recognizing differences between domestic and international markets Government influence in emerging markets Competitive branding in emerging markets Dow Corning Success in China Issues: Business to Business branding Different brand positioning based on dual market segments Protecting a premium brand position Marketing Plastic Resins: BW and GE Issues: Marketing channel design changes over the product life cycle Competitive advantage through field market development and customer education Different market segments may require a very different channel design to meet customer needs of form, time, place, and possession–Dual distribution Different organizations can see the same market differently when viewed through their own culture and paradigm.

Note: This case, when combined with Automotive Headlamps II and Makrolon: The High-Tech Material combine to demonstrate • The different views competitors can have of their markets • Changing channels and customer value over the Product Life Cycle • Managing (or leaving) business at the mature stage of the life cycle • Strategic Business Unit management over the PLC .

Business-to-Business Marketing

Case Study Teaching Notes

Automotive Headlamps II (Revised for academic clarity) Issues: Disruptive versus incremental innovation How innovation is viewed differently by different stakeholders How Marketing Myopia prevented a major supplier from understanding customer needs Difference between market share leadership and Market Ownership “If you don’t innovate your own offering, someone else will.”

Note: This case, when combined with Marketing Plastic Resins: BW vs. GE and Makrolon: The High-Tech Material combine to demonstrate • The different views competitors can have of their markets • Changing channels and customer value over the Product Life Cycle • Managing (or leaving) business at the mature stage of the life cycle • Strategic Business Unit management over the PLC Makrolon: The High-Tech Material Issues: Ingredient branding in the consumer market of a mature industrial product Branding a product without major differentiated attributes that were available from several sources Product management in the mature stage of the PLC Note: This case, when combined with Automotive Headlamps II and Marketing Plastic Resins: BW vs. GE combine to demonstrate • The different views competitors can have of their markets • Changing channels and customer value over the Product Life Cycle • Managing (or leaving) business at the mature stage of the life cycle • Strategic Business Unit management over the PLC Sensacon, Incorporated This is the capstone case for the book, combining many elements from many chapters.

Teaching notes follow in the same order as listed above.

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Business-to-Business Marketing

Case Study Teaching Notes

CASE NOTES: LASTMILE CORPORATION

Synopsis The founder of LastMile Corporation, Tom Sherman, is pondering how to bring new products to market under conditions of scarce resources for development and launch.

The company has proposals from two entities: Midwest Technologies, a major diversified technology company; and ANZ Investment Group, a venture capital investor. Both are potentially attractive suitors. Their initial offers were not entirely appealing. Sherman must decide how he wants to proceed with an attempt to forge a strategic partnership.

Case Questions What are the other alternatives that LastMile could look at that would create a working relationship between Midwest Technologies and LastMile?

There is a range of possibilities for working with large partner, rather than licensing the technology to them. LastMile could arrange a contract to provide finished product to Midwest, on an OEM basis. Another alternative would be for LastMile to provide product components to Midwest, who would use the components within their own finished products. A third alternative would be to license the technology, but to obtain financing from Midwest to fund the development and engineering of the products. If control over the technology and the market direction are important issues, a joint venture may be appropriate. A joint venture provides each party with an opportunity to limit risk to specific assets (Midwest–money and market access, LastMile–technology) while exploiting the strengths of the combination. An extreme alternative would be for LastMile to become acquired by Midwest, which would provide funding for product development in-house.

What are the advantages and disadvantages of these alternatives?

The advantages and disadvantages of the licensing-only option are spelled out in the case. So, too, are the advantages and disadvantages of receiving funding from ANZ. OEM Contract For the OEM contract, the advantages are that LastMile would retain the rights to the technology and would have the opportunity to develop the technology .

Business-to-Business Marketing

Case Study Teaching Notes

and products based on it into the future. LastMile could also market the products to other companies in the market or in related markets. The disadvantages are that development financing would be restricted. They could probably secure venture funding based on having the contract with Midwest.

However, this would probably be very expensive money, requiring short- to mid-term payback and at the cost of a significant portion of the company. Also, whether they build finished products or components, LastMile will have to outsource their manufacturing to be able to meet the needs of Midwest. This may drive costs above an acceptable level.

Licensing With development funding from Midwest, licensing has some attraction to it.

LastMile would get the funding needed to “productize” the technology.

However, the funding would not extend to marketing and may indeed have covenants requiring exclusivity in the partnership. LastMile would retain ownership of the technology, but would have limited growth potential.

Joint Venture If a joint venture is considered, LastMile should recognize the need to continue to push the technology envelope independent of the venture. Unless the venture could produce the cash to make this possible, this has some of the same financing difficulties as other alternatives.

Acquisition In an acquisition, LastMile would lose a good measure of control over the direction of the technology. However, the money obtained would be substantial and a degree of autonomy for the LastMile organization might be built into the arrangement. The upside potential of LastMile would be subsumed within Midwest. Also, the profit stream would substantially go to Midwest, to be used as Midwest management saw fit. Lastly, both organizations would need to think about the problems in melding two distinctly different cultures. Midwest management will see LastMile as being too loose; LastMile will see Midwest as bureaucratic.

What are the objectives that LastMile would like to accomplish out of such a partnership?

LastMile is looking to grow fairly rapidly. To be a player in this emerging market, they will need to achieve a larger size than they are now.

LastMile needs to acquire access to markets. The marketing resources of a large organization are thus attractive.

To continue to develop new technology, a degree of stability is probably a desirable state to achieve.

The people of LastMile would appear to be interested in continuing to develop the technology and develop it to its fullest potential. It’s “their baby.”

LastMile has some longevity already. Tom Sherman probably has a bond with .

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Case Study Teaching Notes

his employees. It is likely that one important objective for him will be to “take care of his people.” This means financial advancement for them, stability and probably retention of as much of the culture as he can manage.

What counter proposal(s) would you recommend?

This will depend on the students’ weighing of the alternatives. They will need to think about the intangibles in the various advantages and disadvantages and find a way to make tradeoffs.

What Happened?

In reality, the real company represented by Midwest in this fictitious case acquired the company that was the model used for LastMile. This occurred in 2000. Even though the acquisition limited the upside potential for the principals of LastMile, they probably did OK, given the technology stock collapse that occurred shortly thereafter.

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Business-to-Business Marketing

Case Study Teaching Notes

CASE NOTES: B2B E-COMMERCE IN CHINA: THE STRENGTH OF ALIBABA.COM Synopsis In 2007, Alibaba.com had its initial public offering (IPO) at the Hong Kong Stock Exchange. The company raised 1.33 billion HKD, the second largest investment offering since the IPO of Google. High hopes from the investment community have pushed the stock-price even higher since then. Alibaba’s market presence has changed the competitive landscape in China, and the leadership style of Alibaba’s founder Jack Ma sheds light on the challenges and opportunities of China’s e-commerce market.

Jack Ma is preparing to further expand his company’s offerings in China and abroad.

The question is whether such an ambitious expansion could be continued with existing strategy.

Suggested Assignment Questions 1. Does the “bird cage” theory, when applied to China’s Internet policy, constitute a serious threat to the development of the B2B e-commerce industry?

2. What is the focus of Alibaba’s business and what makes it so different from some US e-commerce companies?

3. Would Alibaba have been as successful today without the leadership of someone like Jack Ma? 4. What are the benefits of the cooperation with China Post?

5. What are the current and future benefits of the cooperation with Yahoo?

6. Is there room for Alibaba in the global race for online supremacy? What would you do to secure the future of the company?

Teaching Objectives The case is suitable for MBA-level or advanced undergraduate courses on marketing strategy and communication. It has been used successfully in executive training courses devoted to business-to-business marketing. Finally, instructors will find the case useful for illustrating the opportunities and challenges found in the Chinese market of the past few years, when business structures and legal frameworks were changing rapidly, and market dynamics were hard to predict.

Specific teaching objectives include: ⚫

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To establish the importance of developing an integrated marketing plan, one that takes into consideration the company’s overall strategic vision, leadership situation, specific market situation, company’s offering and dynamics of the domestic and international market.

To explore the challenges associated with emerging markets and new technologies. This includes challenges associated with building a portfolio of brands, managing cooperation and fighting competitive forces.

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Case Study Teaching Notes

⚫

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To demonstrate the differences between mature and emerging market environments and government influences. The case gives the opportunities to specifically look into the Chinese development of the last 10 years and to draw conclusions for other ventures.

To illustrate the competitive challenges foreign companies are facing in non-open market investments and the opportunities for local business.

This teaching note has five sections. The first section provides an overview of the China e-commerce market; the following sections concentrate on company analysis.

Situation Analysis

Business Environment: In the last 35 years, China has undergone dramatic economic and technological changes. Its political leaders are committed to the goal of catching up and achieving a leading position in the near future. Since many industries are protected by government regulations, foreign companies only have the chance to cater to the Chinese market with local partners. Since China’s entry into the World Trade Organization (WTO) in 2001, various measures have been taken to open up the country to international competition.

With its 1.3 billion people and huge differences of economic wealth in the various areas of the country, the Internet is an important tool for the liberation from geographical constraints within and outside China. Since government institutions seem unsuited to foster technological and entrepreneurial development, private enterprises play an important role in the development of technology and its commercialization.

With the emergence of the export- oriented economy in China, e-commerce has become an important business tool for the export-oriented Chinese business community. It has also opened doors for foreigners wishing to participate. Chinese companies’ advantages are based on low cost labor, low capital cost, and rudimentary environmental regulations.

Internet technology is a good example of how quickly and efficiently technology adoption occurs in China. Despite its initially rudimentary telecommunication network system and its short history, China has been quick to embrace e-commerce, enabling phenomenal growth in the sector. The best example of this would be Alibaba, which has experienced unprecedented success under the leadership of Jack Ma. The company has positioned itself as champion of e-commerce in the business-to-business sector in China.

Business Model: With modest start-up investment, Alibaba established its presence through word-ofmouth communication. The company easily integrated into the existing business activities of many small- and medium-sized Chinese companies. By offering free .

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Case Study Teaching Notes

transactions, it appealed to the low-cost mentality of the local market environment.

Step by step, Jack Ma transferred various Internet technologies to the Chinese market (see Appendix 3 in the case study): ⚫ Online trading (Alibaba International China) o B2B (Alibaba China) o B2C (Taobao) ⚫ Web-based software (Alisoft) ⚫ Search engine (with Yahoo!) ⚫ Payment system (Alipay) ⚫ And many more (see Appendix 2 key development milestones) The battle with eBay illustrates clearly the commitment and dedication for market leadership.

Why was Alibaba so successful?

The goal and following success to achieve this kind of category leadership was without precedent in China. How did Jack Ma make it happen? Students should be able to identify several factors and conditions that enabled his success.

1) Market immaturity–Internet technologies and market could not reach China until its entry into WTO. Only after this time was the country forced to enable free flow of information. Major telecommunication infrastructure investments had to be made to ensure connection to existing networks. Market maturity progressed quickly within only a few years, driven by demand from the expanding export market.

2) Product emergence–After introducing the search engines and transaction platforms, Alibaba placed many more applications in the Internet and into the market. Most of the applications were in the Chinese language catering to the fastest growing Internet community with a big window to the outside world.

3) Buy-in from investment partners–Whatever the motivation, the fact is that this is not an uncommon event in the recent history of Chinese development (refer to Warren Buffet’s investment in BYD the battery producer and electrical car manufacturer).

4) A consistent brand promise–Although Alibaba was offering various products, it never overstated its offerings and assured consistent delivery. Even after airing TV commercials, Alibaba kept its focus, that it was meeting business and individual needs through dedicated online service.

Problem Analysis By 2008 (the time the case was finalized), Alibaba had established itself as the leading Internet service provider in China. Working within the strict government controlled environment, they have found ways, in line with official regulations, to promote and support the country’s development. Alibaba’s challenge was to maneuver the company .

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Case Study Teaching Notes

through unknown waters. Most students will identify the problem as being caught between investing into the market and delivering results. However the problem is somewhat more complicated than that.

Customer demand versus revenue development: Part of the problem has to do with Alibaba’s growth. The expansion was enormous and the requirements of the customers grew; they expected 24-hour online performance all around the globe. Only after cooperation with Yahoo, where almost U.S. $ 1 billion was handed over to Alibaba to run Yahoo’s platform in China, did Alibaba have the financial resources to expand rapidly and meet its customers’ expectations. However, the money would run out at some point.

The downside of cooperation with partners: The company’s strength was, without a doubt, the cooperation with its partners.

Alibaba signed up various credit card and pay-system providers and established a strong cooperation with Bank of China. Their engagement with China Post enabled them to secure timely deliveries. Alibaba has many more partners such as Cisco and Microsoft, even General Electric (GE) wanted to promote their product and presence in China. Although the cooperation helped them to expand their service offerings, it required a large amount of management attention and demanded massive time investment by top management. Jack Ma was continuously traveling and had, in addition, many speaking obligations.

Involvement with the government: Since Jack Ma had already worked for the government, he knew and understood the dynamics in the political institutions of China, state administrations and state owned enterprises (SOEs) with their own way of decision-making. He was able to use ”Guanxi” to expand his connections, but he also had to play by their rules.

So what should Alibaba do?

By now, students should recognize that any decision regarding the business model should be viewed in the larger context of the business situation. Alibaba needs to figure out what kind of business model they should pursue to secure long-term sustainability of its venture.

As difficult as this problem may appear, it is important to recognize that it is not uncommon. During the Internet hype in the industrialized world, many companies experienced similar situations with a few survivors and many failures. So what are the options to establish a sustainable business model for the future? ⚫

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The foremost issue is the maintenance of the customer relationship. The number of buyers and sellers has to continuously increase to accelerate the Business-to-Business Marketing

Case Study Teaching Notes

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options for possible matchmaking. Many studies have shown that when the number of participants in the Internet decreases and the value they receive increases, the probability that they continue to engage with the existing partner rise.

A second way companies address the problem is by asking their partners to contribute more to their partnership, particularly in monetary terms. Not every company is open to this kind of suggestion, but just before company failure, a reliable partner may step in.

A third way is to switch to an advertisement-paying model. Google has managed successfully to cover Internet services with making advertisers and priority listings pay for their services.

And finally, there could be a mix of other options to pursue.

The point of these examples is to illustrate that Alibaba actually has a larger set of options than it is currently considering.

What did Alibaba do?

After the case was written, Alibaba changed its business model and introduced a premium membership fee for “gold suppliers.” Suppliers identified as “gold” according to their sales volume, had to pay a percentage of their revenues. The membership was voluntarily, but Alibaba strongly promoted it. A gold member could maximize their exposure with priority listings, they had exclusive access to buyers’ contact details, and the latest buying leads. Alibaba offered them real-time performance analysis of their online transactions and traffic. Businesses were offered a professional company web site and they could participate at trade shows. The major benefit was the increase of buyers’ confidence with an Alibaba verified company profile. By the end of 2009, more than half a million companies had joined from China and around the world with 36 million registered users.

Alibaba continued to expand its cooperation network. In Dec. 2009, they partnered with Xinhua, the official China news agency to provide information services on domestic and international events, industries and markets, and many more. They also formed a partnership with China Eastern Airline to promote online air-travel sales through Taobao. Taobao also established an alliance with Lenovo to sell PCs and mobile phones. Taobao had reached a market-share of over 80% in 2009 from the rapid expanding online market in China (about U.S. $ 40 billion in 2009).

The Alibaba listed group announced in the 3rd quarter of 2009 a net income of more than RMB 300 million (about U.S. $ 43 million), which was an increase of 50% yearon-year. All other performance indicators were improving strongly and the company had over RMB 6.1 billion of cash (U.S. $ 890 million) in their bank accounts.

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Case Study Teaching Notes

CASE NOTES: DOW CORNING SUCCESS IN CHINA Synopsis In 2008, Dow Corning was one of the largest providers of silicon products in the world, and the market leader in China. With its dual branding strategy, they had managed to escape commoditization and provide multiple channel access for their diverse customer groups. Due to consistent internal and external brand management, their low-end brand Xiameter was established, which was able to compete with lowcost providers and thus avoid price wars.

Growth in the silicon market has slowed down, however, and Dow Corning is now trying to decide whether to extend its market segmentation to other areas, particularly in China. The question is whether this kind of move would put the dual branding strategy at risk and result in diluting brand equity.

Suggested Assignment Questions The class assignment could be to develop a list of issues that the management is facing as it aspires to expand market presence and maintain strong brand leadership.

This will involve elaborating on brand management options and deciding how to execute in a multi-channel environment.

Challenges for the company would include the following questions: 1. How should Dow Corning make good use of its two brands to grasp the China market to sustain its long-term growth?

2. If the target companies in China cover a broad range of industries–transportation, construction, power & utilities, electronics, personal care, textiles, solar, manufacturing - how should Dow Corning map out its brand strategies and communication activities?

3. With the growing market of personal care in China, will entry into consumer products provide Dow Corning another driver to grow?

4. With increasing Internet users and a fast growing online market, what could Dow Corning do to stand out among those major B2B online service providers?

5. How can Dow Corning prevent channel conflict if its products would be available both in its own Xiameter site and China’s major B2B e-commerce sites?

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Business-to-Business Marketing

Case Study Teaching Notes

Teaching Purpose The case is suitable for MBA-level or advanced undergraduate courses on marketing communications and branding, particularly for business-to-business marketing classes.

It also has been used successfully in executive training courses devoted to industrial marketing. Finally, instructors may find the case useful for illustrating the challenges of management in China in the last few years, when brand building was still a relatively new management concept, business-to-business marketing was just evolving, and competing on price was a major way to gain market access. Specific teaching objectives include: •

To explore the challenges associated with building and managing a business-tobusiness brand. The case details the strategic planning behind the development of one of the most successful industrial dual brands in the world.

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To illustrate the managerial challenges associated with two brands and maintaining efficient operations. The dual branding strategy became the centerpiece for business-to-business and company transformation.

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To highlight the difficulties associated with maintaining one brand on the one hand and introducing another one based on the same product attributes. One of the big questions for Dow Corning is whether the existing segmentation is sustainable for the future, and if not, how the company could further adapt to it.

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To highlight a marketing challenge that students in business-to-business marketing have not experienced. Most students and executives of industrial companies have started to acquaint themselves with the principle of brand management, but this case goes even farther and introduces dual branding and the use of different business models.

Situation Analysis The sales of the specialty chemicals giant Dow Corning grew during 40 years from its early beginning in 1943 to 2003 to about U.S. $ 2.6 billion (see Exhibit 7). With the introduction of the Xiameter brand in 2001, the company almost doubled its revenues to about U.S. $ 5 billion.

This enormous expansion was based on suitable product and service offering and regional expansion. Since the joint venture between Dow Chemicals and Corning Glass Works, which is a privately held company, there are no detailed figures available for divisions and product groups. After the introduction of Xiameter however, not only sales but also the net income improved considerably, and major investments were announced, especially in the China region.

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Case Study Teaching Notes

After the initial success in the early 2000’s, net income slowed down and stayed stable between 2006 and 2007, mainly due to intensive investments.

The introduction of the Xiameter brand caught its competitors by surprise and was not duplicated by competitors such as GE Silicones or Wacker Chemie. None of them were able to make such a bold shift, because they did not have the change management in place and were not willing to take the risk of using e-commerce to drive their future growth. Thus, an important part of the case analysis involves an examination of how Dow Corning was able to make the shift happen and to expand so rapidly in China and the rest of the world.

What was the motivation for Dow Corning to introduce the Xiameter brand?

Generally speaking, there are number of reasons companies build multiple brands. For business-to-consumer brands it is a common practice to cater to different consumer needs; industrial companies favor corporate brands. Dow Corning was already the market leader; it had a competitive product and it had strong relationships with many OEM partners. So why did the management create the Xiameter brand?

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The need to drive demand. Dow Corning served many industries, and for each application there were various technological options. Silicones were one of them. When they were engineered into the products and processes they were hard to replace, and did not need the engineering support necessary for any new product development.

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Many of the mass applications in electronics or consumer care products had moved their productions to China and other emerging markets, and local supplies with appropriate pricing were needed.

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Competitive advantage derived also to a large extent from economies of scale.

The manufacturing investments were capital intensive and needed constant capacity utilization. Dow Corning’s size advantage gave it a significant engineering and manufacturing edge. However, to sustain this advantage the company was under pressure from the low-end market and emerging countries.

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The need to create branding differences and not to cannibalize existing business. Because industry applications were in different stages of the lifecycle, different customers had very different needs, and this could even be true within one customer. The Intel Corporation in Seattle needed strong engineering support for its newest chip applications and also needed large product quantities for its mass production outsourced to China.

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The desire to establish efficient market channels for customers. Engineering geared solution was in high need of direct interaction with experienced personnel from Dow Corning, and the company had established this successfully over the years. Mass producers in remote places of the world Business-to-Business Marketing

Case Study Teaching Notes

needed efficient communication and trusted delivery dates. The big investment in new IT infrastructure provided the basis for this kind of solution. A business model was needed to commercialize this. In Exhibit 5, the parameters for Xiameter are shown. They formed the basis for the new e-commerce solution.

With online ordering, they bypassed the existing direct sales force, avoided the distributors and established direct links with the industrial customers. As for market access, countries were not boundaries; shared global manufacturing sites and its expansion were the basis for reliable delivery.

TN Figure 1: Segmentation and Lifecycle Volume Innovative Solutions

Proven Solutions

CostEfficient Solutions

Marketdriven Price

Time

Compare with Exhibit 3: Two brands under Dow Corning

Students should recognize that brand creation and brand maintenance are like the two sides to one coin. By providing two brands with different value propositions, management has to make sure that they are distinctly different and create different values in the various segments.

Why was the dual branding so successful?

As stated before, the decision to establish a second brand beside an established successful existing brand was without precedent in industrial markets, particularly for a specialty chemical manufacturer. How then, could Dow Corning make it happen?

Students should be able to identify several factors that enable this management success.

1. Segment differences–Customer analysis had provided the management with insight, which clearly signaled customers’ need. After recognizing and understanding them, the opposite alternative had to be defined. .

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Case Study Teaching Notes

2. Business Model Clarity–Identifying is one thing and delivering is another.

Therefore, the company had to establish clear rules for themselves on how to deal with different customers. This leads to different front offices and organizational units. All departments had to strictly agree to the rules.

3. Brand communication–Not only customers but everybody needs to know the changes and the new offering. Intensive communication was needed to spread the word and to tell the world about the new possibilities.

4. Strong brand leadership–Since Dow Corning was a very engineering driven chemical company, top management was committed to making that change happen. Without support from the headquarters and at the regional level, particularly in China, this would not have been possible.

5. Different brand promises–Finally, students should recognize that Xiameter, as part of the Dow Corning company, had to deliver a distinct set of values to the customers. Based on quality and global supply, Xiameter offered value for money with market-driven pricing.

Problem Analysis By 2008 (the time the case was staged), Xiameter had established itself as an independent brand of Dow Corning company, and was a leading supplier in China.

Given this, what was the key problem confronting Xiameter’s marketing team in 2008?

Not too many students may identify the problem since the success of the dual branding strategy was so impressive. However, the problems are indirectly visible.

Changing segments:

Ironically, part of the problem came through the newly established segmentation selection. In Exhibit 4, the brand differences between the two brands are displayed into overlaying curves. The reduction of the unit cost and the increase of sales volume were favoring the Xiameter brand, which lead to Base Level Offering. The Dow Corning brand stood for Added Value Offering with the opposite sales volume and unit cost trends. In the middle was a space of indifference.

The instructor should let the students guess which brand customers in the middle were leaning towards and how much volume could have been related to this kind of group. In Exhibit 3, they are described as “Cost-effective Solutions.”

Commitment of organizational support and marketing communication:

Emerging markets like Brazil and China were not as affected by the global financial crisis in 2007/2008, their growth did now slow down, and demand was going strong.

Most companies in the industrial countries suffered and initiated cost-cutting programs, slowed down investments and reduced marketing communication expenses.

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Case Study Teaching Notes

Raw material prices were cut and local second-source suppliers emerged. Especially in China, competition focused on low prices.

Since margins were already low in 2007 (see Exhibit 1) the management had to face the tough choice to invest in more organization support and marketing communication.

Options Under Consideration Given Xiameter’s marketing challenges, what are the options the company is currently considering? Based on the information in the case, the company appears to be considering two changes to its marketing strategy: 1) Expand the base level offering for Xiameter to more segments, and 2) Shift the Dow Corning brand to a premium offering.

Expand base level offering:

Since the bulk of the volume of silicone is needed by high quantity operations, and efficient delivery channels have been established, customers who could benefit from the Xiameter brand offering can be identified. Most of these customers are served by the competition. If these customers could be “released” from their existing direct sales relationship and could be transferred to the electronic channel offering, the Xiameter offering could be expanded. This transfer would not be an easy one, since strong existing relations exist and conditions are different. Negative competitor reactions are possible, making this a risky proposition.

Enhance Dow Corning to a premium brand:

Innovative solutions always need costly engineering support; high prices are thus justified. The establishment of the Xiameter brand was only possible with the increase of the value offering of the Dow Corning brand. Further expansion may be possible, but requires a shift in resources and strategic thinking.

Since the recovery from the global financial crisis did not follow an example of any previous crises, it is necessary to come up with an original solution, which the student may develop by drawing an example from other industries.

What happened?

After the case was written, Dow Corning made the decision to expand its investment in China and broaden the scope of the Xiameter brand. They authorized additional funds to promote the brand through PR and personal promotion with the top management. They conducted more customer research and clustered their segmenting according to the new findings by expanding the application area for Xiameter. Tom Cook got promoted and his area of responsibility increased.

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Business-to-Business Marketing

Case Study Teaching Notes

CASE NOTES: MARKETING PLASTIC RESINS: GE AND BW Note: As described earlier, this case, when combined with Automotive Headlamps II and Makrolon: The High-Tech Material combine to demonstrate: • The different views competitors can have of their markets • Changing channels and customer value over the Product Life Cycle • Managing (or leaving) business at the mature stage of the life cycle • Strategic Business Unit management over the PLC Synopsis This case presents what we believe to be many unique study opportunities. While it involves real companies, students are unlikely to find any information via Internet or other data searches about the outcome, thus requiring some really thoughtful analysis of the information provided in the case. Borg-Warner Chemicals was a profitable, separate SBU of Borg-Warner Corporation, a major manufacturer of transmissions, transfer gear cases, and propulsion products for the vehicle industry. BW was also diversified into other businesses such as armored car security transportation services.

Shortly after the time period of the case, Borg-Warner was taken private by investors.

Soon after, Borg-Warner Chemicals was put up for sale in an effort to raise cash for the leveraged buyout. In what was rumored to be a biding war between competitors (notably GE and DuPont, though DuPont denied it), GE acquired BW Chemicals. BorgWarner Chemicals ceased to exist. GE also changed the name of Plastic Service Centers to “Polymerland,” effectively eliminating any identification with the prior organization (this created some interesting product line changes, discussed later in this case note).

Borg-Warner was eventually taken public again, re-christened as Borg-Warner Automotive. Internet searches will reveal that the new BW has no involvement with the plastics industry.

Learning Objectives • • • •

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Recognize that marketing channel design changes over the product life cycle.

Recognize that different market segments may require a very different channel design to meet customer needs of form, time, place, and possession.

Understand that different organizations can see the same market differently when viewed through their own culture and paradigm.

Understand the use of a Field Market Development (FMD) team.

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Case Study Teaching Notes

Case Analysis There are really four logical outcomes of this analysis, only two of which students will identify easily. These two outcomes are: 1) Supporting the BW position and recognizing distributors as a valid marketing channel for plastics; and 2) Supporting GE in the continued use of direct channels (Note that students will often overlook that BW continued to use direct channels for larger customers, effectively segmenting the market by customer purchase volume and variety sought).

To entice students to look beyond these two obvious solutions, I point out that there is at least “one solution, perhaps an opportunity, in Exhibit C3-1.” Here are those possibilities.

3) If students support BW and believe it has the correct channel for plastic resins, and they understand the value of industrial distributors, they should see the possibility of another distributor. Though simplified from the real situation, the products of the companies shown in the exhibit can be combined to create an adequate product assortment in all categories (such as the combination of Amoco, Dow, and Monsanto products would create, particularly since, in the case, these companies do not have distributors to serve smaller customers).

This scenario was, in fact, the approach taken by Ashland Chemicals when they developed General Polymers into a nationwide distributor of thermoplastic resins. Today, General Polymers is one of the primary competitors of Polymerland. Interestingly, Ashland was not looking for distribution for its own products, but recognized the business opportunity presented.

4) The fourth outcome is the acquisition of BW Chemicals by GE Plastics. Without the buyout/refinancing of BW, this would not have been a likely scenario.

Management at GE Plastics was strongly committed to their sales teams and their efforts to develop larger markets for their products. Thus, the cultures of the organizations did not readily support a vision of a combination.

Discussion Questions The discussion questions at the end of the case are designed to be thought provoking for students rather than specifically answered in their written analysis. By discussing these questions among group members (or if individual assignments, it may be appropriate to devote part of a class to an exchange of ideas) students often discover details that they might not otherwise see.

1. From the information provided, describe the market environment as viewed by GE and BW. Are both views the same (consistent with each other), or are they different? If they are the same views of the environment, why are the approaches to the market dramatically different? If they are different, which view do you feel is more useful? .

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The market as viewed by GE and BW is consistent for large customers, but significantly different for smaller customers. An effective case analysis should segment the market by size and variety of plastics purchased. GE may not have recognized the unique needs of smaller users, particularly if the buying patterns that were considered included only GE Plastics offerings.

2. Consider customer needs as viewed by GE and BW. Do they see needs as being the same? Are they segmenting the market the same? Have they targeted the same segments? Are they interested in the same market?

Obviously, these competitors have not segmented the market in the same manner, though they do approach many common customers.

Large customers are approached similarly–molders get direct sales representation and specifying influences receive missionary sales/field market development attention.

3. Does selection of target markets impact channel design?

This is obviously a major learning objective of the case. The fact that BW has a very good design in PSCs for smaller customers and GE uses a very effective design for larger customers, which the rest of the industry (including BW) attempts to emulate. Is an ideal solution possible?

4. From what you can discern in this case, describe and compare the goals of BW and GE. a. How do their goals impact their channel structure? b. Do their goals impact how they view the market? Are their views realistic? c. It may be of assistance to consider how their goals and market view compare to others in the market, such as DuPont. Are certain channel structures more suited to certain goals?

A hard-line answer to this question would be that GE saw customers through its own needs and goals–growing the market. General Electric is a market share-driven company. To better understand circumstances behind this question, it may help to recognize that GE was, by some standards, a “newcomer” to the engineering plastics market.

DuPont, among others, always had brand recognition in the industry and was an early pioneer in plastics applications. However, by the time of this case, GE Plastics had surpassed DuPont in the sale of engineering thermoplastics (when products used in fibers is excluded–this distinction was always one of contention) through their aggressive added-value .

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Case Study Teaching Notes

focused market development efforts. The FMD team of the GE organization was a major contributor to this growth.

5. Consider the service mix BW and GE intend to provide. Relate these services to promotion strategy and marketing functions. Is the mix of services consistent with their and/or your view of customer needs?

The GE service was strongly slanted towards larger customers, particularly from a design and application development viewpoint. BW seemed similar, but better appreciated by smaller customers. Whether this was consistent with the market’s needs can lead to a lively class discussion.

6. What role does the FMD specialist play in the marketing organization of GE? What potential conflicts do you see in the dual field structure of GE (having both field market development personnel and field salespeople in sales territories)? Consider all viewpoints–the custom molder, the plastics end user, and the individuals serving as either FMDs or salespeople.

In Chapter 11−particularly the development and uses of the Marketing Operations Forecast−and in Chapter 12–in which the role of the relationship/value creator is discussed–the text describes in general terms the role of field marketing personnel. In this case, students should be sensitive to the potential conflicts from different viewpoints.

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Custom molders found less flexibility when contracting to provide components to a customer who had worked with GE. Particularly prior to the time when specifying influences developed “or equivalent” material specifications, molders were unable to find alternatives and were forced to pay “list price” for GE Plastics products.

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Most end-users (specifiers) were pleased with the assistance provided by the field marketing team. This did, however, change later in the PLC and may have been one of the motivating factors in GE Plastics move to distributors. Customers became very knowledgeable about the products, particularly as the products moved nearer the maturity stage. There was less need for customer education and “handholding.” The development of “or equivalent” specifications accelerated during this period.

Business-to-Business Marketing

Case Study Teaching Notes

CASE NOTES: AUTOMOTIVE HEADLAMPS II THE PARADIGM SHIFT FROM STANDARDIZED GLASS SEALED BEAMS TO TODAY’S PLASTIC CUSTOM DESIGNS Note: As described earlier, this case, when combined with Marketing Plastic Resins: BW vs. GE and Makrolon: The High-Tech Material combine to demonstrate: • The different views competitors can have of their markets • Changing channels and customer value over the Product Life Cycle • Managing (or leaving) business at the mature stage of the life cycle • Strategic Business Unit management over the PLC Synopsis This case provides an excellent basis for discussions of: • How innovations are viewed differently by different stakeholders • The difference between Market Ownership and market share leadership • How marketing myopia can cause a major supplier to lose significant business at a major customer

How innovations are viewed differently by different stakeholders

Competitive pressures in the automotive industry push manufacturers to keep styling and design fresh and innovative. It was a natural evolution for Ford to move to plastic headlamps (“forward lighting”). The existing glass sealed beam headlamps were the only remaining lamp on the vehicle that did not incorporate the separate bulb and envelope design practice. As vehicle designs began to stress aerodynamics, the flat surface of the traditional glass sealed beam headlamps were considered limiting, both aesthetically and functionally. This change to plastic/aero lamps was, to Ford, a natural progression−an incremental innovation.

On the other hand, the General Electric Lamp Division, the leader (by volume) in the market for most types of lighting, saw the plastic aero lamp as a major challenge. Not only did it incorporate a halogen lighting element that GE Lamp was not ready to produce in volume, they had recently rebuilt the manufacturing lines that produced the glass seal beam. Departing from the existing product would be a major disruption for the division.

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This case was originally presented as “Automotive Headlamps” in our first business-to-business marketing book. After several semesters of classroom use, the case has been re-written to clear up some areas of particular confusion to students. To begin with, the case starts out with descriptive backgrounds of the major players. The names of different divisions of the respective companies have been clarified and reduced in number. As a result of some of the changes for academic clarity, the corporate structures may not be as accurate as the previous version of the case. The changes have made the case more clearly understood by students. .

Business-to-Business Marketing

Case Study Teaching Notes

The difference between Market Ownership and market share leadership

GE Lamp was the market share leader in lighting – most all types. Certainly in the automotive market, GE Lamp either supplied the major share of headlamps (Ford, Chrysler, others) or supplied glass subassemblies to other headlamp manufacturers (Guide Lamp Division of General Motors). GE Lamp was very good at producing glass headlamps at the lowest possible cost. They believed (driven by accounting and finance we suspect) that it was in their best interest to stop, or at least slow significantly, the introduction of the plastic aero lamp. The GE Lamp sales organization was put in the position of telling Ford that it was wrong, the aero lamp was a styling gimmick, the lamp wouldn’t work, it wouldn’t meet safety standards, and so on; rather than working with the customer in a joint development.

Had GE Lamp been operating as a market owner, they would have recognized the “next generation” of products in the automotive market. Ford saw GE Lamp as its lighting supplier/partner with significant expertise in lighting technology. GE Lamp saw themselves as a seller of glass sealed beam lamps.

Disruptive versus incremental innovation

How marketing myopia can cause a major supplier to lose significant business at a major customer

GE Lamp grossly underestimated the Ford determination to innovate forward lighting.

After some initial joint development (which GE had successfully completed long before Ford became involved), GE Lamp backed away from the project. Ford was left without a lighting supplier for the new lamp. In the long run, GE Lamp would lose most all of its OEM business at Ford as a result of this. While GE Lamp and GE Plastics might have been two different SBUs of one corporation, Ford viewed them as one entity. GE Lamp actions put the entire GE Value Image in jeopardy at Ford. Ford was forced to develop their own Value Network to complete the project.

Case Analysis−What really happened Ford did go ahead with the project. They “drafted” Sylvania, a supplier that was eager to enter the automotive headlamp business and saw this as a major opportunity.

Faced with the demand of a major customer that they work with a third party, GEP eventually provided plastic technology assistance through Ford to Sylvania, who took on the lighting challenge (up to this time, Sylvania had not been a major factor in automotive lighting). Ford eventually manufactured the plastic components in its own facilities. Ford had started a major disruptive innovation in the automotive lighting industry.

With the driving force of styling and positive durability test results, Ford Motor Company, its internal champion and a growing group of allies built the confidence necessary to take the next step: a fully integrated, plastic unit designed to fit and complement the desired style of a new model. The 1984 Lincoln Continental Mark VII was the first American car to have flush, aerodynamic plastic headlamps. This created .

Business-to-Business Marketing

Case Study Teaching Notes

a unique appearance, gave the Mark VII a distinctive “face,” and created a competitive advantage.

Still, it should be noted that since it was the first North American car to use flushmounted, aerodynamic styled headlamps with replaceable bulbs, Ford took a significant risk. The integrated plastic headlamp concept was not fully approved at the time this car was designed, so to play it safe, Ford had a dual program as a backup.

With significant added expense, Ford built prototypes of this car with the new lamps, as well as with conventional rectangular glass sealed beam units as well. Fortunately, all approvals were in place in time for actual production to begin as planned.

Ford became convinced that they had a leading competitive advantage. Now, the door was open, and proliferation came quickly. Ford began designing and specifying “aerodynamic headlamps” on their new models. Included were the first generation Taurus and Sable (one of Ford’s most effective new vehicle platforms in current times), the Tempo and Topaz compacts, Windstar minivans, and many to follow.

Harder and more durable coatings for lenses were also developed and implemented.

In order to stay competitive, Chrysler, GM and others followed suit. The GEP Detroit and HQ people worked closely with their counterparts in Europe and Japan to lead the translation of this new business and make sure that GEP captured the resultant materials business generated. European OEM’s gradually moved to plastic, despite the objections of their glass-oriented suppliers. Japanese manufacturers, who typically used glass sealed beams, gradually converted as well.

Today, the business that resulted for GEP (and later, other suppliers of polycarbonate and competing plastics) generates more than $100 million of sales annually. GEP captured and maintained leadership in this segment, and, until the sale of the Plastics group by GE, enjoyed the majority share of the plastic headlamp business. The additional business that resulted for the manufacturers of the actual headlamp units added hundreds of millions of dollars⎯not counting the replaceable bulb capsules for OEM and aftermarket use.

Innovation Leads to Industry Structural Change Of particular note is that the change from glass sealed beams to plastic replaceable bulb headlamps caused a structural change in the headlamp supplier community.

Though GEP benefited significantly, GE Lamp did not embrace the ideas of either halogen bulbs or plastic construction⎯despite being first with the plastic unit on the 1980 Lincoln! As a result, GE went from being the dominant supplier of automotive headlamps in the U.S. to a small player⎯with essentially no OEM business, and a declining share of the aftermarket.

Sylvania, who had previously not made headlamps, became a major supplier. Ford’s Sandusky, OH plant, already manufacturing and supplying its parent other lamps in plastic, began manufacturing plastic headlamps to supply increasing Ford demand. As .

Business-to-Business Marketing

Case Study Teaching Notes

more vehicle lines went to the new look, independent lamp suppliers began filling demand at Chrysler, who was quick to follow. GM and its Guide Division dragged their feet for a while, then began to convert models⎯first with replaceable bulb “composite” designs using glass lenses bonded to plastic reflectors/housings⎯then later with all plastic designs.

Today, vehicle-specific plastic headlamps with replaceable lamp capsules are the norm on most vehicles throughout the world. At a recent meeting of the IDSA (Industrial Design Society of America), a panel of automotive design managers concurred that today’s automotive designs have de-emphasized the grille, and emphasized unique headlamp designs, which have become the “eyes” and more of the “face” that gives the vehicle its character. Plastics have made this possible.

Incidentally, at the end of that meeting between GEP and the Department of Transportation, the GEP representative asked why this discussion hadn’t happened before between DOT and a vehicle manufacturer. The official replied, “Usually they come down here to Washington with a bunch of lawyers and engineers. So we match them with our lawyers and engineers. We have a big meeting, but nothing really happens. You came down here by yourself, asked a few questions, and proposed a course of action. The two of us had a good talk, and decided to do something.”

Key Factors of Success There were several key factors that led to this success. Among them were: • The operating premise of the key GEP people involved was that such innovation in the creation of new applications for the company’s products was expected, necessary, desirable, possible and would be rewarded; (GEP had a culture of Market Ownership while GE Lamp fell into the myopia trap).

• A few, dedicated marketing and technical people (in Detroit and HQ) that had the belief, desire, commitment, creativity and tenacity to achieve their goal; • The questioning of assumptions and conventional wisdom; • Finding, developing and supporting a champion at the target customer; • Meeting with each constituency/stakeholder inside and outside the vehicle manufacturer to determine the reality base of assumptions, e.g., styling/design, product planning, marketing, engineering (product, advanced, materials, safety, etc.), purchasing⎯plus SAE, DOT and NHTSA; • Refusing to take “no” (or “we don’t do it that way,” or “you can’t change that”) for an answer; • Following up and addressing every objection; • Determining the real benefits to the customer, and to whom, within the customer organization; • Learning and understanding the customer’s organization; • Mapping and weighing the influences, deciding on who could benefit most and become the “customers within a customer;” • Taking an unconventional approach, visiting and understanding all influences involved; .

Business-to-Business Marketing

Case Study Teaching Notes

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Citing both the benefits and limitations openly, and addressing both; Identifying, recruiting, supporting and working closely with a champion at the vehicle manufacturer (an advanced engineering manager involved with lighting); Obtaining and utilizing the resources available within the company (time, money, people); Securing political support within management to sponsor the activities and offset negative political issues in other parts of the company that disagreed with the strategy; Focusing on getting a lead application, on one new vehicle, at one vehicle manufacturer⎯then rapidly translating the success to other vehicles and manufacturers.

Lessons Learned • • • • • • • • • • •

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Dedicated resources, committed to their goal can achieve it.

Conventional wisdom is conventional, but not necessarily wise.

Assumptions are to be constructively challenged.

“It can’t be done” can be overcome with “Why not?” and “We can.”

Identify the real benefits and to whom. That’s where the sale is.

Pick the most likely target and concentrate efforts there.

Focus on getting a first, visible, market-leading application⎯then repeat and translate it as quickly as possible.

Increased cost can be overwhelmed by more increased benefits.

Impossible is an opinion, not a fact.

Innovation was rewarding to GEP and the key people that made it happen.

Message to incumbents: As Peter Drucker once said, “Defending yesterday⎯that is, not innovating⎯is far more risky than making tomorrow.”

Business-to-Business Marketing

Case Study Teaching Notes

CASE NOTES: MAKROLON: THE HIGH-TECH MATERIAL Synopsis In 2001, having experienced other companies such as Intel, Microsoft and Gore-Tex gain market success through Ingredient Branding, Bayer AG opted to apply this concept to their Makrolon brand. More than 40 years after its market introduction, the popularity of polycarbonates was still high, but the increase of raw material cost and competition prompted management to take this step. In doing so, questions about suitable marketing concepts and the future of the whole business unit were raised.

Suggested Assignment Questions Since the industry is currently restructuring itself, the instructor is advised to become familiar with current developments to prepare for the “what happened” part of the case. The following questions could be used: 1) What was the original motivation behind Bayer’s decision to launch the Makrolon Ingredient Branding concept?

2) What factors were responsible for the success and failure of the efforts?

3) What was the brand promise and how was it materialized?

4) How did they manage the Ingredient Branding concept and what other options does the management have?

Teaching purpose This case can be taught effectively to business bachelor, MBA or executives in marketing courses that stress brand decisions, particularly in business-to-business marketing, but also High-Tech Marketing, or Marketing of Innovations.

The specific teaching objections include: • •

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To explore the challenges associated with building and managing an Ingredient Brand. The case analyzes the situation of the chemical industry and elaborates on the management decision related to that.

To illustrate the challenges for the management in relation to industry developments and the chosen marketing strategy. Makrolon had been marketed for many years as a purely business-to-business brand, the new concept created a different situation.

To highlight the difficulties associated with brand recognition and brand strength. Since only a small portion of the polycarbonate usage was sold as branded product, discrepancies were unavoidable.

Business-to-Business Marketing

Case Study Teaching Notes

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To highlight a crucial decision making process that students are rarely asked to make. Most students are very enthusiastic when asked to develop positive growth plans for the future, but sometimes, it is also necessary to say no and stop a project that is not living up to its full expectation.

Situation Analysis Many students are familiar with the success of the Ingredient Branding campaign of Intel and have the tendency to assume that success is possible for every industry and that all management have the capacity to carry out such a campaign. Unfortunately, this is not the case. As we know from other successful examples, the following criteria exemplified in TN Figure 1 have to be met.

TN Figure 1 Requirements for InBrands Requirements for InBrands ⚫

The performance of the ingredient is substantial to the function of the final product.

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The ingredient differentiates the final product from those of the competitors by adding exceptional functional performance.

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The relationship between the brand and the ingredient brands varies in relation to the development stage.

In the Intel Ingredient Branding example, many outside experts were critical of the success of their innovative marketing concept. The same could be said for Makrolon; in this case, the inside management showed strong resistance, since a chemical company is mainly geared only to be concerned about capacity utilization and distribution optimization. Brand management does not belong in the realm of a typical chemical company. Therefore, it is interesting to find out what the motivation for the Makrolon promotion was.

From its invention in 1953 until today, polycarbonates have become a major part of people’s lives. They are widely used in the modern chemical industry and have very unique features: ⚫ ⚫ ⚫ .

Temperature resistance Impact resistance Transparency Business-to-Business Marketing

Case Study Teaching Notes

These features distinguish it from commodity plastics like PVC (polyvinyl chloride) or PU (polyurethane). The uniqueness may have inspired the management to define them as a basis for differentiation to customers.

Avoidance of commoditization may have been another reason. According to the case, a large number of competitors are present in the market. The biggest competitor is GE Plastics, with the brand name of Lexan. Lexan was also invented in 1953 and has been dominating the U.S. market. Even though Makrolon stayed out of the U.S. market, heavy competitive pressure from Asian and Latin American suppliers may have prompted the ingredient brand development from Bayer as a counter measure.

In which areas was Makrolon successful?

Bayer AG was marketing Makrolon for almost 50 years as an industrial product when they decided to choose an Ingredient Branding concept. The concept was applied in the following selected areas: ⚫ ⚫ ⚫

CDs/DVD Sports goggles Disposable medical products

They selected only a few partners for joint promotion; the case names less than 10 industrial partners that manufactured final products with Makrolon. The Material Science division of the Bayer AG provided them with promotional information and allowed them to use the logo depicting the Bayer cross, which was well known to the final customer due to the world famous aspirin. This case highlights the win-win intention of the partners, although it should be noted that there was no financial contribution by Bayer.

Creating a unique selling proposition: There is no doubt that Makrolon created a notable awareness in the market with the three selected product areas shown above. The case states that 31% awareness in Europe was achieved. However, did the awareness materialize in a sizable pull effect?

The answer is not given in the case, but if you start calculating the “non-brandpromoted” applications of Makrolon, students may easily figure out that the pull effect could only be marginal.

Value Chain Enhancement: The case particularly highlights the example of the UVEX Winter Holding, a company that is very well known to the final customer through its sports division, which manufactures and distributes sunglasses, goggles and helmets for skiing, cycling and .

Business-to-Business Marketing

Case Study Teaching Notes

other fun sports. Their brand mantra is “protecting people” and Makrolon is the material of choice for their sunglasses and helmets, etc. With a very dedicated approach to sport sponsorship, they reach millions of viewers during high profile events. The Makrolon ingredient supported their overall marketing effort, and the material enhanced their value creation.

However, when analyzing the value chain contribution in other examples with different partners, it is not as noticeable that Makrolon is the crucial ingredient. It becomes inconsequential whether Makrolon or other polymers with similar specifications were used.

Issue Analysis

By August 2006, before the global financial crisis (the case was written in 2007), Bayer AG had one of its best years. The turnover grew over €20 billon and Makrolon Science Division had net external sales for the first time of more than €10 billion (see Appendix Fig 2). A major part of this turnover was generated by Makrolon. However, when oil prices began to rise, the bottom line was heavily affected since the main source of raw material was crude oil. The EBIT of the Material Science division dropped by 25% that year (see also Appendix Fig. 2).

Consumer demand also started to diminish and Makrolon showed real signs of weakness. The bigger challenge came from a more surprising side. GE sold its plastic division to Saudi Arabia’s SABIC and helped to create an integrated petrochemical powerhouse1. With direct access to the main raw material, crude oil, the new conglomerate had many means to offer value to its customers. Lexan’s leading position in the U.S. was unchallenged and with new ownership, they had opened up new regional areas for growth. Other competitors, not just Makrolon, were also negatively affected.

Makrolon’s Value Chain Position: As stated before, Makrolon enhanced the value creation for its customers in only a few cases. When students analyze the usage of polycarbonates in their day-to-day products, like mobile phones, computers or cars, they may realize that Makrolon is often used as a component that ends up in systems or gets integrated into the final product, losing its recognition. For illustration, see Fig. 7 of the teaching note.

1 The purchasing price for GE plastic on May 21, 2007 was $11.6 billion. GE plastic had revenue of

about $6.6 billion in 2006. .

Business-to-Business Marketing

Case Study Teaching Notes

TN Figure 2 Value Chain Position Makrolon

Makrolon

Raw Materials Supplier

Components supplier

System Supplier

Final Product Manufacturer

Consumer

Intel Compared with Intel, Makrolon’s position in the value chain is at least one position farther away from the final user and therefore, the impact of its product performance is much less visible.

Options Under Consideration After evaluating the internal and external factors for the support of the Ingredient Branding program, there appears to be two extreme options for the Bayer Material Science Division: (1) step up the Ingredient Branding efforts, (2) look for alternative roads to success.

Step up Ingredient Branding efforts: As shown in Fig. 6 of the case, there are ample possibilities to use Makrolon in the final customers’ product. The picture shows sports equipment, shoes, clothes, etc.

Other application areas like medical equipment or automotives probably have similar potential. Currently, Makrolon is already being used in many of these applications, but they are not branded to the final customer. Makrolon may have the potential, but does Bayer have the means (including the management potential) to make this happen?

Other options for consideration: In principle, there are numerous options that the management can pursue. In many other areas of Bayer’s offering, they are moving up the value chain and expanding their coverings to more value added offerings, which means more investments and long term commitment. It is also possible to go back to business-to-business branding and reduce involvement with the final customer; a pure commodity approach with minimum marketing engagement.

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Business-to-Business Marketing

Case Study Teaching Notes

What Should Bayer Material Science Do? By now, students should recognize that any decision regarding branding to the final customer needs specific knowledge about value chain dynamics and the likelihood that the management can create the pull effect in order to make the Ingredient Branding concept successful.

Some students will point out that financial involvement may be necessary to really create a win-win situation. They may also stress that establishing a viable competitive position at a lifecycle stage soon entering saturation point may not be desirable.

Other students may think that the overall strategy concept of the Material Science division may have to be reconsidered.

What Happened?

After the case was written, Bayer Material Science made the decision to abandon its entire ingredient branding efforts to the final customer and cut all marketing expenses. The marketing department was closed and the employers moved to other divisions.

Now, the company only concentrates on business-to-business selling and focuses on selected industries: construction (roofing, glassing and floor mats) automotive (headlights, etc.) medical technologies (corrective eye glasses and lenses), nutrition (water bottles and containers), data storage (CDs, DVDs), and sports equipment. They also revitalized their sheeting for roofs and green houses, which are sold as commodity by the meter.

In the aftermath of the financial crisis, capacity had to be reduced and the processes streamlined.

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Business-to-Business Marketing

Case Study Teaching Notes

CASE NOTES: SENSACON INCORPORATED High Technology Evolves to High Volume “Capstone Case” Sensacon is a composite of the continuing examples throughout the textbook. Starting in Chapter 8, the development and growth of the fictitious company are used as examples of the application chapter material in the real world. The reader is led through each step and event faced by the company. In effect, the textbook is the teaching note for this case.

The complexity of Sensacon makes it possible to apply the case in many different ways, providing you with basic elements to focus on the particular area your students/market and personal experiences dictate. Therefore, we have not created a specific “solution” to the case.

At the end of the case composite, Allen Chen, the new CEO of Sensacon, challenges his team with the question “What are your ideas on how to defend our brand and grow the company significantly and what future challenges face Sensacon?”

The case composite stops with this challenge. However, in the chapters, the Sensacon story continues. Any plan addressing the challenge of the new CEO should contain elements of the following:

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Re-branding for better identity. The brand name “SensorSUV” is not very descriptive. In the textbook, the name is replaced with the more descriptive name InflationGuard. The revised branding better identifies the product by what it does and more easily allows extension to beyond the SUV market.

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Channel development, including channel member education, to meet the needs of the OEM, service, and aftermarket accessory market segments (dual distribution) is essential. Students may be surprised at the amount of effort required in the development of a product for consumers that was originally marketed in high volumes to industry. While the core product remains the same, price, place, promotion, form and time all must be tailored to the individual segments.

Consider comparing the learning curve of Sensacon to the experience of Apple with the Lisa computer (opening vignette, Chapter 14).

Consider using Exhibit 14-2 (a & b) and Exhibit 14-8 to encourage the discussion of the many channel flows and functions that must be considered and the expenditures necessary to be successful. Discuss if Sensacon should own their own channel, use an Administered system and so on.

Business-to-Business Marketing

Case Study Teaching Notes

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Promotions: Chapter 15 discusses some of the promotional needs of Sensacon. Sensacon’s use of trade shows and PR have been important to the company’s positioning strategy. Now, different tactics will be necessary (leave behind materials for sellers, web development suitable for consumer use, etc.).

Sensacon is a case that you can tailor and focus to your particular situation. Most of the fundamentals are included throughout the textbook. Almost any topic discussed (make or buy, intellectual property rights, direct sales versus manufacturers’ representatives−or both−depending on channel and so on) can be applied to the case.

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Business-to-Business Marketing

Case Study Teaching Notes

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Business-to-Business Marketing

Chapter One Introduction to Business-to-Business Marketing

Authors’ Comments This chapter sets the tone for the book. Three areas emphasized in this chapter are: • Application of the marketing concept in business-to-business marketing.

• Development of the concept of value and the total offering (rather than “the product”).

• Comparison between business-to-business marketing and consumer marketing.

The application of the marketing fundamentals to business-to-business marketing may seem basic, however we are continually surprised at how many undergraduate marketing majors and MBA students forget this idea. The chapter starts with a brief review in the context of business-to-business marketing. We move quickly to reinforce the understanding of customers’ needs, meeting the needs with coordinated activities and doing so in a way that meets organizational goals.

The concept of Value and the Value Chain is introduced. The value chain works as a framework for thinking about how to structure marketing strategy and why. While the implications are simple they are also profound: the ideas of core competencies, market segmentation, positioning, channel management, branding, setting prices and many others all find important guidance from the value chain notion (and from the idea of the value network, built upon the value chain concept). Thus value and the value chain are important concepts to get across as they form the foundation to the “total offering,” a framework of value for much of what follows in the book.

Most students come into their first business-to-business marketing class with an understanding of what it is to be a consumer. Unfortunately, this understanding gets in the way of recognizing the interrelated activities that make things happen in business-to-business marketing. Much of this chapter deals with the unique aspect of business-to-business as compared to consumer markets in a way that assists students in making the transition.

Finally, the idea that the environment for business-to-business marketing is changing fast and becoming more complex is introduced. In this context, the principles of marketing provide an anchor for student understanding and a beginning point to apply them in new contexts.

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Business-to-Business Marketing

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Chapter 1: Introduction to Business-to-Business Marketing

Opening Vignette

FedEx Kinko’s vs. The UPS Stores

The opening describes the expansion of transportation competitors FedEx and UPS into retail locations for mailing and some copy services. FedEx acquired Kinko’s, the copy and printing service chain, and UPS acquired Mailboxes, Etc. Through the acquisitions, both companies created a new bundle of services, particularly for small business clients. The market did not settle down after this−Staples, Inc., expanded their in-store services, adding the availability of office supplies to competition. Core concepts of dynamic markets, new segmentation strategies and competitive value offerings illustrate many of the core concepts to be expanded in later chapters.

PowerPoint 1.2: Business-to-business marketing defined.

Learning Objective Reinforce the Basics of Marketing from your Marketing Principles Course.

With a good grounding in marketing principles, Chapter 1 should be fairly easy for students to understand on their own. All marketing anticipates and measures needs and wants of buyers, whether service buyers or actual product purchasers.

A marketing response to needs and wants is always in the form of goods and/or services to satisfy perceived buyer needs, and the “after-sale” element of marketing is critical for future planning, goals and objectives.

PowerPoint 1.3: Shows the marketing mix as a set of ingredients into an offering/solution.

PowerPoint 1.4 - 7: Definitional slides for each of the “4ps.”

Product Price Place Including Economic Utility: Form, Time, Place, Possession Promotion (Communications) Including Advertising, Sales Promotion, Personal Selling and Public Relations Learning Objective Gain an appreciation for the main differences between consumer marketing and business-to-business marketing.

Exhibit 1-1 summarizes these differences. Each portion of the exhibit is displayed on PowerPoint slides 1.8 - 15.

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Business-to-Business Marketing

Chapter 1: Introduction to Business-to-Business Marketing

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Chapter 1: Introduction to Business-to-Business Marketing

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Concept of Derived Demand The Acceleration Principle (Bullwhip Effect) is an important concept in businessto-business marketing. A thorough discussion can use conditions in the economy as examples. Nothing happens until the consumer buys something.

(PowerPoint 1.16) Exhibit 1.2 discusses the impact of the Ford/Firestone tire recall and its impact through the supply chain all the way to the rubber plantations.

Learning Objective Understand the Marketing Concept and its Implications for Businessto-Business Marketing.

Relationship marketing, central to business-to-business, becomes more distant in consumer marketing via media communications rather than interpersonal.

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Complexity–A Rationale for Relationship Marketing Opportunities Through Relationships Consider asking students how and where they shop. Do they always return to the same store and/or sales associate for assistance? Do they count on these sales associates as a resource and expect recommendations that are of benefit to both parties? Are they confident that value is created for both parties? Can a sale at a competitor distract them from this loyalty? Most likely, students will not have established relationships with consumer sellers.

Market Structure Consumer instincts, conditioned by mass marketing approaches, are often contrary to business-to-business marketing logic.

Consider a discussion of the evolution of competitive types over the Product Life Cycle. Using the PLC as an anchor is repeated throughout this text.

Integrated Versus Networked Supply, Brand Identity Discuss sourcing decisions Exhibit 1-3, Networked Versus Integrated Supply (also PowerPoint 1.17), shows recently introduced cars and component suppliers. Notice how few of the component suppliers are household names and how many of them supply the same or similar components to customers that compete with each other. As a base, note that the supplier list for the 1990 Ford Crown Victoria, a car that has undergone only minor changes since its introduction, is heavily dominated by vertically-integrated Ford supply operations. In the past 15 years there has been a trend to reduce dependency on vertically integrated supply chains, lowering fixed costs and increasing flexibility. The 2005 Ford Escape has a more diverse supply base.

Some International Considerations Business-to-business products are subject to the same politics of tariffs and other trade barriers. However, many materials, supplies and components meet standards that are agreed to and consistent across international borders.

Consider a discussion of international standards organizations and Business-to-Business Marketing

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Chapter 1: Introduction to Business-to-Business Marketing

professional groups. PowerPoint 1.18 lists some organizations.

Steel, plastic, pulp and paper products, chemicals and electronics industries have technical standards that are applied worldwide.

Organizations such as the International Standards Organization (ISO) have created a common language to define and specify the technical performance of manufacturing and quality systems.

Compliance by suppliers with many of these standards has become a requirement of many global firms.

Learning Objective Understand the meaning of value.

Have students examine their perceptions of “value” in terms of things they purchase and the actual + physical costs they incur compared to a product that is specified as to content, size, weight, etc. and purchased in volumes. Ask the students to think in terms of economic utility–time value, place value, form value, exchange value, etc.

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Evaluated Price (PowerPoint 1.19) Discuss the total cost of owning and using the product. This may include transportation, inventory carrying costs, financing costs, potential obsolescence, installation, flexibility to upgrade, cost of failure, and obsolescence of existing products or equipment, plus the price paid to the vendor. Note that consumers have the same considerations, though they are more easily distracted by “a deal.”

The Total Offering PowerPoint 1.20 shows the “total offering” as a piece of a puzzle—the puzzle that must be understood by the business-to-business marketer as potentially different for each customer.

Learning Objective Gain a sense of how the value chain is structured and how it is related to the concept of a supply chain.

Some students seem to have difficulty dealing with the value chain concept and the inherent importance of every element from start to finish and throughout to generate true overall “value.”

Consider a discussion where students name the portions of an organization (HR, Operations, Sales, Product Development, Facilities Management, etc.).

Ask which of the named parts of the organization do not contribute value.

Exhibit 1.4 and PowerPoint 1.21 describe the value chain.

Exhibit 1.6 and PowerPoint 1.22 show a conceptual chain of suppliers.

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Chapter 1: Introduction to Business-to-Business Marketing

Learning Objective Gain an understanding of the implications of the value chain for business-to-business marketing.

Exhibit 1.5 and PowerPoint 1.23 show the combined value chain and total offering. Of particular note is that the customer and the supplier that created the total offering may perceive it quite differently.

Learning Objective Obtain a sense of the changing nature of the business environment.

PowerPoint 1.24: Trends and Changes in Business Marketing Hypercompetition Formation of Partner Networks Adoption of Technology and the Internet Supply Chain Management Time Compression Key Terms bullwhip effect business marketing business markets channel facilitators consumer demand derived demand discontinuous demand economic utility elasticity entrepreneurial marketing evaluated price form four Ps hypercompetition inelastic (demand) marketing concept outsourcing place possession supply chain supply chain management switching costs time time compression total offering value value chain .

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Chapter 1: Introduction to Business-to-Business Marketing

Answers to Questions for Review and Discussion 1.

Describe the differences between business-to-business and consumer marketing for the following market elements: products buyer behavior decision making Products differ by typically being larger in quantity and total purchase value, and they are generally used in the creation of another, final product in business-to-business. Consumer products will probably have only a few ancillary features, such as a warranty or a service contract. Business-to-business “products” are often more complex, with features that include customization, installation, testing, training, spare parts, financing, etc. Often product features blend into attributes provided by the other elements of the marketing mix, so thinking in terms of a total offering is often more useful than thinking in terms of products.

Buyer behavior in business-to-business markets tends to involve several people in the decision process, often including professional purchasing personnel, and may seem less emotional than consumer behavior because task motives tend to predominate in business purchases. Business buying behavior is often tied to relationship selling from the vendor. Buying behavior in business-to-business is often more systematic in that it is established by specifications to manufacturing needs, reflects specific manufacturing timing needs and generally has less tolerance for deviation in the form of what is purchased/received.

Customer decision making in business-to-business marketing often progresses in somewhat observable stages, focused on the satisfaction of organizational needs. Conversely, decision making by consumers seldom moves through observable, quantifiable stages and is often focused on the satisfaction of individual, personal needs.

Referenced from Exhibit 1-1: Business Products: • Can be technically complex • Customized to user preference • Service, delivery & availability very important • Purchased for other than personal use Consumer Products: • Standardized • Service, delivery & availability only somewhat important • Purchased for personal use Business Buyer Behavior • Professionally trained purchasing personnel • May involve several individual members of the Buying Center - Functional involvement at many levels • Task motives predominate Consumer Buyer Behavior: • Individual purchasing • Family involvement, influence • Social/psychological motives predominate Business Decision Making: • Must satisfy specific technical needs • Must satisfy organizational needs • Progresses through somewhat observable stages Consumer Decision Making: • Seldom technical in nature • Primarily focused on subjective, personal needs • Stages of process difficult to quantify and observe

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Describe the differences between business-to-business and consumer marketing for the following market elements: market structure channels promotion Market structures in business-to-business markets often follow the 80/20 rule, with few buyers−an oligopoly−that consume a high percentage of products. Additionally, businesses will tend to cluster where other similar businesses are located, taking advantage of alreadydeveloped infrastructure and support facilities and businesses. Conversely, consumer markets are mass markets with many buyers, geographically dispersed, where product attributes differentiate offerings. Markets are in monopolistic competition.

Channels in business-to-business markets are more direct, with fewer participants acting in a highly coordinated manner. Consumer channels have many levels in an attempt to provide a wide variety of economic utility needs. Many relationships are indirect, and seldom is the consumer involved in the channel design. In fact, it can be said that the ideal situation is where the channel design is “invisible” to the consumer.

Promotion in business-to-business markets relies heavily on personal sales, establishing and maintaining relationships through dialogue. Communications in business-to-business markets are targeted, not generally seen by mass markets. Consumer markets are dominated by advertising, a less personal monologue. Messages are broad based, seldom involving the specific needs of an individual.

As with question 1 above, reference Exhibit 1-1.

3.

Describe the difference between derived demand and consumer demand. How does the leveraging phenomenon occur?

Derived demand starts with consumer demand for goods and services. To create these consumer products, businesses must obtain goods and services themselves, which are translated into the final consumer products. Thus the demand for business-to-business goods and services is derived from and dependent on consumer demand. Because there is a long chain of suppliers who create goods and services that eventually result in the final consumer products, business activity is leveraged from the initial consumer demand. Changes in demand for consumer products result in changes in demand across a wide range of business-to-business markets.

4.

What is the difference between value as perceived by the customer and value as perceived by the supplier?

Value as perceived by the customer is the sum of the benefits, less the sum of all costs, monetary and otherwise, that are incurred with the purchase and use of the product. Value can be unique to each customer. Value as perceived by the supplier, without the appropriate marketing focus, can be construed as that value that provides benefit to the supplier. The supplier’s marketer must understand value as perceived by the customer, so that the offering can be constructed to provide superior value to the customer. The supplier also obtains value from the customer, as well, in that profit is obtained and establishing a relationship with the customer may create the potential for future profit.

5. .

We learned in economics the difference between elasticity and inelasticity.

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What is meant when we say that business-to-business demand is inelastic in the short term and discontinuous in the long term?

Business-to-business demand is inelastic in the short run and discontinuous in the long run because a purchasing manufacturer has incorporated the product into the manufacturing run, may not be able to substitute without discontinuing production against specifications; it is discontinuous in the long run because it is generally a purchase made against other criteria to manufacture against specified demand.

6.

Ultimately, who is the long-term benefactor of application of the value chain?

Explain your answer.

The long-term benefactor of value chain application is ultimately the purchasing customer, but every stakeholder in the chain benefits due to the adherence to the concept of creating superior value for the customer.

7.

Considering all of the elements of evaluated price, would value to the customer's customer be a major consideration? Why or why not?

When a business buys a product, the benefit received by the business is defined by how much the product contributes to the value the business provides to its own customers. So is the product worth the evaluated price? It is if value to the final customer is greater than the evaluated price.

8.

How is value created in the transaction process?

Value is created in the transaction process as both buyer and seller recognize increased value as a result of the transaction. Without this creation, there would be little motivation to partake in the transaction.

9.

As consumers, how do our "shopping instincts" make it difficult to understand business-to-business marketing philosophy?

Consumer “shopping instincts” are often based on emotional needs/wants, individual interpretations of value, issues attributed to peer/social pressure, to who we are, where we are, and how we are versus the business-to-business necessity to buy against specified criteria of price, quality, availability, delivery, etc. Because of the emotional basis and a subjective interpretation of value, our instincts as consumers often make it difficult to fully “see” the business-to-business process.

10.

What factors can contribute to a customer remaining with a particular supplier even though lower-cost substitutes may be available?

Customer retention in business-to-business in the face of lower-cost substitutes can be enhanced by the vendor’s recognition of buyer perceived value in less tangible areas such as technological support, just-in-time stock holding, ongoing participation in problem-solving and overall confidence in the supplier as a partner in the success of the customer.

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What factors contribute to the decision to outsource versus vertically integrate?

How does proprietary technology affect this decision?

In the formative years of an industrialized economy, vertical integration was a necessity−Edison invented the light bulb but also had to invent the socket as well as develop the generation and distribution of residential electricity. Henry Ford required volumes of steel and glass that were not available from other sources, requiring him to develop his own iron mines, steel mills and glass factories.

In a post-industrialized economy, businesses have several alternatives. Whether to outsource or produce internally can be based on Availability of capital funds Ease of business entry/exit Mission of organization Volumes necessary to develop economies of scale Patent or proprietary positions of processes and designs And so on.

Vertical integration can be seen as a drawback in rapidly changing industries. A manufacturer that is highly integrated may enjoy economies of scale and control of supply of essential materials and parts, but may be adverse to innovation in the market that would obsolete the integrated facilities.

12.

Discuss the bullwhip effect. How can management of the supply chain reduce the volatility produced by the bullwhip effect?

The bullwhip effect (short-term) and the accelerator effect (long-term) can be better managed through improved and accurate communication between supply chain members not only about short-term events but about long-term plans as well. Since all changes are based on consumer activities, every supply chain member should be aware of the changing conditions in the consumer markets where their materials and components are ultimately consumed. (Know your customer’s customer!) The entire channel must recognize the real costs of stock outs and JIT inventory procedures.

13.

Discuss the relationship between evaluated price and value and the importance of that relationship to both suppliers and buyers.

Evaluated price is the total cost of owning and using the product. This may include transportation, inventory-carrying costs, financing costs, potential obsolescence, installation, flexibility to upgrade, cost of failure, and obsolescence of existing products or equipment, plus the price paid to the vendor. Less quantifiable factors, often attributed to the value of a particular supplier, include the supplier’s reliability, their capability to jump in when there is a problem, their commitment to the customer’s industry and market and so on. These factors are often developed and ensured by ongoing relationships where both organizations are impacted by the same risk/reward relationship. The trusted and committed supplier brings much greater value to the exchange than the new, inexperienced, or unknown supplier, regardless of quantifiable price.

14.

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How can a company gain competitive advantage through supply chain management?

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A supply chain is the chain of entities and activities that results in products provided to endusers. It starts with raw materials and traces the flow of materials and subassemblies through suppliers, manufacturers and channel intermediaries to the final customer. In the eyes of most organizations, supply chains are stable, yet flexible enough to meet varying market demands.

Competitive advantage through supply chain management will vary depending on customer needs. A very large customer may require dedicated supplier facilities located adjacent to its own facilities, virtually eliminating any risk associated with logistics. A smaller customer without the leverage provided by high volume needs may need centralized distribution centers where many suppliers cooperate in efficient logistics to serve the customer. Supplier flexibility, a willingness to provide value when, where, and how each customer demands it, can provide significant competitive advantage.

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Chapter Two Business-to-Business Environment: Customers, Organizations and Markets Authors’ Comments This chapter provides additional background for understanding the context of business-to-business marketing. Also, it provides a way of looking at the context for a given business–a way of classifying customers and markets–that helps in the marketer’s first pass at understanding the business environment. Classification of the competitive market and customers does not, in and of itself, provide enough information for the marketer to create effective strategy. However, it provides a sense of the constraints and drivers that will tend to shape the behavior of customers and competitors. The marketer will then need to develop more refined information about the environment to guide the development of marketing strategies and tactics.

The value network concept expands beyond the idea of the value chain to include partners and supply chain dynamics (Exhibit 1-6), making it more useful for today’s business-to-business environment. What was once vertical integration strategy is now, often, the more flexible approach of collaboration among several partners to create a complex offering. The collaborators form a network with the goal of satisfying a particular set of customer needs. For each new customer, the new network may or may not be comprised of the same value team as the last collaboration. In recognition of this new integration flexibility, the value network concept helps frame the partnership relationships within a market. This network framework aids in understanding who competitors are and their strengths and weaknesses, and in understanding customers and how they create value for their own customers. It is also valuable for the marketer in deciding how to flesh out an offering and determine who should be approached as partners to create superior value for customers.

The product life cycle (PLC) and the technology adoption life cycle (TALC) help the marketer understand the dynamics of the market. While it is difficult to predict when a market will change in nature, the life cycle concepts help the marketer understand how the constraints and drivers will tend to evolve when the market does change.

We have found that when given a central reference point, students are more easily able to interrelate many of the concepts of business-to-business marketing. The PLC and TALC serve as part of this central reference point–a “hub” or an anchor−to understand the interrelationships of many elements of the marketing mix.

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These concepts will form the basis for many of the ideas that come later in the book, particularly the concepts surrounding innovation, competitiveness and marketing strategy construction.

Opening Vignette

TRW Automotive operates in multiple categories

This opening discusses the many markets of TRW Automotive. TRW operates in OEM, aftermarket, and service channels with products that range from airbag sensors to braking systems. Each market involves a unique set of customers, though the core product may not change.

As an example, consider TRW braking systems. These systems are sold to vehicle manufacturers, usually co-designed with the vehicle manufacturer to meet the specific requirements of the intended vehicle. Quantities are large, and the commitment may extend over several years and/or models. In this case, the vehicle manufacturer is the end user. The same components will be demanded by the service industry when the necessity of repair or replacement occurs. An independent garage or repair shop will not need a large quantity of any one component but will require a great assortment of components to service the many different vehicles, manufactured in many different years, brought in for service by the shop’s customers. The end user in this instance is the shop owner or vehicle owner. This channel must deliver a large assortment of several different components, rather than a large quantity of a small assortment. The core product, brake parts, has not changed but the relationship that TRW has with the vehicle manufacturer is direct, while the relationship with the service provider is distanced by several channel intermediaries. Each market segment has very different expectations of services associated with the products. The different markets require very different total offerings. As such, TRW marketing must focus not on product categories, but on customer value.

Learning Objective Understand the Different Kinds of Business Customers.

Business exists in many shapes and forms. An understanding of the different kinds of businesses and the markets they serve will assist in understanding the varied environments in which business-to-business marketing operates.

Additionally, recognizing the variety and impact of external issues related to this business will greatly enhance the ability to plan and strategize appropriately.

Kinds of Organizational Customers (PowerPoint 2.2 shows all) An understanding of traditional business patterns reveals that organizations and markets evolve over time to meet the value needs of customers in an environment that’s always changing.

• Commercial Enterprises (PowerPoint 2.3) .

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o Industrial Distributors (PowerPoint 2.4) o Value-Added Resellers (VARs) (PowerPoint 2.5) o Original Equipment Manufacturers (OEMs) (PowerPoint 2.6) o Users or End Users (PowerPoint 2.7) Government Units (PowerPoint 2.8) 85,000 local, state, and federal units (1998) More than 35% of GNP. (More recent data shows significant growth) Largest consuming group in United States Nonprofit or Not-for-Profit Organizations (PowerPoint 2.9) Hospitals, churches, colleges, nursing homes, etc.

Learning Objective Understand the Different Categories of Business marketers.

Just as there are several types of businesses that purchase goods and services, there are several categories of organizations that work to satisfy those businesses. The goods produced can be a method to classify business organizations.

• Producer Types (PowerPoint 2.10) o Raw Materials Producers (PowerPoint 2.11) o Component Parts and Manufactured Materials Producers (PowerPoint 2.12) o Capital Goods Manufacturers (PowerPoint 2.13) o Accessory Equipment Suppliers (Power Point 2.14) (Not detailed in the text)

Accessory equipment suppliers are companies that make equipment that works with some other equipment. The accessories may be added to a bundled offering by a systems integrator, VAR, or other channel intermediary of some kind; they may be added to a bundle offered by an OEM; or the business customer may purchase them separately. Some examples of accessory equipment include clean room supplies for semiconductor manufacturing, floppy disks for computers, and telephone headsets for businesses’ telecommunications systems. In most cases, the supplier of the primary product or service does not make the accessory equipment because an independent supplier can make it more quickly with higher quality or for less cost.

Customer Needs Influenced by Classification of Markets Some students may have been in marketing principles courses that defined raw materials as limited to the raw form of materials as removed from their natural state (iron from mines and so on). This limitation does not serve to help understand customer behavior.

Consider whether or not a “component” remains in its final form and is identifiable as that component after use by the customer or whether it has been molded or formed into an entirely different identity. The appliance manufacturer stamps a sheet of steel sold by a Steel Producer into the housing of a refrigerator. The steel is no longer recognizable as .

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the product sold by the steel company. The customer (appliance company) purchased the steel as a “raw material,” though the steel company sold it as their end product.

Conversely, when a computer manufacturer purchases a disc drive for inclusion in a desktop computer, the drive is still a drive after application by the customer (computer company). The computer company purchased the drive as a component, incorporating it “as is” into their product.

Buyer behaviors and the associated decision process are often different based on whether the buyer sees the purchase as a raw material or a component part.

As a general rule: If the purchaser maintains the final form and function of a purchased item, it can be considered a “component.” If the purchased item is no longer identifiable, it can be considered a “material (raw or otherwise).”

Learning Objective Gain an appreciation of the different kinds of competitive market structures and their effects on buying behavior.

Classifying the Business-to-Business Market Environment • Publics (PowerPoint 2.15) • Financial Publics, Public Interest Groups, Internal Publics (PowerPoint 2.16) • These public communities are o not direct participants o have interests because of economic or societal effects of activities o should often be considered as stakeholders in the buying center The Macroenvironment (PowerPoint 2.17) • The Demographic Environment: Issues that fall into this section include o Demographics of “your customers’ customers,” to fully understand what drives your customer decisions o The age of a firm, which may relate to its business model or attitude toward risk and innovation o The size/standing of the customer in its market o Customer locations–often industries of similar type locate near each other to take advantage of common labor pools and other business services unique to their particular industry (Automotive–Detroit, HiTech/Semiconductors−Silicon Valley/San Jose, CA, Austin, TX, etc.)

The Economic Environment Applying the Accelerator principle/bullwhip effect, the economy impacts consumer willingness to spend. .

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The Sociocultural Environment • Just as in consumer markets, different industries may have “cultural preferences,” the way a company or an industry does business.

The Natural Environment • A large impact on business−refer to the text example of McDonald’s switch from foam to paper packaging.

The Technological Environment • Rapid changes in technology can obsolete a firm’s way of doing business.

Consider beginning to tie together Marketing Myopia with firms that resist new technology or stay with an older technology rather than innovate. Note the text examples of vacuum tubes, mainframe computers and instant/digital imaging (Polaroid). This may also be an appropriate time to introduce Market Ownership−covered in detail in Chapter 5.

The Competitive Environment (PowerPoint 2.18 lists the types) Exhibit 2-1 describes the four common forms of competition.

Discuss the 80/20 rule; oligopolies are natural examples—80% of a supplier’s sales volume is likely to come from 20% of its customers.

Learning Objective Understand how the value chain concept is extended by the value network concept and by the special case of integrated supply chains.

Value Creation Value Networks and Supply Chains Value Creation and the Value Chain, (Exhibit 1-5 and 2-2, PowerPoint 1.21) are generally discussed from the view of one organization. This part of the book extends the concept to “Value Networks and Supply Chains.”

Value Networks (Exhibit 2-3 and PowerPoint 2.19) can be viewed as an alternative to vertical integration, based on the combined notions of rapidly changing markets and hypercompetition. The Value Network business model is common in Silicon Valley as it avoids the costs associated with development of vertical/internal supply.

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Exhibit 2-1: Competitive Forms in Business-to-Business Markets Pure Competition • Many buyers and sellers exist with no single entity having much effect on the price – no leverage positions. The market is significantly larger than any one entity (buyer or seller).

• Generally exists in commodities, such as raw materials and agricultural products.

• Price is a major component of the marketing mix and products are not differentiable, thus sellers seldom deviate from the market-clearing price.

Monopolistic Competition • Many buyers and sellers but product is differentiable such that a range of prices is possible.

• Products can vary in terms of quality, features, style, and so on, such as in specialty steel fabrication or in advertising services.

• Branding, advertising, personal selling, and so on, important to differentiate branding.

Oligopolistic Competition • Market consists of a few sellers who are highly sensitive to each other's strategies.

• Products can be uniform or non-uniform. Typical examples include autos, airlines, steel industries.

• Few sellers exist because of barriers to entry.

• Price has often been aimed at maintaining stability (note chaos in airline industry).

Pure Monopoly • Consists of one seller.

• Examples are Postal Service; utilities; and, before government action, Standard Oil. • "New" competitors to the products and services provided by this group (such as windmill power companies), are generally small, niche players indistinguishable (or barely visible) in the market.

The Network model has many advantages/disadvantages, among them: Advantages: • Rapid development; ability to change partners as markets and technologies change.

• Minimal investment in infrastructure.

• Flexibility–not bound to a particular facility after it is obsolete (but before fully depreciated!)

• A natural alternative for a market owner, but not for a share driven company.

Disadvantages: • Potential conflicts of interest, as flexibility allows a firm to have many partners, particularly when one firm has a key portion of a total offering and more than one Lead Collaborator, in a competitive situation with other potential networks, seeks that technology to serve the same customer.

• No direct control or ownership over critical elements of the network or supply chain.

• Less opportunity to take full advantage of economies of scale.

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Learning Objective Reinforce and extend your understanding of the product life cycle and its impacts on business-to-business markets.

Learning Objective Introduce the technology adoption life cycle and its implications for targeting and positioning.

Changes in Markets Over Time Both the Product Life Cycle (PLC) Exhibit 2-5 (PowerPoint 2.20), and the Technology Adoption Life Cycle (TALC) Exhibit 2-6 (PowerPoint 2.21) are discussed.

The PLC serves as a hub or anchor that most concepts are related to throughout the text. Discuss the PLC noting the changes over time not only impact sales revenue. Why the sales revenue changes is important. In this context, the different stages of the PLC can be related to customers with different needs and attitudes, particularly with respect to innovation.

When the TALC and the PLC are superimposed on the same grid, Exhibit 2-7 (PowerPoint 2.22), students should be able to see that, as the product becomes mature, the number of new users declines while the PLC shows that sales continue (for a period) to previous adopters.

Key Terms capital goods chasm culture demographics end user industry standard macroeconomy market development gap monopoly monopsony oligopoly original equipment manufacturer (OEM) product life cycle (PLC) publics technology adoption life cycle (TALC) tornado user value added resellers (VARs) value networks .

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Answers to Questions for Review and Discussion 1.

What are some of the differences between marketing to typical commercial enterprises and marketing to government agencies?

Differences in marketing between typical commercial companies and government agencies will generally recognize that government agency purchasing can be subject to more public scrutiny than commercial firms. Creating value to government units is likely to involve the meeting the interests of a more diverse set of stakeholders than for business customers. The buying center may be geographically dispersed as many agencies may be involved. The needs of the customer may include a social agenda as well as political objective.

2.

Classify the following businesses as VARs, users, component producers, or raw material producers. a. A supplier of copper to a wire manufacturer b. A supplier of rear axle assemblies to a heavy truck manufacturer c. A distributor of private telephone exchange equipment (PBX) and installation services d. A supplier of pigments to a paint manufacturer e. A maker of automated assembly equipment f. A supplier of small motors to disk drive manufacturers a. b. c. d. e. f.

3.

raw materials producer component producer value-added reseller (VAR) raw materials producer capital goods manufacturer components producer

How can the agenda and focus of financial publics and public interest groups create seemingly opposite goals for business-to-business marketing managers?

Opposing goals of financial publics versus public interest groups will run the gamut of responses concerning economic gains versus public or social well-being. A firm that recognizes its responsibility as a corporate citizen will consider the long-range societal impact of its actions as well as its short-term financial results. In this modern economy, it is not unusual for a firm to work with/partner with as many interested parties as possible to create an overall acceptable solution.

4.

Defend the validity and importance of internal publics.

The company’s human resources make it possible to perform the necessary activities within the value chain. If these are not performed well, the value produced by the company is degraded.

Internal publics are the people within the organization most of whom have an interest in the performance of the firm. If the organization does not meet the needs of these internal publics, they can react by not doing the activities in the value chain that need to be done. Additionally,

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each and every member of the firm has the opportunity to represent the firm in a positive manner thus enhancing the value represented by the firm.

5.

How can market-sensitive internal publics improve a firm’s competitiveness?

If the internal publics have an interest in pursuing the strategy of the firm, if they know how to pursue this strategy, and, often, if they have the authority and capacity to make improvements themselves to strategic initiatives and to their execution, then they will tend to take actions that improve performance. If they are customer oriented then many of their improvements will tend to result in more value to customers. A market-driven firm can instill a sense of ownership on the part of each individual that can contribute value to the total offering.

6.

Should technology play a major role in your approach to your customers? Why or why not?

In business-to-business marketing, the marketer can get caught up in the product’s technology.

This is reinforced as the marketer markets to technophile and visionary customers. Once the market evolves to the point where the marketer needs to address pragmatists, the marketer must understand that the technology becomes secondary to the benefits or solutions that the customer/organization will receive. Marketers and sales personnel need to make sure that the benefits are truly valuable to pragmatists and that communications are couched in terms that focus on these benefits. Relationships built on technology can be subject to the technology’s obsolescence.

7.

How do oligopolies support the 80/20 rule?

Oligopolies support the 80/20 rule in that 80% of a vendor’s sales volume is likely to come from 20% of its customers−the largest volume customers. This requires marketing strategies and tactics that focus heavily on these customers and often require strong, collaborative relationships.

8.

Describe the areas of validity and fallacy associated with the study of the PLC.

9.

What market characteristics make it unlikely that pragmatists will easily follow the role model of visionaries?

validity more relevant at category level anticipates general behavior offers general guidance only

fallacy differences between products and firms impacted by individual firm strategies not predictive between stages

Pragmatists generally need to have two things in place before they will adopt. They need the existence of a fully functional offering that has been proven to work. Secondly they need assurance that offering has been tried successfully and that adoption represents a minimum of disruption to their operations. Visionaries are not good references for pragmatists because they adopted the new technology before it was formed into a fully functional “whole product.” They generally created just the disruption within their organizations that the pragmatists hope to .

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avoid. Consequently, pragmatists do not have anyone to look to as a reference at first, thus contributing to the chasm. Note Question #6, above.

10.

Relate the PLC and the chasm, with particular emphasis on the market factors that undergo change from introduction to rapid growth of an offering.

The chasm generally occurs very early in the growth period of the product life cycle. The chasm−the period in transition−occurs because pragmatist buyers are not yet satisfied that a “whole product” exists or has been proven. Marketers have not yet found and developed the segments in the pragmatist market that are most likely to adopt. Until they do, the growth part of the product life cycle will not take off. After pragmatist buyers begin to buy, the suppliers of the new products much undergo rapid and wrenching changes internally. The supplier must shift from a start-up to a growing company, with procedures more standardized and more “professional” management. This can involve several cultural as well as structural changes. As markets grow, the firm may embrace a decentralized decision structure, develop an infrastructure to achieve economies of scale, and redesign the offering in face of new economic realities of competition and high volume. Outside the organization, the competitive environment will change as more competitors enter the market that has now been demonstrated to exist.

Many of the company’s employees may find that their skills are more adaptable to smaller organizations and may elect to leave; at the same time, the organization must recognize that the skills required of employees in a growth-oriented, high volume company may not be possessed by the current staff.

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Chapter Three Organizational Buying & Buyer Behavior Authors’ Comments This chapter presents the concept of the buying center and the buying decision process that one would normally expect in a chapter on organizational buying behavior. We present the traditional 8-step buying decision process and as a process with four stages, rather than the numerous steps often depicted. We did this because the step-wise progression of the process varies from instance to instance, whereas the stages can usually be identified, even in straight rebuy situations.

Two concepts are added here that we think are not always well presented or documented. First is the idea that the buying organization and the individuals of the buying center have needs that are evident during each stage of the process. These needs relate to the end-product, but are specific to the stage of the process. For instance, a semiconductor manufacturer buying new process equipment will need prototypes to test and integrate into its manufacturing process designs. Production planning engineers may need time and assistance in doing new facility designs. These needs occur during the process and will need to be fulfilled before a final product is delivered, and perhaps before the final product is even finished.

The second concept concerns the role of emotion in the buying process. The initial inspiration for this book owes much to Paul Sherlock’s book, Rethinking Business-toBusiness Marketing (New York: Free Press, 1991). Sherlock noted that buyers often make their decision very early in the process based on a visceral reaction to the supplier’s initial value image. The rest of the process is an objective rationalization of that initial decision. We have tried to capture this idea in this chapter and examine some of the consequences.

In all, the nature of organizational buying suggests to the marketer that building relationships where possible and early involvement in the customer’s decision process will tend to create customer value and win business.

Opening Vignette

Covisint: Illustrating the Importance of Adapting to Customers’ Buying Behavior

Covisint was the ill-fated attempt by the auto industry to join forces and use the Internet to lower costs. It is a classic example of what not to do in an industry where relationships are important and complex and customers and suppliers are intensely .

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competitive.

Early in 2000, Morgan Stanley Dean Witter (MSDW) proposed a combination of the marketplace exchanges established by Ford Motor Company and General Motors.

MSDW, estimating that the resulting exchange would have tremendous purchasing power, forecast purchases through the exchanges by Ford and GM, combined, would be around $600 billion. MSDW argued that an independent exchange would attract additional automotive companies to join and that that such an operation could be worth $10 billion in five years as a separate company on the stock market.

By 2002, GM, Ford, and Chrysler (then part of Daimler), had invested $200 million in the project. Twenty-five other companies, including Toyota, Nissan, and many top Tier One suppliers had joined. Unfortunately, the system was not universally accepted by suppliers and, in fact, Ford and Chrysler had continued to invest in their own systems.

By 2004, Covisint had been through four CEOs, fought issues of technology compatibility between technology suppliers and been sold to Compuware for $7 million (that’s right−million!).

Pundits who initially heralded the project blamed the industry for not getting past their rivalries. While there may be some truth to that, most had ignored the fact that approximately 80 percent of all automotive purchases were based on “intellectual collaboration” and contained significant proprietary content. In hindsight, it’s not hard to see that the collaboration and proprietary relationships existing in the auto industry would not lend themselves to an online process. The Web holds much promise as a productivity tool in business-to-business marketing, but it was not able to replace relationships.

Learning Objective Develop an understanding of the difference between quantifiable organizational needs and the often qualitative process used to fulfill those needs.

The intricacy of business-to-business purchasing decisions is often not fully understood. Organizations have complex sets of needs. A Buying Center member−a professional in a department of the customer’s organization−responsible for that discipline’s portion of the problem/solution creation, will view the task from the needs of that particular discipline. The view is limited to the specific needs and responsibilities of that part of the organization. The final selection of the solution/supplier is only possible when the needs and views of all stakeholders are combined.

PowerPoint 3.2: Consumer Decision Process The emphasis shown in the slide is that, in reality, this is not a sequential process, although students will “memorize” it as such.

Consider a discussion of the informal sources of information (and logistics events) most consumers use for the majority of purchases. Have students .

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consider the number of individuals (usually few or one) impacted by the decision. Compare this to the scope of an inappropriate purchase decision in a corporation.

To reduce the impact of an incorrect decision (reduce error, risk, costs) and to ensure that all stakeholders in the organization receive satisfactory value from the purchase, the business-to-business buying process is more formalized.

Learning Objective Understand how organizations develop and satisfy the requirements for selecting and maintaining relationships with suppliers.

The Buying Center Exhibit 3-1 (summarized in PowerPoint 3.3) The buying center—a collection of individuals with a stake in the buying decision. Members of the buying center determine, within their own professional responsibilities, the organization’s needs and the methods the organization uses to satisfy them. Buying center complexity changes depending on the complexity of the need.

Major Differences, Organization Buying vs. Consumer Buying (PowerPoint 3.4) • Involves more buyers–more decision makers or contributors to portions of the decisions.

• Participants (stakeholders) in the buying center are driven by the specific needs of their professional responsibilities.

• Different types of decisions are often occurring simultaneously in the process, spread throughout the buying organization.

Learning Objective Gain an appreciation for the different levels of complexity of decisions made in the buying process and how the business-to-business marketer can influence the process.

This learning objective is central to the theme of this chapter.

“Traditional” Business-to-Business Buying Decision Process (Exhibit 3-2 and PowerPoint 3.5) Emphasize again that this is not a sequential process, but a “list” of activities that can provide opportunities for interaction with customers.

Learning Objective

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Understand how individuals within organizations develop and satisfy the requirements of their professional responsibilities as dictated by their organizations and, within that framework, their own individual needs.

Consider a discussion of each of the following points (PowerPoint 3.6) that contribute to the intricacy of the process: • Interaction is fluid, broad based • Process is simultaneous, not sequential • The “track record”−the quality of relationships will influence whether a supplier is considered in the “evoked set” at the very start of the process • Relationships build loyalty Buying Center members try to meet three kinds of needs in the decision process. (PowerPoint 3.7) • Organization’s Needs Benefits of the product or service to the organization.

• Individual’s Needs Based on the individual’s role in the Buying Center and the expected professional activities/functions of the job.

• Individual’s Personal Needs Career, quality of life, recognition, and so on will influence decisions.

Learning Objective See how the supplier/customer relationship is the principal defining factor in the success of business-to-business marketing efforts.

Students are often suspicious when told that relationships and not price are the most significant factors in business-to-business decision making. While price is important, past experience with a supplier and the extent of recognition of common goals contribute to the selection and subsequent success of the supplier decision.

Process Flow Model (PFM) of the Organizational Buyers Decision Process The traditional, or stepwise model of the decision process can be misleading in that it defines activities as discrete steps and overlooks the value of relationships.

The PFM attempts to demonstrate the interaction and fluidity of what really happens in organizational buying decisions.

Exhibit 3-3 (PowerPoint 3.8) shows the stages of the PFM and how they .

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Exhibit 3-3: Stages in the Process Flow Model of the Buying Decision Process (PowerPoint 3.8) Process Flow Stages Definition Stage (PowerPoint 3.9) • Problem definition • Solution definition • Product specification Selection Stage (PowerPoint 3.10) • Solution provider search • Acquire solution provider(s)

Deliver Solution Stage (PowerPoint 3.11) • Customize as needed • Install/Test/Train End Game Stage (PowerPoint 3.12) • Operate solution • Reach end result • Evaluate outcomes • Determine next set of needs

Buying Decision Process - Steps • • •

Problem recognition General need description Product specification

• • •

Supplier/Source Search Proposal Solicitation Contract for supplier(s)

•

Make the transaction routine

• •

Evaluate performance Resell the job

relate to the traditional process. Subsequent PowerPoint slides 3.9 through 3.12 elaborate on each stage.

PFM Stage 1: Definition The extent and seriousness of the “problem” or opportunity are determined.

The first attempt at describing a solution is prepared. The intricacy of the solution and the number of organizational units to be involved (size of the buying center) is determined.

New task, modified rebuy, or straight rebuy is determined.

Consider a discussion of supplier involvement at this point. This is the stage where most successful suppliers will get involved. If the task is a new buy, members of the buying center may have a “favorite” supplier for that type of project. A modified or straight rebuy will likely include the existing suppliers.

A discussion of “defending supplier” may be appropriate. Which type of purchase is a defending supplier at the most risk?

Generally, the existing supplier is most vulnerable in a modified rebuy. Even the customer has modest concerns about a supplier, a straight rebuy situation is unlikely to justify the time and expense to evaluate a new supplier, particularly if things are going along in a “satisfactory” manner. However, the modified process will allow for greater evaluation of existing sources (the supplier you know versus the supplier you don’t?).

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The meaning of a Specification Marketers should be weary of specifications unless their organization contributed to the development. From a customer viewpoint, the specification is an attempt to make all potential suppliers equal. The specification works against differentiation.

Through participation early in the decision process, a supplier has an opportunity to contribute to the development of the specification, hopefully leading the customer to an internal standard or brand.

PFM Stage 2: Selection Discussion of RFQ/RFP practices may be appropriate. However, if there has been a favorite supplier candidate through the process, the selection may be a foregone conclusion−even if the customer is unwilling or unable to acknowledge it!

Public Sector Purchasing: The relationship process desired by marketers in the private sector may not be acceptable in the public sector. Discuss with students the need to fully understand how the customer prefers to make the decision−how much help they want!

It may be appropriate at this point to emphasize that the most appropriate total offering, rather than the lowest price, usually wins.

PFM Stage 3: Solution Delivery This stage has significant supply chain implications.

This may be a good time to discuss many of the issues that led to the demise of Covisint.

• Industry leaders, enamored with web technology and attracted to inflated estimates of cost savings, ignored the way 80 percent of buying decisions were made.

• Tier one suppliers were required to join. They balked because they feared loss of competitive advantage.

• Potential cost savings were highly overestimated.

• All participants were required to give up their own systems–the way they buy−and adopt Covisint system.

PFM Stage 4: End Game This is not the end of the process, but the beginning of the next opportunity for the supplier to serve the customer.

The buyer must match the routine logistics of the customer. There isn’t any room for “we don’t sell that way” (within legal and ethical bounds).

The idea of “resell the job” might be discussed, noting several factors.

• Buying from any particular supplier should not involve additional steps or consume additional time–the process should be differentially invisible to the customer.

• The customer’s evaluation of the supplier is ongoing. The success of .

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the mutual effort is now in continuous review.

• The supplier should use every opportunity to reinforce the validity of the buying center decision. The relationships are ongoing, and contribute to “being in the right place” for the next opportunity.

• Exhibit 3-4 describes a typical rebuy situation. A summary is provided in Exhibit 3-5 and PowerPoint 3.13.

• Exhibit 3-6 describes a typical new task situation. A summary is provided in Exhibit 3-7 and PowerPoint 3.14.

Exhibit 3-9 and PowerPoint 3.15 show the evolution of the decision process from a new task to a straight rebuy. A more complex evolution that starts with a straight rebuy is shown in Exhibit 3-10 (PowerPoint 3.16).

You might consider a full discussion of Exhibit 3-10 as an optional topic. This may be useful for an extended discussion of points of supplier vulnerabilities if all is not going as the customer expected.

Learning Objective Gain an initial sense of the concepts of trust and commitment in effective relationship development.

An Examination of the Human Factors–the Variability of Rational Decisions • Objective means may be used to narrow choices, but cultural, interpersonal, and relationship needs make the final decision between otherwise equal suppliers.

• A review of “the facts” is often done because business culture expects it. There is safety in “doing it the way it was supposed to be done” even though the selection was already made.

• Individuals seek reinforcement for their beliefs in every factor presented to them.

Mutual Dependence and Customer Loyalty • Value Image (PowerPoint 3.17) A thorough discussion of value image may be appropriate, as the concept is used throughout the book.

Value Image: the total of all impressions that a customer has of the firm, is a very powerful motivator–perhaps because so much of an individual’s beliefs about a firm, situation, or occurrence are based on forgotten experiences. While the concept of value image is more obvious in consumer markets, it has application in business-to-business markets as well.

Rationalization: The text describes two different outcomes to the same business problem (buying new office computers) depending on personal attitudes and beliefs. Students may relate more closely to the car purchase example−you can rationalize a GT Convertible as easily as you .

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can rationalize an economy car. A good discussion to see if the students have done the reading!

Key Terms buying center internal brand modified rebuy new task process flow model request for proposal (RFP) request for quotation (RFQ) Stakeholders Straight rebuy Value Image

Answers to Questions for Review and Discussion 1.

Contrast the consumer buying decision process with the organizational buying process.

The consumer buying decision process generally satisfies the needs of the individual in his or her personal and family roles and may seem less rational, more emotional and can take significantly less time than organizational buying. Organizational buying relies on specifications, often more stringent price analysis and involves greater quantities. Consumers and organizations go through roughly the same stages in their decision processes. The purposes differ, though. More people are involved in organizational decisions, the process is generally more rigorous, and organizational buying satisfies a diverse set of needs, both subjective and objective, emanating from the many stakeholders involved.

2.

What is a buying center?

Not a place! A buying center in organizational purchasing is a collection of people with a stake in the buying process and who contribute to the purchase decision; these individuals will have specialties related to their professional discipline and purchase function in products, components, organizational needs and the firm’s culture.

3.

What organizations or departments are usually considered to be in a buying center?

Short answer–any entity with a stake in the decision.

Within a buying center, organizations typically will include technology, product design, legal, financial, accounting, production/manufacturing, marketing and service, either directly or within

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a less formal relationship. Stakeholders in the buying center may also be internal and/or external to the buying organization and located across several physical as well as organizational locations. Depending on the complexity and nature of the buying decision, external publics may feel they have a stake in the process

4.

How does the buying center change for different types of purchases (straight rebuy, modified rebuy, new task)?

Straight rebuys require a simpler ordering/delivery process typically from existing vendors while modified rebuys begin to enter a process where new specifications are included in previous purchases. New tasks will include the full gamut of considerations from specifying to bidding to evaluating to in-use capability measures. When the buying situation is closer to the new task end of the spectrum, the buying center will tend to have more people involved from a wider range of functions within the firm. When the situation is a straight rebuy, only professional procurement/purchasing individuals are involved, often purchasing from a predetermined list of approved suppliers.

5.

Relate the value chain discussed in Chapter 2 with the buying center. How can they be intertwined to provide value for the customer?

Different elements of the supplier value network contribute specific pieces of the offering.

These pieces are perceived by different members of the customer buying center as having value based on the members’ professional role in the customer organization. The three types of needs to satisfy−the needs of the organization/job function−the individual’s needs stemming from their role in the organization−and personal needs, act upon the decision maker. See Exhibit 1-3.

The Value Chain (VC) implies that all parts of the supplying organization, direct and indirect, contribute to the total offering—value as defined by the customer.

Each part of the VC may contribute its professional expertise directly in the creation of the offering. The buying center perceives the offering from the view of each buying center member’s profession. The VC elements may work directly with customer complementary counterparts in the buying center to custom tailor the offering to the customer needs.

6.

Discuss how an internal culture within a buying center could work against rational, quantifiable decision making but results in satisfying decision outcomes.

An internal culture (“cultural code”) sets the tone and rules of the interactions within the buying center. The culture may affect the way that steps within the buying decision process are carried out. To an outside observer (e.g., a supplier marketer), the process may appear unusual or unpredictable, but because the customer’s culture serves the organization’s purposes well, the buying decision process results in a very satisfactory outcome.

7.

.

Compare two or three internal cultures that you have read about (or experienced) and their impact in consumer decision making and business decision making.

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Students may have several approaches to this question. “Cultural codes” in consumer decision making imply values within families based upon myriad inputs of ethnicity, learning, experience, role playing and individual needs, while these “codes” within organizations typically are based on corporate experiences, stakeholder values and longer-term goals of corporate economic efficiency rather than need satisfaction.

8.

Why is it difficult to generalize the process of business buying behavior?

Buying situations differ in many ways, both small and large. The variation in the individuals involved in the buying center creates variation in how buying centers behave. This is particularly true for new task situations when the interactions among buying center members can become very complex. The supplier with existing relationships within the new task stakeholders will have an advantage over those who may be new to the process.

9.

Relate the buying process model to organizational and individual needs. How do they change throughout the process?

Throughout the buying decision process, the organization’s needs are for efficiency and effectiveness in reaching the desired outcome. Along the way, the process must provide assurances to the organization that the purchase will be successfully completed. Individual needs throughout the buying process involve needs related to the individuals’ roles and personal needs. Role needs concern the individual’s performance in his or her job. Personal needs relate to the individual’s career and emotional health. The astute marketer works to be aware of both organizational needs and the needs of those individuals in the corporation.

10.

Under what type of purchase decision is an existing supplier at the greatest risk–new task; modified rebuy; or routine purchase?

Existing/defending suppliers are at the greatest risk in a modified rebuy.

In a straight rebuy, the motivation may not be present to change something that is working, though not working well. Additionally, there may be no budget or time to investigate alternatives.

In a new task, all alternatives are on the table.

In a modified rebuy, an existing supplier that has not continuously “resold the job” may not be aware of any difficulties with the process. The change in the buy, though not a complete new task, gives the customer the opportunity to “fix” any existing frustrations.

11.

What types of purchases are likely to experience extensive activity occurring in the following portions of the buying decision Process Model? a. definition stage b. selection stage c. solution delivery stage d. end game stage a. Definition: Generally, new task purchases−situations where available alternatives are not satisfying organization needs. Activities include many parts of the organization as the need is defined and potential solutions are discussed. b. Selection: Generally, supplier search and selection activities can be associated with new

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task or modified rebuy purchases. The extent of the search for a new supplier will depend on the level of satisfaction with the existing supplier. c. “Solution delivery: Customize as needed–install/test/train.” When the purchase is a new task, this portion has been largely incorporated in the entire design and development process. The specific need of customization of an existing product or service is more likely to occur with a modified rebuy−note question #10 above. d. End Game: Time for the performance evaluation. When an ongoing process, usually no surprises. The end game is important in every type of purchase.

12.

What types of purchases and purchase decisions lend themselves to the Internet or other Web-based decision strategies?

The Internet or other web-based strategies can be most effective in rebuying, analyzing alternative products at an early stage, sorting out various purchase source options–whenever there is little need for the assurance of face-to-face relationships.

13.

An influential member of the buying center has confided in a supplier’s representative that she is anxious to “show her stuff” and move up in her organization. Into what part of the individual needs description does the statement seem to fit? When is such a request likely to occur?

A “request” in a buying organization from someone wanting to be a “hero” or “show her stuff” represents a need based on an individual’s desire to be recognized within the buying center as a consequence of his/her role. This sort of request may well be generated within a corporate culture where individual recognition and rewards are hard to come by or this individual may not feel a desire to be a team player if that is the cultural imperative. The “hero” likely recognizes that a successful relationship with a supplier is one that enrolls both customer and supplier in each other’s success. The supplier has the opportunity to gain the support of the “hero” by creating an offering that “wins” on all levels–job function, organization and personal. It is often difficult for marketers to “get” these messages because they are seldom straightforward. They will often appear as “quirky” or difficult behavior on the part of the customer. Knowing how the organizational customer works gives better insight to how the individual customer may be trying to work.

14.

Your company has been a reliable and trusted supplier of somewhat generic, frequently purchased hardware items. One of your largest regular customers has announced that all purchases of hardware and supplies will be subject to an online bidding service. Your company has a choice of either submitting to the bidding system or lowering your current prices by 5 percent (thus avoiding exposure to the online process). How would you respond?

Responding to a policy change instituted by a buying organization has a great many implications… if the purchaser has opted to change a straight rebuy policy, an historic supplier should have sufficient data from past performance to operate successfully within the new system. if, however, a vendor feels it necessary to merely reduce its price–5% to avoid exposure to an online process, the risk of losing future business can be enhanced.

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In either situation, this stresses the need within a selling organization to understand fully its customer base in terms of manufacturing processes, the role its products play in the process, and the innate value of relationship selling as more than periodic lunches, but rather solution selling. Most organizations recognize the value of the total offering−including the relationship. If the supplier finds itself in this type of situation often, the price demand may be a symptom of other business issues, including but not limited to: • Product maturity or decline to commodity stage • Over-emphasis on relationships without continuing to deliver superior value • Lack of innovation in the supplier’s way of doing business

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Chapter Four The Legal and Regulatory Environment Authors’ Comments During the initial reviews of our prior text in Business to Business Marketing, we often were asked why include a separate chapter on the legal environment and Business Ethics (Chapter 16). For this text, reviewers fully accepted the needs for these chapters and in fact requested specific topics be covered (Sarbanes-Oxley, and so on). Since we have always believed that the regulatory environment and business ethics are contextual issues, the new feedback was heartening. Perhaps the last few years of business news has made an impression!

Our feeling is that students generally don’t enter their business careers with a strong enough appreciation of the legal pitfalls that can mire an otherwise good strategy or program. Nor do they fully appreciate the competitive protection the law often gives them. While they might develop an awareness of marketing-related law in their principles course, there is seldom curriculum space for a thorough briefing. Additionally, the specific issues in business-to-business marketing are somewhat different than the consumer-oriented law that is the usual, albeit brief, focus in the principles course.

An understanding of marketing-related law can provide the business-to-business marketer with opportunities to tailor offerings to customer needs in competitive markets. Our experience with teaching these topics has shown that the initial reaction of students is one of amazement because they believe they know of violations that occur on an almost routine basis, or frustration, because they believe that price is a major element of the marketing mix and the law has taken that away from marketers.

As understanding grows, students recognize that good marketing efforts will usually avoid any conflict with many of these provisions. Since we are not attorneys, the material has been presented by laypeople for laypeople−in what we hope is an understandable way.

We have added more material related to intellectual property and briefly covered the Foreign Corrupt Practices Act (FCPA). Overall, our focus is on interpretation and enforcement, more than might normally be expected in material on legal issues. We believe that this will help the student gain a sense of context rather than relying on memorization of legislative prohibitions and strictures. It may also prove enlightening for students to recognize that marketers as individuals may be found guilty of many of these legal restrictions independently of the firm they work for.

©2011 Pearson Educaiton, Inc. publishing as Prentice Hall

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Opening Vignette

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Your Plight as Owner of Pacific Drives

This opening introduces Pacific Drives, a fabricated company that will be used in sample legal scenarios throughout the chapter.

Pacific Drives is a small, innovative manufacturer of computer hard drives. Its primary customers are the makers of laptop computers. Several situations are described where Pacific Drives is unable to compete in the marketplace because of predatory actions by larger, more established competitors. Questionable anticompetitive activities include several types of restricted access to markets (exclusive dealing in transportation services; tying agreements, predatory pricing of service at the business-to-business market level, an so on).

This opening vignette makes an ideal small case assignment for students. The various ways that a large conglomerate can make life difficult for smaller competitors is something that many students have not likely considered.

Learning Objective Understand the primary goals and objectives of business legislation and its implications in a market economy.

Business Legislation in a Free Market Students are often surprised (and skeptical) when they are exposed to the substantial number of rules and regulations governing business in a “free market.” As discussion of this chapter develops, consider a focus on two general themes: (PowerPoint 4.2) • Legislation providers a level playing field for companies that may otherwise not be able to compete (coincident with the Marketing Concept−maximizing choice in the marketplace).

• Well-developed and effective marketing plans usually avoid most legal issues−good marketing solves most problems where questionable activities might prevail.

Business related legislation is focused in three areas: (PowerPoint 4.3) • Protect Companies from each other Predatory pricing, tying agreements, and so on, maintaining market access.

• Protect Consumers Deception, labeling, packaging, fraudulent claims, and so on, maximizing choice in the marketplace.

• Protect the Interests of Society Maintaining free markets−equal opportunity−for everyone (level playing field), hold businesses responsible for the environmental impact of their activities. .

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Enforcement Responsibilities (PowerPoint 4.4) Enforcement is the responsibility of the executive branch of the federal government or a federal administrative agency. Consider a short “civics” lesson, noting the primary function of each branch of U.S. government. Also note that the administrative agencies are neither judicial nor legislative bodies.

Enforcement is Choice−the enforcer has the right to elect to not enforce. Ask students how many of them have talked their way out of a speeding ticket!

Exhibit 4-1: Summary of Antitrust Acts and Their Focus (PowerPoint 4.5) Statute (PowerPoint 4.6)

Sherman Antitrust Act (1890) (PowerPoint 4.7)

Clayton Act (1914) (PowerPoint 4.8)

Federal Trade Commission Act (1914) (PowerPoint 4.9)

Robinson-Patman Act (1936) (PowerPoint 4.10)

Celler-Kefauver Act (1950) (PowerPoint 4.11)

Consumer Goods Pricing Act (1975)

Focus Monopolies, attempts to monopolize. Provided for both civil and criminal penalties. Broad coverage was base for later legislation.

Tying agreements, interlocking directorates, intercorporate stockholding. Provides for civil penalties only.

Broadly defined unfair competition or competitive situations.

Often known as “the price discrimination act,” provided penalties for both buyers as well as sellers.

Requires proportionally equal terms to buyers in common markets.

The “Antimerger Act.” Broadened power to prevent acquisitions where they may substantially impact competition.

Repealed Miller-Tydings Act (1937) which had allowed “fair trade,” a form of price maintenance.

Learning Objective Understand the basic U.S. antitrust and business regulatory legislative acts.

Legislative Acts that Affect Marketing Exhibit 4-1 summarizes the various Legislative Acts (PowerPoint 4.5) PowerPoint 4.6 through PowerPoint 4.11 explain the focus of each act (as indicated in the exhibit below).

Securities Laws While beyond the scope of this text, students that are interested in new ventures or start-up organizations will find the silent period relating to IPOs interesting.

(PowerPoint 4.12) .

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Uniform Commercial Code (PowerPoint 4.13) Adopted by all states except Louisiana, the UCC is the topic of most Business Law courses and not extensively dealt with here.

Time permitting a discussion of “common law” and precedence may be interesting.

Sarbanes-Oxley Act and its Offspring (PowerPoint 4.14) Public Company Accounting Reform and Investor Protection Act of 2002 Commonly called “SOX” Established the Public Company Accounting Oversight Board to oversee wide-ranging new standards for all public company’s boards, management and public accounting firms.

SOX inspired: In Canada, “Bill 198,” is known as the “Canadian Sarbanes-Oxley Act” (C-SOX) In Australia, “Corporate Law Economic Reform Program” (CLERP) In Japan, “Financial Instruments and Exchange Law” (J-SOX) Learning Objective Gain a sense of the interaction of legislation and the activities it restricts or prohibits.

Business Legislation Issues (Summarized on PowerPoint 4.15) • Intercorporate Stockholding (PwrPt 4.16) • Interlocking Directorates (PwrPt 4.17) • Price Maintenance (PwrPt 4.18) • Refusal to Deal (PwrPt 4.19) • Resale Restrictions (PwrPt 4.20) • Price Discrimination (PwrPt 4.21) Price Discrimination is one of the major issues that business-tobusiness marketers will face. While most companies will have attorneys to deal with commercial and contract law, marketers with any price responsibility should understand fully the implications of the Robinson-Patman Act and its pricing controls.

Learning Objective Recognize the business-to-business marketing implications and nuances of those restrictions.

To further discuss competitive pricing and price discrimination, Pacific Drives is again used as an example.

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Exhibit 4-4 (PowerPoint 4.22) shows a straightforward situation where Pacific Drives supplies the same product (Model 1000) in the same quantities (5,000/month) to two companies, NBM Computers and PaloAlto Computer, that serve the same market. Pacific supplies both at the same price ($38).

Exhibit 4-5 (PowerPoint 4.23) shows a United Memories (UM) entering the market, offering NBM Computers a hard drive (UM Model 300) comparable to the Pacific Model 1000 for $32.

Issues: The most serious marketing issues are not related to price.

• Given a successful relationship between NBM and Pacific, is the price attractive enough to get NBM to switch?

• Should NBM inform Pacific? (yes) • Can Pacific meet the price? The choice depends on the marketing implications. Robinson-Patman allows lowering prices to meet a competitive threat without also lowering the general “market” price of a product. Is this a smart thing to do?

• If the NBM/Pacific relationship has value, a compromise price between $38 and $32 is possible. How much is the relationship worth?

• If Pacific lowers the price at NBM, must it lower its price at PaloAlto? (no) • If UM is not successful at NBM, where do you think the next stop will be? (PaloAlto). What price will they offer? What is UM likely to tell PaloAlto about their competitor, NBM and Pacific? Will this embarrass Pacific? Hurt the relationship with PaloAlto?

• If Pacific is surprised by this competition, what does that say about their competitive intelligence? Generally, Pacific should know costs and prices in their markets.

• How low would the UM price have to be to be considered predatory?

Learning Objective Recognize the defining role that legislation can have with regards to intricate and multiple supply chain roles.

Exhibit 4-6 (PowerPoint 4.24) shows a third but smaller customer, Spartan Computers, entering the market in competition with NBM and PaloAlto.

Spartan believes that its products must match the offerings of NBM and PaloAlto but exceed in service and customer care. They approach Pacific Drives for a quote on Pacific Model 1000 in quantities of 500 per month.

Pacific quotes $55 per unit.

• Is it acceptable to charge Spartan a higher price? Yes, the higher quantity discounts to NBM and PaloAlto are legal if cost-justified. .

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•

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What happens if, based on the lower volume purchases, all of Spartan’s suppliers charge a higher price than they charge NBM and PaloAlto? Doesn’t this make it very difficult for Spartan to compete? Could this be interpreted as an action that restrains trade?

Though not thoroughly covered until Chapter 14, this may be a good time to introduce the concept of Industrial Distributors.

Spartan may be able to purchase many of the components it needs from a distributor that carries a full line of computer components and allows aggregate pricing.

Learning Objective Understand specific market issues related to price discrimination.

How can effective marketing avoid some of these pitfalls?

• Don’t sell the generic version of the drive to large customers–sell it only to distributors and retail channels.

• “Package” a customized total offering for each customer that includes any special component provisions (connector locations, lead length, mounting brackets and rails, etc). Define this as a “total offering” that has minimum order quantities, special payment terms, etc. These special features would be developed in partnership with the customer. The component would be unique to that customer.

• Don’t wait for competition to lower price. Introduce the next generation product, developed in conjunction with the customer, as the customer moves on to its next models. Move the market–don’t let it move you!

• PowerPoint 4.25 summarizes the major tenets of price discrimination legislation.

Exhibit 4-7 provides a real-world example of price-fixing and Department of Justice enforcement.

Learning Objectives Understand the methods and variability in enforcement of the acts.

Understand the substantiality test in enforcement decisions.

Several factors contribute to the variability of enforcement of these acts. Not the least of the reasons that enforcement is variable is that agencies have limited budgets and must pick their battles with discretion. Usually, the DOJ or agencies will “go after” the “big fish,” the largest violators, expecting (hoping) that smaller .

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organizations will fall into place.

Substantiality Test (PowerPoint 4.26) Three Considerations • The size of the organizations involved • The volume of business involved • Significance of market preemption Some International Implications Many of the same goals and principles Example: European Union U.S. companies have found that EU regulations can block acquisitions, enforce stricter limits on market activities.

• Microsoft face challenges to its marketing practices by the EU • The EU also blocked, as anticompetitive, the General Electric (U.S.) acquisition of Honeywell Corporation, previously approved by U.S. regulators.

Foreign Corrupt Practices Act (FCPA) • Result of a Securities and Exchange Commission (SEC) investigation of payments made to foreign officials by U.S. companies.

• To be a violation, payment must be made to a foreign government official, candidate for foreign office, a political party, or any person that may serve as a intermediary in the facilitation of such activities.

• In 1997, the U.S. was one of 34 countries that signed the Organization of Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions–similar to FCPA. Learning Objective Be introduced to intellectual property protection, licensing and the relationship to antitrust laws.

Intellectual Property (PowerPoint 4.27 shows all, individual slides follow) Patents (PwrPt 4.28) Copyrights (PwrPt 4.29) Trade Secrets (PwrPt 4.30) License (PwrPt 4.31) Cross License (PwrPt 4.32) Joint Venture (PwrPt 4.33) Confidentiality Agreements Often necessary in development partnerships Supplier and customer formally show respect for each other’s intellectual property. .

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Political Framework of Enforcement Revisit Pacific Drives opening vignette Consider reviewing the Pacific Drives situation and the alternative that the company may have.

Key Terms common law confidentiality agreement consent decree copyrights cross license equality/proportionately equal terms exclusive dealing free rider intercorporate stockholding interlocking directorates joint venture license non-disclosure agreement patents predatory pricing price discrimination price maintenance refusal to deal resale restrictions trade secrets treble damages tying contracts Answers to Questions for Review and Discussion 1. How can intercorporate stockholding exist without raising FTC or Justice Department concerns?

Intercorporate stockholding can exist with FTC and Justice Department guidelines only when there is no evidence of manipulating the ownership in a way that reduces choice and competition in the marketplace.

2. What market factors must be present under Robinson-Patman that require a supplier to offer the same product to two (or more) different customers?

The market factors that must be present under Robinson-Patman that require a supplier to offer .

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the same product to two or more different customers at the same price include: • purchases must be of the same quantity • purchases must be of the identical product • sold for the same application/use • purchases must be within the same time frame (judged by season, PLC, or other marketbased factors) • customers who purchase must be competitors of each other, serving and vying for the same market segments • not sold to meet a competitive threat at an established customer • not sold to government agencies

3. What market factors must be present for a manufacturer to legally refuse to continue to offer its products through a particular channel (what are the circumstances when a "free rider" condition can exist)?

Market factors present for a manufacturer to legally refuse to offer its products through a particular channel include issues of financing, consignment sale, sales and service support; when these are reduced by a channel, that channel can be denied an opportunity to sell a particular product by the manufacturer.

4. Describe the practical importance of good market intelligence in addressing potential competitive pricing situations under the Robinson-Patman Act. Good market intelligence in addressing potential competitive pricing situations under RobinsonPatman will include uncovering evidence of price discrimination through actual price policies, discounts or unequal promotional benefits offered between similar parties. Most important is the understanding of competitive price moves that may be associated with changing technologies, expanded manufacturing capabilities and product life cycle issues related to time frame of purchase and product obsolescence.

5. When a marketing manager questions whether an action may or may not be interpreted as a violation of a competitive legislative act, what consumer-level factors can ultimately be used as guidelines?

Consumer-level factors that can be used as guidelines to determine whether or not an action can be interpreted as a violation of a competitive legislative act are a reduction of choice in the consumer market or the creation of an “unlevel playing field” for all sellers in a market.

6. Overall, it can be said that the unified goal of business legislation is to maximize choice in the marketplace. Of the philosophies of marketing (Production, Product, Sales, Marketing and Societal Marketing), which has as its goal to maximize choice in the marketplace?

Production Era – Maximize Consumption Product Era – Maximize Consumption Sales Era – Maximize Customer Satisfaction, default to maximize sales Marketing Era – Maximize Choice in the market .

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Societal Marketing – Maximize Quality of Life

7. What extenuating circumstances must usually be present for a business practice to be scrutinized by the Justice Department? What limits the Justice Department from investigating all potential violations?

The extenuating circumstances present for a business practice to be scrutinized by the Justice Department center on issues that create the appearance of reducing competition. Limitations would include businesses too small to impact a market and differing classes of trade buying from similar vendors when specific elements of “cost” are or are not readily needed by the buyer group, e.g., volume discounts justified through large purchases and the inherent savings in delivery. The “substantiality test” is often used as a guide to the severity of the violations. The Justice Department is limited by budgetary as well as political considerations in its enforcement strategies.

8. When there is significant disparity in size of competitors seeking the same customers, how do Clayton and Robinson-Patman fail to maintain the fabled "level playing field”?

While complying with the “letter of the law,” the larger company may have a significant advantage over the smaller company if its size yields greater economies of scale in purchasing. If the smaller company is able to exist through differentiated positioning, unique total offerings, and so on, a level playing field is considered to be maintained to the extent no damages or intent to damage have been proved.

Situations such as this are more likely to receive scrutiny if the large company has a very aggressive approach to the market that makes it difficult for the smaller company to thrive.

Additionally, the marketer would be wise to understand the attitude of the administration and justice department at the time.

9. How can continuous innovation and close partnerships with customers reduce the likelihood that market managers will be concerned with price discrimination issues?

Continuous innovation and close partnerships with customers reduce price discrimination issues through the continued modification and adaptation of techniques that can provide savings over time, e.g., logistical and channel improvements and a smooth system of customer information through channel partners. Joint development programs create a sense of ownership on both sides of the transaction. Other factors include supplier participation as a market owner— innovation before significant competition from lower-cost producers.

10. Rather than the "letter" of the law as related to specific acts and legislation, understanding business regulation has often been described as understanding the intent of the law and the temperament of the enforcers. Explain.

The intent of the law implies the “essence” of the law, i.e. to avoid reducing competition, to maintain a healthy business environment, to avoid entry barriers, etc. The temperament of the enforcers reflects the political and social attitude of various administrative entities. Under different presidential administrations, the attitudes toward government intervention in markets .

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may create very different enforcement scenarios. (See #8, above)

11. How are the myriad of State and Federal legislative acts and commissions consistent with a free market philosophy?

The myriad laws and acts are consistent with a free market philosophy in that they assist in the avoidance of “controlled” markets dominated by a few and in the “establishment” of free markets through equal competition opportunities.

12. What protections does a joint venture offer to the two companies that have partnered together? What limitations must be agreed upon at the start of the venture? Why is a willingness to participate in a confidential agreement with a customer an important factor in the “resell the job” or end game portion of the buyer decision process (Chapter 3)?

Joint ventures provide a method for companies with disparate resources to create a combination of effort without one party losing control over its resources. It allows a company with technology and another company with a presence in the target market to come together and form a third company, transferring specific assets to the new entity.

A joint venture has some advantages over a simple license arrangement.

The small technology company avoids the large company “running away” with the small company’s technology.

The new venture creates a barrier that allows the small company to continue its own R&D distinct from any competing claims.

Marketers should consider confidentiality agreements as a positive connection between customer and supplier. Both organizations, customer and supplier, may have access to each other’s future product plans and R&D efforts. The mutual knowledge can lead to stronger relationships at many levels.

13. Discuss the ways use of industrial distributors can assist small companies to overcome uncompetitive price situations that develop in their small volume purchases. (This may be more easily understood if you return to this question after completion of Chapter 14.)

Generally, industrial distributors act as a “one stop shop” for small businesses that would otherwise not attract the attention of large suppliers. The distributor creates a product line that serves a particular market segment by combining the products of several large suppliers. The distributor uses its buying power, made possible by the demands of the small companies, to get volume pricing across the product line. The small company gets the benefit of local inventory, rapid delivery and aggregate prices (where allowed).

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Business-to-Business Marketing

Chapter Five Concepts and Context of Business Strategy Authors’ Comments This chapter provides a look at corporate and business strategy. Our purpose in doing this was to give the business marketer a sense of the internal company context that he would have to work within. Concepts of strategy continue to evolve. The business-to-business marketer will be called upon to contribute to and participate in corporate and business unit strategy development. An understanding of some of the key concepts concerning the nature of strategy and strategy development will help the marketer be influential in these planning efforts.

We often emphasize to students that understanding organization strategy and direction plays a role in the daily efforts of business-to-business marketers. Individual efforts should contribute to, and be aligned with, the mission and goals of the organization. In this regard, we believe that understanding the how and why of strategy contributes to even the seemingly least significant or most routine decision and plan. Marketers should be knowledgeable of strategy and its tools to enable alignment and consistency with the organization’s goals.

Key ideas that we present are, first, the current context of strategy making, a la Hamel and Prahalad–competing by changing the rules and by development of differentiation through a focus on core competencies−doing what you do well. We also revisit the familiar growth-share matrix and strength-attractiveness matrix, show how they remain useful and suggest how the might be updated to reflect current ideas on competitive strategy. We cast the familiar topics of goals, mission and objectives in light of an entrepreneurial approach to strategy, foreshadowing our discussion of entrepreneurial marketing in Chapter 9. We address the classic strategic management process and contrast it with ideas of emergent strategy and logical incrementalism.

All of this is intended to give the student an idea of the strategic context he will face and to suggest how strategy ideas can be employed at the level of marketing strategy.

Opening Vignette

Siemens Changes Its Strategy

Through the past decade, Siemens has had its share of ups and downs. The vignette describes former CEO Heinrich von Pierer’s efforts to restructure the company, focusing on new technologies where Siemens could see growth while maintaining a presence in “stodgy” markets that other conglomerates were abandoning. .

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Siemens kept its power generation and locomotive businesses, though short-term prospects were not inspiring. Eventually, energy demand would outstrip the world’s ability to generate power with existing facilities and energy efficiency needs would bring life back to aging railroads. This long-term focus, combined with Siemens’ competencies in these markets (ironically, Siemens’ strongest global competitor, General Electric, went through the same decision process a decade earlier) put Siemens in an attractive position as the power generation market picked up and railroads were reborn in the last half of the decade.

Students should recognize that decisions based on a short-term outlook are not always wise, notwithstanding “Wall Street” attitudes. Power generation and locomotives are very long cycle businesses, while semiconductors and components are short-cycle.

Understanding individual business cycles for specific markets rather than painting all businesses with the same economic and planning brush is a prime goal for students in this chapter.

Learning Objective Understand the value of strategy and its role in a complex organization.

The chapter starts with a discussion of mission, goals, objectives, strategies and tactics. Students have a natural tendency to think tactically, though they may not always understand the distinctions.

In the discussion of what “strategy” and “planning” are, consider an emphasis on the process of strategy creation as one of the most important elements.

(President Eisenhower is said to have made the statement about the Normandy invasion plan that went something like “the plan was nothing, the planning was everything.) Planning forces a formal look at what is and what can be.

A discussion of how each succeeding phase−goals, objectives, strategies and tactics must support the mission is probably appropriate. Ideally, every organization wants all contributors pulling in the same direction. PowerPoint 5.2 demonstrates this progression, each step increasing specificity in development of the overall plan. Arbitrarily, we have inserted the marketing-sales line to demonstrate the tactical nature of sales. That is not intended to say that such things as sales goals and sales strategies do not exist.

Note that “tactics” are shown as several pieces. Within each piece fits another planning progression. The intent is to show that each portion of the organization will have its plan to achieve the deliverables that the corporate plan has charged it with. You may prefer to show this visually as Exhibit 5-1, which is also PowerPoint 5.3.

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Learning Objective Understand the planning process for defining and executing business strategy.

Four Critical Elements of Strategy Development (PowerPoint 5.4) 1. Set Goals and Objectives Goals are not time-limited.

Objectives are specific targets, expressed in quantifiable terms.

2. Understand the Environment in Which the Business Operates Develop strategies that fit the environment or, if distinctive competencies and resources are readily available, develop strategy to change the environment. (Market share driven or market owner?)

3. Learn from Experience, Update that Experience Continuously monitor deviations from the plan and learn from the deviations.

4. Critical Thinking Strategy development is a creative, interpretive and learningoriented process.

Learning Objective Relate mission, goals and objectives of an organization to the process of developing strategy.

Strategy Making and Strategy Management Processes While we resist “lists” of things to do to achieve a particular business function, the Strategic Management Process, Exhibit 5-3 (PowerPoint 5.5) is presented as a template rather than a recipe. Our research has led us to believe that, with some adaptation, the methodology has changed only modestly.

Assuming a mission is clearly understood: A good mission statement should assist all members of the organization to understand “where they are going.” (“what does the company want to be when it grows up?!”)

Step 1: Develop Goals and Objectives Step 2: Environmental Analysis Market segments, competition, channel design and so on.

Strengths, Weaknesses, Opportunities, Threats (SWOT) Step 3: Strategy Design Elements could include vision of future business, allocation of resources, etc.

Many of these elements will be natural extensions of Step 2.

Step 4: Implementation Plan Design Implementation plan must be within distinctive competencies and .

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resources/acquisition and funding become issues.

Measurement Plan should be included.

Step 5: Strategy Implementation Step 6: Monitoring of Environment and Performance Results As soon as the implementation begins, the environment will change.

Step 7: Analysis of Performance Variance to plan should be completely understood–both over and under achievement.

Step 8: Adjustments A Critique of the Model Time Consuming, but forces examination of what is out there and what parts of it the organization can “get” with what resources it has at hand.

Shortcuts aren’t always possible though they are tempting. (It takes 9 months for one woman to go full term with pregnancy−it can’t be sped up to only 1 month with 9 women!)

Planners should not plan in isolation−get them out into the field with customers.

Learning Objectives Develop an understanding of how an entrepreneurial approach to marketing is not limited to small, start-up organizations.

Be able to identify ways in which a marketing organization can be made more entrepreneurially oriented.

Key Strategy Concepts Seek to establish a fit between the business environment and the strategy. (PowerPoint 5.6) Fit−providing superior value through differentiated pieces of the total offering.

Differentiate the total offering through key distinctive competencies.

Drive change rather than adapt to it. (PowerPoint 5.7) Quality improvement and process improvement are essential (resell the job) to superior value.

Measuring and tracking results necessary for continuous improvement.

Summary of Strategy Concepts (PowerPoint 5.8) • Change in customers, channels and competitors interact to create discontinuities in the evolution of industries or markets.

• While companies can have an influence on how markets change; they .

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can seldom appreciably impact the pace of change.

Companies need to look for ways to “change the rules” of the markets they compete in; proactively creating conditions for success that favor their own business model instead of those of the competitors.

Changes in the rules are subject to the constraints of the business environment; any flexibility must be recognized.

Need to identify the core competencies that will translate into advantages when the rules have changed.

Advantages are not sustainable for long, so the company must continue to innovate, changing the rules on an ongoing basis, to stay ahead of the competition. (Key element of “Market Ownership”)

Consider whether to discuss Market Ownership now or after the discussion of matrix analysis tools. Many of the tools define “winning” or “success” as a large market share. Market Ownership is not market share. The key may be whether or not you believe that students will pick up on the tools as inconsistent with the “ownership” philosophy or whether you use the discussion to demonstrate the desirable and not so desirable points of matrix analysis. I have found that the discussion works better after the traditional discussion of the BCG GrowthShare Matrix and multifactor analysis tools.

Chapter 11, Business Development, contains additional discussion of Market Ownership.

Learning Objective Be able to demonstrate an understanding of different strategy tools (growth-share and business-attractiveness matrices and balanced scorecards).

You may want to tailor the content of this discussion to the character of industry in your region. Here in Silicon Valley, very large multi-division companies participating in different markets are not common. Students are most familiar with startups, small companies, and/or single product/product line organizations. The question of applicability to growth industries versus mature industries often arises. I have found that there are three key factors in the development of this discussion: 1. Point out that matrix analysis is a resource allocation tool and does not fit well with single-product single-market companies.

2. Use a multinational, multi-business, diverse company as an example, companies such as Siemens or General Electric. These organizations are a mix of new-economy and old-economy businesses. The discussion of cash cows funding growth for other business units comes through quite well.

3. In undergraduate classes, concepts are demonstrated with the BCG Growth-Share Matrix rather than the GE Attractiveness-Strength Matrix.

The GE matrix is far more subjective and thus difficult for students to .

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grasp. The multifactor matrix is a very long and involved discussion that may be better reserved for graduate classes.

Resource Allocation (PowerPoint 5.9) Includes infrastructure, personnel, finances, technologies, relationships and so on.

They are not limitless.

Strategic planning process is a resource allocation process.

This requires: • Knowledge of distinctive competencies • Understanding of future core competencies that the organization may develop or acquire Business Portfolio and Strategic Business Unit Management Consider a discussion of personal investment portfolios, education portfolios, etc., to develop a sense of competencies related to each and what is obtainable and what is not.

A portfolio is a set of businesses and products that make up the firm.

A good portfolio matches the firm's strengths to the opportunities in the marketplace.

An SBU is a unit within the company that • has a separate mission and objectives that can be planned independently • May be a single brand, a product line, a division, or a customer group

Would a product/production-oriented company focus on manufacturing as a parameter to define SBUs?

The Boston Consulting Group Growth-Share Matrix Exhibit 5-5 and PowerPoint 5.10.

Good analysis of existing businesses Not good to examine future planning Very formalized, but useful “A snapshot in time” Heavy emphasis on market share growth as road to profitability

Discussion: Good for mature/commodity product. Is it good for an innovator? May make move to a new market attractive but not aligned with distinctive competence (stick to knitting)

Star:

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(PowerPoint 5.11) High growth, High share Need heavy investment to finance growth, invest more to build market share Manage with Market Ownership as an objective Eventually become cash cows Business-to-Business Marketing

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Cash Cows:

(PowerPoint 5.12) Low growth, High share Established, successful, invest enough to hold market Cash generators Harvest to increase short term cash

Question marks:

(PowerPoint 5.13) Low share, High growth markets Require cash to hold share What should be done?

What does the organization have in its distinctive competences that will make it win?

Can I buy the resources needed?

Build into stars or phase out

Dogs:

(PowerPoint 5.14) Low growth, Low share May be self-supporting One organization's dog may be another's cash cow!

(If this were not true, why would any other organization be interested in purchasing the business?)

Discontinue, Divest Note the generally accepted evolution of SBU's (counterclockwise) Growth-Share Matrix Relationship to the Product Life Cycle As noted in earlier, the PLC can be an effective anchor to relate various marketing tools. Continuing this approach, develop the relationship between the BCGs matrix and the PLC. PowerPoint 5.15 shows the PLC with the related positioning of growthshare elements.

• Product Development/Introduction Stage of PLC = Question Mark.

With low or non-existent share and questionable growth, an offering in the introductory stage of the PLC is a natural (if not exact) fit as a question mark in the matrix. The relationship with the Technology Adoption Life Cycle before the chasm is also evident, as a new technology faces many of the same market characteristics. Before the chasm, it is not clear what technologies will survive in the market and where resources should be allocated.

• Growth Stage of PLC = Star.

Following the counterclockwise rotation of the BCG matrix, the star fits nicely in the growth stage. Heavy investment is required to keep up with the rapidly expanding market. To gain on competitors, additional .

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•

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investment is needed.

Maturity Stage of PLC = Cash Cow. Note that profits often peak at the end of the growth stage, and investment needs are substantially reduced. The offering begins to develop excess greater cash reserves.

Consider reminding students that many products remain in the maturity stage for long periods, creating the cash that results from the investments in economies of scale. The upside is the funding of new developments; the downside is the temptation to develop a myopic view of the market. Avoiding this temptation is a critical differentiating factor between market share driven companies and market owners.

Decline Stage of PLC = Dog. While at this point, the relationship may be self-evident, the opportunity exists to point out one of the weaknesses of the Growth-Share matrix.

(See sidebar in the text, “General Electric Leaves Small Appliance Business.”)

Because the definitions of a cash cow, star, dog and question mark are subjective and usually unique to the needs of the organization, one company’s dog will not always be a dog to other companies. If the evaluative criteria were consistent, it would be unlikely that the strategy of “divest” for a dog would find any usefulness.

Learning Objective Recognize what it means to create a strategy that “changes the rules” for a market or for an industry.

An Entrepreneurial Approach The Organization Mission Fostering Ownership Changing the Rules Consider an emphasis on the “whole organization” proceeding toward the common mission, with an attitude of change.

“Don’t let the sleeping dog sleep.”

“If it’s not broke, break it.”

Proactive change is possible with a Market Ownership focus.

The Strategy of Market Ownership Depending on the arrangement of your course, you may find it more appropriate to hold off on this discussion of Market Ownership until Chapter 11, Business Development.

(See sidebar in the text, “Market Share is Not Market Ownership, ” and PowerPoint 5.16) “Define, Evolve, Collaborate” (PowerPoint 5.17) .

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1. Define: Market owners define a market niche as theirs and work toward dominating it. Their brand is immediately identified as the standard in that market. These branded products are defacto standards in their industries. Competitors to these products note their equivalence to those offerings (PowerPoint 5.18) 2. Evolve: Market owners continue to evolve their offerings with the next generation as defined by the value presented to the customer.

(PowerPoint 5.19) 3. Collaborate: Market owners benefit from other organizations developing ancillary products and markets that serve the owners’ customer base. Third parties define their products as compatible with market owner. The owner thus gains insight to other points of view about its market.

Consider a discussion of the fluidity of Market Ownership as related evolving markets and customer needs–reinforced by the PLC and TALC. The GE Multifactor Attractiveness-strength Matrix Exhibit 5-6 and PowerPoint 5.20.

As noted above, you may want to treat this as optional material.

The Balanced Scorecard Intended to not rely solely on quantifiable factors; ROI, market share, etc.

Focus on forward-looking measures in four core areas: (PowerPoint 5.21) • Financial Performance Perspective • Customer Perspective • Stakeholder Perspective o Upper management o Partners o Channels • Value Perspective Learning Objective Understand the importance of agility, adaptability and alignment in pursuing integrated value network or supply chain strategies.

Special Issues In Business Strategy (PowerPoint 5.22) • Strategy Implications of Value Networks and Integrated Supply Chains • Strategy Development and the Internet • Strategy Development in New Businesses Strategy Implications of Value Networks and Integrated Supply Chains .

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(PowerPoint 5.23) Successful strategies hinge on developing a portfolio of core competencies, including changing strategies and models rapidly • Agility–being able to adapt to short-term changes in demand • Adaptability–being able to adjust supply chain architecture to address a changing business environment • Alignment of members’ interests–structuring incentives so that all members in the supply chain are pursuing the same goal. o Strong supply chains can lead to inflexibility−long-term commitments can slow change o Value Networks–“fast vertical integration” Strategy Development and the Internet (PowerPoint 5.24) The Internet can be used to o Manage customer relationships o Streamline purchasing relationships o Increase the speed with which the environment changes o Reduce transaction costs, shipping costs and inventory costs Volatility and Uncertainty Require Flexibility (PowerPoint 5.25)

Key Terms balanced scorecard business model business portfolio core competencies differentiation entrepreneurial marketing fit goals growth-share matrix market attractiveness–business strength matrix market ownership mission objectives Strategic Business unit strategy strategic management process

Answers to Questions for Review and Discussion .

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1. What is the difference between corporate strategy and marketing strategy? What are the similarities?

Differences: Corporate Strategy o Defined by executive management o Overall missions, goals, objectives o Overall strategy scenario broader

Marketing Strategy Within corporate parameters Supporting goals and objectives Strategy to serve corporation’s specific concepts and tools

o o o

2. What is the process by which marketing strategy ought to be formulated?

Formulation differences: Corporate Strategy o Establish mission o Set overall goals and objectives o Analyze current macro-environment o Consolidate results periodically o Confirm/deny changes in direction

Marketing Strategy o Mission implementation; maintain mission consistency o Interpret goals and strategies into marketing goals and strategies o Monitor macro-environment; analyze micro aspects of customer behavior o Establish results benchmarks o Provide directional definitions

3. How can a company mission statement be made to provide motivation and guidance for a company, rather than just giving lip service to a set of unrealistic values and goals?

A company mission statement can provide motivation and guidance rather than simple lip service to unrealistic values and goals when it is truly in tune with a firm’s capabilities, competencies and culture as well as the markets it serves; it must be understood by and generate a sense of ownership within the personnel of the firm and provide guidance at many levels of the firm.

4. Suppose you are working on constructing a portfolio of businesses for your company to pursue in the next three to five years. What makes for a good portfolio of businesses? What makes for a good portfolio of products?

A good business portfolio will identify current strong performers as well as future winners within appropriate business categories. Resources must be generated to support the businesses that require investment, therefore a balance must be struck between resource-generating businesses, such as cash cows, and resource-using new businesses, such as stars.

An overall portfolio of products across all the lines of business should achieve the same sort of balance between resource generators and resource users. However, within an individual business unit, the portfolio of products may not reflect that balance. For instance, within a line of business in emerging markets, there may be few if any products that generate significant .

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profits. Within the overall business portfolio, though, there must be SBUs in markets generating profits to support the resource requirements of the future winners.

5. Is the balanced scorecard consistent with the strategic management process outlined in Exhibit 5-3? Explain any inconsistencies.

The balanced scorecard is consistent with the strategic management process, but it adds in extra dimensions of stakeholder performance, buy-in and acceptance by personnel as well as a need to examine the future as well as past performance benchmarks.

6. Suppose you are involved in starting a new business in a fast-changing environment, such as RFID products (radio frequency identification). To what extent would the strategic management process be useful in planning strategy for such a new business?

The strategic management process will be useful in planning strategy for a new business in that it will keep the managers focused on the problem of creating a fully fleshed-out business, rather than simply a working version of the new product or service. The problem with the strategic management process is that it calls for data that are difficult or impossible to obtain.

Doing a full analysis may take so long as to lose the window of opportunity. Accordingly, the strategic management process should identify the areas of uncertainty and find ways of learning and managing risks. The strategy developed must be flexible enough to allow radical changes as information from the business environment becomes available.

7. Suppose a company follows the strategic management process with a degree of diligence. Yet, the company executives recognize that the business environment is rapidly changing. How might such a company adapt the strategic management process for such an uncertain environment?

First, management must recognize that everything changes. The strategic management process employed must not kill off new strategy that results from feedback from the environment and new ideas from line managers. At the product line level, marketing managers and sales personnel will develop new ideas stemming from contact with customers or prospective customers. The strategy management process can be structured in such a way that learning and new ideas as developed by the market focus can be reviewed and accommodated by upper level managers. At the corporate level, the process should also be structured to review the results of entrepreneurial initiatives that have arisen, as well as learning that occurs from feedback from the environment. The only ideas that should be given minimal attention are those that arise with little support from contact with customers.

8. To what extent are entrepreneurial marketing and the strategic management process consistent? Inconsistent? Explain.

Entrepreneurial marketing is consistent with the strategic management process in that a clear vision, enlivening mission, and striving for market ownership can guide the organization whether marketing is done more entrepreneurially or less entrepreneurially. Strategy based on .

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changing the rules of the market tends to make strategic management more difficult to pursue.

When the rules are changed, marketplace changes are difficult to predict, making strategy difficult to plan. If the strategic management process creates flexible strategy based on changing the rules, and is careful to allow for learning as the environment changes, then the strategic management process will enhance the entrepreneurial approach.

9. Discuss the relationship between market ownership, value networks and the trend toward integrated supply chains in today’s market.

Market ownership gives the owner a great deal of leverage within the value network. The market owner can then obtain cooperation that enhances value for customers and directs much of the profit toward the market owner. However, it does not give the market owner total control of the value network. If the market owner’s strategy shifts to be more share-driven, the market owner will tend to choose to design out the innovative partners that create important components of value. While this creates more control and potentially more profit for the market owner in the short term, the value network becomes more vulnerable to innovative efforts meant to supplant the dominant technology form.

In fast-paced markets, there is less likelihood that traditional forms of vertical integration will occur. A value network approach provides greater flexibility and faster response to changes in the market. True market owners will recognize the value provided by the partnerships they develop. Strong supply chains can lead to inflexibility−long-term commitments can slow change. The concept of continuous change, while seemingly inconsistent with well-developed supply chains, must be accounted for in today’s market.

10. Discuss typical planning cycles other than the often-used annual cycle. How should rapid innovation and fast-paced change impact the frequency and duration of strategy planning?

Planning cycles, to be effective and efficient, should be better tuned to the uniqueness of any specific market. Rapid innovation and fast-paced change in highly competitive markets that are typically growth and introduction markets, must demand planning cycles that are shorter than those typically used by more traditional, annual cycle planners. If this does not occur, a firm’s ability to remain competitive is impacted by others planning more often and more thoroughly.

At the corporate level, the problem becomes matching the corporate planning effort to the variety of planning cycles employed through the organization. This suggests that corporate strategy planning should not be a build up of individual product line and business unit plans, but rather be confined to a review and rethinking of mission, businesses, advantages and core competencies, combined with an analysis of the directions in which markets are moving.

11. The chapter related the BCG Growth-Share Matrix to the Product Life Cycle. Other than the pace of changes in the market, what are the similarities in the marketing mix between stars/the growth stage, cash cows/maturity, question marks/introduction and dogs/decline?

Product Development/Introduction Stage of PLC = Question Mark o Low or non-existent sales o Questionable future o Promotion usually follows a PR and market development format o Product yet unproven, market not clearly defined .

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o Channels are usually direct Growth Stage of PLC = Star o Rapid market growth o Heavy investment o Channels move from direct/exclusive distribution to more selective/intensive, depending on services required o Economies of scale provide a penetration price strategy o Collaborative product development efforts with customers should begin to look at the next generation offerings necessary to maintain ownership Maturity Stage of PLC = Cash Cow o Product variations decrease o Market “settles” on a known set of variables related to the product and its uses o Investment needs are substantially reduced; industry has consolidated into few players, usually ologopolistic in nature o Previously developed economies of scale provide cash flow to survivors Decline Stage of PLC = Dog o Offering no longer finding new uses o Substantial number of users have shifted to new technologies o Depending on organization mission, best alternative may be to divest of business or move it into a different market structure o Sellers must avoid price as main driver in customer selection of supplier

12. How can moving from a question mark to a star (in the counterclockwise evolution around the Growth-Share Matrix) be compared to crossing the chasm?

Many factors changes when an offering makes this transition, whether the offering is a single product from a startup company or a new product from an established organization.

A few of the possible changes ...

Corporate/Department culture Organizational structure Product design for volume production Facilities development/economies of scale New market segments/adopters Price/margin structure

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Chapter Six Market Research and Competitive Analysis Authors’ Comments We intend to reflect the reality of doing research and forecasting in markets with relatively few customer companies, well-populated buying centers, and volatile competitive environments. Business-to-business marketing requires different approaches to understanding customers and competition than consumer marketing.

In business-to-business marketing, the number of customers is likely to be relatively small. Also, the competitors are likely to be the marketer’s partners as well as competitors. This chapter discusses approaches to doing market research and competitor research that are crafted specifically for business-to-business environments.

Our experience has been that market research in business-to-business markets tends to be less quantitative and based more on personal interviews than in consumer market research. To do this well, building a network of reliable sources and asking the right questions comes in handy. It also requires close attention to performing research that’s geared to the type of decision under scrutiny. These ideas are reflected in the first part of the chapter.

Competitive research, the second part of the chapter, is becoming somewhat more difficult due to formation of competing value networks. Determining strengths and weaknesses requires assessment of the effectiveness of synergies between companies. We also find that students performing competitive analysis get distracted from the central purposes of the analysis by focusing on financials and product features. Accordingly, we reinforce the fundamentals of competitive research and analysis.

This chapter in our earlier editions concluded with a discussion of forecasting that focused on the marketing operation forecast. We have moved this discussion to Chapter 10 for this edition.

Overall, we’ve tried to show a realistic picture of intelligence gathering and learning, taking into account time pressures, data scarcity, and the overall objective–creation of customer value.

Opening Vignette

IBM Re-Learns its Customers’ Perspective

When IBM went through a corporate revival and rethinking effort in the early 1990s, Lou Gerstner went to IBM’s important customers to learn their needs and perspective. .

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His effort illustrates the need to perform market research, even at the highest level of the company. The approach he used, visiting customers, asking questions and listening, is a typical way of learning about customers in a business-to-business setting. When Sam Palmisano took over for Gerstner in 2002, he continued the process of customer learning, taking the same approach and spending more than half his executive time talking with customers.

Learning Objective Appreciate the rationale for market research in business-to-business markets.

The chapter opens with a reminder of what it means to be market oriented in a business-to-business environment. A market or customer orientation implies that the marketer will collect information about customers and competitors, as well. The need for collection of competitive information is driven by the nature of competition in markets: companies compete by attempting to offer value to customers that is superior to the value provided by competitors. To compete effectively, marketers must understand customers’ perceptions of value and how competitors are able to meet that demand.

Market research, in business-to-business marketing probes more deeply than consumer marketing, defining differences between companies and cultures, and even establishing relationships when it is well-planned and implemented.

Market Intelligence (PowerPoint 6.2) Portions of Market Intelligence: Exhibit 6-1 (PowerPoint 6.3) • Formal market research involves rigorous adherence to research design, careful data collection, careful analysis and interpretation.

• Competitive intelligence gathering is less rigorous–often called “informal” research. The data collected may tend to be more qualitative; and the data collection is more of an ongoing process.

• In business-to-business marketing, the two portions of Market Intelligence are the ends of the continuum of “Knowing your Market.”

Market Research Defined (PowerPoint 6.4) “Market research is the systematic collection and interpretation of specific data related to the resolution of a specific problem or to satisfy a specific objective.”

Competitive Intelligence Defined (PowerPoint 6.5) “The collection and informed interpretation of what might appear at first as a number of random, unrelated events.”

Knowing Your Market (PowerPoint 6.6) To truly know customers, the business marketer needs to understand several elements. The marketer needs to understand the customers’ .

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• Technologies • Products • Markets and customers • Competitors • Channels • Buying center and buying patterns • Culture Sources for this information can be widely dispersed and often the product of relationships rather than formal investigations.

Secondary Data (defined) (PowerPoint 6.7) “The results of a research effort developed for another reason, information compiled for other purposes, such as existing sales tracking information, as well as third party research.”

Primary Market Research (defined) (PowerPoint 6.8) “The collection of data directly from respondents in the population in question. The marketer determines what data needs to be collected and sets out to obtain it.”

Market Research Fundamentals (PowerPoint 6.9) • Define the Problem and Research Objectives • Design the Research Method to Achieve the Research Objectives • Collect the Data • Analyze the Data and Draw Conclusions • Present the Findings PowerPoint 6.9 through PowerPoint 6.13 expand on PowerPoint 6.8, as shown in Exhibit 6-2, below.

Exhibit 6-2: Steps in the Market Research Process 1. Define the problem and research objectives (PowerPoint 6.10) What decisions will be supported?

What information is needed to make these decisions?

Should the type of research be exploratory or conclusive?

2. Design the research method (PowerPoint 6.11) What respondents will be sought?

What sampling method used?

Design the research instrument.

3. Collect the data (PowerPoint 6.12) Control the quality of data collection.

Enter data in database.

4. Analyze the data and draw conclusions (PowerPoint 6.13) Apply appropriate analysis techniques.

Control for non-random error.

Draw appropriate conclusions, given the results and quality of data.

5. Present the findings (PowerPoint 6.14) Apply information to decisions.

.

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Consider reinforcing with students that applying the research findings to decisions can be difficult. One common failure, though occurring more often in consumer markets than in business-to-business markets, is failure to apply the findings or act on decisions in a timely manner. More appropriately, market research should be ongoing, simultaneous with the activities that rely on it.

An excellent, though old example of this is the Edsel (how many of your students have heard of it−I often describe it as “a BMW sucking a lemon”). Ford Motor Company performed what was at the time considered to be very sophisticated consumer research regarding the viability of a new “mid-priced” car. Unfortunately, the company spent four years developing the vehicle−without updating the research. When introduced, the vehicle was four years behind the market.

Implications of Types of Decision Support: Exhibit 6-3 (PowerPoint 6.15 through 6.17) • Research to Support Targeting Decisions • Research to Support Design Decisions • Research to Support Go/No-Go Decisions Learning Objective Understand the differences in market research between consumer and business-to-business marketing.

Learning Objective Understand the kinds of market research methods employed in business-to-business marketing versus consumer marketing.

These two learning objectives are closely related so we treat them together, here. The essential ingredients for successful market research in business-tobusiness marketing are identical, in theory, to consumer research. However, smaller numbers of customers, more complex buying entities, and a competitive environment (often with a heavy technology component) argue for methods that a) Go much deeper into customers’ internal dynamics, and b) May focus more on individual differences between customers as much or more than trying to generalize from a sample to the total population.

Methods used tend to be more qualitative, often relying heavily on informal conversations with the marketer’s network of contacts.

Differences from Market Research in Consumer Markets (PowerPoint 6.18) • Concentrated Markets • Diversity of Interests in the Buying Center • Technical Expertise Special Circumstances: • Time Compression • Uncertainty

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Learning Objective Understand how current trends influence how market research is done in business-to-business marketing.

Market Research for Entrepreneurial Marketing Entrepreneurial marketing ...

• Can occur in either startups or established companies.

• Involves identification and proactive pursuit of opportunities.

• Requires that the marketer face and manage risks. Market research in this context, then, becomes a way to manage risk rather than avoid it.

• Often a “learn-as-you-go approach.”

Market Research with Online Data Collection and Analytics Software Market research is taking on new roles and new forms.

• Online researchers such as Greenfield Online and Harris Interactive offer easier, cheaper, and faster ways to create surveys and collect data through the Internet and World Wide Web. o Business-to-business marketers often avoid survey research because the number of customers in many business markets is so small. o Online surveying can remove many of these barriers when properly designed and managed, to be attractive and useful. o Companies like InsightExpress, Survey Monkey, and Zoomerang give marketers more control over their own survey creations. o Care must be taken as marketers without much, if any training as researchers can obtain useless or even misleading data. o Marketers need to add real research skills, particularly survey construction capabilities, to their bag of tools.

Use of Analytics Software, also called Business Intelligence Software Analytic software can help in the evaluation of marketing programs and campaigns, using both externally and internally generated data. Uses include: Text Example: Milwaukee Electric Tool, Inc. adopted a system from Hyperion Solution Corporation (now part of Oracle Corporation) to ▪ Analyze and understand market segment purchase behavior ▪ Plan customer retention programs ▪ Evaluate marketing program performance This was after Milwaukee had spent several years trying to make use of a system that collected a lot of performance data but did not produce insightful analyses.

Personal Interviews: Obstacles in Performing Qualitative Market Research (PowerPoint 6.19) • Small number of prospective customers within many business markets.

• Size, complexity and informality of the buying center. .

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Unpredictability of buying center interactions.

Technical or complex nature of products in many business markets.

Short time horizons for making decisions.

Lack of time for respondents to participate.

Heightened uncertainty about market dynamics.

Exhibit 6-6: (repeated below for convenience) Improving Cooperation from Interview Respondents (PowerPoint 6.20) • • • • • • •

Demonstrate an understanding of the respondent’s organization If necessary, reassure confidentiality of source Ask open-ended questions–have questions prepared to serve as an outline Have some follow-up probing questions scripted and ready, as well Lead in with an easy question or two to break the ice Ask the important questions early in the interview; then if you run out of time, you’ll still have obtained the important material Don’t overstay your welcome; if you run out of time, ask to finish up over the phone or by e-mail

(Continued on PowerPoint 6.21)

To help get the most out of the interviews: Ask essentially the same questions of every person interviewed Take care to ask for what you need to know, but be flexible–be a sponge Take good notes; write a summary of the interview immediately after the interview, while it’s fresh in your mind

• • •

Learning Objective Understand the theoretical context guiding the collection of competitor data.

Customer analysis should precede competitor analysis (even though students will try to start with competitor analysis since it is easier to find competitive data on the web) because competitive analysis is about paying attention to the right competitors and learning how well they can provide value for customers.

If the analysis starts with customers, customers can tell you who the competitors are likely to be, what value customers want, and how well competitors provide value–thus informing your analysis of competitors.

The Nature of Competition Innovation has the effect of changing market dynamics, sometimes radically.

An economic analysis based on equilibrium can be misleading–markets seldom reach equilibrium, they only tend to move toward it while innovative forces tend to undermine or change the nature of equilibrium. With this dynamism in mind, Porter’s 5 Forces model provides a good structure for analyzing competition: existing direct competition, competition from channels, competition from upstream suppliers, competition from new entrants and competition from substitutes. We have changed Porter’s 5 Forces to include a 6th force, partners through value networks, consistent with our concept of value networks.

Exhibit 6-7: The Six Sources of Competition (PowerPoint 6.22) .

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1. Existing direct competition 2. Competition from channels 3. Competition from upstream suppliers 4. Competition from new entrants 5. Competition from substitutes 6. Competition from value networks Learning Objectives Know what kinds of data need to be collected on competitors and likely sources for these data.

Understand the effect of current trends on competitive information collection.

What to collect, how to collect it and the effects of hypercompetition and time compression.

Information to Collect on Individual Competitors (PowerPoint 6.23) • Goals What level of performance does the competitor want to achieve?

• Strategies Through what means will the competitor attempt to achieve these goals?

• Capabilities What resources does the competitor have that can be used to pursue its strategies?

• Assumptions What is the competitor’s mental model of how its markets work?

Sources Of Competitive Information (PowerPoint 6.24) Should start with customers, but also include • The Internet • Business and trade press • Trade shows • Competitors’ communications • Other sources Appendices The appendices at the end of this chapter provide additional advice for students/practitioners for performing market research in business-to-business settings. The advice is not exhaustive, but we hope it will give readers some thoughts on how to gather market information in the real world. – RV, JG, WP Key Terms alpha test .

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assumptions beta test capabilities conclusive research design decision evidence seeking exploratory research focus groups goals go/no-go decision incentives for participation market intelligence personal interviews primary market research response rates sample secondary data sources of competition strategies targeting decision time compression Answers to Questions for Review and Discussion 1. Why is market research needed in business-to-business marketing? Why can’t decisions always be made based on the manager’s experience and intuition?

Market research is needed in business-to-business marketing because marketer’s experience is limited and markets change. Even though a manager may have experience in several market segments, she may not be familiar with all segments. Experience can also be an anchor to the past. As for intuition, even folks with good intuition are fallible and fallibility can be extremely costly.

2. What factors make market research in business-to-business markets different from research in consumer markets? What are the resulting characteristics of businessto-business market research?

The factors that make market research different in business-to-business markets compared to consumer markets include smaller sample size potential, greater technical knowledge in businessto-business and diversity in needs and viewpoints within the buying center. Consequently, business-to-business market research, compared to consumer market research, tends to be more qualitative, based on individual interviews of customers and prospective customers.

3. Compare the data requirements for go/no-go decisions, targeting decisions and design decisions.

Data requirements for go/no-go decisions, targeting decisions and design decisions are as follows: .

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Go/no-go decisions Whether or not market opportunity exists Measure market potential size Determine market growth rate Market interest Determine potential acceptance of intended target market Targeting decisions Collect data to distinguish segments based on needs To ascertain need strength To determine fit with firm’s strengths To estimate costs of targeting and addressing needs Confirm/deny segment size Design decisions Segment definition of situation, preferences, buying behavior Segment definition of needs/benefits Significant in-depth understanding to determine how best to design the offering

4. What are the differences between exploratory and conclusive research? When could exploratory research be used effectively without progressing to the use of conclusive research?

Difference between exploratory and conclusive research: Exploratory Research designed to ascertain context and possible relationships. It’s used as a first assessment of potential in a market or markets for product concepts, strategic opportunity definition, pricing iterations, channel modifications and communications messages and channels.

Conclusive Research designed to confirm preliminary findings, often with more of a quantitative approach. This allows the marketer to make more definitive decisions, but presupposes that data can be collected in a timely and cost effective manner and that the data are a valid representation of the market or customer reactions to marketing variable. These data may be so expensive to obtain or so invalid, that the marketer may design the marketing program based on exploratory research. The design would then allow the constant collection of data that would indicate how well the market is responding and would further allow the adjustment of strategy and tactics as this “conclusive” information is collected and interpreted.

5. Why do the authors assert that research for segmenting markets and research for designing offerings aimed at target markets should be kept distinct, instead of run in the same research study?

Research for segmenting markets should be distinct from research for designing offerings because the former requires information on multiple segments and the latter requires detailed information on only a few. The levels of abstraction are different. Collecting data sufficient to design programs in all segments is costly in time and money.

6. In what kinds of markets would you want to use quantitative research similar to .

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that often used in consumer research?

Quantitative statistical research is best used in markets where there are many customers. In markets with relatively few customers, quantitative research is still useful, but data collection approaches census rather than sample and needs to be interpreted as such.

7. Why is it more difficult to do competitive analysis in today’s market than it was a decade or so ago? Explain in terms of the six forces of competition.

It is more difficult to do competitive analysis in today’s markets because (a.) real and potential competitors may differ, (b.) the ability to determine new entrants is becoming significantly harder, (c.) opportunities for substitutes expand proportionately to the growth in technology, (d.) emerging and growth markets are often less well-defined in terms of actual longer-term needs. A big problem is the increased use of value networks and the resulting requirement to interpret the strengths and weaknesses of partnerships rather than of individual competitors.

8. From a general viewpoint, what are you trying to determine about competitors when doing competitive analysis?

When a competitive analysis is undertaken, the primary issue is to determine future actions of competitors and likely reactions to your strategies and tactics

9. How would you go about collecting information on each of the following competitor characteristics: goals, strategies, capabilities and assumptions?

Information collection: Goals Annual reports Internet News releases Customers Business press

Strategies Annual reports Internet Public speeches Own sales people Trade shows

Capabilities Annual reports Business press Own sales people Business press

Assumptions Customers Other compet.

Trade shows Business press

10. Describe how competitive analysis is like doing a jigsaw puzzle or creating a mosaic. Why is it like this?

Competitive analysis can be likened to a jigsaw puzzle or crossword puzzle to the extent that there is no singular place where all the necessary answers can be found to determine competitive strengths, weakness, and threats. Solid analysis can only come from an amalgam of as much data and confirming or denying data that can be collected, analyzed and reported. Field teams should be encouraged to “soak up” as much information from customers as possible.

11. Discuss the strategic implications of trade shows as sources of competitive information. What types of information will be available?

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Participants in trade shows will tend to display the products and programs they see as important.

The competitors’ strategies will be at least partially evident from their booths. Competitors may also make presentations in trade show sessions, revealing more about their perceptions of what is driving markets. Over time, a competitor’s use of trade shows can be correlated with their actual moves in the market. Patterns may emerge allowing the marketer to anticipate the timing or direction of the competitor’s new strategies and tactics.

Appendices APPENDIX 6-1: TYPICAL RESEARCH PROBLEMS TO BE OVERCOME BY ATTENTION TO GOOD RESEARCH METHODOLOGY Some typical problems in the use of market research that we have seen include the following: • Misspecifying the problem. This usually comes from misunderstanding the general nature of the market or how the strategic management process (see Chapter 5) should progress. For instance, one of the authors was involved in a project in which managers in a company wanted to “fine tune” their targeting and positioning. The research revealed that their beliefs about market structure and customer needs were inaccurate and that they were launching a product into a nonexistent market. Needless to say, fine-tuning was not the managerial issue in this case. If the problem is misspecified, everything that comes after this, then, has limited value.

• Designing a study that does not provide enough of the right kind of information to inform the decision maker.

• Choosing the wrong kind of data collection method or analytic tool. This is often the “kid with a hammer” problem: give a kid a hammer and he will find a lot of things that need pounding.i Many business marketers, particularly in the high tech and Internet realms, have fallen in love with focus groups. Often this is the wrong type of research for the issues under scrutiny.

• Choosing the wrong respondents. Very often in business marketing only one person in the buying center is queried.

• Drawing conclusions that are not supported by the data collected.

• Using the results of a study to draw conclusions about another problem altogether. Granted there may not be enough time to do another study, but the limitations of the study must be clearly recognized.

APPENDIX 6-2: USEFUL SOURCES OF CUSTOMER INFORMATION In the new online environment, marketers can find several tools that can help in understanding customers, users, channel members and even competitors. Some of these resemble off-line tools that do the same thing. Usually, the online form of the tool tends to work better or faster. Others have no off-line counterparts; they are simply something that is unique, that can only be done online.

User groups have been around for years (for a sampling of business-tobusiness user groups, go to http://groups.yahoo.com and view the list of product user group discussions that Yahoo hosts). In their off-line version, a marketer, customer service specialist, or technical specialist would set up the group, recruit its members, and manage the interactions through mailings, phone conferences, yearly conference .

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meetings, and, often, e-mail. As proprietary online services such as CompuServe and Prodigy came into use, companies started to move more and more of their user group activities to these new “communities.” Their proprietary nature, though, kept many users from participating. Similarly, many companies used “listserve” e-mail communities for their user groups or “UseNet” news groups. Both of these required the users to have Internet access and to be somewhat computer/Internet literate.

Listserves and UseNet groups generally limited the nature of interaction among users and customer service people to text-based communications. Online services had a little more flexibility in the use of graphics but were still somewhat limited. The advent of the Web enabled user groups allowed users to have much richer interaction.

While user groups were principally used for customer service interactions, user group communications can also be used for exploratory market research. Marketers, or research companies they hire, can treat the user group as a large focus group. The researcher asks questions and analyzes the answers. The researcher may set up the sessions in a way that other user group members may or may not be able to read everyone’s responses, depending on whether the researcher wants discussion answers or not. User groups may also be used as a panel of respondents for surveys. These are still exploratory in nature, because the generalizability of the data is unknown.

While user groups have fairly restrictive entrance requirements (e.g. members have to be users) a similar kind of online organization can be constructed using online discussion groups or discussion boards. For companies that do not want to incur the IT cost, or who want to set up a discussion group quickly, several web sites exist (e.g., Google and Yahoo both have more than adequate facilities for setting up groups) that allow a company to create discussion groups. The cost is free and administration is straightforward. The company must be careful, though, to offer participants real value in exchange for their participation. Such value might be given to participants in the form of useful information, collections of links to other resources, presentation of research results, or monetary compensation. These discussion groups could be run as online focus groups. They would, of course, have most of the problems of focus groups, particularly the uncertainty as to whether discussions are being driven by people who are not representative of real prospective customers.

The growing popularity of blogs and other online forums has prompted companies to pay more attention to what is being said about them on the Internet and has given rise to a new kind of market research aimed at finding useful information in the sea of online chatter. Carmaker Volkswagen AG has used a service

by Techdirt, Foster City, California, to find out which new technologies are generating the most customer response. “The key is the ability to get a pulse quickly,” says Steve Sommers, senior manager of market research at Sony Corp., which hired Cincinnatibased Intelliseek Inc. to monitor what people are saying about Sony and its products online. “We move at a pretty fast clip here.” Other companies have created panels of what it calls "word-of-mouth influencers," a list of thousands of bloggers and message-board posters to analyze the influential blogger in the online community and to examine traffic numbers. According to Tim Holmes, executive director of public affairs for Ford, "To make full use of real-time information, you need to develop an internal structure that can react at the same speed.”ii Advisory boards are another variant of the kinds of groups already discussed.

Advisory boards of various kinds have been around for a long time. Advisory boards .

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would tend to have more permanence in their membership than discussion groups and would deal with topics more far-ranging than user groups. They are more decisionoriented−particularly with respect to strategic decisions–than discussion groups.

Advisory boards would generally have a limited number of members as well.

Accordingly, advisory board members can be asked to provide some big-picture views of buying behavior. While they provide useful information on the detail of buying behavior, most advisory boards would not feel well used for such purposes.

The company’s own sales force is usually a good source of information. The marketer or researcher has to be careful in using this source, though. Most sales forces are heavily incentivized, both positively and negatively. Consequently, salespeople tend to take actions when it is clearly in their interest–often only their short-term interest–to do so. Consequently, it is important for the researcher or marketer to keep information requests to a minimum, both in frequency and level of effort required. If the marketer has enough of a budget to provide some incentives such as a sweepstakes or other premium, the level of cooperation should rise. Finally, the marketer or researcher should be careful to clarify that sales quotas are not set based on the salesperson’s predicted sales levels. If the salesperson believes sales quotas indeed are set based on the responses she gives, the results are likely to be skewed.

The marketer may also be able to collect customer data informally in ways that may not be entirely apparent. One such method is to collect data when entertaining customers or prospects. Often marketers take customers to dinner or to sporting events, host parties at conventions, or provide other entertainment events. This may afford the marketer the chance to ask a few casual but well-thought-out questions.

The answers in the casual setting may be more frank than they would be in the everyday business environment.

SOURCES OF SECONDARY DATA A significant amount of decision making for business marketers derives from interpretations of secondary data. In this section we give a brief review of some of the most prevalent and useful sources of such data.

Trade organizations often conduct good research of general interest and make the

results available for members. Often the data are also available to the general public, either on a paid basis or for free. The quality of such research varies tremendously.

As always, the marketer must look closely at the methodology employed before interpreting the results.

Subscription services provide detailed information to companies who subscribe. The analysis is provided in depth, usually concerning a single market or industry. The data and analysis are provided periodically, anywhere from weekly to quarterly or biannually. Information may include updated statistics on the performance of a market or industry. Many subscription services also include ad hoc reports on current issues and trends. In many services the subscribers are permitted to submit several of their own questions to be included in the data collection. While this source gives more detail than is found in the public arena, it still has the drawback that it is collected and interpreted by a third party. Hence, except for the few questions that subscribers .

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contribute to the questionnaire, it is still secondary data, albeit focused and usually useful secondary data. Another drawback is the price of subscription, which is often prohibitive for smaller companies.

In contrast to subscription services’ reports, many research vendors perform other studies that constitute secondary data. These vendors create special reports on topics of interest and offer them for sale for a one-time fee. These are usually much more extensive than the special reports provided to research subscribers. These are often timely and useful. Marketers must pay close attention to the definitions and methods used, though. Often research vendors studying the same issues come to strikingly different conclusions. The differences often arise from differences in approach.

The federal government is one of the best sources of data on domestic industries. The Bureau of the Census, the Department of Commerce, the Department of Labor, the Small Business Administration and all of the bureaus and agencies with special commercial jurisdictions create a mountain of information. Two of the most useful for business marketers are from the Bureau of the Census. These are County Business Patterns and the Annual Survey of Manufactures. County Business Patterns provides a count of the number of companies, sorted by the size of company as measured by the number of employees. Reports are generated for each county in the United States and aggregated into data by Standard Metropolitan Statistical Areas (SMSAs), by states, and for the U.S. as a whole. The Annual Survey of Manufactures provides estimates of revenues and line item expenditures for companies in all the manufacturing standard industrial classification (NAICS–North American Industrial Classification System) codes for each state, each year. The problem with most of the federal government data is that it is usually about two years old before it comes out in a report. Some of the national-level economic and labor data are reported more quickly, but this information is usually not useful for specific industry analyses.

Two web sites are particularly useful in finding federal government statistics.

The first–http://www.fedstats.gov−is devoted solely to government statistics. The second–http://www.firstgov.gov−is a portal for finding anything governmental, including statistics, but also other kinds of research.

State and local governments produce research reports on similar economic and business issues for their own states. Often, the data reuse federally reported data.

However, they may collect their own data and report it as well. For a regional or single city-focused business, these local sources may prove to be the most useful sources. Economic development agencies often are the best sources of this local information.

International trade organizations, such as the World Trade Organization, often have good sources of data on international trade. For someone that is used to looking at domestic data presented by the federal government, the availability of useful data on international markets will be disappointing. The international trade organizations are just not as well organized for this as the federal government is. For similar information beyond the U.S., Eurostat, the European office of statistics and the Chinese government statistics office can provide such information.

APPENDIX 6-3: CHECKLIST OF THINGS TO KNOW ABOUT CUSTOMERS 1) Who is in the buying center? .

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2) Is it the same for most companies in the target segment?

3) How does this buying center operate?

4) Is it the same for most companies in the target segment?

5) What are the key dimensions of need for the organization?

How are they manifest at different stages of the customer decision process?

6) What are the key needs of the principal actors in the buying center?

How important is it for the customer to address these needs?

How are these manifest during the decision process?

7) What is the buying process, nominally and actually?

How flexible is it?

Can it be influenced?

What barriers will be employed to block supplier access to the process?

8) How many organizations are like this (or close)?

9) Is the number of organizations who will buy increasing? How many and how fast?

10) Will the organizations that buy increase their purchases over time? How much and how fast?

11) Where in the Technology Adoption Life Cycle are the current customers (or likely first customers, if this is for a new product)?

12) Is there an established budget? If not, what do customers currently spend to address the problem your company will solve for them?

13) Who do customers think are the current and future competitors?

14) What do customers think are the competitors’ strengths and weaknesses? i Attributed to Abraham Kaplan in Paul Dickson, The Official Rules (New York: Dell, 1978), 96 ii Vauhini Vara Companies Mine Blogs For Market Research, The Wall Street Journal Online, April 2007

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Chapter Seven Segmenting, Targeting and Positioning Authors’ Comments Segmentation is just as important in business-to-business markets as it is in consumer markets. Even when there are relatively few customers to address, very often there are multiple buying centers within each one and they differ in terms of needs and buying behavior. The value chain gives a good rationale for finding segments based on differences in value sought and we make case for thinking about segments in the value chain framework.

A method of finding and addressing segments that we have observed in business-tobusiness marketing is what we have called segmentation by innovation translation.

Given initial success with an innovative offering in an initial customer, the company looks for opportunities to translate this business to new customers who seek offerings producing similar types of value.

Also in this chapter we present a systematic approach to choosing target segments based on segment attractiveness and choosing segments that will combine to meet the marketer’s objectives.

Positioning is presented as positioning in the mind of the customer, or customers within the buying center. The marketer will attempt to influence this positioning, forming the framework for the marketing strategy.

Opening Vignette

Panasonic Targets the Rugged Laptop Segment

In 1996, Panasonic was eager to enter the laptop computer market, but realized that as a late entrant, they would, at best, be a “me too” product. Instead, Panasonic created a different class of notebook computer, the Toughbook, targeted at those users that must have computer functionality in less than ideal environments. A niche market, other major manufacturers had for the most part ignored these users.

Panasonic priced the Toughbook at roughly twice that of a “regular” computer.

The rest as they say, is history. The U.S. Army took an interest, as did other “hard use” organizations. While originally a small niche, the segment grew to include any user not willing to risk their laptop to environmental circumstances. Today, other market players exist, Panasonic still “owns” the market they first developed.

©2011 Pearson Education, Inc. publishing as Prentice Hal

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Learning Objective Reinforce the student’s understanding of segmentation as a tool to manage markets and resources.

Students will have been exposed to the idea of market segmentation in a Marketing Principles course.

In business-to-business marketing, segments are clusters of firms that are distinct from others in terms of what they need and buy as well as how they buy (PowerPoint 7.2).

Targeting (PowerPoint 7.3) a segment means to produce an offering that meets the needs of customers in the segment better than competitor’s offerings and reaching that segment through communications and distribution channels so that customers realize the superior value offered.

Marketers strive to choose segments to target that are (PowerPoint 7.4): • Measurable • Accessible • Substantial • Actionable While these four characteristics are universal definitions of the properties of a good segment, the following definition may be useful to students in business-to-business marketing: “An effective segment has members that homogeneous within the segment and those members as heterogeneous as possible with the members of other segments.” (PowerPoint 7.5) Positioning (PowerPoint 7.6) is the relationship of the product and marketing activities−relative to other segment participants−such that prospective customers perceive the superior value.

Positioning is in the mind of the customer and becomes the marketing strategic framework to achieve goals/objectives towards the targets. Resources of the firm are managed in a way to make successful positioning possible.

Learning Objective Recognize segmentation as an effective management tool.

Three possible strategies for addressing Market Segments (Porter, 1980) (PowerPoint 7.7) • Competitive advantage through low cost position.

• Competitive advantage through differentiated offering, yet appeal to mass markets (effective when economies of scale already exist).

• Competitive advantage through providing exactly the right product to a niche market willing to pay a premium for the special attention. .

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As discussed throughout the text, these three strategies can apply to the same offering, depending on where the offering happens to be in the PLC. • Maturity−advantage through low cost position • Growth−advantage through differentiated offering • Introduction−advantage through providing exactly the right product to a niche market willing to pay a premium Different market segments are attracted to offerings at different points in the life cycle, supporting adoption behavior as a legitimate segmentation variable.

Exhibit 7-1 describes common bases for business-to-business segmentation.

(PowerPoint 7.8) Learning Objective Develop an understanding of segmentation based on the concepts of value and the value chain.

The value chain concept depicts the chain of value creating activities producing the offering that is offered to a “segment” of customers. When the customers are relatively homogeneous in the value they seek, the offering can be structured to provide that particular value. Working backward through the value chain, the chain of activities that produces a limited set of values is generally more efficient than a value chain that produces lots of value elements. Hence the value can be produced at less cost than the offering that must produce multiple kinds of value.

Exhibit 7-2a, Segments and the Value Chain (PowerPoint 7.9) If the value produced is costly, a segment that highly values this offering–the target segment–is more likely to be willing to pay more for offering.

Consequently, perceptive choice of target segment can still produce competitive advantage and profitability even when the offering is costly. Panasonic and the ToughBook illustrate this idea well.

Exhibit 7-2b, Segments and the Value Chain (PowerPoint 7.10) Learning Objectives Introduce the market information needs necessary for successful segmentation.

Understand when and how an analytic approach to segmentation is useful.

Understand how segmentation supports business-to-business marketing decisions. .

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An idea not discussed in many marketing texts is the difference between an analytic approach to segmentation and an innovation translation approach. The analytic approach is based on research; the innovation translation approach is a discovery approach based on iterative interaction with customers Analytical approach develops two sets of data: (PowerPoint 7.11) • Determine the relative size and growth potential of segments • Determine individual segment needs and buying behavior The North American Industry Classification System (NAICS) code is a scheme of industry classifications designed and used by the U.S. government, as well as Canada and Mexico. To see a full description, go to http://www.census.gov/naics/. (PowerPoint 7.12) Exhibit 7-3 shows the top-level industry groups in NAICS (PowerPoint 7.13).

Exhibits 7-4 & 7-5 assist the student through a sample process.

Learning Objective Understand customer involvement in business-to-business segment translation and evolution.

Innovation Translation: (PowerPoint 7.14) The process of looking for these new customers−verifying the existence of a segment by translating the technology of the offering from the first customer (Business Development) to additional customers.

Innovation translation involves exploratory interaction with customers and prospective customers.

This activity usually occurs at the chasm, as marketing works to verify that a new offering has opportunities beyond one customer or narrow segment (See Chapter 11, Business Development and Planning) Ideas are offered to customers and discussed in depth. If some early products are available, innovation translation may be accomplished by showing an existing or prototype product to prospective customers. This collaboration, if successful, results in an offering tailored to the specific needs of the new customer.

Innovation Translation is often the primary responsibility of Field Market Development (FMD) personnel or other industry specific title Consider relating successful innovation translation to Market Ownership. Successful translation leads to an offering closely developed with input from the customer. The customer may be an early user in the segment, and success aids in the establishment of a standard that future competitors must meet.

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Learning Objective Understand segment evaluation and the targeting process to maximize market opportunities.

Exhibit 7-6: Factors in Assessing Segment Attractiveness (PowerPoint 7.15) Attractiveness is determined from information that comes from all the elements of an environmental analysis.

Some organizations may want to allocate weights to the various factors and then assign attractiveness scores based on a qualitative assessment for each segment.

There is a certain logic to the analysis of market segments. It follows this sequence (PowerPoint 7.16): • Setting goals; these usually include achieving a certain sales level, growing at a desirable growth rate, and maybe achieving other less tangible goals; • Defining segments based on some measures that reflect differences in needs; For each segment, determine how attractive the segment is.

• Market Attractiveness–size and growth of the segment; profit potential in the segment • Competitive Attractiveness–number, strength and relative advantage of potential competitors vying for the segment • Channel Attractiveness–accessibility of the segment through channels; power position of the potential channel members • Internal Attractiveness—Playing to Your Strengths–matches well with capabilities and cost structure • Attractiveness–Other considerations Determine the extent to which the goals can be reached if the segment were targeted–this requires assessing the response that can be obtained from each segment, considering a differentiated offering that competes against offerings likely to be provided by competitors; • Rank segments based on the extent to which they would contribute to reaching desired goals; • Choosing the most attractive segments, by ranking, until there is assurance that the organizations will be met To pursue this approach, the distinction of segments on important dimensions must be doable. This usually means that secondary data are available or that primary market data have been collected.

Exhibit 7-7: Segment Attractiveness for Hypothetical Example (PowerPoint 7.17) The hypothetical example, shown in Exhibit 7-7, of the market research company determining the segmentation for a new online service, .

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illustrates how target segments can be chosen analytically.

Walking the students through the calculations in the hypothetical example in the text will show how overall attractiveness can be determined. This can be used to show that demographic segmentation is not the only way to identify and target segments–all these segments are within the demographic grouping of “small companies.” It should also illustrate that something other than demographics produces more usable segments This hypothetical example sets up the approach to analyzing the Townsend Productivity Resources case.

Hypercompetition and time compression create uncertainty that cannot be addressed through more analysis. To analyze and choose segments in this environment, the marketer needs to use a combination of the analytic and innovation translation approaches Learning Objective Reinforce market-positioning philosophy through an understanding of its importance as a tool to enhance both customer and vendor value.

Customer’s beliefs about the positioning of the offering depend on the value they experience. This comes, in part, from the marketer: • Creating value better than competitors on one or more key dimensions • Communicating this differentiation • Delivering on the promises consistently • But also from the customers’ own experiences and from communications they receive from other customers and non-customers The Technology Adoption Life Cycle (PowerPoint 7.18) (Also PowerPoint 2.21) Adopter Categories: (PowerPoint 7.19) • Technophiles adopt the very newest technologies, just to try them out and experiment. These adopters do not require a fully developed product or offering • Visionaries see the competitive advantages they can build in their organization with the new technology. They buy before the product or offering is standardized and require a custom offering built around the new technology.

• Pragmatists want to gain competitive advantage through new technology, but will not buy until they believe the product is easily adopted with minimum upheaval. They will distrust the references from visionaries. They need a fully developed offering.

• Conservatives tend to adopt only when it costs them not to adopt. They need to be convinced that the offering is exactly what they need. .

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Laggards will find reasons not to adopt, even when all

evidence says they should.

Adopter categories of the TALC are a special case of segmentation with implications for targeting and positioning (PowerPoint 7.20): • Technophiles – their principal needs are curiosity; target them early in the TALC to get feedback on the technical aspects of innovative products and to get initial notice from technology gurus • Visionaries – want to get a jump on their competition and will pay for it; target them to obtain help in making the offering robust and in generating early revenue • Pragmatists – want to keep up with the cutting edge; they want the “whole product” without a lot of risk or drama in adoption; target the ones who need it most to “cross the chasm;” use innovation translation to target additional accessible pragmatist segments • Conservatives – want newer innovative products because they can no longer compete with products they buy based on older technology; target them based on particular niche needs so that they will be willing to pay a premium • Laggards – have unique needs met by old technology; they often consider it courageous to not adopt; target them only if you have a special advantage in dealing with them or if you have a special relationship that mandates that you continue to deal with them Positioning of a product line Products in the line will be aimed at segments that have similar, yet distinct sets of needs.

The problem–or opportunity–customers will perceive similarities in positioning of the products in the line, whether this is intended or not.

Goal is to get members of the different segments to see and value both the differences and similarities (PowerPoint 7.21).

• Relate to the overall corporate brand positioning, or at least considered in light of it.

• A flagship product may be desired.

Example: iphone product in the line is already established, well known, and embodies the desired position. If one does not exist, then a product that can achieve this level of awareness and perceived position should be considered.

• Position consistent with McKenna’s idea of market ownership.

Position based on: o high quality standards, o continuous innovation, o thoroughly satisfying market segment needs, and o establishing credibility as delivering this level of value continuously in the future. .

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Key Terms accessibility actionability analytic approach (to segmentation) attractiveness (of segments) bases for segmentation differentiation field market development (FMD) personnel innovation translation approach (to segmentation) measurability niche North American Industry Classification System (NAICS) positioning positioning statement product line segmentation framework segmenting substantiality targeting Answers to Questions for Review and Discussion 1.

Consider the following segmentation basis variables and note potential strengths and weaknesses of employing each in a segmentation framework: a. Demographics b. Technology c. Culture of technology adoption d. Perceived value subject to industry standards e. Point of technology adoption of the customers’ customers Segmentation basis variables…strengths and weaknesses: DEMOGRAPHICS: Strengths Data are usually most available for demographic groupings–by size of company, SIC or NAICS, geographic location, etc., because governments and trade associations usually collect data this way.

Weaknesses The biggest problem with demographic bases for segmentation is that they are seldom related to differences in value sought.

TECHNOLOGY EMPLOYED: Strengths Data are very often available organized by type of technology employed in processes or products. When customer needs are related to the type of technology they use, then these data will closely reflect useful segmentation.

In addition, if the technology evolution can be forecasted, then this will translate into segmentation evolution, as well.

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Weaknesses There can still be a great deal of variation in needs and buying behavior within groups formed around technology used.

CULTURE OF TECHNOLOGY ADOPTION: Strengths

Related to TALC; adopter types have consistent patterns of behavior and needs.

Weaknesses Hard to collect/measure correctly. This will usually require primary data collection. Even then there are segments and niches that exist within the adopter types.

PERCEIVED VALUE SUBJECT TO INDUSTRY STANDARDS:

Strengths

Can align needs/wants to benchmarks. Groups are based on value, rather than some proxy variable(s).

Weaknesses Will require primary data collection or extensive and possibly questionable assumptions. May focus segmentation and strategy on current status quo, rather than focusing on future segments or segments that can be created by “changing the rules.” Also, standards may be in flux or inadequate and hence segments will change as better standards emerge.

POINT OF TECHNOLOGY ADOPTION OF THE CUSTOMERS’ CUSTOMERS: Strengths Reflects differences in needs at different points on the Technology Adoption Life Cycle.

Weaknesses Difficult sometimes to determine where on the TALC the group is. Needs may still vary among companies located at the same point on the TALC, particularly in the Bowling Alley.

2.

How do the concepts of value and the value chain define how marketers should try to segment markets?

When a segment of customers seek similar kinds of value, the supplier can address that segment with a relatively simple offering, much simpler than if the segment has a great deal of diversity in the kinds of value they seek. Tracing the value chain backwards from the offering, a relatively simple offering implies that the construction of the value chain will also be relatively simple. Hence, costs will be relatively low and the company can concentrate on supplying superior value. This means that finding segments based on similar value sought will tend to produce a higher level of performance for the supplier.

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What is the difference between the analytic approach to segmentation and the innovation translation approach to segmentation?

The analytic approach is based on finding targetable segments with a pre-determined set of variables that will impact on market focus. The innovation translation approach is, in effect, more entrepreneurial and focuses on the translation of individual successes to a broader market. Discovery segmentation relies on relationships with both the “first” customer of the new product and subsequent translation customers.

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What factors do you think will influence how strong the airlines’ perceived need will be for super jumbo jets seating 600+ passengers in the year 2010?

The factors that will influence how strong the airlines’ perceived need will be for super jumbo jets in 2010 will include cost to performance relationships, cost to service need relationships, adaptability to current technology for maintenance needs, as well as the obvious demand from passengers on relevant flight routes.

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Why would you say the market for super jumbo jets is a market segment, even though the customers–the airlines–are the same customers who also buy jumbo jets and other kinds of airliners?

Even though the buyers of superjumbo jets are the same companies buying other airliners, the market for super jumbo jets is a segment because purchases will be based on different needs than needs for other jets. Buying decision processes will likely be different, as well, at least initially.

6.

In Exhibit 7-7, the last column of the table shows that there is a lot of variation in the strength of the need perceived by segment members and in the strength of competition in meeting functional improvement needs within this segment.

Why would these observations argue against choosing this segment as a target segment?

These data argue against choosing this segment, the last one, because of the high variability and degree of inconsistency between key variables; even though the overall attractiveness number is in the range of the others, the individual factor content is not as consistent. This suggests that addressing this segment will be potentially more costly or that value will be more difficult to provide because the value chain required to address it will have to be relatively complicated.

7.

What should a marketer do if, in choosing target segments, he or she runs out of attractive segments to add to the list of targeted segments and it does not appear that objectives can be met?

If a marketer “runs out of attractive segments” before his/her objectives are likely to be met the marketer might investigate product adaptability to other segments and look to define segment opportunities on differently defined criteria. The market research on segmentation might be re-examined to see if a different, better interpretation emerges. Lastly, the marketer may have to scale back the objectives.

8.

Why can marketers only hope to influence positioning and not create it?

Marketers can only hope to influence positioning rather than create it because it is generated in the mind of the prospective customer against attributes that are not always clear or fully measurable. Many positioning influences are not in the direct control of the marketer.

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Compare the importance of positioning in business-to-business markets with positioning in consumer markets.

Positioning is important in both consumer and business-to-business markets. The customers’ perceptions of the value produced by the offering, relative to competitors’ offerings, determine customers’ choices. Accordingly, marketers in either setting need to try to influence the customers’ perceptions. In business-to-business marketing, the number of dimensions upon which positioning is based is likely to be higher than in consumer markets, so the marketer must take greater care to perform well on those dimensions and to communicate this to customers and prospects.

10.

How is positioning an offering for new customers different from positioning for existing customers?

Positioning an offering for new customers relies on faster insights into buyer needs/wants than those developed over time with existing customers; further, concepts of loyalty based on previous experiences are not yet in place to reinforce a positioning strategy. Before new customers will adopt, they will likely require the supplier and the individual sellers to be positioned appropriately, compared to other potential suppliers and their individual sellers. The sellers must be addressing the appropriate elements within the buying center and be perceived as appropriately positioned by those people.

11.

Explain why mass markets require offerings with fewer distinctions than niche markets.

Mass markets require offerings with fewer distinctions than niche markets because there is generally little variation in needs across customers or the costs of meeting varied needs are too great to warrant targeting subgroups within the mass market.

12.

What is the difference between a niche and a market segment?

The distinction between a niche and a segment is largely a difference in popular usage. If marketers make a distinction, they usually refer to a niche as relatively small and insular. A single supplier can usually meet the needs of the niche.

13.

How is McKenna’s philosophy of market ownership, discussed in Chapter 2, reinforced by the TALC positioning strategies suggested in this chapter?

The TALC suggests that a “gorilla” will emerge during a tornado. Standards are built around the offering of the gorilla. Indeed the pragmatist market wants a gorilla to emerge so that order is established in the market. Market ownership roughly corresponds to a gorilla position in the market. Whether it’s called market ownership or becoming the gorilla, this position in the market is desirable to achieve and both concepts describe similar routes to its achievement.

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Define the business segments addressed and positioning of your business school or marketing program. What could your school do to change or improve your target segments chosen? Your positioning?

Business segments addressed and positioned for a business school or marketing program may include relational values imputed to the school or program by the needs and perceptions of the necessary publics. To change or improve targets one must begin to understand the value propositions of the institutions or programs, the availability of allied markets, etc. (This is a question that can be fun in an exam when students are asked to address these issues for the school in question versus competitors).

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Chapter Eight

Developing the Product, Service and Value of The Offering Authors’ Comments This chapter develops three principal ideas.

• The use of the product life cycle to guide the development and management of the offering. o Even though the PLC is not predictive, it still gives a framework for thinking about how strategy must evolve over time. The focus on the PLC continues to give students an anchor around which to gather other concepts.

• Marketing plays a major role in the new product development process. o Marketing’s role is often neglected in product development, particularly in technology companies. We stress the responsibilities of marketing in the process and define what activities marketing should be undertaking in the process.

• Marketing plays a major role, particularly with respect to fast-paced markets, in the decision whether to “make or buy” new product development or new product technology. We frame this decision and show how it fits in with the development of value networks.

Opening Vignette

The Best and the Brightest still have Product Failures

This opening provides the opportunity to discuss some business history through product failures! Many people, including most students, believe that product failures are failures of products − that is, the physical failure of a product, while it can be shown that the overwhelming majority of product failures are related to poor or nonexistent marketing. Here is a short summary of the “failures” noted in the opening vignette: • The Edsel: (~$350 million loss) This car has been the icon of product failure for generations. Gen Y students, however, may have heard of it but probably never seen it. Ask your students to “Google” it. When they find a photo I like to comment that it looks like a BMW sucking a lemon (they relate to BMW). Basis of Failure: Product introduced four years after market research (actually by the standards at the time, very good research) effort ended. The market had changed significantly.

Students may not know that the United States once considered developing a competitor to the Concorde SST. The cartoon of a caricature of the plane, with an Edsel grill, was prophetic. History has shown that the SST was one venture that never became a commercial .

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success.

RCA Project Intercept: (~$500 million loss) RCA wasn’t the only company to attempt to compete with IBM in the mainframe market, but they bragged the most about their efforts−until they failed. The company had established a new division to go after this market.

The Apple Lisa: ($ not known) Yes, even Apple, known by Gen Y for the iPhone and iPod, can have a product failure. For additional details, see the opening vignette for Chapter 14.

IBM Pcjr: (~$100 million loss) Why would the market owner in desktop computers introduce a “junior” product without an open architecture for expansion and the highly regarded standard IBM keyboard, two attribute that had helped IBM own the “PC” market? Perhaps they didn’t realize that consumers at home were also users of the IBM “standard“ at work.

Xerox Star System: ($ not known) Students may be surprised to learn that the graphical icon interface (known today as the “Mac” interface) was not developed by Apple.

(At the Comdex show following the product announcement, I inquired about the Star System at the Xerox booth. Xerox personnel had no idea what I was referring to!)

New Coke: ($?) Coca Cola discovered that in blind taste tests, people actually did prefer Pepsi, and set about to duplicate the taste in their new product! They completely ignored their existing market! Motivated by a slight loss of market share wherever consumers had a choice between Pepsi and Coke (“The Choice of a New Generation?”) such as grocery stores, Coke market research focused on symptoms rather than problems.

Susan B. Anthony One-Dollar Coin: ($?) The U.S. government, ignoring several market studies that said that the coin would not be used very much and that retail establishments would resist it, went ahead and introduced it, in honor of Susan B. Anthony.

RCA Videodisc Player: ($?) Not to be confused with today’s DVDs, this player was introduced in ~1980. It used large, “LP” sized discs and a very different technology than today’s discs. RCA was convinced following their success with VHS recorders that the consumer market would embrace the product, notwithstanding all the market studies that said otherwise. The main use for the VHS recorders was time shifting/recording. The videodisc technology that RCA was so proud of could not record. There wasn’t a selection of pre-recorded discs available either.

Apple Newton: ($?) Apple promised a PDA that could recognize handwriting and be compact enough to carry everywhere. Unfortunately, they over promised. The device could read hand printing with some accuracy, but its physical size was that of a textbook. The market wanted what was promised, not what was delivered.

WebVan: ($?) Grocery shopping via the internet sounds reasonable. Caught in the momentum of the “dot.com” era, WebVan convinced investors to create the infrastructure for a mass market of shoppers (Distribution centers, delivery trucks, and so on). Did they ever segment the market?

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Without a doubt, you can find examples more closely related to your community and/or students. However, the common thread above was the failure to recognize and/or understand the markets and what the customer regarded as value. Good but not timely market research, poor market research, failure to design marketing channels for the intended market, executive hubris, and so on, lead to “product” failures.

Learning Objective Understand the importance of customer and supplier involvement in the development of new offerings.

Value offerings mean collaborative efforts between customers and suppliers as an integral part of any product offering. Key ingredients for success also include an awareness of and response to the product life cycle, including issues of scale economies passed on to buyers, timing for offerings, and technological needs.

The Product Life Cycle: Exhibit 8-1 (PowerPoint 8.2) shows the PLC with five stages.

• Development • Introduction • Growth • Maturity • Decline Assumptions associated with use of the PLC: • All products and offerings have a limited life.

• All products pass through different stages of evolution. o For each of these stages, there is an idealized marketing mix that best fits the environment in that stage when the life cycle is viewed from the viewpoint of a product category. o The different stages offer the organization different opportunities and threats, and market segmentation and targeting should reflect the changes. o There are discontinuities in sales as products pass through the stages as different customers/segments adopt of discontinue use of the offering.

▪ Exhibit 8-2 (PowerPoint 8.3) shows the Technology Adoption Life Cycle−repeated from Exhibit 2-5.

• Profits vary over the life cycle, contributing to the need to modify the marketing mix. Profits classically peak in the late growth-early maturity time frame.

Development Stage (PowerPoint 8.4) Note that the transition between “development” and “introduction” is most often a continuous period rather than a specific line.

During this stage: .

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No sales volume.

Product is not yet completely defined−may be a collaboration with customers or value network partners.

Profits do not exist.

Price/value are being determined.

Promotion may be oriented towards publicity about technological developments.

Heavy investment to prepare the offering to satisfy customer needs.

From the viewpoint of the degree of innovation, consider a discussion of high learning versus low-learning products, particularly where the developer’s view does not correspond with that of the customer.

Introduction Stage (PowerPoint 8.5) • Low sales volume.

• Product is somewhat basic–little need for competitive differentiation.

• Profits are typically negative.

• Price/value are being determined • Promotion is used to build awareness.

• If many offering elements have been outsourced or are part of a first-time value network, the logistical process experiences a learning curve.

Growth Stage (PowerPoint 8.6) • Profits increase−new adopters accept product−pragmatists begin to accept the offering.

• Market penetration pricing may be appropriate as competitors bring pressure on high margins.

• Accordingly, product differentiation becomes important to distinguish the offering from competitors (and to help protect margins.)

• Distribution is often important in the training and education of customers.

Key Issues as Offering Enters Growth Stage: (PowerPoint 8.7) Consider a discussion of product acceptance among pragmatists as well as the need for differentiation as competitors enter the market.

Reinforce the significant changes, particularly those associated with economies of scale when crossing the chasm.

The multi-chapter case, Sensacon Corporation, begins here.

Maturity Stage (PowerPoint 8.8) • Profits have peaked, competition fights over market share.

• Promotion reinforces buyer decisions and focuses on supplier reputation and value.

• Remaining major players compete in an oligopoly.

• Distribution strives to serve all market sub-segments.

• Price is a major component of the marketing mix. .

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New customers do not replace sales volumes as old customers move to newer products.

Decline Stage (PowerPoint 8.9) • Consolidation usually occurs among suppliers.

• Product line is reduced to minimize product variation–efforts are made by remaining competitors to operate at productive rates.

• Promotion reduced to minimal levels to accommodate existing customers.

• Price, particularly associated with long-term contracts, is a major part of the marketing mix.

Learning Objective Know the role of marketing in the development process, particularly in a market-driven firm, as the source of direction and definition.

Traditional New Product Development Model (PowerPoint 8.10) Reinforce that, though this model is often discussed sequentially, in reality many of these steps are concurrent. It may be helpful to draw parallels to the Buyer Decision Process from Chapter 3.

Stage 1: Idea Generation Stage 2: Product Screening Stage 3: Business Case Analysis Stage 4: Product/strategy/plan development Stage 5: Test Market Stage 6: Product Launch Stage 7: Hand off to the innovation translation/customer education team (Market Development).

“Innovation Translation” is discussed in Chapter 7.

Notes on Product Development Customer/Market Orientation (PowerPoint 8.11) Two product development approaches: • Engineering Driven (assumes customers buy technology). Relate to the “Product Concept” of Marketing.

• Market/Customer Driven (assumes customers seek solutions). Relate to the “Marketing Concept” of Marketing.

Team Approach (PowerPoint 8.12) Avoid silos−cross-functional approach Goal-oriented rather than discipline-oriented Product “Champion” often required−overcome inertia, business hurdles.

Invest in The Early Stages (PowerPoint 8.13) Market Driven standards–offering concept must fit with and support the distinctive competency of the organization. .

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New Product ideas can often be correlated to “question marks” in the Boston Consulting Group Growth-Share Matrix. The greatest idea may not have a fit with the organization, or may be too costly, either financially or otherwise, to be considered.

Stage Gates (PowerPoint 8.14) • Checkpoints along the path of the product development process.

• Multidisciplinary review of the development effort–not individual “steps” in a process.

• Stage gates shadow the new product development process and certain milestones to ensure that: o The original goals and objectives are still viable, o The new product development is still forecast to meet the expectations that were created as part of its initial approval.

THE ROLE OF MARKETING IN THE PRODUCT DEVELOPMENT PROCESS

“Marketing Defines the Outcomes”

We believe that the role of marketing in the new product development process cannot be overemphasized. Too often, a firm that does not give full regard to the marketing function will create new products without marketing input. Once created, marketing is expected to “sell it.” As this is written in Silicon Valley, it would be easy to say that technology “junkies” are particularly prone to this, but as shown by the data below (Why New Products Fail), the malady is not limited to one particular industry.

Consider using marketing’s role in the process as a way to gather the interaction of many of the subjects discussed up to this point (PLC, TALC, Growth-Share Matrix, Buyer Decision Process and so on).

The Role of Marketing: (PowerPoint 8.15) • Understand the technology in depth • Define and redefine current and future customer needs • Motivate other company departments and organizations • Screen and select ideas from all sources • Guide the new product development with the continuous redefinition of current and future customer needs already noted • Reward the efforts of the technical and support staff • Catalyze company resources to get the right talent on the job−be willing to cross traditional company boundaries Reducing the Risk of New Product Failures The text cites data related to the frequency of new product failures. The failure rate for consumer products is much higher than for business-tobusiness products, likely because BTB products are often created through a direct collaboration with the customer(s), while consumer products often will have input from a sample of the market. .

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Exhibit 8-3: Why Do New Products Fail? (PowerPoint 8.16) • The Missing Marketing Plan • No Real Need Exists • The Market Size is Overestimated or a “Me Too” Product Fails to Penetrate the Market • The Offering Fails to Meet Needs Adequately • Market Will Not Pay • Contrary Perceptions of Innovation Learning Objective Recognize the concept of the value network as a powerful tool in creating market ownership.

Collaborators Delivering customer value as a group of organizations, not as a single organization.

The text discusses the idea that the early stages of the development of a value network is collaboration with other like-minded companies to create an integrated solution for a customer.

Value Networks as an alternative to vertical integration, albeit temporary but very fast, leads to a discussion of what vertical integration really is. Many of the industrial pioneers of the last century did not have the luxury of value networks. Ford had to create its own iron ore mines and steel mills. Edison’s light bulb had no value without the “illuminating companies” he developed to distribute power.

Side Note: If natural gas companies had not been myopic in their view of the market, would they have innovated into electric product development? Students may have difficulty grasping that homes were once “piped” with natural gas for consumer use (lighting, etc.) just as they are now wired for electricity. It seems that this might have put an earlier end to the smoking habit.

As successful “new economy” companies (Cisco Systems and so on) develop markets, competition increases. Alternative R&D opportunities are sought. The text describes the development of value networks as a product development business model.

Make or Buy Decisions: Exhibit 8-4 (PowerPoint 8.17) The text discusses the pros and cons of vertical integration, and using the Sensacon case example, goes through several steps in the consideration process.

The text mentions Ford, General Motors, and General Electric as companies that grew through vertical integration. In some instances, it was the only available option (Ford). For others, it made good economic .

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sense through economies of scale (GM). Once the economies of scale were obtained, it made sense to offer the products to the general marketplace (GE). These were 20th century business icons. Today, Ford has downsized, GM is a mere shadow of its former self, and GE has left the plastics business (as it often does with a mature or declining product). As a counterpoint, the sidebar “Microsoft Integrates Xbox Supply” describes a case where vertical integration is still viable in the 21st century.

Key Terms collaborators decline stage development stage discontinuous replacement technologies economies of scale evolutionary product introductions growth stage introduction stage maturity stage negotiated price reductions opportunity costs proprietary disclosure agreements proprietary information stage gates unique or first time value network

Answers to Questions for Review and Discussion 1.

Review the generalized Product Life Cycle as shown in Exhibit 8-1. How well does the PLC model work for rapidly changing technologies? Markets? Why? The PLC model works as well in rapidly changing technologies and markets as in others, but the diffusion process and the time lapse between stages can be greatly accelerated because of the new learning and adaptation of changing technologies, e.g., Beta vs. VHS in videotape, DVD vs. memory sticks, etc.

2.

At what point in the PLC are the following product categories?

Railroads Gasoline Commercial aircraft Desktop computers Genetic engineering category/product railroads gasoline commercial aircraft

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desktop computers genetic engineering

3.

mature introduction/growth

How can executive attachment to a technology lead to product failure?

Executive attachment to a technology can lead to product failure because it can impede developmental team realities of the product’s potential, decrease firm morale, avoid the necessary screening steps to justify further interest in development. Executive attachment often overlooks or disregards solid market research in the product decision (see RCA videodisc player in the opening vignette).

4.

How does the fast pace of markets impact make or buy decisions?

The fast pace of markets impacts make or buy decisions by shortening developmental times, thus forcing a buy decision; additionally, there are often circumstances when the costs of a new component and/or its relative uniqueness can impact upon timing of a product’s entry into a competitive market, creating rapid make or buy decisions.

5.

What are the implications of outsourcing significant parts of an offering that will have a very long maturity stage in its PLC? The implications of outsourcing significant parts of an offering that will have a long maturity phase in a PLC may, in part, be the strategic determination that a relatively stable price for an outsourced part is paramount in a PLC period where profit maximization is a central element.

Conversely, in a relatively long maturity phase, scale economies from in-house production may offset this, and the phase length will reduce any capital investment costs. Further, outsourcing significant parts of an offering in a lengthy maturity phase may conceivably control the outsourcing manufacturer’s production of that part, creating a dependence of the supplier on the manufacturer with the offering.

6.

What are the implications of vertically integrating to provide most/all of the elements of value for a product category that competes in a highly competitive technology market?

The reasons for vertically integrating to provide most/all elements of value for a category competing in a high technology market include consistency in control, output and strategic follow-through with possibly better fulfillment. Vertical integration may create inflexibility, though. A value network may be able to provide the needed technology and enough flexibility to adapt to radical changes that occur in the evolution of the technology.

7.

What role does marketing play in the new product development process? What are marketing’s responsibilities?

The Role of Marketing: • Understand the technology in depth • Define and redefine current and future customer needs • Motivate other company departments and organizations • Screen and select ideas from all sources

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Guide the new product development with the continuous redefinition of current and future customer needs already noted • Reward the efforts of the technical and support staff • Catalyze company resources to get the right talent on the job−be willing to cross traditional company boundaries Also, the role of marketing in the new product development process begins with the initial offering definition, provided marketing has the appropriate feedback on buyer needs. It is the marketer’s role to represent customers in the new product development process. In many cases, this will involve managing the relationship with a collaborating customer who is involved in the design and development of a new product. Effective marketing will be able to transfer changes in needs over time into the product development process. Inherent in this, however, are the necessary marketing skill levels in understanding product and corporate capabilities, the ability to continually redefine against future needs, acumen at motivating teamwork between corporate disciplines, knowing how to implement effective screens and assuring confidence that the directions being taken are well thought out within the market’s parameters.

•

8.

How are the attitude and culture of the new product development team related to the number of successful developments?

The attitude and culture of new product teams will be related to overall success rates when the atmosphere and discipline are open and inquisitive, not hide bound by myopia or politics within an organization; successful teams will include a wide range of corporate functions, will take risks and will establish consensus as best as possible given the appropriate evidence for success or failure as it develops through the development process.

9.

Is it better to invest heavily in the early stages of NPD or toward the end of the process? Why? It is better to invest heavily (in marketing) in the early stages of the new product development process to ensure that thorough and efficient examination and evaluation is made of all the variables involved at the start, rather than as the process becomes more complex. Strong initial investment will more readily dictate “pass/fail” conditions at a time when the cut-off of a concept precedes significant possible investments in plant, equipment or personnel for an idea not thoroughly screened at the process start.

10.

If misunderstood or misapplied, what are potential pitfalls of the stage gate method of managing NPD? When misunderstood or misapplied, the potential pitfalls of the stage gate method of managing include misapplication of appropriate and pre-specified milestones to be reached before the next step; in effect, these are “reality checks” to ensure adherence to the original goals and objectives of the project, that the initial expectations as part of the project go-ahead will be met.

11.

Using Exhibit 8-3, explain how effective marketing can overcome each listed reason for product failures.

No Marketing Plan: (~22% of product failures) The most likely scenario under which this occurs is when, through a myopic view of the market, the product developer believes that the

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organization is in the business of what they make rather than in the business of providing value. All of the subsequent reasons can be placed in this category. Also, development funds are often used (78% of funds) to verify technological assumptions, but not market assumptions.

No real need exists: (~28% of product failures) When developed in isolation, without continuous feedback from the market, products can be an answer to a question nobody is asking.

Market Size is overestimated: Overestimating market size has implications beyond lower-thanexpected sales revenues. Initial market estimates are used throughout the organization.

Whether to attract investors, plan facility development and expansion, or staff the organization, inflated estimates lead to unfulfilled expectations. Very large organizations may impose higher benchmarks of success than smaller, more nimble or productive firms, even if the offering is successful beyond the introduction stage. Notwithstanding marketer zeal to justify a new project, projections of growth as a product moves through the PLC must be continuously reviewed. Also note that in many oligopolies, a sustained market share of greater that 30% may be very optimistic.

A “me too” product fails to penetrate the market: (~24% of product failures) Without a sustainable distinctive advantage, jumping into someone else’s new market may not lead to the same level of success as the market innovator. Market leadership/ownership is usually not an attribute associated with followers.

The product does not fully meet customer needs: (~15% of product failures) Products that don’t work right, whose technology isn’t proven, or has been rushed to market before full development has been completed are not acceptable to pragmatists. High volume industries that serve consumer markets and have major economies of scale and high fixed costs, usually can tolerate neither inadequate product performance nor inexact delivery schedules. These industries (e.g., consumer electronics, automotive) adopt technologies later in the life cycle.

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Business-to-Business Marketing

Chapter Nine Innovation and Competitiveness Authors’ Comments This chapter presents ideas for competing that do not fit well in the usual conceptualizations of marketing strategy and the marketing mix. An entrepreneurial orientation adds vibrancy to a company’s marketing efforts and tends to create enhanced and unique kinds of value for customers. Innovation is a key part of an entrepreneurial orientation and in this chapter we discuss how innovative efforts can be brought to bear across all elements of marketing, not just in products or services.

Many times, though, marketers will borrow strategies and tactics from other industries. These approaches are not innovative, per se, but by applying them proactively–being the first to apply them in a given market or industry–a marketer is also acting entrepreneurially. An entrepreneurial approach also involves keeping watch for new opportunities. Today’s new opportunities are tomorrow’s cash cows. Finally, paying attention to risks and uncertainties is necessary for keeping all this entrepreneurship in context. Successful entrepreneurs seldom bet the company; rather they know how much they can place at risk and they trust their abilities to create a success by adjusting as the realities of the market become apparent.

Opening Vignette

Sun Creates an Innovative Partner Network

In the opening example, Sun Microsystems noticed that its customers were becoming overwhelmed with the intricacies, choices, and uncertainties involved in building Ecommerce systems. To bring all the pieces together in one place, Sun formed the iForce partner network and developed programs to support it technically and with marketing assistance. Over time, Sun has continued to build this network and has found innovative ways to support it. This example illustrates some of the key ideas in this chapter. Sun acted entrepreneurially through nonproduct marketing innovation.

They controlled the risks involved by innovating in steps, obtaining feedback, and revising the innovation. They continue to incrementally innovate to improve the value for their partners and for customers. The innovations build on each other and enable further innovations, by Sun and its partners. Finally, they gave it a brand name and continue to support the brand. As the initiative builds new aspects (e.g., the iForce Wireless program and the partnership with direct sales), the iForce brand will acquire a stronger reputation among partners and customers. This will help Sun compete against the likes of IBM and Hewlett-Packard. Even assuming Oracle’s efforts to acquire Sun are successful, iForce will help Oracle/Sun in its competitive efforts. .

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Learning Objective Understand the application of entrepreneurial marketing and innovation in order to compete in business-to-business markets.

Entrepreneurial Marketing is marketing that is … (PowerPoint 9.2) • Driven by opportunity seeking • Innovative • Proactive • Controlled risk taking (Elements of Entrepreneurial Marketing is defined in PowerPoint 9.3) Innovation is creating something new and making it useful.

Proactivity is doing something before others do it.

Controlled risk taking is a combination of knowing what the risks really are, taking moderate risks in which the worst case is survivable, and finding ways to manage the risks to increase the chances of success and reduce the consequences of failure.

Opportunity seeking is actively look for opportunities and constantly evaluating how attractive prospective opportunities are.

For any one entrepreneurial event, there is a cycle of activity: (Exhibit 9-1 and PowerPoint 9.4 show the Entrepreneurial Cycle) For this event to be successful … (PowerPoint 9.5) a. the opportunity must be kept firmly in mind b. producing a successful design involves combining established technology with recent technology c. get the innovation into the market, first to test it, and then to pursue the opportunity full bore–taking too long can kill momentum More on Controlled Risk Taking: (Summary of this is PowerPoint 9.6; four bullets, one for each paragraph) Successful entrepreneurs find ways to make things work, and they trust in their abilities to do so. Thus, entrepreneurial marketing is done in a way that minimizes the resources that are put at risk.

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Exhibit 9-1 Entrepreneurial Cycle

OPPORTUNITY RECOGNITION

IDEA GENERATION BUSINESS IDEA DEVELOPMENT

BUSINESS PLANNING

EXPERIMENTATION & EXPLORATION

OBTAINING RESOURCES

LAUNCH FEEDBACK REVISE

A way that information can be gathered while being proactive is to run one or more "experiments."i These are trial runs in which the new business, new product, or new program is launched on a minimal scale in the market, usually in a small, controllable portion of the market. The results can be assessed and a revised offering launched into the larger market, eventually. In many cases, this can produce a full-scale launch more effectively than a launch based on extensive research.

The ultimate way of reducing risk, or at least changing everybody's risk, is to change the rules of the market, as discussed in Chapter 5. Entrepreneurial marketing, then, is the undertaking of a marketing strategy that actively pursues a new opportunity and has relatively high levels of innovation, proactivity and controlled risk taking. It stands to reason that it improves the marketer’s chance of success because it creates new value that tends to be higher than the value offered by competitors.

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Learning Objective (Shown here for implementing Entrepreneurial Marketing) Understand how to implement innovation and entrepreneurial marketing in business-to-business marketing.

Practical Aspects of Creating an Entrepreneurial Orientation (PowerPoint 9.7 shows the headings, below) Hiring people who are comfortable acting entrepreneurially—three key traits stand out (PowerPoint 9.8) • Ability to persistently pursue a passion • Comfort with trying new things, making mistakes and learning from them • Bias for action Directing Appropriate Activities (PowerPoint 9.9) • Opportunity recognition comes in part from traditional market research activities to analyze potential markets and match unmet needs to the company’s strengths • Develop contact networks that help in performance of marketing activities–this will help make proactivity a habit in the organization • Establish learning mechanisms–this is the key activity for controlling risks. This helps foster a culture of trying new initiatives on a limited scale and assessing the results.

Removing Impediments (PowerPoint 9.10) • Requirement for extensive justification increases the time it takes to launch initiatives • Tendency to punish failure makes managers cautious Top management needs to address these. A marketing manager can be a protective buffer to a certain extent, but ultimately the company culture needs to ensure support for entrepreneurial behavior.

Providing Incentives (PowerPoint 9.11) • Providing a range of incentives needs to be considered, including cash, equity and non-monetary rewards • Award the incentives for doing the right things i.e.,. opportunity seeking, innovation, proactive behavior, controlled risk taking • Provide the rewards soon after the actions occur, to reinforce the desired activity Learning Objectives Obtain an understanding of how innovation relates to entrepreneurial marketing.

Gain a sense of how innovation can be accomplished in all elements of the offering. .

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Competing Through Innovation (PowerPoint 9.12 has three bullets, each summarizing the paragraphs, below) Innovation in the non-product elements of the offering can be just as important–sometimes even more important–than product innovation. An example is Dell Computers’ choice of a direct channel–selling personal computers over an 800-number phone line.

New product development is extremely important in producing value for customers. It is accomplished through a process (see Chapter 8). This process can be mirrored in similar development processes for the other aspects of the offering, potentially becoming a source of differentiation.

Top level management, with the help of strategy planners, decide on businesses to pursue, goals to pursue, and general strategy. In so doing, they need to determine how innovative to be within the chosen strategy. The question becomes what type(s) of innovation to emphasize. Different types of innovation imply different kinds of organization and activities. (PowerPoint 9.13, with three bullet points, below) • Incremental innovations take the existing product and offering and make small-step improvements.

• Radical innovations produce large changes in the functions and performance of a product or offering.

• Breakthrough innovations – the term has a lot of variation in usage; generally a breakthrough innovation will create a different kind of product or offering that produces a new kind of value.

Considerations of disruptive vs. sustaining innovations (PowerPoint 9.14) • Sustaining innovation is innovation that improves the existing dominant technology, products or offerings. It serves the needs of higher-end customers who already purchase similar products, but who want more value from these products.

• Disruptive innovation is a product or business idea that creates a new kind of value and disrupts the existing market or industry.

Customers addressed by the disruptive innovation can be segments that are over-served by the products previously available. Or they might be customers whose needs are substantially different from the needs of existing customers.

• Disruptive technology is not necessarily radical innovation– disruption often occurs at the low end of the market. An innovation makes it very easy and inexpensive to meet low-end needs. Companies competing for the high end do not compete at the low end because they cannot make a profit. Then the disruptors improve and begin to move up-market to take business away from the mainstream.

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An example of disruption is how Internet news is disrupting the business of printed newspapers. Similarly, digital photography, particularly sharing photos over the internet, is disrupting filmbased photography.

Disruptive innovation is the “mirror” of marketing myopia, in that firms that resist change because of economic/accounting factors (facilities not fully depreciated, existing economies of scale can’t produce the new technology, and so on) are usually overruled by the marketplace.

•

In the long term, nearly all firms must deal with disruptive innovation. Too often, existing companies must deal with someone else’s innovation disrupting their business.

Regarding disruptive innovation: It’s better to do it to yourself than to have it done to you by a competitor (maybe a competitor

that you didn’t even know existed!). Obsolete yourself!

Proactive innovation advantages: • Your customer sees you as the innovator • You incorporate the new technology in a way that benefits your organization • You maintain/create your position as a market owner A review of the characteristics of market ownership is probably appropriate at this time. (“Define, evolve, collaborate”) (PowerPoint 5.16 through PowerPoint 5.19)

Pursuing disruptive innovation (PowerPoint 9.15) • A corporate or business strategy that intends to “change the rules of the industry or marketplace,” as discussed in Chapter 5, almost always needs to pursue breakthrough or disruptive innovation and to be proactive rather than reactive.

• Disruptive strategies should be pursued when a product technology has developed to the point where mainstream customers’ needs are over-fulfilled • Implementation of disruptive innovation involves five things (PowerPoint 9.16) 1. Separate the project or business unit responsible for pursuing disruptive innovation from the existing company with its established customers and business model. Find new customers who really want the offering.

2. Address the new business with a small business unit appropriate in size for the small market size of the initial opportunity.

3. Use an iterative, exploratory approach for finding the right market and the right way of addressing the market.

4. Use processes and decision making rules appropriate to the .

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new business model; do not use the processes and rules of the existing organization, as these were not likely designed for an emerging business, nor will they facilitate changes.

5. Develop the markets that want the offering; do not try to find the breakthrough technology advance that makes the disruptive technology competitive in the old mainstream market. Eventually the new markets will evolve together into a new mainstream of their own.

To emphasize the necessity of #1 above, consider a discussion of student experiences in organizations. The individuals reluctant to embrace change (for whatever reason, cynicism, resistance to change, risk adverse, or just plain negative) can lower the expectations of an entire group, effectively slowing or stopping the innovation process. It’s not unusual for a student to use the phrases “let a sleeping dog sleep” or “if it isn’t broke, don’t fix it.” The market driven/ownership position of “wake the sleeping dog” and “if it isn’t broke, break it” is usually a memorable alternative for students.

In summary, when pursuing disruptive innovation, the marketer should find himself pursuing an uncertain opportunity. The business unit should have autonomy. The approach should be exploratory. The internal processes and the external markets should be those appropriate for the opportunity, not those that match the rest of the organization.

Pursuing Sustaining Innovation (PowerPoint 9.17) To compete for any length of time within an industry, a company must pursue sustaining innovation. The process for preparing the periodic marketing plan can be used as the framework for instituting sustaining innovation throughout the offering.

Time pacing of planned organization change–setting strict time tables for new versions of products, operations, strategies and so on−has been found to work well in fast-paced business environments in focusing the company’s efforts and setting expectations for customers. Periodic marketing plans should include plans for improved value in all elements of the offering.

Too often, business-to-business marketing planning focuses innovative attention on products and markets to the exclusion of innovation in the other elements of the offering. Time pacing of non-product innovation will take the marketers out of product-centric marketing planning and refocus them on pursuing multiple avenues to improved value for customers.

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Learning Objective (Repeated here for Implementing Innovation) Understand how to implement innovation and entrepreneurial marketing in business-to-business marketing.

Practical Aspects of Accomplishing Innovation (PowerPoint 9.18 shows the headings in this section) Hiring the right people–match the type of person to the type of innovation being pursued. (PowerPoint 9.19) • Someone that takes a visionary, extensive redesign approach to every problem would not be appropriate for incremental innovation.

• Someone that takes an impatient, results-oriented approach may become frustrated in a setting with so much uncertainty and uneven progress as displayed by disruptive or radical innovation.

• Hire people who are creative and innovative.

• Avoid hiring those with a strong tendency toward being territorial.

Directing Appropriate Activities (PowerPoint 9.20) • Establish networks of people who are good information sources o In disruptive innovation, the network should include insightful customers and industry watchers with a broad perspective o In sustaining innovation, the network is focused more on customers, partners and channel members within the markets of interest •

Radical innovation needs autonomy and constant rethinking of the future market and appropriate business models • A large problem in product commercialization is the match between the company’s beliefs about the innovation and customers’ beliefs o Shadow products–the market sees the innovation as radical while the company sees it as incremental. The company is likely to miss a major opportunity o Delusional products–the market sees the innovation as incremental while the company sees it as radical. The company will spend too much on promoting it and will lose credibility in the eyes of the customers PostIt note were almost ignored by 3M. Originally the outcome of an unsuccessful attempt to develop an adhesive, 3M did not recognize its many uses. Initially, the wrong sales channel was used and the product was almost ignored. Placed with 3M “Scotch” brand office products, the product took off.

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(PowerPoint 9.21) Exhibit 9-3. Perceptions and Misperceptions of Innovations Type of Innovation

Radical

Supplier Perception / Misperception

Customer Perception / Misperception

Approach to Solving

Accurate

Inaccurate -- Not Radical Inaccurate -- Difficult to adopt

Education, demonstration Education, demonstration, target

by TALC Listen to customers & prospects; reposition Listen to customers and prospects; create rest of offering that eases adoption

Accurate

Incremental

Inaccurate – Not Radical Inaccurate – Easy to adopt

Accurate

Accurate

Inaccurate – Difficult to adopt

Inaccurate – Not Incremental

Accurate

Accurate – Difficult to adopt

Education, demonstration, target those with greatest need Listen to customers and prospects; reposition; scale back effort

Removing Impediments–similar to addressing impediments for Entrepreneurial Marketing (PowerPoint 9.22) • a requirement for extensive justification increases the time it takes to launch initiatives • a tendency to punish failure makes managers cautious Top management needs to address these. A marketing manager can be a protective buffer to a certain extent, but ultimately the company culture needs to ensure support for entrepreneurial behavior.

Providing incentives for being innovative (PowerPoint 9.23) • providing a range of incentives needs to be considered • award the incentives for doing the right things • provide the rewards soon after the actions occur, to reinforce the desired activity

Key Terms breakthrough innovation controlled risk taking discovery-based planning disruptive innovation entrepreneurial marketing incremental innovation .

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innovation lead users opportunity seeking proactivity radical innovation sustaining innovation technology time pacing Answers to Questions for Review and Discussion 1.

Why would taking an entrepreneurial orientation in business-to-business marketing yield better competitiveness for a company than would a more reactive, risk-averse approach?

An entrepreneurial orientation should tend to yield better performance because the company will address markets before competitors do and will constantly create differentiated positioning.

As long as the efforts are directed at providing value to customers, customers should tend to respond positively. Taking a strictly reactive stance often allows a new competitor to obsolete the offering that your risk-adverse approach was protecting.

2.

How does innovation differ from proactivity?

Innovation differs from proactivity in that it is focused on creating something useful or improving something that presently exists to be more beneficial; being proactive simply indicates an ability to act before the competition does. This may be as simple as setting a price or lining up partners in a value network before the competition does. Proactivity is a necessary but not sufficient ingredient in innovation.

3.

Why is controlled risk taking more competitively attractive than strictly riskaverse behavior?

Controlled risk taking is more competitively attractive than strictly risk-averse behavior because some of the risky alternatives sought will pay off. As long as the assets or resources at risk can be lost affordably, then the company will be able to weather losses that occasionally occur and still perform well. Risk-averse behavior is often risky in and of itself. By not taking risks, the company runs the risk of having competitors make moves that provide superior value and win important customers.

4.

What is the difference between radical innovation and disruptive innovation?

Radical innovation is innovation that makes a discontinuous leap in the capabilities of a technology. Disruptive innovation, on the other hand, need not be discontinuous in its advances. Rather it alters the capability of a technology in such a way that new customers can use and afford the technology. These new customers are numerous enough that they overwhelm the existing customer base. The innovation is disruptive because it supplants the old product line or way of doing business.

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Why is an autonomous organizational unit the appropriate way to pursue disruptive innovation?

Without an autonomous organizational unit the innovating company will tend to kill the new technology because it does not fit with the current customer base. Evolution and support of existing technologies is often approached with a more risk-adverse attitude–“don’t change the rules–we’re doing fine.” The policies and procedures in place can stifle new ideas and proactive approaches. Management must support a culture that rewards and encourages change without the distractions of day-to-day business involvement.

6.

Why should a marketing manager try to enhance and direct incremental, nonproduct innovation? Since it is incremental, why not just let it happen on its own?

A marketing manager should try to enhance and direct incremental, non-product innovation because eventually, product innovations dry up. To achieve differentiation, often the nonproduct features are the only ones left upon which a competitive advantage can be gained.

7.

Compare the marketing mix and customs of an innovation-oriented firm and a market share-driven firm. What prevents a share-driven firm from also being a leader in innovation?

The marketing mix and customs of an innovation-oriented firm and a market share-driven firm compare as follows: Innovation Share driven Price value driven growth driven Place needs efficient broad availability Product leading edge broad acceptance Promotion proactive reactive Culture risk taker risk averse entrepreneurial volume focus long horizons immediate horizons In general, the innovation-oriented firm will tend to try new things in creating new products and marketing programs. These will tend to be aimed at emerging or pre-emergent market segments and will have an element of risk. The culture will tend to support such activity and get excited about it. The market share driven firm will tend to address only those new opportunities where there is a good chance that they can dominate.

8.

Referring to Question 11, what suggestions could you make to a share-driven firm that also wants to be known as the innovator in the market?

Suggestions for a share driven firm seeking to be known as a market innovator might include the following: • establishment of a “green house” to nurture product development–the organization should have relative autonomy • creation of an environment that rewards measured new venture steps

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better focus on brand development over product development proactive service concepts that put into practice innovative financing, selling, and logistical considerations

Thomas J. Peters and Robert H. Waterman, In Search of Excellence, (New York: Harper and Row, 1982).

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Chapter Ten Pricing in Business-to-Business Marketing

Authors’ Comments Because price is easily changed, particularly in consumer markets, it often becomes a tactical surrogate for other problems. In the classroom, students often view price as the solution to every customer objection. (We often challenge this approach by suggesting that price be increased, rather than decreased.) In business-to-business marketing, tactical price moves can often cover the real issues of a customer’s resistance to the offering.

Price is where the positioning, products and relationships should come together to produce profit. In this chapter, we focus on creating pricing that is conceptually sound and that is consistent with the idea of building profits through building value for customers.

Theoretical analysis must be tempered by an understanding of the nature of demand in business-to-business marketing. The gap between economic theory and practice is bridged with a review of the basics of pricing, while noting that supply-demand analysis is usually starved for data. The concept of elasticity helps understand how pricing dynamics will play out, but much of the analysis needs to remain qualitative rather than quantitative.

We also spend some time building an understanding of costs, based on Nagle’s ideas, and examining pricing dynamics in light of customer relationships, the PLC and the TALC. Most notably, we emphasize that, other than as a determinant of profitability, cost has little to do with price−cost is what it takes to create an offering−price is the assignment of value from the customer’s perspective.

We again include a discussion of price negotiation because we continually hear marketing managers bemoan the fate of their pricing plans once negotiations begin with customers. While the intricacies of negotiation methods require training and practice, we emphasize the importance of proper strategic preparation and focus on objectives. Hopefully, students will recognize the need to allocate resources to these efforts–both in incorporating negotiation into marketing plans and in building their own personal skills–once they embark on their careers.

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Opening Vignette

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Intel Changes Its Competitive Pricing For Microprocessors

This opening vignette describes the evolution of microprocessor pricing by Intel Corporation over the product life cycle.

Initially, Intel processors were priced for high-end users and early corporate adopters.

At low volumes, most “desktop” computers were out of the reach of home users.

When Intel introduced a faster processor, the previous processor price was lowered to be acceptable to users with lower budgets. Intel used a basic price skimming strategy.

Competitors AMD and Cyrix were kept one step behind, offering “previous generation” chips at lower prices.

What happened next is an excellent example of crossing the chasm. By the end of the 1990s, AMD processors reached (and in some views, surpassed) the performance of the most capable Intel chips. The AMD Athlon-brand processor became a viable alternative to Intel at the premium end of the market. Computer manufacturers now had another source for high-end chips, and Intel had a one-on-one competitor.

As a result of the economic slowdown of 2000-2001, computer sales slowed. Intel “remade” itself, downsizing where necessary. During this period, Intel did not reduce R&D spending. When the market recovered, cash-rich Intel was ready with new technology products and a new brand campaign. As the processor market moved through growth stage of the PLC, lesser competitors faded away. Intel and AMD remain the two major competitors in this market.

Learning Objective Reinforce the basics of pricing from marketing principles courses.

What is Price? (PowerPoint 10.2) • Price is a strategic element of the marketing mix.

• Price is an indication of the value or worth of something in the eyes of the customer.

• Without an agreed upon price, transactions could not take place.

Whenever a transaction takes place, each party in the transaction leaves with a sense of greater value as a result of the exchange.

Consumer “low price guarantees” make it difficult for students to understand this value exchange proposition. Consider asking these questions of students: a. Did you ever purchase something and a short time later see it available for a lower price? (Usually there will be several students that say yes.) b. Did that bother you? (Likely, yes.) c. Then, why did you pay the higher price?

The ensuing discussion should present an opportunity to point out that at the time of the exchange, the customer (student) felt that the money they were giving up was of lesser value to them than .

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the product they were obtaining. Also, the seller believed that the money received was of greater value than the product. Each party leaves the exchange with a net greater value.

“Value is in the eyes of the beholder” (It may also be interesting, with regard to low price guarantees, to ask how many students keep shopping for something after they have already purchased it.)

The value of an offering is related to the cost (or value) structure of each party involved in the transaction.

Learning Objectives Understand the relationship between perceived value and price.

Understand the relationship between cost and price.

Perceived Value and Evaluated Price (PowerPoint 10.3) Value-Based versus Cost-Based Pricing • Value-based pricing is often difficult to establish−it is price determined by value as perceived by the customer and often includes factors not completely known by the marketer.

• Cost-based pricing is easy (often mistakenly used)−it is price determined by the cost to produce an offering and includes factors known by the marketer but have no relation to customer value.

Costs are important in determining profit levels from different pricing alternatives. Beyond this, cost has little to do with price.

The Total Offering (From Chapter 1), Exhibit 10-1 (PowerPoint 10.4) The offering that provides a complete solution to the buyer’s needs can include • the core product • service • financing • image • delivery • availability Over time, value associated with the total offering can include • cost of operation, including environmental costs • cost of replacement • cost of obsolescence of existing items • and so on Evaluated Price The price of the offering, from the view of the customer, after all costs associated with the total offering are evaluated. Includes all elements considered in the total offering plus the costs associated with ownership, repair and other costs over time.

Exhibit 10-2 provides a detailed description. PowerPoint 10.5 is a summary. Exhibit 10-3 is a sidebar that describes where “value” comes .

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from in the substitution of plastics for metal in motor parts.

Exhibit 10-4 (PowerPoint 10.6): Customer’s Perception of Value and Evaluated Price.

Learning Objective Gain a sense of what aspects of business-to-business pricing are strategic and which are tactical, and how to address these aspects.

Perceived value, relative to competitors’ offerings, establishes the appropriate price to be charged Maximum and Minimum Price: Exhibit 10-5 (PowerPoint 10.7) Over time, there is a maximum price that can be charged dictated by the customer’s view of the worth of the offering.

Even in single-source sole-supplier situations, there is a maximum that is sustainable by the ongoing nature of the relationship.

Relevant Costs Over the long term, there is a minimum price that can be charged dictated by the supplier’s need for profitability−setting a price higher than the level at which relevant costs are just covered. Ongoing costs must be covered out of ongoing revenue. Revenues from the product are reduced by only those costs directly attributable to the product and costs.

Relevant costs must meet the following criteria: (PowerPoint 10.8) • Resultant (PowerPoint 10.9) • Realized (PowerPoint 10.10) • Forward-looking incremental (PowerPoint 10.11) • Avoidable (PowerPoint 10.12) Contribution Margin (PowerPoint 10.13) (Contribution analysis is discussed further in the appendix at the end of this chapter.)

Viewed as the difference between ongoing attributable costs and ongoing attributable revenue It represents the portion of revenue that “contributes” to coverage of fixed costs, indirect costs and profit, i.e., value in excess of variable and directly attributable costs Price Cut Example: Exhibit 10-6 (PowerPoint 10.14) Supply, Demand and Pricing: Exhibit 10-7 (PowerPoint 10-15) .

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Demand Curve−quantity sold/consumed by a market at different price points Supply Curve−quantity an industry will produce at different price points Elasticity−the tendency of demand to react to price This is a good time to review the differences between demand in consumer markets and demand in business-to-business markets. In the short-term, business-to-business demand is inelastic; in the long term, it can be very elastic. Markets will behave differently in the short term than they will in the long term. A business-to-business customer may have no choice but to accept a price increase in the short term, but may begin the process to completely eliminate the need for the product in the future. Price increases must be sustainable within the parameters of the ongoing relationship between supplier and customer.

Example: The advent of platinum-based catalytic converters for automotive emission control created significant increased demand in the platinum market. High prices led automotive manufacturers, in the short term, to begin trading in the platinum market. At the same time, R&D efforts were funded to find ways to reduce the quantity of platinum need for the converters. Eventually, a converter was developed that used significantly less platinum. As a result, the price of platinum dropped significantly.

Summary of the Economic Fundamentals of Price: (PowerPoint 10.16) 1. Demand levels will be different at different levels of price 2. Changes in price yield reactions from customers−different in the long and short term 3. Changes in price yield reactions from competitors−different in the long and short term ”Remember the signals you send.” A consideration often not fully recognized (both in the classroom and in business) is that a price change communicates a message. How the competition will react is an important consideration and, based on whether the situation is seen as tactical or strategic, may be different over time. Ask students how they would react to a significant price change by a competitor. The discussion may lead to considerations of raw material resources, political events, facility capacity, changing strategic views of the market, etc. Now ask them why, when faced with customer resistance (a tactical situation that may or may not be related to price), the first “solution” considered will be to lower price.

(See “Initiating Price Changes” later in this chapter.)

Managing Price as Part of Marketing Strategy Price is a strategic part of positioning, and thus the range of acceptable .

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price should be is determined at the outset of the segmenting/targeting effort. Price though, is situational, depending on strategic purposes and market circumstances.

Exhibit 10-8 (repeated below) shows several marketing objectives addressed by pricing−both strategic and tactical. PowerPoint 10.17 displays the strategic purposes; PowerPoint 10.18 displays the tactical purposes.

Pricing Through the Product Life Cycle and Technology Adoption Life Cycle The text reviews several factors that influence price over the life cycle.

Many of the basics are considered in Chapter 8, Developing the Value Offering.

Pricing Considerations through the PLC & TALC (summarized) (PowerPoint 10.19) • Pricing is situational, depending on strategic purposes and market circumstances • Customer perceptions of value change • Different market segments will be attracted to the offering at different stages in the life cycle • Competitive environment changes • The role of the offering in the marketer’s organization will change • The role of the offering in the customer’s organization will change Price Models Pricing an Innovative Product Market Skimming and Market Penetration pricing Exhibit 10- 8 Several Marketing Objectives Addressed by Pricing Strategic Purposes (PowerPoint 10.17) • • • • •

Achieving a target level of profitability Building goodwill, or relationships, in a market or among certain customers Penetration of a new market or segment Maximizing profit for a new product Keeping competitors out of an existing customer base Tactical Purposes (PowerPoint 10.18)

• • • • • • .

Winning the business of a new, important customer Penetrating a new account Reducing inventory levels Keeping the business of disgruntled customers Encouraging customers to try a product or service Encouraging sales of complementary products Business-to-Business Marketing

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Students often make the assumption that skimming is used during introduction and market penetration pricing is used during late growth/maturity. This discussion applies to the use of both price models, depending on circumstances and the resources of the marketing organization, for innovative products.

Market Skimming and Market Penetration pricing defined (PowerPoint 10.20) Skimming: Charging relatively high prices that take advantage of early adopters’ strong desire for the product. Skimming is most effective when an offering has significant patent protection and offers significant value at the skim price.

Penetration: Charging relatively low prices to entice as many buyers as possible into the early market. Penetration pricing can assist in obtaining a dominant market share during growth–an excellent defense to future competition.

Market Conditions Necessary for the Success of Skimming or Penetration Pricing: Exhibit 10-9 (PowerPoint 10.21) Learning Objectives Understand how negotiated pricing works; gain a sense of strategies for maintaining margin and customer relationships in negotiated pricing.

Learn how to avoid dropping price as a short-term tactic (optional).

Many portions of the following material are often considered “as time allows” or as optional topics.

Managing Pricing Tactics (PowerPoint 10.22) • Bundling • Discounts and Allowances • Competitive bidding* • Initiating price changes *Hypothetical Example of Profit Expectations in a Competitive Bidding Situation: Exhibit 10-10 and PowerPoint 10.23.

Determining a Bid Price (PowerPoint 10.24) (optional) Expected profit at a given price is calculated as ØE(PF) = PW(Pr) x PF(Pr) .

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Exhibit 10-9: Market Conditions Necessary for the Success of Skimming or Penetration Pricing Price skimming strategy: (PowerPoint 10.21) • With skimming, the value of the offering as perceived by the market must reflect the high price • the market is somewhat inelastic • the marketer has a sustainable market advantage over any possible competition via patents, availability • competitive entry is difficult if not altogether blocked • production methods must be profitable at the lower volumes–economies of scale may not be feasible or desirable Penetration strategy: • the market is somewhat elastic • When a low existing price level acts as a barrier against competition • Economies of scale in manufacturing as well as distribution are necessary

Where: ØE(PF) = Expected profit ØPW(Pr) = Probability of winning the bid at price Pr ØPF(Pr) = Profit at price Pr Effect of an Industry Increase in Costs: Exhibit 10-11 (PowerPoint 10.25) Types of Negotiating Situations: Exhibit 10-12 (PowerPoint 10.26) Stages in the Negotiation Prices in Business-to-Business Sales: Exhibit 10-13 (PowerPoint 10.27) Final Negotiation Considerations (PowerPoint 10.28) • Who has the authority to make a final decision?

• What are the bargaining styles of the individuals most likely to participate in the bargaining decision process?

• Will the situation be perceived as a transaction, part of a relationship, or a balanced combination of the two?

• What evaluated price range is the customer expecting?

Learning Objective Gain an appreciation for the effects of current trends on pricing.

Pricing and the Changing Business Environment (PowerPoint 10.29) Time Compression .

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As time pressures increase, marketers must react quickly to changes in customer needs or competitor actions.

Hypercopmpetition Requires constant collection of information on customer value-cost models and paying attention to your customers’ customers and their perceptions of value.

The Internet Improves communication, increases both buyers and marketers preparation. The Internet also facilitates online auctions–this is good for commodities, but can minimize relationships for other products.

Key Terms avoidable costs bundling contribution margin cost-based pricing demand curve elasticity evaluated price forward looking incremental costs integrative bargaining learning curve ongoing costs ongoing revenues open bid penetration pricing price skimming realized costs resultant costs revenues sealed bid supply curve total offering value-based pricing value-cost model Answers to Questions for Review and Discussion 1. .

In general, what is the maximum price that can be charged for a product or Business-to-Business Marketing

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service?

In short, the maximum price that can be charged, ideally, is the price just noticeably below the price that is commensurate with the value of the benefits the buyer expects to receive, less the other costs that the buyer will incur in the acquisition and use of the product or service. The evaluated price includes all these other costs, so the maximum evaluated price is just below the value of the benefits the buyer expects to receive.

2.

What is the maximum price that can be charged for your product when you have direct competitors but your product is differentiated, that is, it provides more benefits than competitors provide?

When your product is differentiated and provides more benefits than the competition it can be priced at a premium above the price charged by competitors, but only to those buyers whose concept of differentiated value is positive and necessary in their purchase satisfaction with an offering. The premium will reflect the customers’ perception of the additional value provided by the differentiated offering.

3.

Under what kinds of circumstances would a marketer want to charge a price less than the maximum price possible for the offering?

A marketer might be inclined to charge a lower price than the maximum possible price, when the objective is to achieve rapid market penetration and the circumstances internally allow for reduced margins. A low price may be called for if the marketer expects a low price will discourage potential market entrants, thus avoiding competitive price pressure. A price less than the maximum may also be called for when the offering is a collaborative effort or when price is a “goodwill” factor in developing a relationship with a customer.

4.

In general, what is the minimum price that can be charged for a product or service?

The minimum price that can be charged for a product or service is the price that is expected to cover all relevant costs. Relevant costs are those costs that are resultant, realized, forwardlooking and avoidable. Beyond these considerations, marketers should realize that competitive aberrations (such as a competitor trying to fill a new manufacturing addition and so on) can occur that may create a price that is well below what is known as “cost.” The marketer must then determine “why?”

5.

When would R&D costs be a relevant cost to consider in pricing decisions?

R&D costs are a relevant cost to consider in a pricing decision when they have yet to be incurred, i.e., at the early part of the new product development process. At this time, R&D costs are

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avoidable and result from the decision to proceed.

6.

Suppose you were considering a price increase. What kind of difference would you expect between short-term elasticity and long-term elasticity in response to your price increase?

In many cases, the short-term response to a price increase may be minimal or non-existent.

When customers’ production schedules have been set in advance and tied to their own customers’ demand, demand in the face of the price increase may be very inflexible and hence inelastic. In the long run, the customers will reevaluate how the changes in the cost of inputs impact their value and profitability. Long-term demand can thus be very elastic–and discontinuous.

7.

Under what general conditions would you want to use a price skimming strategy?

A penetration price strategy?

A price skimming strategy is ideally used the when price of the offering is a reflection of its value as perceived by the market, and • the market is somewhat inelastic • the marketer has a sustainable market advantage over any possible competition via patents, availability • competitive entry is difficult if not altogether blocked • production methods must be profitable at the lower volumes–economies of scale may not be feasible or desirable.

Skimming also makes sense when the marketer is the first to enter a market but expects to drop out of the market when the large competitor inevitably enters and dominates. It makes sense in such circumstances to get as much profit from the early adopters as possible.

A penetration strategy is appropriate to build heavy market penetration when creation of a large installed base gives the marketer an advantage. Ideally: • the market is somewhat elastic • when a low existing price level acts as a barrier against competition • economies of scale in manufacturing as well as distribution are necessary and available If the marketer believes that competition is forthcoming and the marketer wishes to stay in the market, a penetration price is usually called for. (See Exhibit 10-10)

8.

Under what conditions would you switch from a skimming strategy to a penetration strategy? What elements of the marketing mix other than price would be involved?

You would switch from skimming to penetration when a competitive product or substitute was introduced effectively into the marketplace. Re-pricing of an existing product would make sense in order to penetrate a different, price-sensitive segment at this time. The marketer would also be inclined to switch strategies to address new segments with sustaining innovations based on previous versions of the product (or service). A natural place to switch from skimming to penetration pricing is when the targeted segments switch from visionaries to pragmatists, i.e.,

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when the marketer’s company is crossing the chasm.

In addition to price and product, other elements of the marketing mix to be affected would be • place (through expanded distribution to reach larger as well as new market segments), • marketing communications (through aggressive announcement of pricing policy changes, different appeals to new market segments), and • selling (through changed sales messages and methods).

In many organizations this change must also be accompanied by a change in the product design, though not the function of the product. Skim pricing scenarios may have a higher percentage of product cost as variable, avoiding the high investment in infrastructure to obtain economies of scale. The change at the chasm involves product redesign for automated manufacturing, etc., whatever will produce the necessary economies of scale. This will create a product with higher fixed costs but lower variable costs. Such changes will often impact the marketing organization as well, as customers expect different levels of support at different points in the TALC and PLC. In a new (start-up) organization, this change can have a significant impact on organization culture and control.

9.

The chapter relates the “second in, low-cost producer” to the acquisition of small technology companies by large firms as two strategies that have potentially similar strategic outcomes. In a fast-paced market, which strategy would be most effective for a) an established, large manufacturer of consumer products and, b) a large high technology network equipment manufacturer? a). An established manufacturer likely has existing investment and economies of scale that will support a high volume market. It is most likely that, assuming the manufacturing and marketing capability of the large manufacturer and the “slower” pace of consumer markets, the “second in, low-cost producer” strategy would work best−assuming the new product/offering is not a disruptive innovation. b). The high-tech network equipment manufacturer is likely faced with rapidly changing markets, a greater difficulty that “a” above in predicting which technologies will succeed in the long run.

The tech company is more likely to find it effective to acquire small technology companies (even to the point of funding the smaller firms). The competition between the smaller firms to be the acquired firm can lead to leveraged results in a fast changing market.

10.

Discuss the organizational and marketing-mix changes required when a small company hits the chasm. From question 9, above, of the two strategies discussed, which would be the most appropriate in today’s marketplace?

The chasm generally occurs at late-introduction/early-growth of the product life cycle. The chasm occurs because pragmatist buyers are not yet satisfied that a “whole product” exists or has been proven. Marketers have not yet found and developed the segments in the pragmatist market that are most likely to adopt. Until they do, the growth part of the product life cycle will not take off. After pragmatist buyers begin to buy, the suppliers of the new products must undergo rapid and wrenching internal changes.

• The supplier must shift from a start-up to a growing company.

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Procedures must be more standardized with more “professional” management.

Several cultural as well as structural changes occur, including the need for different professional skills.

As markets grow, the firm may embrace a decentralized decision structure (e.g,. different management skills and working environment), develop an infrastructure to achieve economies of scale and redesign the offering in face of new economic realities of competition and high volume (e.g., different engineering skill-sets). Outside the organization, the competitive environment will change as more competitors enter the market that has now been demonstrated to exist (e.g., different marketing approach).

• •

Of the two strategies discussed in Question 9, the appropriate strategy would be the one that most fits with the existing organization’s competencies. Since consumer markets do not embrace new technologies as quickly as business markets (technology must become readily available at a relatively low price for consumers to accept it), the most likely candidate is the small high-tech company–if that’s what it wants to become. The “second in, low-cost producer” strategy occurs after the chasm.

11.

Suppose your company is the market leader in a fast-growing market. Your product is differentiated in that it provides more and better benefits than your competitors’. How would you price your product?

With a product differentiated by more and better benefits in a fast-growing market, and where you are striving to become the market leader, the question becomes whether you are helped most by a relatively low price or a premium price. A relatively low price would help if it were desirable to build an installed base or to discourage competition. A slight premium may help reinforce your offering as the leader. The marketer needs to assess whether the rapid sales increases are helped more by a penetration price or by a high-value position. In either case, the long-term financial reward is almost always more important than short-term financial gains.

If the marketer intends to get out of the market before it peaks, then a premium price position, foregoing establishment of a large installed base (and associated economies of scale), may make sense. Overall corporate strategy also plays a role in this decision. If a small, technologyoriented firm must show adequate financial return to early investors, a focus on high value markets may be necessary, particularly if the goal of the firm is to be acquired rather than “grow up.”

12.

In competitive bidding, what factors would enter into your determination of a bid to offer?

In competitive bidding, the first consideration is how badly you want the business. If the customer is strategic or has a high likelihood of developing into a profitable partner over time, then the price you will bid can be very competitive. If the customer is likely to be a drain on resources, then you might want to add in a “hassle factor” in your bid and celebrate if someone else wins the business at a lower bid. Assuming you want the business, the factors that would enter into your decision in determining a bid would include market potential, competitive intensity, ability to provide superior value, expected profitability and sufficient market intelligence concerning your costs to manufacture and deliver as compared to the competition.

It will also be useful to have an understanding of what the customer considers an appropriate price for the offering.

13.

Why is preparation for negotiation so important to effective pricing?

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Preparation for negotiation allows you to learn your customer’s perceptions of value and your own constraints. This prepares you for making good tradeoffs in the negotiation process and saves you from making or accepting offers that undermine your objectives, e.g. lowering price too much. Part of the preparation process includes tracking the value network of your customer as it makes up its offering, how your network will fit in and how the network of your competition may fit. This process gives you an opportunity to better understand what benefits your customer will view in consideration of an evaluated price. In other words, know what the customer considers a “win” before you enter the negotiation. This of course assumes that the win is also acceptable from your view.

14.

Explain the major differences between negotiation in a single-transaction situation and negotiation in a balanced-concern situation.

The differences between negotiation in a single-transaction situation and a balanced-concern situation relate to the existence or potential of a relationship between buyer and seller. In a balanced-concern situation, issues of short term profitability are balanced against relationship enhancement. In a single-transaction, the primary issue is maximizing performance against your objectives, e.g., maximizing the profit in this one transaction.

15.

Explain why time compression causes problems for price negotiations even when both parties have an interest in enhancing a relationship.

The best resolution of a negotiation occurs when the parties find a creative solution that improves the situation of both. Such solutions take time to emerge in the negotiation process.

Second, even when a compromise is the likely outcome of the negotiation, the best solution may not be “splitting the difference” evenly. It is best to let the negotiations play out to arrive at a solution in which value is understood. This is better in the long run because the partners will tend to remember when one of them was “short-changed” and it is best to avoid resentment in the relationship. It is difficult, though, to handle time compression. Perhaps the best approach is to examine the nature of the time compression and ask whether the time pressure is real or imagined. If at all possible, the negotiations should be given time to run their course.

16.

Explain “Evaluated Price?”

One view of evaluated price is what your customer believes it will cost to select you as a supplier−the overall cost of doing business with you. Thus, evaluated price includes all of the factors noted in Exhibit 10-2, plus the value image and quality of relationship between the companies and the individuals. How have previous differences been resolved? Has the supplier treated the customer as a partner in success (and vice-versa)? Many intangibles contributed to evaluated price.

Example: It is likely that the evaluated price of doing business with Firestone (at least from the Ford perspective) was significantly higher after the tire blow-out and rollovers on SUVs.

APPENDIX 1: CONTRIBUTION ANALYSIS In evaluating alternative marketing programs or actions, a useful way to make comparisons is to analyze the contribution to fixed cost, overhead and profit from the alternatives presented. Contribution is the expected revenue less the costs that can be attributed to the action taken, as shown in the following equation: ©2010 Vitale, Giglierano, and Pfoertsch

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TC = [(P – VC)  Q] – AC where

TC = Total contribution to fixed costs, overhead and profit P = Price VC = Variable cost per unit Q = Quantity sold AC = Other attributable costs (costs incurred by undertaking the action)

Often one will see contribution presented as revenue minus the variable costs.

The problem with this is that variable costs are not the only kind of costs that are caused by a particular action. For instance, launch of a new product may require the hiring of a product marketer and involve retaining advertising and public relations agencies. These are not variable costs, but they are attributable to the project and they are avoided if the decision is not to launch the product. So, in essence, these costs must be paid for out of the proceeds from this product if the product is to be deemed profitable. Review the following example to illustrate.

Suppose a marketing manager for a manufacturer of commercial pizza ovens is considering launching a new service program for resellers. The program will involve hiring three marketing specialists who will help resellers analyze their markets and plan and execute marketing programs. The program is supported by a 10 percent allowance on product purchases for resale. The marketing manager has forecast that product sales will increase by 80 units in the next year due to the new program. It is expected that the dealers who participate in the program would have sold 120 units without the new program. The pizza ovens wholesale for $25,000; variable cost on the ovens is $7,500. The marketing specialists cost $100,000 per year, each, including training and benefits. The manager estimates that support costs will run $50,000 per year.

Accordingly, the contribution is calculated as follows:

TC = [(P – VC)  Q] – AC TC = [($25,000 - $7,500 - $2,500)  80] – ($120  $2,500) − $300,000 − TC = [($15,000)  80] – ($300,000) − $350,000 TC = [$1,200,000] − $650,000 TC = $550,000

$50,000

This has a positive contribution, so the company would be better off if the manager pursued this program. We can also see what the break-even volume would have to be for this program. If we set TC = 0, which is break-even, we can solve easily for Q: $0 = [(P – VC}  Q] – AC AC = (P – VC}  Q Q = AC/(P – VC) Q = [(120  $2,500) + $300,000 + $50,000]/($25,000 − $7,500− $2,500) ©2010 Vitale, Giglierano, and Pfoertsch

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Q = [($300,000)+$350,000]/$15,000 Q = $650,000/$15,000 Q = 43.3 units So the break-even number of pizza ovens needed to be sold under this program is 44. The expected total of 80 is considerably more than the break-even number, so there would seem to be ample room for uncertainty. The manager should probably go ahead with this program. The final decision will depend on other alternatives and what their total contribution figures are. Any projects that return a positive contribution would improve the profitability of the company. However, there may be projects that are incompatible. If two projects are incompatible, the manager would choose to do the project with the higher contribution.

©2010 Vitale, Giglierano, and Pfoertsch

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Chapter Eleven

Business Development and Planning

Authors’ Comments In this chapter, we develop several ideas that have arisen from our contact with marketing managers and entrepreneurs, as well as from our own experience.

Businesses, both new and established, pursue product development and innovation efforts as they are usually well aware that they need to be active in looking for new revenue generating opportunities. We have observed that as companies look for and pursue opportunities they often become involved in activities that fall under the general heading of “business development.” In this broad usage, business development can refer to the development of new revenue. More precisely, we have defined Business Development as “the search for opportunities and the structuring of business entities to exploit those opportunities with current or near term organizational capabilities.” It involves active data gathering and analysis, search for appropriate partners to work with in addressing new opportunities, and structuring relationships, strategies and activities to accomplish the “new business.”

An important part of business development–and an important tool for marketing and sales planning as well–is the Market Operations Forecast (MOF). This is a tool that allows managers to plan and continuously review the company’s marketing activity, its effectiveness, how it is influenced by exogenous trends, and how new opportunities are likely to develop. We present the basics, giving you, the instructor, a base to work from in presenting this to student.

Users of this book’s predecessor will recognize the forecasting portion of this chapter as originally in Chapter Six. In the development of this edition, it became apparent that Chapter Six, with the updates we planned, was too long. When this chapter (focused on the management of products and services in a dynamic environment, the role that Business Development plays throughout the product life cycle and the organizational structures most appropriate to these changing market efforts) was put together, forecasting and the MOF were a natural fit.

Our classroom experience has shown that the MOF and its broad organizational implications is one of the more difficult concepts for undergraduate students to fully grasp. We also feel that the business development and management concepts discussed in this chapter may be more appropriate for advanced students. As such, you may want to consider this chapter as more appropriate for graduate classes.

With the continued use of the Product Life Cycle as the anchor, we discuss how .

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business development and marketing combine to address new opportunities and change over time. We relate the PLC to the Technology Adoption Life Cycle–the distinctions between customer adopter types provide clues for how marketers will need to change their marketing strategies as products evolve.

This chapter concludes by focusing on how marketing is organized to manage multiple products at different stages of the PLC. We argue that an organization based on customer types is superior to an organization structure that has a team associated with a product from cradle to grave through the PLC. The cradle to grave approach requires too much learning to accommodate the transitions from stage to stage of the PLC. Opening Vignette

Sensacon and New Business Progression

Sensacon, our hypothetical company (founded in Chapter 8) about an innovator in the pressure sensor industry, serves as the model for this opening. As noted earlier, Sensacon is a composite of several real companies and illustrates many of the ideas we are trying to get across. In this vignette, we trace Sensacon’s movement from offering specialty sensor products in small market niches to crossing the chasm, competing in larger, sophisticated, rapidly evolving markets.

Sensacon started with innovative pressure sensor products in the SCUBA and healthcare markets. Soon the opportunity in the SUV tire sensor market emerged and Sensacon was successful in winning a share of this new business. However, this brought about new challenges in scaling up to meet much larger demand and increasing the complexity of marketing efforts to remain competitive. Sensacon management realized that they had to adapt to the different stages of the PLC and TALC. Each stage had characteristics that required different marketing strategies and configurations of marketing activities in order to compete and prosper. They also realized that they had to anticipate changes as the business moved on to future PLC stages. Much of this business building and future anticipation revolves around the set of activities that are often called “business development.” Business development, though, must integrate with marketing and operations to effectively take advantage of the new opportunities that present themselves.

The Sensacon example can be referred to throughout this chapter to illustrate the concepts presented and their practical implications. It would also be useful to return to Sensacon at the end of the last section on managing a pipeline of products in progressive life cycle stages. Students can be asked to discuss how Sensacon should organize to begin to manage its own emerging pipeline.

Learning Objective Understand the distinctions between “line” functions and “development” functions in an organization.

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Business Development (PowerPoint 11.2) The search for opportunities and the structuring of business entities to exploit those opportunities with current or near term organizational capabilities. It involves • analysis of markets and market segments • creation and maintenance of relationships with partners that could include customers, channel members, or suppliers of complementary products and services Business development (BD) is the “link” between planning to create new revenue from a new source and the execution of that revenue generation. It is the activity that encounters uncertainty, finds a way to overcome that uncertainty and executes the activity to generate revenue from the new source.

Line functions are the activities that take over activities after the business development effort has been successful, when the nature of ongoing activities that sustain the business has been established. Innovative activity in this line of business will still continue–incremental innovation and continuous process improvement continue to improve the line of business. In their continuing operations in this line of business, the line functions may also observe opportunities for new revenue that can be exploited. It then becomes the job of the business development function to explore these new opportunities and determine whether and how to pursue them.

Learning Objective Explore how the level of innovation of an offering can determine the part of an organization that is responsible for its success.

As markets change in the context of the PLC and the TALC, the best segments to target will also change. BD efforts search for new segments, define their usage and purchasing patterns and structure new offerings and operations to address these new opportunities.

Students may ask what the difference is between business development and translation activities. Business Development is a “first of a kind” new business for the organization (new revenue; new source).

Translation is the field marketing effort that seeks to find additional customers beyond the initial “beachhead.” In this regard, translation is more appropriately considered “market development.”

R&D, product development, and innovative efforts are most effective when the team responsible for these functions is specialized−focused on particular demands rather than attempting to provide invention, innovation, BD, marketing and customer service for an offering from “cradle to grave.”

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Learning Objective Understand the different types of forecasts and the integration of market information into the organization.

Chapter Six has discussed market research methods in business-to-business.

Market research is usually a snapshot in time and in itself, not a tool for forecasting. In this chapter we discuss forecasting as a use of both qualitative and quantitative information to project where markets are headed and where opportunities are likely to occur. The credibility and reliability of forecasts are directly dependent on the quality of information used to create the forecast (naturally) and whether or not the creator is invested in the forecast being “good” (as opposed to useful).

The usefulness of a forecast will be directly related to the time, effort and money invested in its accuracy. (PowerPoint 11.3) Marketing forecasts attempt to account for: (PowerPoint 11.4) • Technological change • Time horizons • Barriers to entry/exit • Elasticity of demand • Forecast expenditures Different types of forecasts can be employed depending on purpose, the data that are available, and time available to do the analysis.

Types of Forecasts (PowerPoint 11.5) • Strategic forecasts • Marketing planning forecasts • Marketing Operation forecasts (MOFs) • Sales forecasts Strategic forecast (PowerPoint 11.6) • “Top down” forecast • Usually 3-5 years • More qualitative than quantitative • Attempt to reconcile reality with desired strategic direction Marketing planning forecasts (PowerPoint 11.7) • Usually associated with a product or market • Significant inputs from market research and competitive analysis • Attempt to predict what customers and competitors will do • Usually 1 to 3 year periods Marketing operation forecasts (MOFs) (PowerPoint 11.8) .

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Exhibit 11-1: Predictive Models Rolling Averages Forecast for the next period is a weighted average of a preset number of prior periods.

• Data: existing sales figures • Averaging decreases impact and awareness of turning points • Not predictive of turning points • Appropriate for large volume, low value markets, ineffective with low volume, “lumpy” markets (large single purchases–facilities, infrastructure, etc.)

Econometric Models Forecasts are based on relationships derived through statistical analysis.

• Useful for coverage of several years • Requires prediction of many independent variables • A study of history applied forward • Lumpy markets can be modeled • Provides information about broad categories: not effective for single brands or shared data Delphi Approach Forecasts are from a panel of experts who are systematically polled.

• Executive opinion polling, with feedback provided to respondents to enable “correction” to the mean • Selection of respondents critical to validity of results; stability over time improves usefulness of predictions • A qualitative, intuitive model, useful for trends, not specific brands or offerings • May have value in business-to-business marketing because of the oligopolistic nature of markets, ability to acquire informed respondents

• • • • • •

Usually the responsibility of the field marketing organization Tactical in nature Source of significant market information, often sourced through customer relationships An element in sales forecasts Serves many parts of the organization Usually 1 to 3 year periods, continuously updated

Sales forecasts (PowerPoint 11.9) • Shorter range than MOFs • Input to logistical functions, resource planning and so on • Usually derived from analysis of historical data − assumption that future activities will follow current patterns Other predictive models: Exhibit 11-1 (PowerPoint 11.10) Often involve statistical manipulation of historical data • Rolling Averages • Econometric Models • Delphi Approach

Learning Objective .

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Understand the distinctions between New Business, Translation and Core Churn categories of business and the business-to-business marketing resources necessary to support each effort.

These categories of business provide marketing managers with insight into the level of resources that will be required to support market development efforts.

The manager also can examine the balance of business in the portfolio−are future business opportunities sufficient to maintain cash flows and/or are new products/resources required to succeed?

Combined with the information in the MOF, the manager has an array of powerful tools to understand and manage markets.

Business Development Tracking Grid: Exhibit 11-2 (PowerPoint 11.11) This grid provides relatively straightforward definitions of the categories of business.

• Core: Existing business with existing customers/markets. Most resource commitments are logistical in nature. Field sales maintains a successful relationship with customers, recognizing that the business is dynamic. The MOF, discussed below, provides information regarding the longevity and volume of this business.

• New Business: New markets and new offerings, often the result of a major R&D, product development, and/or marketing effort, if done from a marketing viewpoint, in conjunction with the customer. This partnership with the customer results in first time applications or adoptions of technologies. This is the “beachhead” application. For a small startup firm, this usually occurs near the chasm. The marketing effort is most accurately characterized as business development.

• Translation: Existing products/new markets. Business occurs when the customer specification is not a first of a kind application. Though it may be new in the view of that customer, it is not “new” to your

Exhibit 11-2 Business Development Tracking Grid Products

New

New

Existing

New Business

Translation

Core Churn

Core

Markets Existing

.

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•

organization; it’s merely a translation of a previous success. The marketing effort is mostly field market development (missionary sales). The “first translation” of new business usually verifies the existence of a viable market segment beyond the beachhead application–known as segmentation by translation.

Core Churn: New products/existing customers. This is the trickiest category. Churn occurs when translation business at a customer replaces an application of your older core business or technology.

This “new” business certainly required an effort by the team to get the business; however, it shouldn’t require as large an effort– assuming the translation tools were adequate. Unfortunately, the organization does not experience an increase in business equal to the sales of the replacement. The organization realizes the net of the old and new volumes.

A single piece of business can fall into more than one category, as described by the core churn definition. Students may note the similarity between product/market expansion tools that define new markets/new products as diversification. Please note that new business is not necessarily a diversification. The resources required can be significantly different.

Learning Objective Understand the value, use and development of a market operations forecast, and the launch of new business efforts, segmentation by translation, and core churn management.

The MOF is one of the most useful tools in managing marketing, sales and business development. Done well, the most of the information is sourced directly from customers regarding current and future business.

The manager has the information to think ahead and take into account all interacting relevant factors.

A MOF (PowerPoint 11.12) provides the “who, what, where, when and how much information” about current and future business.

Information in the MOF provides a total picture of market development activities, including projections of

.

•

Core business–How much will customers buy of what they are now already buying and when will they buy it? How much will customers pay for it?

•

Core churn–How much of current customers’ demand for existing products will be replaced (usually through translation efforts) by demand for new products? When will they buy it? How much will customers pay for it?

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•

Real new business–this is new business from new customers that comes from sales of new products. When will they buy it? How much will customers pay for it?

•

Translation business–this is new business from new customers that come from sales of existing products (that have been translated for use in new market segments); as discussed in Chapter Seven, segmentation can be accomplished by learning who wants the product translated for their line of business.

Operational forecasts of this detail can be difficult, not because the necessary information is not available but because obtaining it can be time consuming and will be viewed by a field seller as getting in the way of selling. This will be aggravated if there is no formal missionary sales structure.

Learning Objective Understand the different efforts involved with launching new products and managing mature business both at the organizational and customer level.

Managing products through the product life cycle In this section, we make use of the Product Life Cycle and Technology Adoption Life Cycle simultaneously.

Figure 11-4: the PLC and TALC, superimposed. (PowerPoint 11.13) The PLC is most useful when viewed from the perspective of a product category, rather than at the level of an individual product model or version. The customers and prospective customers are best understood for strategy purposes based on their perceptions, thoughts and emotions concerning the category of the product, which is what is portrayed in the TALC. Taking the two concepts together sets the stage for addressing New Business, Translations and Core Churn.

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Exhibit 11-4 The TALC and PLC Superimposed

PLC – Total Sales

TALC - Sales from New Adopters/ period

Time

The following is a review of the stages of the PLC with the ideas of the TALC integrated in. This is a precursor to the discussion of business development and marketing implications for each stage. The instructor can decide whether to present these as two passes through the stages or to treat the changing environment and changing BD/Marketing implications simultaneously.

For classroom discussion, consider leading students through a discussion of the challenges faced by Sensacon as the company evolves through the TALC and the PLC. Development Stage of the product life cycle, efforts focus on moving invention to innovation, often with a specific partner or customer.

Customers at this stage are the technophiles in the TALC and some early visionaries. Engaging them in the development stage is initiated through business development activities.

Introduction Stage–with feedback from technophiles and visionaries, development work continues to improve the product. The customers in this stage will generally remain visionaries. They are engaged throughout business development.

Growth Stage–product innovation continues, but moves toward a consistent architecture; the type of innovation transitions toward .

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incremental from radical. Two phases occur in the growth stage.

• •

In the first phase, pragmatists adopting the product category for the first time drive growth.

Second, many of the early adopters repeat their purchase. Often their second purchases greatly increase in volume and dollars over their first purchases as they increase the use of the initial product or translate the success to additional products in their line. Eventually, sales in these pragmatist markets begin to stabilize.

Initially in the growth stage, product innovation is focused on developing a standard that will be accepted by many customers, leading to an ownership position. Later, as growth among pragmatists slows, the competitors that will survive and prosper are those who have adapted to the predominant technology standards and who have developed their operations to deliver value and manage costs.

Mature Stage–begins when markets begin to become saturated and when most buyers are customers that have incorporated the product into their “standard way of doing things.” New buyers in the market are now “conservatives.” Innovation is now generally incremental and focused on sustaining/improving the dominant technology. Marketing is focused on inexpensively reaching segments or niches that highly value these incremental improvements.

Decline Stage–customers have begun shifting demand to other products or solving their needs in some other way. Competitors decide whether they will continue to address the market or leave the business.

Those that do remain may continue to pursue some incremental product innovations, perhaps aimed at niche markets. These niche markets may sustain a few survivors in the business.

Marketing and Business Development throughout the Product Life Cycle (PowerPoint 11.14) The PLC and TALC cannot predict specific inflexion points in the total sales curve, nor can they prescribe specific marketing strategies to address specific product markets. At any point in the PLC/TALC, there are still major uncertainties about customers, competitors and technology.

Different customer groups (segmentation via adoption inclination) reach ascendancy as the PLC/TALC progresses and marketing strategy must change to address these different groups as they emerge.

Development Stage–the company working on early stage products in a new product category must • Find a marketing strategy, • Learn about customers, .

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• •

Find initial target markets, Explore how to shape the business to pursue the opportunity.

• •

• •

•

The goals of early marketing/business development are to generate information about customers, generate product and business designs, and begin to build trust with important partners.

BD helps find development partners who will be the test cases for first products as they move beyond the prototype phase– conventional market research efforts will not suffice. The business developer must simultaneously approach many potential markets in a learning process, as visionaries are not concentrated in any one market, but exist throughout all markets.

The marketer needs to be talking with the development customers about uses, usage situations, likely buying processes, and what is valuable for the customers.

The value proposition and positioning are evolving. A key element of the value offered to visionaries is the access to early stage products and upgrades that can change the customer’s strategy toward its own customers.

Pricing is not a major consideration. If revenue can be generated, that is positive. The nature of pricing discussions at this stage is to anticipate price after the chasm is crossed.

Introduction Stage–the purpose in this stage is to get exposure and begin to educate potential customers–prospective visionary customers–about the technology, its near term products and potential benefits. The company working on early stage products in a new product category must find a marketing strategy: learn about customers, find initial target markets and begin exploring how to shape the business to pursue the opportunity.

• To get exposure and interest, the marketer should pursue participation in trade shows, information-rich web sites, and “webinars”–online multimedia seminars.

• BD should pursue direct contact with companies that the marketer feels have a high likelihood of being good visionary customers.

• Use missionary “evangelist” field marketing or business development to educate, find and work with “ripe” early pragmatists to work toward finding the beachhead for crossing the chasm.

• If there are many potential early customers, conduct a formal product launch after business development has validated the nature of this early market.

• Pricing is driven by the value perceptions of these first customers, plus profit requirements, both current and future.

Growth Stage–initially, the purpose in this stage is building sales in the beachhead segment across the chasm. Concurrently, marketers and business .

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developers will be finding and developing business in next adopter pragmatist segments. The second phase of the growth stage starts when earlier pragmatists begin repeat purchasing and field marketing and account management take on business maintenance.

• Marketing communications would be aimed at generating awareness and understanding of the advantages of the product.

• Missionary sellers/FMDs will tend to perform a lot of the business development effort.

• Pricing will take into account competitive dynamics as well as customer perceptions of value.

• Effort may go into developing channel relationships, particularly if the large-volume adopters have ancillary needs in the aftermarket.

• Pricing is driven by the value perceptions of these first customers, plus profit requirements, both current and future.

• Build Market Ownership ➢ stay close to the front in product development ➢ become recognized as the owner of the market ▪ take good care of customers ▪ improve the value provided ▪ good branding communications Maturity Stage–the slow-down in growth occurs as pragmatist customers become saturated. New customers are conservatives. This stage can last a long time, as long as pragmatists and conservatives continue to repeat purchase and do not shift to a new alternative. Marketing during maturity usually focuses more on reselling products or upgrading products to existing customers. Newcomer suppliers that compete with new technologies and eventually marginalize the mature company’s lines of business will limit the market for the existing offering. An important role for BD, then, is to develop the transition from current offering to next generation offering with large volume pragmatists.

• If a supplier is relatively small, a reasonable strategy is to find a niche that they can dominate and defend.

• The successful large suppliers will be those that focus innovation for low-cost production. The supplier with the most staying power wins the market share battle in maturity, and that usually is the low-cost producer. Efficient ordering systems and streamlined logistics aligned with supplier needs become competitive advantages.

• BD must contribute to the company’s strategy for competing in the maturity stage of the PLC. BD must also look ahead to the next generation of new business.

• Marketing communications would support branding and position products for niche or large-scale markets. The company must expend selling efforts to protect core business from its competitors as well as get existing customers to seek additional/replacement products and services (core churn) for aging products. Much of it is accomplished through the established sales force. .

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•

•

•

13

Inadvertently, newcomers that compete with the new technologies will eventually marginalize the mature company’s lines of business and will limit the market for the existing offering. An important role for BD, then, is to develop the transition from current offering to next generation offering with large volume pragmatists.

Pricing will take into account competitive dynamics as well as customer perceptions of value. Even in niches where the marketer has a dominant, differentiated position, pricing for high value will be referenced to competitive prices in mainstream markets, so the marketer must be prepared to think competitively.

Channel management becomes very important except in those markets where everything is direct.

Decline Stage–this stage occurs when customers have shifted demand to a new product category or no longer have much need for the products offered.

Often, a company decides that it is not cost effective to pursue a line of business that is in decline and they sell it to another company. Some users will stay with the older technology just because it works well and meets their needs. If there are any new customers, they are skeptics (laggards).

• If a supplier is relatively small, a reasonable strategy is to find a niche that they can dominate and defend.

• The successful large suppliers will be those that focus innovation for low-cost production. The supplier with the most staying power wins the market share battle in maturity, and that usually is the low-cost producer. Efficient ordering systems and streamlined logistics aligned with supplier needs become competitive advantages.

• Marketing communications will use very tightly targeted communications so that money is not wasted communicating with non-customers.

• The price is set at a level low enough to discourage the customers from looking to switch to new technologies.

• Field market development will be non-existent, with sales efforts rewarded through short-term reward systems (i.e., commission selling). The company that stays in the late-cycle business uses a sales-oriented sub-organization or separate department entirely.

• Many of these products have achieved commodity status, thus marketers tend to sell and distribute through industrial distribution.

However, many products in the decline stage are now sold through web-based marketing.

• Business development at this stage has two possible directions. First, in looking for new customers, BD focuses on finding the most efficient channels that reach the skeptics. A second direction of BD is to find the other companies that might be interested in buying the line of business in the declining stage of the life cycle.

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Learning Objective Recognize the changing roles played by marketing professionals as an offering evolves in the market.

Organizing to Manage Simultaneous Product Life Cycles Most companies attempt to manage a series of products in various stages of their own PLCs. The company needs to take a “pipeline” approach to the portfolio of businesses and products pursued.

Ideally a company would simultaneously have a balance of products in early stages of the product life cycle, in middle stages of the PLC and in maturity and decline. As some products reach decline there are products that come through the pipeline to take their place and provide stability and growth in revenues and profits.

There are two general alternatives to the organization of its marketing based on this pipeline analogy.

1. the company can assign a marketing team to a product or product line and carry out the product’s marketing from cradle to grave 2. the company can organize by customer adopter type Each alternative has advantages and disadvantages, but we believe the second alternative is better suited for long term viability, on the whole. Creating a team for each product that markets the product from “cradle to grave” requires the team to learn too much, too fast to adapt to changes in the life cycle stages.

Exhibit 11.6 (PowerPoint 11.15) illustrates how the marketing activity emphasizes might change from stage to stage.

Exhibit 11- 6 Activities Emphasized at Stages of the PLC for a Hypothetical Product Activity Research & analysis Product development New business development Translation business dev.

Core churn business dev.

Selling & sales support Channel development & management Market communication Customer service

.

Development Stage

Intro Stage

▲ ▲

▲ ▲

Chasm and Early Growth ▲ ▲

▲

▲

▲

▲

▲

Tornado – Later Growth ▲ ▲

Maturity Stage

Decline Stage

▲ ▲

▲

▲

▲

▲

▲

▲

▲

▲

▲

▲

▲

▲

▲

▲

▲

▲

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We believe the best results come from a marketing organization configured around the different kinds of adopters (customer-centric). Different pieces of the marketing organization will have different goals and objectives to achieve and will address these goals with different sets of activities. The motivation and compensation should be structured to reward the performance of these specified activities and the achievement of particular objectives.

Exhibit 11-7 (PowerPoint 11.16) shows the PLC with three horizontal bands, each indicating an area of different marketing focus.

Exhibit 11-7: Business Development Bands over The Product Life Cycle

Range of Major Sales-Driven Effort Revenue

Time

Range of Initial Business Development for Each Offering

Range of Major Translation Effort

The Range of Initial Business Development for Each Offering employs business development teams focused on the innovators/visionaries in potential customer organizations.

The Range of Major Translation Effort is the period when field market development specialists/missionary sales, coordinated by headquarters marketing effort, seek customers for offerings “proven once” in the first band. A major tool of this effort is the Marketing Operation Forecast discussed extensively in the first half of this chapter.

The Range of Major Sales-Driven Effort is the third and final band. At first .

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glance, this type of representation, the results-compensated sales-driven role, is unfortunately applied in the earlier bands by many organizations. However, in the context of this strategy, there are two functions of this role: 1) maintain ongoing successful relationships with buying customers, a traditional salesdriven approach and 2) interface with the organization marketing effort to prepare purchasing organizations for new business, translation, or core churn changes that may be on the horizon. FMDs are working with customers/partners in that many have remote manufacturing locations or use contract manufacturers, as well as manufacturing at the location where the developments take place. These logistical endpoints−nodes in the Supply Chain−when they occur in the territory are the responsibility of the seller.

The pivotal tool in this integrated effort is the MOF. Additionally, the overall strategy of the organization must be one of value pricing to enable the margins necessary to support the education and development efforts of the teams.

Key Terms business development core business core churn design decision field market development goals MOF (marketing operation forecast) missionary sales translation translation tools

Answers to Questions for Review and Discussion 1.

List the uses for forecasts in business-to-business marketing. [ Instructor – an answer to this question requires the student to use the information in this chapter, as well as previous chapters, to think creatively about how forecasts can and cannot be used.]

Forecasts can be used to support decision making at all levels, as listed in the answer to Q2, below. Data collection only gives a snapshot of what has already happened. Forecasts allow the decision maker to project trends, anticipate how they interact and gain more appreciation of the dynamics of the market. Thus they give the decision maker more of a framework for considering what-if questions.

Two specific uses of forecasts that might not be obvious are their use in goal/objective setting and in setting output measures for measuring performance of business units and individuals.

In both cases, good forecasts can keep goals, objectives, and performance targets within the range of what’s reasonable.

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Market Operations Forecasts and Sales Forecasts aid in the communication with other elements of the business to ensure that manufacturing, service, and logistics operations are planned to support the planned marketing activity and anticipated sales levels.

It is important to understand the limits of forecasts. They are based on available data perhaps on creative “visioning” of experts. As such they are prone to inaccuracies and inaccuracy should be accommodated in the planning process.

2.

What are the different kinds of forecasts used in business-to-business marketing?

In this chapter we have discussed: • strategic planning forecasts, which are generally long-range business forecasts associated with macro planning efforts; • marketing planning forecasts, which are usually associated with a particular product or market; • market operations forecasts, which are operational forecasts, tactical in nature, that are an ingredient in sales forecasts for territories, the tool used to judge performance for missionary sellers/field marketing operatives and a major source of market information in business development efforts • sales forecasts are shorter range than marketing operations forecasts, are valuable for logistics, manufacturing, and material resource planning, and are generally based on quantitative analysis of historical data

3.

Who has primary responsibility for developing the marketing operations forecast? Why? Operational forecasts are usually the responsibility of the field operation, sometimes in conjunction with brand/product/market specialists from headquarters. The idea is to look ahead 12-36 months and make judgments based on expectations for individual accounts and take into consideration the likely effects of business conditions, marketing and sales programs, and competitors’ activities. The people in the organization with the best knowledge on these activities are the field marketing people.

4.

How is a marketing operations forecast used differently than a sales forecast?

The MOF is used for marketing tactical and often strategy decisions based on the best thinking on what will happen in the short- to mid-range period. The sales forecast is used for coordinating with manufacturing and service operations in the near term. It is also used for tracking the effectiveness of the sales organization.

5.

What is business development? How does it differ from personal selling?

Business development is the search for opportunities and the structuring of business entities to exploit those opportunities with current or near term organizational capabilities. It is focused on developing revenue from new customers or new kinds of revenue from existing customers.

Personal selling may be an aspect of what the business development specialist does, however, business development is more focused on adapting new offerings to the needs of customers in ways that the organization does not yet fully understand.

6.

.

Describe the role of the Field Market Development person in an organization whose focus is technophiles and visionaries.

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Technophiles are the prevalent customers in the development stage of the PLC. Visionaries are the primary customers during the introduction stage. Teamed up with business developers, FMD specialists during the development stage interact with Technophiles to get them early stage products and prototypes to try out. They then listen to what the Technophiles have to say to help guide early product development and start thinking about customer markets.

In the introduction stage, FMDs continue to work with business developers. They help find potential visionary customers with outreach activities. They educate and train potential visionaries and help them think through business applications of the new products. As visionaries begin incorporating the product into their own operations, the FMDs continue to provide onsite support.

The FMDs are the principal people providing day-to-day onsite interaction with these early customers. Much of this activity is wrapped up in building relationships with these customers as development partners. A great deal of their activity then is aimed at learning as much as training.

7.

Describe the role of the Field Market Development person in an organization whose focus is pragmatists.

The role of FMDs varies somewhat between working with early pragmatists and later pragmatists. With early pragmatists, FMDs are still learning, helping identify new segments and looking for ways to continue to develop the offering to address next segments. With later pragmatists, the innovations are more incremental and the translation for new segments is much more straightforward.

8.

Why is the role of the FMD diminished for products in maturity and decline?

In maturity and decline, most of the business is repeat business or core churn. Customer education and training needs are minimized–customers may know as much if not more about your product as your own field team! Real new business and translation new business is a relatively small part of the ongoing business. FMDs are more involved in looking for opportunities in the next PLC.

9.

As an offering moves across the chasm, what strategies will be necessary to ensure market ownership?

Market ownership comes from maintaining an innovative progression, so the product and related service stay on the forefront of providing value. A second element is customer care. So FMDs and service personnel keep focused on providing support to new and existing customers, both before and after sales. A third element is brand-based communications, getting a memorable, accurate brand message consistently communicated to prospective customers.

The communications ought to be specific in conveying that market ownership belongs to the brand. Last the brand needs to be adopted as a standard.

In the case of crossing the chasm and starting to address the pragmatists, these elements need to be integrated with the market development efforts of the company. This means that a serious service effort needs to accompany the product development efforts of the company.

Communications should be directed at more of an audience than just the current target pragmatist market. And the business development and FMD effort should include efforts to adapt the product to fit well with customers’ operations. Product improvements should have ease of use or ease of build-in as a goal. Adoption of the product (or service) should be made as easy as possible.

Again, consider the Sensacon case as a classroom discussion.

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10.

How do the goals of market “ownership” and market “share leadership” differ?

Market ownership and share leadership are not necessarily incompatible. Ownership often translates into share leadership. However, as competition increases, share leadership may be accomplished by a competitor who provides an inexpensive product or service. This competitor may not be considered the market owner, though, because it is recognized as a low-cost alternative to the standard in the market. The goal of market ownership is to be recognized by customers as the standard. While this may not equate to share leadership in the short term, if ownership is maintained it ought to translate to profit leadership in the long run, and probably share leadership as well.

The market share leader will be content to stay with an established product through the middle business development band to the range of a sales driven effort of the PLC, leading to marketing myopia. The market owner will segment by customer adopter group and work to satisfy the changing needs of each development band separately.

11.

Describe how “real new business” is analogous to diversification.

Real new business is the result of a major R&D, product development, and/or marketing effort, particularly if the offering is the result of partnering with the customer. This partnership with the customer results in first-time applications/adoptions of technologies. Thus real new business is new revenue from new customers from sales of a diversified offering. However, not all new business can qualify as a diversification effort, as the resources and commitment levels of the organization are different.

12.

When is core churn also new business?

Core churn comes from existing customers moving on to new products or offerings. When this occurs, ideally, the defending supplier will offer new technology, often through joint development with the customer. The resource demands of this effort match the demands that would be made in a new market.

13.

How does business development change as the PLC progresses through its stages?

Because the main new customers change as the PLC progresses, the efforts to find and work with new customers changes, as well.

Development Stage–learn about customers, find initial target markets and begin exploring how to shape the business to pursue the opportunity. Business development works with marketing to generate information about customers, generate product and business designs and begin to build trust with important partners. BD also helps find development customers who will be the test cases for first products as they move beyond the prototype phase. BD is looking for visionaries in multiple markets to learn as much as possible about potential opportunities.

Introduction Stage–BD begins to educate potential customers–prospective visionary customers–about the technology, its near term products and potential benefits. BD is still heavily focused on learning about customers, finding initial target markets and exploring how to shape the business to pursue the opportunity. BD should pursue direct contact with companies that the marketer feels have a high likelihood of being good visionary customers.

Use missionary “evangelist” field marketing or business development to educate, find and work with “ripe” early pragmatists to work toward finding the beachhead for crossing the chasm.

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Growth Stage–business development is initially focused on finding the beachhead segment across the chasm. Concurrently, business developers in partnership with marketers will be finding and developing business in next adopter pragmatist segments. As the company gains momentum in the growth stage, missionary sellers/FMDs will look for translation opportunities.

Maturity Stage–an important role for business development is to develop the transition from the current offering to the next generation offering with large volume pragmatists. BD must also look ahead to the next generation of new business.

Decline Stage–if there are any new customers, they are skeptics (laggards). Field market development will be non-existent. Business development at this stage has two possible directions. First, in looking for new customers, BD focuses on finding the most efficient channels that reach the skeptics. A second direction of BD is to find the other companies that might be interested in buying the line of business in the declining stage of the life cycle.

14.

Why should a marketing organization be oriented toward different types of adopters rather than specializing in different products?

In order to market a portfolio of products at different stages of the PLC, two approaches are possible: a cradle to grave organization, where the principals stay with the product throughout its life cycle, or an organization structure in which teams specialize on types of customers in the TALC/PLC. Creating a team for each product that markets the product from “cradle to grave” requires the team to learn too much, too fast to adapt to changes in the life cycle stages.

15.

How should compensation be used to motivate and reward business development activities, such as field market development? Why? [ Instructor – this question precedes Chapter 12 and sales management. However, it can serve as a discussion question that gets students thinking ahead.]

You want to reward the desired activities and outcomes. In the case of business development, the desired outcomes are focused more on learning and relationship building than on sales.

Accordingly, sales commission is probably not the kind of compensation to use since it will tend to motivate transactions rather than relationships. This will become particularly problematic when the company is organized to specialize in customer types. Rather, compensation should probably be structured as team-based bonuses in addition to a competitive salary. If it is possible to determine profitability of customers, profit sharing based on long-term profitability of customers in which a team helped build a relationship might be a further basis for compensation.

16.

List the roles and responsibilities of the three different bands in the management of simultaneous life cycles.

Range of Initial Business Development for Each Offering–business development teams focused on the innovators/visionaries in potential customer organizations. The team will be prospecting for the first successful partner for the new product. The team builds a limited number of relationships and learns from the interaction.

Range of Major Translation Effort–field market development specialists/missionary sales, coordinated by headquarters marketing, seek customers for offerings “proven once” in the first band. The marketing operation forecast plays a major role in providing structure to this effort.

The FMD focus is market development within a specialized area (territory, product line, etc.).

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Successful translation of the proven-once new business leads to identification and understanding of new market segments.

Range of Major Sales-Driven Effort–sales and account managers maintain ongoing successful relationships with buying customers, and BD personnel work to identify and develop purchasing organizations for new business, translation, or core churn changes that may emerge. FMD reps are working with customers/partners in that many have remote manufacturing locations or use contract manufacturers, as well as manufacturing at the location where the developments take place.

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Chapter Twelve Business-to-Business Selling: Developing and Managing the Customer Relationship Authors’ Comments In this chapter, we highlight the role of relationships in business-to-business marketing. Field marketers (missionary sellers) and the sales force are the primary builders of the relationship with customers. These individuals have the opportunity, as the liaison at the boundaries of organizations to dramatically impact the strength and depth of the organizational relationship. Good sellers fill the role of supplier representative at the customer and, working to get resources committed to their customers’ programs, customer representative at the supplier.

Students will often have a less than stellar image of a person who has the title “salesman.” It may be appropriate to remind them of the value of a good sales force to both the selling organization and the customer.

This chapter takes the position that selling is an ongoing process of creatively combining customer needs with the capabilities of the selling organization. The ongoing nature of the effort is key to the development of a successful relationship.

We also note that the buying organization needs to be oriented toward a relationship– no relationship results unless the customer wants a relationship.

Different situations call for different levels of relationship and the sales force needs to be configured, recruited, trained, and compensated to accomplish the appropriate form of relationship. This chapter points out many of the factors that contribute to the development of an effective sales force, not the least of which is the “way the customer wants to buy.”

Opening Vignette

HP Returns to its Original Selling Competency

The opening describes the Hewlett Packard sales organization at the time Mark Hurd became CEO. What the new CEO inherited was a sales organization that, once very efficient, had grown to a rather oversized (bloated?) organization that was overburdened with its own bureaucracy and slow to respond to customers. We have found this situation at other firms in rapidly growing markets, particularly high-tech, as the need for “more representation” as product offerings multiply and markets expand takes priority over efficient sales force design. A redesign that returned to the fundamentals of good business-to-business sales structure was needed.

It may prove useful to relate the changes made by Mark Hurd to some basic .

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ideas (noted for students in the vignette).

• Accountability to product marketing • One-stop focus for customers • Organize to sell rather than manage • Marketing Operations Forecasting–Chapter 11 • Rewards more aligned with desired outcomes

Business-to-business selling is creatively joining your company's capabilities with your customer's needs (PowerPoint 12.2) Learning Objective Understand the roles of sales and the seller in business-to-business organizations.

The seller is important to the organization’s Value Image. Sellers serve on the front-line of the marketing effort.

Combined, sellers and buyers are the “Boundary Personnel;” individuals in the organization who span the boundaries of their own organizations and those of customers. (PowerPoint 12.3) Boundary personnel serve as the liaison with other key organizations–they can be a major asset in the buyer-seller relationship.

Learning Objective Understand the differences between selling in business-to-business markets and selling in consumer markets.

The Nature of Sales and Selling Definition versus Consumer sales: Business-to-Business Selling (PowerPoint 12.4) • Is more time-consuming • More relational between buyer and seller • The stakes are greater in terms of the “value” of the sale Many students have negative ideas about selling based on consumer experiences−just mention real estate or automotive sales and observe the reaction. Many students would not consider a career in sales.

Consider asking students how their major purchases, e.g., automobiles, computers, and real estate, evolve. These higher cost purchase situations more closely replicate a business-to-business buying situation.

Emphasize that customers look to sellers to be information sources, problem solvers, and at times, financial advisors. An obvious part of the long-term relationship in the B2B setting, these functions are not always acknowledged in a short-term consumer relationship. Yet consumers often expect a level of service that places sellers in the position of .

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seeming “pushy” as they work, in a very short time span, to discover consumer needs and develop a solution. Few consumer sellers have the luxury of an ongoing relationship to understand a particular consumer’s needs and wants.

Characteristics of Business-to-Business Selling: Exhibit 12-1 (PowerPoint 12.5) • Repeated, ongoing relationships • Solution-oriented, total system effort • Long time period before selling effort pays off • Continuous adjustment of needs • Creativity of seller in problem solving often demanded by buyer Repeated, ongoing relationships (PowerPoint 12.6) • The relationship between the seller and buying center members is a series of dyadic interactions o One-to-one meetings or interactions between stakeholders in the buying center and the seller or other individuals in the selling organization’s value chain.

Solution-oriented, total system effort (PowerPoint 12.7) • Customers buy solutions, not technologies or core products. o The seller and the selling organization must understand the needs of the customer. o The seller must also understand the different motivating elements between members of the customer buying center.

Long time period before selling effort pays off (PowerPoint 12.8) • In business-to-business selling, the outcome of the sales effort may not be known for months (or years!)

• It is important to use the development period to reinforce the value offering relative to competitive offerings. o Reduce buyer perceptions of risk by reinforcing the total value of the offering.

Continuous adjustment of needs (PowerPoint 12.9) • It is important to be flexible and responsive to the changing needs of customers. o Customer needs evolve as they learn more about the sellers offering and how the offering can be applied to their needs.

Reference the role of marketing in the product development process from Chapter 8 Creativity of seller in problem solving often demanded by buyer (PowerPoint 12.10) • Customization of the offering to meet the specific needs of the buyer is expected, especially by large customers.

• Approaching each customer’s problem in such a way that the .

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customer perceives the offering as unique is particularly advantageous. o Can relieve the seller of concerns relative to pricing Learning Objective Understand the basics of business-to-business sales force organization.

Relationship Sales and Marketing The relationship” between buyer and seller is always important though the nature of the relationship and the expectations of the parties involved change under different circumstances.

Successful relationships between suppliers and business customers involve (PowerPoint 12.11) • mutual respect • trust • authenticity At this level of relationship, the business-to-business seller must demonstrate an authentic interest in the success of the customer as an individual and the customer’s organization. Customers who place a high value on business relationships reciprocate in kind.

Levels of Relationship and Intricacy (PowerPoint 12.12) • Discrete Exchange • Differentiating an undifferentiated product • Multiple transactions • Collaboration/Partnering Learning Objective Recognize the different types of sales representation that are most appropriate for offerings under different customer buying patterns.

The discussion of culture and relationships that follows can be successfully related to the eras/philosophies of marketing (Chapter 1) and the four forms of seller roles, discussed later in this chapter.

Corporate Culture and Relationships The attitude and expectations of the organization are demonstrated in the culture/marketing view of the firm.

Exhibit 12-2 recalls the Philosophies of Marketing. For this discussion, it is appropriate to break this exhibit into two components: • Inward focused, sales driven cultures: (PowerPoint 12.13) Maximizing production and/or sales is often the goal. These .

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cultures are inward focused. o Production era and Product era o Sales era Customer/Market focused, value driven cultures: (PowerPoint 12.14) Maximizing market choice (Marketing era) or life quality (Societal era) are goals of these philosophies. The focus is on the customer and satisfying needs. o Marketing era o Societal/partnering/value network era

Four Forms of Seller Roles: Exhibit 12-6 (PowerPoint 12.15) • The order taker Primary role is taking orders and ensuring timely delivery of products. (PowerPoint 12.16) • The persuader/sustainer Updates customers about offerings, attempts to convince customers of offering value. (PowerPoint 12.17) • The motivator/problem solver Assists customers in maximizing product value by providing advice and customer education. Unique customer solutions through match of capabilities and needs. (PowerPoint 12.18) • The relationship/value creator Creates a partnership with the buying center that stimulates customers. Often built by sales and marketing teams. (PowerPoint 12.19) The relationship/value creator will satisfy all of the criteria associated with “knowing your markets” from Chapter 6, PowerPoint 6.5, and summarized in Exhibit 125.

PowerPoint 12.20 is a repeat of PowerPoint 6.5.

The type of seller in any particular organization will depend on culture, customer expectations, the degree of innovation, ownership versus share leadership and so on (basically, a summary of the previous 11 chapters).

Types of business−new, translation, or churn, are recalled from Chapter 11 in Exhibit 12-4. Perhaps this is a good time to reintroduce Exhibit 11-2, The Business Development Tracking Grid, here.

Learning Objective Understand the internal and external relationships necessary for successful sales and market development personnel.

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Other Types of Seller Roles (PowerPoint 12.21) • Missionary Sellers−(often part of marketing organization) generic term for individuals who perform many merchandising tasks, customer education, problem solving, etc. These “sellers” aren’t really sales people, so the term is misleading. Usually compensated by salary rather than commission.

• Field Marketers−(usually part of marketing organization) specific term for individuals who, in business-to-business marketing, are responsible for market development efforts, particularly related to translation and customer education. These individuals are important in establishing relationships and developing a market ownership position. Depending on the offering, the role of field market developers (FMDs) usually fits within the growth stage of the PLC (often too costly for a mature product line). FMDs usually fit the relationship/value creator role. The FMD role is further described in Chapter 11. o Different titles are often given to these individuals, depending on industry. A few examples: ▪ Customer engineers ▪ Product evangelists ▪ Market development specialists and so on • Post-Sale Customer Service Effective customer service can reinforce the purchase decision and create superior value for a customer The role of FMDs in establishing market ownership, their appropriate place in the PLC, and the use of dual field structures is demonstrated in the “Marketing Plastic Resins” case.

Learning Objectives Recognize the different levels of selling associated with product types, rewards and seller performance.

Reinforce the necessity of understanding customers’ needs and preferences in the building of a sustained organizational relationship.

Dual field structures: Exhibit 12-7 (PowerPoint 12.22) (Because of detail, preview for clarity before projecting to class)

Exhibit 12-7 shows the relationship between field sales and field marketing. While a somewhat complex exhibit, time should be spent such that students understand the purpose of dual structures.

• Field Sales: Based on the philosophy of “you get what you reward,” this part of the dual structure is compensated through a commission plan, either partially or entirely. Focus is short term. o Primarily motivators/problem solvers or persuader/sustainers • Field Marketing: As described in the role of FMDs above, field .

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marketing focuses on long-term development and value creation.

Exhibit 12-8 (PowerPoint 12.23) shows the correlation of value and complexity of relationships in business-to-business selling.

The Mutual Needs of Buyer and Seller (PowerPoint 12.24) Three Needs to Satisfy • The needs of the job function • The needs of the organization • The individual needs of the buyer and seller Selling−The Structure Three basic selling structures (PowerPoint 12.25) • Direct Sales Force Direct employees of the supplier’s organization: high fixed costs, most responsive to management directives • Manufacturers’ representatives Contractual relationship as broker; no product logistics functions, virtually no fixed costs; often no economies of scale • Distributors (Covered in detail in Chapter 14) Contractual relationship, often full service; takes ownership and performs logistics functions • Any combination of the above (See Dual Distribution in Chapter 14) Selling−The Compensation (PowerPoint 12.26) • Straight Commission • Straight Salary • Combination Plans Straight Commission (PowerPoint 12.27) •Most appropriate where repeat efforts are necessary to sustain customer purchases.

•Rewards are linked to short-term, repeated performance.

•Sellers will likely concentrate on customers that have a pattern of frequent and substantial purchases.

•Inappropriate during new product introductions.

•May not work well for sophisticated products where missionary work is needed.

•Compensation variability/volatility may create problems for the sellers.

Straight Salary (PowerPoint 12.28) •Management is able to exercise greater control over the sales force (compared to straight commission).

•Appropriate when personnel in selling roles are required to provide design and engineering assistance.

•Motivator/problem solver and relationship/value creator roles are .

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appropriate for straight salary compensation.

•Creates stability of sales employees.

•Does not tie financial rewards to sales results–may attract personnel who are security oriented instead of achievement oriented.

Combination Plans (PowerPoint 12.29) •Most frequently used form of compensation.

•Salary portion of compensation corresponds to management’s needs for the sales staff to perform administrative duties, while the commission portion encourages increased selling effort.

•The commission portion of the compensation is paid as it is earned, as opposed to a bonus (most likely paid on a quarterly or annual basis).

Manufacturers’ Representatives “Reps” are specialists in a particular market segment or collection of segments that have common users or call patterns. (PowerPoint 12.30) • A sales call pattern is dependent on the type of selling involved with a product and the type of customer base.

Products with similar buying styles, habits, customer types and selling intensity may be grouped together and represented by the same seller. An equipment product line that is a new task purchase, possibly requiring a capital investment decision by the customer would not fit the same call pattern as items that are routine purchases such as supplies and materials.

Matching call patterns is an important consideration in sales force design. In selecting a manufacturers’ representative, the rep’s call pattern should reach the intended target market.

Reps act as agents for manufacturers. (PowerPoint 12.31) (Manufacturers are known as principals in the rep industry.)

As agents, reps • Take no ownership of what they sell • Carry no inventory • Have low fixed costs, spread over many manufacturers, and create no fixed costs for the manufacturer • Have little or no role in the transaction between the principal and the customer • Are compensated through a commission only after a sale is culminated (booked) • Are usually “in business for themselves” or part of a rep agency The best rep for a firm is the one that has successful, ongoing relationships with the customer base that the firm is trying to meet.

Exhibit 12-11 (as shown here and on the powerpoints, bullets have been .

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Exhibit 12-11 Comparison of Appropriate Market Conditions for a Direct Sales Force and Manufacturers’ Representatives (PowerPoint 12-32) Appropriate for Direct Sales Force When • The product is technically complex • The selling situation requires a specialized background • Control is important–the organization selects, trains, and controls personnel • Long lead times for results are common; Significant missionary work is required to build relationships • Prospecting for new customers is required • The customer base is concentrated • Explicit customer feedback is desired for innovations, new products, competitive information • High fixed costs

(PowerPoint 12-33) Appropriate for Manufacturers' Representative When • The product is standardized or generic • For technical products, a technical education or background is important • Control of personnel is less important – reps are independent business people • Short sales cycles are common • The reps have other complementary lines • Reps have established relationships with target customer segments • Match of reps’ existing call patterns • The market is dispersed and/or when the market consists of many small customers • Customer feedback is less critical • Low fixed costs are required

shortened from the text) describes the appropriate market conditions for direct sales and manufacturers’ representatives. (PowerPoint 12.32 & 33 as noted) Combinations of Representation Manufacturers often use a combination of several types of representation−direct, through distributors, and manufacturers’ representatives−based on the needs and preferences of the customer base.

Consider an example of a large tire manufacturer such as Goodyear.

Serving many different market segments Goodyear has • direct sales to high-volume customers (auto companies); • their own retail stores with sales catering to consumers that have preselected the tire brand desired before going to a retailer; • sales through independent tire distributors and retailers that feature many brands.

In all, the core product, the tire, does not change.

Key Terms booked sale bottom-up forecast boundary personnel call pattern direct sales force distributor dyadic Interactions fixed cost of sales .

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intensity of territory design manufacturers’ representative motivator/problem solver order taker persuader/sustainer relational exchange relationship/value creator sales call switching costs top-down forecast Answers to Questions for Review and Discussion 1.

Compare the role of a seller in consumer markets with a seller in business-tobusiness markets.

The seller in consumer markets, unlike the business-to-business seller, may tend to focus more heavily on consumers’ emotional needs/wants or those of the consumer’s family; in business-tobusiness, the successful seller focuses on providing solutions for a more complex set of buyer needs or problems, in which the needs of individuals and the needs of the organization are intertwined. In consumer selling situations, the relationship between seller and customer is minimal and short in duration. Seller-buyer relationships are more the norm in business-tobusiness selling. These relationships tend to be closer, more complex and last much longer than most seller-consumer relationships.

2.

How is the repeated, ongoing relationship in business-to-business selling an advantage for both the seller and the buyer?

The repeated, on-going relationship in business-to-business selling is an advantage for both buyer and seller by establishing consistency of results to expectations, an inherent desire of the seller to do what is correct because of the larger financial considerations involved. The ongoing nature of the relationship is necessary to fully recognize the scope of needs to be satisfied–job function, organizational, and personal–of both the seller and the customer.

3.

Explain why a dyadic relationship between buyer and seller may be of value to Order Takers.

A dyadic relationship between buyer and seller may be of value to order takers because it extends the creation of value beyond the tasks that are of immediate concern. In essence, buyers and sellers, in a dyadic relationship, will understand how both individual and corporate needs can be best met for success, and that will, by its nature, include consideration of job function needs, organizational needs, and individual buyer and seller needs.

4.

As a product moves through the Product Life Cycle, how does the nature and complexity of customer support change?

The nature and complexity of customer support change through the product life cycle because

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buyer needs and marketing focus are altered. At introduction and in the growth stage, buyer needs are focused on a new buy situation; this changes over time as these needs are filled by straight rebuys and/or modified rebuys during maturity, then reduced needs and greatest cost efficiencies at the end of maturity and into decline. Early in the product life cycle, service aspects of relationships will focus on customer education, product design and integration of the offering into customer’s value chain. Later in the product life cycle, the service aspects will tend toward customer’s cost management and integration of supply chain–not just the product–into the customer’s value chain.

5.

Discuss how the changes examined in Question 4 are related to technology adoption.

Referring to the Technology Adoption Life Cycle and various adopter groups, customer needs change based on the attitude toward new ideas and innovation, the degree of education necessary to correctly and productively use the new technology, the level of acceptable risk, the willingness to pay for “new” products and so on. In business-to-business markets, the customer adoption of new and often unproven offerings will be based on the customer’s intended market and its willingness to accept innovation. Higher volume markets are pragmatists, willing to accept only a proven, complete product. Earlier adopters will require an education as to the best use of the product and are often interested in the product for its “newness.”

6.

Refer to footnote 13, related to the levels of selling. Of the four forms of seller roles described in this chapter, which would you assign Level A? Level B? Level C? Students will have various positions on this question. Some may assign “C” level to the less complex seller roles while seeing the roles with greater complexity and intensity as being “A” level selling. While there is arguably some truth to this, good (or bad) selling occurs in all roles.

One view is to regard the level of sales (A, B, C) as a capability measurement/requirement while the four seller roles are performance requirements. How do you and your students see this?

7.

Characterize the differences between the seller role of a Motivator/Problem Solver and the seller role of a Relationship/Value Creator.

Differences between a motivator/problem solver and relationship/value creator are as follows: Motivator/problem solver: • buyer relies on seller for advice as offerings become more innovative • buyer often needs more education regarding the offering to achieve full value • seller must be market-driven, satisfying customer needs • seller and buyer must be aware of the functionality of the three mutual needs of the buyer and seller Relationship/value creator: • concepts of all-inclusive partnership between seller and buyer needed • both parties rely on each other for success • both parties work to join needs/wants of each side • seller demonstrates an authenticity in their interest in the buyer and the organization • As described in Chapter 8, the seller/marketer has a significant role to play in support of the customer in the new product development process.

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Note that students, in discussion, may see the increased intensity of the relationship/value creator as a requirement of greater capability required of the seller.

See question 6, above.

8.

Many sales managers claim “our sellers are the first line of defense and the first line of offense in the supplier-customer relationship.” What does this statement mean? What role types are the sellers likely operating in?

The statement, “…sellers are first line of defense and the first line of offense” means that sellers, per se, have to perform in a manner that allows them to become conduits of prospect, buyer and competitor actions, and to then be able to act in a responsible manner that allows the selling firm to gain a strategic position in the marketplace. The typical role type for this would have to fall on the relationship/value creator where field communications are a two-way street of knowledge between seller and buyer.

9.

Suppose you are the marketing manager for a small company marketing a new product that requires extensive collaboration with the customer before the customer will adopt it. What are the advantages and disadvantages of selling your product through manufacturer’s representatives?

In a situation where extensive collaboration with the customer is required prior to adaptation, the advantages and disadvantages of selling through manufacturer representatives are as follows: Disadvantages: • contact with the buyer through a second party • selling firm may have stronger expectations than rep firm • non-exclusive focus of seller to buyer • potential product knowledge problem with seller to buyer Advantages: • keeps operating costs lower on a new item introduction • prior ongoing relationship of seller firm to buying organization • conceivably broader exposure faster in the marketplace • longer-term opportunities for sale of complementary products

10.

What are the three areas of mutual needs of buyers and sellers?

• • •

11.

The needs of the job function The needs of the organization The individual needs of the buyer and seller

One-to-one marketing has been a goal for marketers since Peppers and Rogers popularized the idea.* One-to-one marketing is, in essence, treating each customer as a segment of one market and marketing directly to that customer.

In business-to-business marketing, how close do you think most companies can come to implementing one-to-one marketing?

For marketers addressing markets with relatively few and/or large customers, one-to-one marketing is a necessity–the sales levels and margins for individual customers are very large,

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allowing suppliers to develop and support marketing and selling efforts tailored to individual customers. Implementing one-to-one marketing for markets with more customers and narrower margins is difficult at best because it requires a consistently high level of seller skill and knowledge as well as a unique sensitivity to different buyer and/or buying organization cultural differences and operating differences. The total contribution generated by individual customers is not large enough in such cases to support this level of relationship.

12.

What risks must be considered when changing representation from manufacturers’ representatives to a direct sales force?

The risks involved in changing sales policies from manufacturers’ representatives to direct selling include an adjustment in relationships between seller and buyer, a shift from variable to fixed costs as well as greater costs for the selling organization and a possible loss of skill in understanding the buying organization’s needs.

13.

At what level of sales success would you consider making the switch described in Question 12? What are the factors you must consider to make such a decision?

The levels of sales success to be considered in making the change alluded to in “12” above would include sales level profitability to afford direct selling expenses, an understanding of the brand equity for the products being sold that would justify a change without buyer disruption, potential “staying power” of the product(s) being offered and an ability to have sales people capable of gathering unbiased competitive information. These changes must be weighed against many of the factors that favored the use of manufacturers’ representatives in the first place, notably the value of the ongoing relationship between potential buyers and the rep.

Consider also that the rep is likely to work to replace the product in his product line with a comparable offering. Your product must be able to withstand the competition from the sales organization that originally established it with the customer.

14.

Consider the relationship between Daimler-Chrysler and its suppliers, described in Exhibit 12-9. Chrysler was in trouble and needed cost reductions. Think of some ways that Chrysler could have obtained the reduced costs and maintained a strong working relationship with its suppliers.

The answer to this question, written below, was prepared before the recent turmoil in the automotive industry. The bankruptcy of Chrysler and GM can add credibility to our position that it is good practice to recognize the supplier as a partner in success. During the period just before the bankruptcies, there was considerable concern that suppliers to these companies would also fail or fall into bankruptcy and thus be unable to supply other auto companies, causing a domino effect in the industry. Indeed, one of the principle reasons that Ford supported its competitors’ position during the bailout discussions was to bring stability to the supplier base.

Previously written answer: DaimlerChrysler could obtain reduced costs from suppliers yet maintain a strong working relationship with its suppliers by optimizing the relationship selling opportunities between supplier and manufacturer, enhancing the complexity of the selling firm’s role to instill a sense of collaboration between the parties, and, in general, by partnering in the developmental issues inherent in automotive production over time. Students need to realize that a “relationship”

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implies two-way interactions, not one-way dictation. Collaboration to find mutually agreeable ways to reduce costs would be preferable rather than simply mandating cost reductions from “partners.” While Chrysler may have been justified in its need to reduce costs, provision should be made for suppliers to share in the success of mutual efforts as well.

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Chapter Thirteen Business-to-Business Branding Authors’ Comments This chapter concentrates on Business-to-Business Branding, and explains the concept in detail. The areas emphasized in this chapter are: • • • • •

Holistic branding Brand dimensions Brand elements communication Competing by brand building Ingredient branding

In recent years, branding of industrial goods has finally made it into business textbooks. In the 12th edition of his book Marketing Management♯, Philip Kotler includes extensive instructions on brand management. There is even a section on Ingredient Branding.

The concept of holistic brand management is introduced by highlighting the interrelationship of various marketing and managerial issues with the customer’s understanding of the company’s values and offerings. Western students tend to compartmentalize and separate tangible and intangible benefits of the offerings. We would like to emphasize an integrated approach.

After explaining the characteristic and role of business-to-business brands, we introduce the concept of the Branding Triangle, which puts the whole branding effort in perspective. The branding checklist then gives very concrete advice on how to get the brand management operational, and is then followed by the next challenging task of organizing the architecture of brands in multi-branded companies.

After that, we would like to give students practical recommendations for brand communication by explaining the various elements and concepts, including brandbuilding tools. Additionally, there are instructions for measuring equity and value of brands. For more details, please refer to specialized literature such as B2B Brand Management (Kotler/Pfoertsch 2006), or get information from brand equity measurement organizations such as Interbrand or Millward Brown.

A whole section is dedicated to the topic of competing by brand building. Many practitioners and students need help in this area, because in the past, technology or pricing has been in the foreground of business-to-business marketing. Then, we would like to emphasize the need for understanding the importance of the brand for industrial buyers and explain how brand management can be established in a ♯ The 14th edition is due to come out in 2010. .

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company and in the minds of its customers. Please refer to the example of SensorSUV case and the 3M example.

Finally, Ingredient Branding is introduced to give the student and future managers the opportunity to learn about this marketing innovation that has not yet reached its fullest potential because the concepts are complex and not widely known. It requires knowing the multi-level marketing concept and the push and pull concept. The Bitrex and Makrolon cases will add more information to this new concept.

Opening Vignette

ITT Industries–Brand Engineering in China

The opening vignette illustrates the effort needed to vitalize an existing brand portfolio and the need to streamline efforts for a joint appearance in a demanding market like China. ITT’s rebranding demonstrates clearly the challenges industrial companies face when moving upwards in their offerings, having to face other issues like organization alignment and HR-related issues. Examples from other companies are given to support the reasoning behind ITT’s management efforts.

Learning Objective Understand the creation and application of brand management in order to compete successfully in business-to-business markets.

Industrial branding is as old as industrial production, but conscious brand management started to spread in the 70s in the U.S. and became popular in the 90s in the rest of the world. Many students and practitioners still ask about the necessity of investing in the brand, but nothing is more convincing than proof of success. In Exhibit 13-1, the brand values of the top 10 companies in the world are shown based on calculations by Interbrand, the only worldwide recognized brand valuation method; six of the companies are business-tobusiness companies. This chart shows clearly that industrial brands can make it to the top of the list of world brands, even when a major portion of their sales is not to the final user.

Exhibit 13-1 (PowerPoint 13.2): Brand Value of Top 10 Companies Other analyses show that the success of these companies could be expanded to stock market performance. At this point, it is important to point out to students that brand management is not the ultimate reason for success. Instead, it is an additional way of management, which gives a boost to the overall performance of a company. It should also be stressed that brand management cannot create something that is not there, such as giving a false or exaggerate view of product performance. Brands should always follow the overall strategy of the company, and brands have to be aligned with characteristics and goals of management. Companies that have understood this created from the beginning a sense of completeness and customer connection that fostered innovation and .

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cooperation between various partners in the value chain.

Learning Objective Obtain an understanding of how branding relates to entrepreneurial marketing and gain a sense of how branding can be accomplished in all elements of the offering.

In order to practice branding as a holistic approach, executives have to incorporate all branding efforts into their entrepreneurial mindset. Business-tobusiness branding needs leadership from the top. Important decisions have to be made when taking the customer’s offering to the customer or even to the customer of the customer.

The main purpose of branding is to differentiate and to create preferences for the customer. This is achieved when the prospective customer can distinguish the offering from that of the competition and the company has a name or logo that is easy to identify. Eventually, the recognition will lead to increased sales; many studies have proven this. The ultimate consequence resulting from customers’ preferences is the ability to demand a premium price for the product.

So, understanding what the concepts of increased information efficiency, risk reduction, and value added/image benefit creation could mean for the customer can help the student and future executive to conceptualize the benefits from the investment into the brand.

The role of brands is depicted in Exhibit 13-2 (PowerPoint 13.3) and shows how all these factors support the branding efforts.

Entrepreneurial brand management is not only geared to the customer, but must also be targeted to the members of the company. We define them as collaborators, not employees, because we believe they work in collaboration to achieve the best for the customer and the company (3Cs). In the Branding Triangle; Exhibit 13-3 (PowerPoint 13.4) this relationship is displayed.

Between the company and the customer, there should be an external relationship with abundant communication activities. Customers have to be informed about the company’s offering and the product benefits.

The company itself must inform its collaborators continuously. A large amount of internal communication is needed to make everybody familiar with the brand offering. This could be achieved through training, internal publications, Intranet, etc., so that every collaborator can represent the brand accordingly.

This is an important prerequisite for the relationship between the collaborator and the customer. This relationship is particularly important for industrial brands with a large amount of service. Every interaction between the .

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collaborator and the customer can create additional value and improve trust in the brand. Therefore, understanding the Branding Triangle is important for any entrepreneurial action.

To make the branding efforts easier to understand, we added the Branding Checklist which gives the reader a list of easy to answer questions about your current brand positions. In all cases, brands are directed toward the future, because they only apply to the possibility of success.

Branding Checklist: Exhibit 13-4 (PowerPoint 13.5 through PowerPoint 13.7) Learning Objective Understand how to implement brand management in business-tobusiness marketing.

For many students and executives, business-to-business brand management is reduced to brand communication. After introducing the Branding Triangle and understanding the role of brands, students should consider brand management as a task that needs the full attention of the leaders on top.

Since they give the orders, the company needs the structure and the organizational units to make this possible. Brand communication is one part of this.

Internal consequences of brand development are demonstrated with the Brand Architecture of three companies: AKZO NOBEL, Daimler, and GE. Their branding concepts can illustrate the various thoughts behind their branding approaches. GE emphasizes a very concentrated approach focusing on its corporate brand, neglects the negative effects after M&A integration, and does not adapt to particular market needs. In contrast, Daimler, with its flagship brand Mercedes-Benz, has developed various sub-brands in their truck business to cater to the need of different markets such as Freightliner in North America and Fuso in Asia. AKZO NOBEL pursues a hybrid model, where AKZO NOBEL as the corporate brand is also used as product brand, together with their other brands.

Exhibit 13-5 (PowerPoint 13.8) The Brand Customer Relationship It is necessary to emphasize that even in the hybrid situation there should be no internal conflicts and overlap. The day-to-day management has to assume that the differences are clearly noticeable to the customer.

This could also be achieved through the distinct elements of brand communications. Most importantly, there must be a clear visual identity to all 3Cs.

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In the text, we illustrate the elements of the Visual Identity Code. It should be stressed to the students that the chosen set of elements should be kept stable for a longer period of time, because they mainly represent the company in the mind of the customers, and this takes time to establish.

Various brand building tools are introduced, which are known from B2C communications, but have to be adapted to industrial market conditions.

•

• • • • •

Personal Selling: Full knowledge of company and products are required. A long-term individual relationship is anticipated; even personal friendship can evolve.

Direct Marketing: Mainly conducted through in-house or experienced personnel, includes all offerings of the company and is ongoing.

Public Relationship: Focused on industry specific media and events, includes all aspects of company developments, including top executives.

Trade Shows and Exhibitions: This varies from industry to industry, but could range from large show attendance to in-house exhibitions.

Advertising: May be focused on industry publications, except for special topics or occasions.

Sales Promotion: Only applied in very competitive business environments.

These tools provide a good basis for competing by building a brand. The section “Importance of Brand in Business-to-Business Buyer Behavior” gives the students a deeper insight in the decision process. Extensive explanations are offered for brands to become designated as a standard.

Please consider that there could be a downside to this … when the industry standard becomes so dominant that the differentiation actually happens on the product feature level.

Learning Objective Develop insights in the concepts of competing and winning over a long-time frame through building and managing brand strength in a business-to-business environment.

With a good basis of marketing principles provided in Chapter 1, 3, 4 and 7, it should be fairly easy for students to understand this, but the differences to consumer branding have to be kept in mind. Illustrated in Exhibit 13-1, similar differences between Business-to-Business and Consumer Branding could be used to work this out. All branding anticipates business success and measures .

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have to be established to demonstrate this. The whole chapter, therefore, has to be introduced to give the students the full picture of the branding efforts needed.

To highlight the complexity of interaction with branded products and companies, the instructor should relate to the Brand Customer Relationship chart and exemplify the various aspects of relationships and interaction.

Exhibit 13-6: The Brand Architecture Spectrum The example of sensor SUV is used to demonstrate how to defend the brand, with option of • Market up • Market down • Market sideways All brand building activities need time. It is hard to accelerate the brand building process if the company does not invest massive amounts of money.

Building brand strength is based on creating recognition or awareness, therefore, students need to understand that building brand association is important. In the Caterpillar insert, we highlight this by showing quality footwear branded by CAT. The company reached out with licensing of their logo to clothing and shoe manufacturers who adhere to high quality standards and display CAT brand identity in their product design.

Exhibit 13-7 (PowerPoint 13.9): CAT Footwear Competing Through Branding Importance of Brand in Business-to-Business Buyer Behavior (PowerPoint 13.10 and 13.11) A recognized brand name with positive customer perceptions has an advantage at each stage of the decision process • Determine that a need exists–Missionary salespeople from a wellrespected company may have entry into the buying center to discuss new products • Determine product specifications–customers may design around component products from a well-known supplier; the brand may be the standard by which the specifications are set • Acquire solution providers–the list of suppliers to invite for bids will most likely include the well-known companies • Cull the bids/proposals to a short list–the well-known supplier gets the benefit of the doubt for inclusion on the short list • Evaluate the short list, or get revised proposals/bids–evaluations of name brands are given more weight or are trusted more .

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• • • •

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Cut the short list to finalists–the name brand may be included for comparison, may get the benefit of the doubt, may be evaluated higher because its figures are better known or trusted, and may win any ties Presentations–the name brand may be treated with more deference or respect; holes in the presentation may be assumed away Final evaluation and choice–the well-known company wins ties; the name brand may have more negotiating power Post-purchase relationship–if satisfaction is good with the well-known company, there is no reason to switch; if there is minor dissatisfaction with the name brand company, the customer may believe the situation could not be improved with another supplier

How does a manufacturer’s brand become a standard? (PowerPoint 13.12) • First with New Technology • Being Best with Service • Innovating to meet the need–not simply to advance the Technology Consider a discussion of the value of brands in shortening the time to market for new products.

Example: A designer of ski parkas is in the process of specifying materials for the company’s next generation parka. Included are design decisions related to zippers, buttons, snaps, etc. How shall the sleeves by closed at the wrist? After due consideration, the designer decides to use plastic hook-and-loop fasteners − best known as Velcro®. The designer considers saving a few cents per sleeve by specifying an alternative “comparable” brand of hookand-loop closure but is unsure of the performance over time of brand “X.” Two possible alternatives: • Begin a testing program to determine the durability of brand X, using Velcro as the benchmark. Use robots to attach, release and reattach several samples to see if brand X lives up to Velcro. Unfortunately, this testing takes time and production is delayed, missing the ski parka selling season.

• Use Velcro. Get the product to market as fast as possible, be first with the new style/design.

(Ownership?) Spend the extra time skiing, then begin designs for next season.

Defending the Market Position (PowerPoint 13.13) There will be imitators, either copycats trying to be the low-cost producer or modifiers trying to slightly move the technology envelope.

So …

Market up–build relationships with management above the influencers to .

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reinforce the decision process Market down–build relationships with the lower level users of the product or service Market sideways–build relationships in other parts of the organization to facilitate translation of the current or future products within the customer organization Learning Objective To understand the meaning of Ingredient Branding.

Since the introduction of the Intel Inside Campaign in the 1990s, Ingredient Branding is well known all over the world. Intel was one of many computer processor manufacturers; today only a handful are left. In addition to an aggressive innovations strategy from the beginning, Intel introduced the concept of Ingredient Branding♯. They made the end user of computers aware that there is a powerful machine inside that drives the performance of this piece of hardware. Other companies that have used the concept are: Nutrasweet Gore-Tex Lycra Dolby Tetra Pak … and many more All of them offer a unique product feature in their component, which is interpreted in the final product such as beverages, clothes, or stereo systems and make the customer choose the final product with the branded component.

More than 200 companies in the world are following this concept, but many more would if they understood the principles and positive consequences of the innovative branding concept.

It is important to let the students know that this concept is not like cobranding where you can initiate a cooperation with another brand and stop at will. With InBranding, it involves a long-term relationship with your partner up in the value chain and a relationship with his customers, the final users, is also established. This multi-stage branding is also complicated because it will change existing relationships and will influence the power constellation between the partners. Normally, the component supplier is much smaller than the original equipment manufacturer (OEM) and does not have a full ♯ The short form of Ingredient Branding is Inbranding

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understanding of the final customers’ needs. This must be considered if an Ingredient Branding concept is to be established.

In the case of Intel, the power in the value chain completely shifted to the component supplier over the years, but this is an exception. In many other cases, the power shift is not so radical.

The next important concept for the successful implementation of InBranding is the understanding of the push-pull principle. Marketing push is normally achieved through strong marketing communication measures. For businessto-business companies, the most commonly used means are sales promotion or fair participation. When the supplier wants to push through the value chain up to the final user, much effort is needed. The most efficient way is to focus on public relations or to initiate word-of-month marketing. If a company wants to reach farther than their target audience, they have to use outdoor advertisements or even TV commercials. These kinds of push activities could be very costly, so supplier should not rely on it. Instead, they should be aware that only the pull from the customer could make their component the number one choice. In short, if the consumer asks for a product with the supplier’s component inside, the demand-pull gets created and the ingredient is successful. Please see Exhibit 13-10.

Exhibit 13-8 (PowerPoint 13.14): Push and Pull through InBranding

Key Terms associations awareness brand architecture brand building brand functions brand image brand management brand strategy

brand strength branding dimensions branding triangle buyer behavior external marketing financially-driven approaches holistic branding

ingredient branding interactive marketing internal marketing loyalty push-pull research-based evaluation visual identity

Answers to Questions for Review and Discussion 1.

What are the benefits created by branding?

Externally, a branding effort will help you: Increase awareness and recognition for your products and service, differentiate yourself from competition, communicate and reinforce your organization’s mission and values, create a positive image in the minds of the targeted markets that is relevant and emotionally connected with their daily lives,

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increase sales, and enhance customer loyalty.

Internally, branding can: Align marketing and communications efforts across business lines, instill pride in employees and build loyalty to the organization, and boost the level of customer service.

2.

How does business-to-business branding differ from consumer products branding?

Business-to-business is different from B2C in some crucial ways, including the need to closely align corporate brands, divisional brands and product/service brands and to apply your brand standards to all the aspects of your brand appearance, particularly service offerings, personnel interaction and electronic communication.

3.

Why should you approach branding in a holistic way?

Knowing that brand influences any buying decision in a complex business environment and that interrelated processes exist between the company’s offering and the customers’ demand means that it is necessary to consider them in an appropriate way to leverage the strength for successful long-term business relationships.

4.

What are the important business-to-business brand functions?

Since brands help business-to-business companies to differentiate, they have major functions for their customers, so the company can compete better. The functions are: • Increased information efficiency • Risk reduction • Value added/image benefit creation

5.

What roles do brands play for a company’s offering?

In business-to-business, brands can play many roles. The following are the most important ones: • Differentiate (“de-commoditizing”) • Secure future business • Create brand loyalty • Differentiate marketing efforts • Create preferences • Command brand image • Increase sales These roles help to prevent penalties, such as price cutting, discounts, etc.

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6.

Why should marketing apply the branding triangle?

The Branding Triangle is a concept, which can align the thinking and action of business-tobusiness marketing executives. With this concept in mind, they can focus on the important areas (3Cs) and concentrate on the interaction between them.

7.

Why should a business-to-business marketer care about building a strong brand?

One major reason for establishing business-to-business brand is to avoid commoditization and to fight price erosion. Brand provides you with the strength needed to survive in a competitive environment. They are based on the perception of your customers; unfortunately, you do not own them!

8.

Why is it advantageous to have your brand designated as a standard by a customer’s purchasing process?

By establishing a brand as a standard, the company establishes a threshold which other competition have to reach first, before competing. The examples used in the book are brands like Xerox, Velcro, Plexiglas, Makrolon and Lexan. This could be achieved through innovative technological solutions or being best in service.

9.

How are positive associations for a brand established in the memory of persons in the customer’s buying center?

When planning to establish positive brand associations, it is necessary to understand first what associations customers currently have about the company and its offerings. Then, the marketer must decide what associations the company would want customers and perspective customers to have in the future.

10.

Can a business-to-business marketer be innovative in the way a brand is built?

As branding follows strategy, marketers have to be in line with the company’s general direction, but brand management can initiate innovative business models such as Ingredient Branding or brand licensing as CAT did. Most important is that it enhances the general values of a company and what its product stands for. An example is IBM. Many people are aware of the phrase: ”Nobody ever got fired for buying an IBM,” stressing the exceptional brand strength of this company.

11.

What are requirements for Ingredient Brandings, and what are current examples?

The most important requirement for Ingredient Branding is the possibility for the customer to recognize the features and performances of the component in the final product. If the component itself is not visible, you have to make it visible through additional information

©2010 Vitale, Giglierano, and Pfoertsch

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(sticker, logo, etc.) on the final product. Current examples are Makrolon, Bitrex, Microban, CoreWise, Solae, Shimano, etc.

12.

What industries are more inclined to use Ingredient Branding?

In principle, all industries have relevance to Ingredient Branding. It is important that the final customer understands and appreciates the importance of the component. Currently, many new InBrands are emerging in the health and lifestyle industries, where customers make conscious choices about preferred ingredients. Companies like Cargill and Invista have established numerous InBrands and manage them accordingly.

13.

Many positive aspects of Ingredient branding have been discussed. What are some of the potential problems?

InBranding success shifts the power structure in the value chain. The supplier becomes more powerful and is directing the industry development. The less powerful OEM has to follow, and may lose brand position or even suffer reductions of their margins.

If InBranding suppliers are applied too widely, its differentiation potential is reduced, so the whole InBranding concept can become obsolete. Some InBranding suppliers therefore introduced restricted availability of the products (Gore-Tex).

14.

Why is it important to choose an ingredient branding partner carefully? What factors must be considered beyond short-term market effectiveness?

Component suppliers need partners who are close in the value chain to final customers. This partner needs to understand the principles of Ingredient Branding and needs to be willing to cooperate with the suppliers for the benefit of the final customer. In the process of InBranding exercise, they need to share information and need to have mutual trust for the joint future development. If these aspects are not present the partnership will not proceed.

In addition to the short-term effectiveness of marketing communication, cooperation with the partners should be ready for continuous development of the product and customer groups. A good example here is Dolby. They started out with improving the sound quality of top recorders, then they moved their quality enhancement system to CD, DVD and now, they are entering the mobile phone and mp3 player market.

©2010 Vitale, Giglierano, and Pfoertsch

Business-to-Business Marketing

Chapter Fourteen Channel Relationships and Supply Chains

Authors’ Comments Marketing channels are among those few neglected topics in many basic marketing courses. Students often express confusion, based on popular consumer myths, about the value of middlemen, not fully recognizing the economic utility they provide. That confusion is heightened by a common impression that “B2B” is something new– something that came upon us with the advent of the Internet and Web-based exchanges. With these factors in mind, this chapter seeks to provide a basic grounding in the four types of economic utility and the value provided by traditional marketing channels while also reinforcing the critical nature of relationships in marketing channels. In addition, the B2B use of the Internet is approached in what we hope is a realistic manner. We believe that the Internet, contrary to many pundits, is neither a “fifth p” in the marketing mix nor a fifth element in the promotion mix. The Internet is a communication tool, one that can be very powerful and productive (particularly since it provides an accelerated method to achieve dialogue with customers) as we learn the most effective ways to use it.

Effective marketing channels and efficient business logistics systems are often the elements of an offering that provide the winning edge in competitive situations. A well-designed and well-developed marketing channel effectively provides, in a manner and form acceptable to the customer, attributes in the offering that reach beyond the core product. The logistics system, part of the channel design, delivers the core product at the right time and place, again as determined by the customer.

This chapter emphasizes the value delivered by marketing channels, the necessity to develop different channel patterns for different market segments even though the product may be identical, and the value of strong channel relationships to create synergistic goals and overcome conflicts. This chapter also further develops the Value Network concept and places it in perspective as a channel design as well as a method for collaboration. The flexibility of Value Networks as a vertical integration alternative is examined and compared to other more stable and, perhaps, less responsive vertical systems.

Opening Vignette

The Apple Lisa

In preparing this chapter, we sought an updated opening vignette that would clearly demonstrate the importance of channel design in serving a particular segment needs.

Eventually, we reverted back to the Apple Lisa, not only because it demonstrates what .

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we sought, but also because students know the company, Apple, as astute marketer.

Apple has come a long way from the Newton and the Lisa.

Learning Objective Understand the principles of market channel design and the delivery of economic utility–form, time, place and possession−to customers.

The introduction defines some basic channel terms.

Primary participants Ancillary Participants Direct Channel The Rationale for Channel Design (Why have a channel?)

Economic theory of division of labor Provide customization of offering closer to the final point of use Create efficiencies−reduce the number of transactions Exhibit 14-1 (PowerPoint 14.2) Consider describing, with intended humor, a consumer purchase without the economic utility of a channel. I have used both of the following successfully: Scenario 1: The Aspirin−Imagine it’s 2 a.m. on a Sunday evening; the end of a well-partied weekend. You (your students) go to your medicine cabinet, reach for the bottle of aspirin; it doesn’t rattle.

(Who put the empty bottle back on the shelf? Better yet, who used the last one without replacing the bottle? Blame it on roommates!)

You now have two choices: Choice #1. Wait until midmorning when Costco opens; run in and get “a gallon of aspirin for $5” (as I like to describe it). Good deal.

Choice #2: walk/crawl/stumble to the corner 24-hour convenience store (there are always “C” stores near college apartments), pay $5 for a little yellow (you know it works wonders) package of 10 aspirin. A ripoff? Depends.

Your head is throbbing. You really want and will “give almost anything” for two aspirin. The C store has provided form, time, place and possession (they take your credit card) and deserves to earn a margin that covers the costs of the economic utility. Of course, you could let your head throb until Costco opens ...

Scenario 2: The new car−You are going to buy a new car. There isn’t a dealer network. All cars are purchased directly from the manufacturer−lower price, right?

Without the dealer the following items are missing: .

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A car to view and test drive Inventory to select from A knowledgeable sales person A method to finance the purchase To buy the car, you must Research the options, colors, etc. that you may want Rent/borrow a friend’s car for a test drive Travel to the manufacturer’s headquarters (Detroit, Germany or Japan?) to place the order Wait 6 to 8 weeks for manufacture Return to get the car Pay in cash Receive keys and title Travel to production facility to pick up the car ...

OK, we’re stretching a little bit, but students should realize that this process is far more costly, in dollars and time, then the dealer purchased vehicle.

Marketing Channels create Economic Utility (PowerPoint 14.3) Form Time Place Possession • • • •

Form: (PowerPoint 14.4) The usable quantity or mode of the product most preferred by the customer.

Time: (PowerPoint 14.5) The availability of the product when the customer needs it.

Place: (PowerPoint 14.6) “Locational Convenience,” the availability of the product where the customer needs it.

Possession: (PowerPoint 14.7) Methodology by which the customer obtains ownership or the right to use the product or service.

Channel Flows and Activities Create Value Flows to the customer: Exhibit 14-2a (PowerPoint 14.8) Flows to the supplier: Exhibit 14-2b (PowerPoint 14.9) Consider a discussion of the “missing” flows in the Apple Lisa opening vignette.

Learning Objectives Understand value networks and the relationship to marketing channels. .

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Understand classical vertical integration patterns and the value network alternative.

Effective channel development is closely related to the “make or buy” decision and vertical integration.

Vertical Integration A firm may elect to own the elements of its supply chain beyond its immediate business.

“Backward” Vertical Integration: (PowerPoint 14.10) Henry Ford developed his own iron ore mining operation, steel mills, glass factories, tire manufacturing and so on.

“Forward” Vertical Integration: (PowerPoint 14.11) Apple owns its own retail channels.

Vertical Integration provides many advantages, but also disadvantages (PowerPoint 14.12) + Economies of scale Lack of flexibility Complete control of activities Significant investment Reliability and availability Slow to innovate (myopia) In the context of this chapter, vertical integration refers mostly to ancillary services.

Companies wishing to avoid vertical integration usually engage in Functional Spin-off.

Functional Spinoff (PowerPoint 14.13) Ancillary services are provided most efficiently by experts in each service–a basic application of the principle of division of labor.

Exhibit 14-3 describes the competitive efforts of UPS and FedEx, two examples of expert logistics providers serving other companies that engage in functional spinoff.

Consider a discussion of the many new online businesses that would be hard pressed to provide all of the ancillary functions necessary to serve their markets, such as credit, shipping, communications facilities, etc.

Value Networks are Marketing Channels: Exhibit 14-5 (PowerPoint 14.14) The value network concept is analogous to functional spin-off, albeit for creation of the offering rather than performance of ancillary services.

Experts in that technology or service provide portions of the offering.

Value Networks (“fast vertical integration”) provide many of the “plusses” of traditional vertical integration without all of the negatives.

(PowerPoint 14.15) Greater flexibility Lower initial investment .

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Fast response to market To obtain flexibility in rapidly changing technologies/markets, value networks often forego economies of scale.

Learning Objective Understand the fundamentals of business logistics and how these principles are being applied in today’s global supply chains.

In business-to-business marketing, Industrial Distributors serve many of the same functions as Merchant (full-service) wholesalers in consumer markets.

While the core product may be similar, consumer markets and business-tobusiness markets demand different economic utility.

In the context of purchasing a computer (Apple Lisa opening vignette) compare the following services provided by business channels versus consumer channels. (Detailed in the text) • User training • Product Information • Product Support and Delivery • Financing Exhibit 14-4–repeated here (also PowerPoint 14.16) Exhibit 14-4 Enhanced Customer Service−Distributors serve both Buyers and Sellers

Seller Benefits

Buyer Benefits

Buy and hold inventory Combine supplier outputs (reduce

Provide fast delivery Provide market segment-based product assortment Provide local credit Provide product information Assist in buying decisions Anticipate needs

discrepancy of assortment)

Share credit risk Share selling risk Forecast market needs Provide market information

Supply Chain Management The discussion of supply chain management is a shift from the rationale, economic utility and design of marketing channels to the management of movement, sorting and storage of goods.

Business Logistics: (PowerPoint 14.17) • The management of movement, sorting and storage of goods−an important tactical function. .

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Today, the elevation of logistics as a major strategic function is most often referred to as Supply Chain Management.

Supply Chain Management: (PowerPoint 14.18) • Creation of value for customers through effective and efficient flow of materials, components, finished goods and services.

• Extends from raw materials through to end use customers.

(Authors’ Note: Over time, the following has been referred to as the Physical Distribution Concept, the Business Logistic Concept and Supply Chain Management. Regardless of the definition, the concept remains the same.)

Physical Distribution Concept (PowerPoint 14.19) System design aimed at minimizing costs while maintaining a given level of customer service through the simultaneous management of three elements • Inventory • Transportation • Warehousing Inventory Management (PowerPoint 14.20) • Often largest cost associated with logistics system • Inventory implies carrying and finance charges and costs of storage and creating assortment • Tools to manage include, JIT inventory and manufacturing methods and facility location, and so on • Lower inventory quantities lead to lower costs but can result in more costly transportation needs and/or stockouts.

Transportation (PowerPoint 14.21) • Tradeoff of speed versus cost • Slower transportation implies larger safety stocks • If transportation costs are minimized without regard to necessary inventory levels, carrying costs increase Warehousing (PowerPoint 14.22) Two primary functions of warehousing • Product flow/movement–associated with the creation of assortment (Distribution Centers) • Product storage (Warehouses) Distribution Centers • Optimized to move product through the facility, creating assortment in the process.

• If any inventory is held, it is held for a very short time.

• Rapid, continuous transportation plays a major role in distribution center management. .

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Warehouses: • Optimized as storage and assortment creation facilities. Significant inventory is held.

• Transportation plays less of a role as large inventory quantities reduce the need for frequent shipments.

Logistics as a Competitive Edge (PowerPoint 14.23) • As technology and product advantages become more fleeting, efficient supply chains have become a competitive advantage • Best designs match “the way a customer buys” in that the marketing channel is different ially invisible to the customer Customers should not be required to match the channel and logistics design of the vendor. Vendors should develop channel designs that seamlessly match the operation of customers. For small customers, this usually involves the use of industrial distributors. For large customers, this involves matching delivery time and methods, palletizing, and other requirements.

Differentially Invisible (PowerPoint 14.24) Customer should not be required to adapt to the vendor–the process should be invisible. This level of service, part of the total offering, can be a competitive differentiating factor.

Learning Objective Recognize the importance of building channel relationships from the view of providing economic utility and developing sustainable value networks.

Channel Design Different market segments will require different channel designs even though the core product remains the same.

Goodyear uses a direct channel to serve auto manufacturers, providing tires in bulk to auto assembly locations. For individual consumers, Goodyear provides retail stores equipped to provide addition auto-related services. The core product, the tire, does not change, but the total offering is quite different.

This channel design concept is referred to as Dual Distribution (PowerPoint 14.25).

Different regions or customer concentrations may require a different number of identical channel designs–many members at the same level.

Honda’s retail channel design will vary in quantity (number of dealers in a geography, depending on population) but the design will remain the same. This channel design concept is referred to as Multi-distribution (PowerPoint 14.26).

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Channels are designed to convert the product lines of manufacturers (usually produced with an assortment with a product line) to the product assortment required by customers.

Industrial distributors seek several suppliers to create a market segment-based assortment, providing customers with a one-stop shop for their business needs.

This channel function is to Reduce the Discrepancy of Assortment (PowerPoint 14.27).

An alternative definition is “to transform manufacturers’ assortment into a market segment assortment.

When is it good practice to use distributors and when is it good practice not to use distributors − summarized in Exhibit 14-6 (PowerPoint 14.28) Channel Management Selecting and Caring for Distributors (PowerPoint 14.29) • Determine right distributor for your marketing plan • Ask customers who they recommend • Train and support them well, at both your facilities and theirs • Make calls on them • Make calls with them Power and Conflict Bases of Power in Marketing Channels (PowerPoint 14.30) • “Soft” Bases of Power o Expertise o Information o Identification • “Hard” Bases of Power o Reward o Coercion o Legitimate Channel Patterns and Control Exhibit 14-7 in the text is a detailed exhibit. PowerPoint 14.31 has been provided, but it is difficult to read. Exhibit 14-7 has been simplified, as shown below, for classroom projection. (PowerPoint 14.32) Important considerations in presenting Vertical Marketing Systems are the extent and type of control and the degree of voluntary cooperation required for success. Ultimately, as channel patterns become less distinct, an understanding of these variables is necessary to achieve a design that is successful for all channel members.

In the exhibit, the span of the box representing each type is intended to show that channel’s flexibility, control, influence and need for goal agreement relative to the other channels.

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Centralized control increases significantly with corporate systems. All channel members are employed by the corporate entity. Corporate Vertical Marketing Systems (CVMS) require significant investment but provide direct control.

Corporate officials direct goals; performance to these goals is not voluntary. In these situations, hard power bases are often used. It is difficult to instill a sense of ownership in channel members.

As a channel design appears further to the left in the exhibit, the following occurs: • Generally, capital investment by the manufacturer is lower • Flexibility relative to changes in channel partners and channel design increases • Direct control decreases • The necessity of common, mutual goal setting to obtain voluntary cooperation increases Exhibit 14-7: Control and Cooperation in Vertical Marketing Systems Increasing centralized control

Value Networks

Conventional Systems

Contractual systems

Administered Systems

Corporate Vertical Marketing Systems

Horizontal Sprawl / Keiretsu

Mutual Goals

Increasing Voluntary Cooperation

Directed Goals

Learning Objectives Gain an understanding of how the Internet can enhance the value that marketing channels can provide to customers.

Obtain an appreciation for the limits of applying information technology to enhance marketing channels.

Know when and how the Internet can provide competitive advantage by enhancing marketing channels and when application of Internet .

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technologies will not provide a competitive advantage.

Though the Internet is just now becoming a player in consumer marketing, it never lived up to the hype surrounding its potential in business-to-business marketing. The Internet in itself is not a channel design. The Internet is important in business-to-business marketing when used effectively.

A review of the opening vignette in Chapter 3,”Covisint: Illustrating the Importance of Adapting to Customers’ Buying Behavior” may be appropriate. Our experience has shown that students have what could be considered as an inflated opinion of the capabilities of the Internet (a web page does not create automatic success!).

Covisint and other companies that formed to change the nature of business-tobusiness channels never got to profitability. However, this does not mean that Web-based technology has not had an impact on business-to-business channels. Many companies have adopted technology that enables today’s agile and efficient supply chains. This area continues to hold promise, though planners and pundits now take a more realistic view of it.

Opportunities for business-to-business marketers through the use of the Web: (PowerPoint 14.33) • Better and faster channel flows − market data more readily available • Faster communication provides rapid ordering and order tracking • Reduced transaction costs through online processing and tracking • Product information available at the customers’ convenience Consider a class discussion on how the Internet enhances form, time, place and possession utility.

The business conditions most appropriate for the Internet is not unlike the manufacturers’ representative model presented in Chapter 12, Exhibit 12-11 (also PowerPoint 12.32 and PowerPoint 12.33) Consider the following conditions: • The product is standardized or generic • Customer requirements for personal attention are minimized • Short sales cycles are common • The market is dispersed and/or when the market consists of many small customers • Low fixed costs are advantageous • The selling situation does not require a specialized background New Channel Types (PowerPoint 14.34) • Affiliates–link on a web site that refers to a product or service supplier’s site. The affiliate downloads a code from the supplier’s web site that allows the supplier to track referrals. A commission is paid for each referral.

• Hubs–Intermediate that brings buyers and sellers together in a .

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market o Auction hubs, Catalog hubs, Exchange hubs, Barter hubs

Key Terms administered channel intermediaries affiliates ancillary channel members channel pattern contractual channel corporate vertical marketing system differentially invisible direct channel direct channel participants discrepancy of assortment distribution centers dual distribution exchange hubs form functional spinoff horizontal competition house accounts hubs intensity of distribution keiretsu logistics marketing channel material requirements planning (MRP) multidistribution palletizing physical distribution concept place possession product line maintenance superordinate goals supply chain time trade credit vertical integration vertical marketing system warehouses

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Answers to Questions for Review and Discussion 1.

Does a company that markets directly to other companies have a channel?

Why or why not?

A company that markets directly to other companies operates within its own direct channel of selling, thus providing all of the needed services–the four types of economic utility, form, time, place and possession–expected of any channel partners within the specific industry.

2.

Why can channel structure differ between segments, even though the products are the same?

Channel structure may differ between segments even with the same product because each segment may have its own needs relative to the support levels offered by channel variations. As an example, consider Goodyear marketing channels for tires. The core product is the same, but Goodyear has different channel designs (dual distribution) depending on the segment served.

OEM sales are a direct channel; Goodyear dealers provide a set of services to the market segment that expects complete auto care in addition to availability of the full Goodyear product line; Goodyear tires are available through independent dealers, serving the segment that prefers to “shop” tires without need for additional auto services or brand preference; and Goodyear tires are available, in a limited assortment nationwide through Sears retail outlets.

While the core product is consistent, the buying habits of each market segment require a different channel pattern.

3.

Explain the four kinds of economic utility.

The four types of economic utility are:

form: the useable state of the product or service as expected by the buyer –often combined in B2B with time, as in JIT services. Form also includes the process of creating assortment– reducing the discrepancy of assortment. time: the availability of the product or service when the buyer expects it. place: the locational convenience preferred by the target market, as well as delivery of a product or service as expected by the buyer. possession: the means by which the buyer gains ownership and/or usage rights of the product or service in a financial sense.

4.

When a channel provides financing to customers, what kind of economic utility is it providing? Explain.

When a channel provides financing to a customer, it is providing “possession” as a utility with the consequent opportunity for the customer to own/use the product.

5.

When a channel provides training for the customer’s personnel, what kind of economic utility is being provided? Explain.

When a channel provides training for the customer’s personnel, it is supplying a combination of form utility (allowing for the “use” of the product in an appropriate manner) as well as possession utility to the extent “usage” ensues with adequately trained personnel after the

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product is owned by the buyer.

6.

What does it mean for a channel to “reduce the discrepancy of assortment?”

A channel “reduces the discrepancy of assortment” by consolidating inventories from a selection of manufacturers to a point where the channel customer can then achieve close to “one-stop” shopping through the channel intermediary rather than seeking out a variety of manufacturers to fill the same needs.

7.

Why is carrying extra inventory so costly for suppliers or channel members?

Carrying extra inventory is expensive for suppliers or channel members because they take title to−they own that inventory; if it is in excess that capital is tied up. It may be appropriate to encourage a discussion among students about the validity of “just-in-time” inventory policies as interest rates trend downward and, as witnessed by recent events, certain modes of transportation become more difficult to rely on for timely delivery.

8.

What are three reasons that a business-to-business marketer may want to market through channel intermediaries rather than market directly?

Reasons a business-to-business marketer may want to market through channel intermediaries rather than market directly are: to spread the financial risk with the intermediary rather than across a large selection of possibly smaller customers; to share the selling risk to the extent a good channel intermediary should have an in-market reputation, relationships, etc. with the right buyers; to enhance the collection of market information by utilizing a channel intermediary sales staff as an addition to any other sources being utilized.

Additionally, Exhibit 14-4 lists other reasons why intermediaries serve marketers.

9.

Review the opening example of Apple and the Lisa computer. Using Exhibit 142a, determine what path Apple used to get the Lisa to its market. Compare that to the path you think may have been more appropriate.

The channel path that the Apple Lisa product offering used included a reseller (retailer) when, in fact, a direct channel approach from Apple to the buyer would have enabled Apple to “customize” its channel strategy and sales policies to include industry-specific training, product information, product support, financing, delivery, etc. to a buyer base that would have supported this channel strategy with larger sales numbers per buying site to justify the support needed on an individual firm basis.

10.

What sort of risks does an industrial distributor share with the supplier?

The risks an industrial distributor shares with the supplier include financial/credit, inventory holding and selling risk.

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11.

Suppose that a start up company is offering an innovative product that management hopes will establish a new product category. What forces will tend to lead the company to market the product through channel intermediaries rather than directly? What characteristics of an early market will tend to lead the company to market the product directly to final customers?

The forces that will lead a start-up company to market through channel intermediaries may include a desire to avoid initial sales force costs, previous relationships of the customer base in the buying industry, overall intermediary knowledge of the buying groups, needs for custom packaging, local inventory and fast delivery, and possible broad scale geographic diversity of buying potential. On the contrary, direct selling would be appropriate if the selling firm had an existing, knowledgeable sales force in place with the target industry, had unusual competitive conditions that necessitated greater control of product introduction and selling, held an existing relationship with buyers in or near the product category, or had a complex offering that required significant customer education to utilize the full value of the offering.

12.

What are key causes of channel conflict?

The key causes of channel conflict are usually associated with goal incompatibilities that can manifest themselves as issues of exclusivity, commission rates, delivery response and financing policies.

13.

What are the chief differences between an administered channel and a value network?

The chief differences between an administered channel and a value network include control and effective utilization of training, sales materials, inventory availability, strategic selling focus to plan and management levels. Beyond these considerations, value networks will change more often as members of the network are focused on the specific needs of a few or quite possibly only one customer. The network creates value custom-tailored for a specific set of needs. A network partner serving one set of needs may not be a partner (or in fact may be part of a competing network) for the next opportunity. An administered channel is more stable, with longer-term goals and planning. This stability is desirable, however in fast changing markets the flexibility of value networks may be of greater value.

14.

What kinds of value can be provided by web applications that manage channel transactions?

The value that can be added with web applications that manage channel transactions include a facility to enhance form, time, place and possession utilities through speed of access by the buyer, i.e., rapid paper process flows to provide better buying needs analysis, geographic demand pattern studies and reduction of transaction costs by reducing error possibilities.

15.

What kinds of value would channels provide that cannot be substantially enhanced through web applications?

The value channels can provide that may not be substantially enhanced by the web include onsite training, customization issues, production adaptations requiring immediate involvement,

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short-term pricing and finance issue resolution and immediate delivery (when a tangible product is at issue). The common thread in these issues is that they are all part of the value built around one-on-one relationships.

16.

Using Exhibit 14-4 review the Apple Lisa and compare how well the factors were addressed. Note how much better developed was the channel for the iPhone in meeting customer needs as they pertained to “the way the customer buys.”

Neither buyers nor sellers benefited from the Apple Lisa channel. The market for consumeroriented computers was significantly different than the total offering required for success in the business-to-business market.

Note that when Apple developed the channel for the iPhone, it used functional spinoff to enroll an expert in the communications business (AT&T) rather than attempt to use the existing Apple channel for personal computers and iPods. Lesson learned!

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Chapter Fifteen

Communicating with the Market

Authors’ Comments In this chapter we highlight the role of non-personal communications, emphasizing its contribution in the buying decision process, but also its limits. So much business-tobusiness seller-buyer communication depends on complex interactions at the personal level, that non-personal communications are often cast in a supporting role. The role of public relations and other marketing communications, such as trade shows and conferences that are uniquely business-to-business are also emphasized.

The enhancing role of Internet communications is also highlighted in this chapter.

Because the Internet and Web can be used for rich interactive communications, and because so many buying center members regularly use Internet communications, this is a useful tool for creating and managing value through effective communications.

Opening Vignette

Andersen Consulting Does a Quick Transformation to Accenture

Andersen Consulting had to change the name of its firm as the result of a split with its parent firm, Arthur Andersen, the accounting firm. It could not keep the Andersen name and had to accomplish the changeover in a matter of months. Andersen Consulting became Accenture and accomplished changeover through a strong, wellcoordinated communications campaign over only a few months period of time.

Accenture’s campaign illustrates many of the key points of this chapter: the importance of message, paying close attention to audiences’ decision processes and perception processes, and delivering the message through a combination of media that is carefully chosen to synergistically enhance the message. The teaser campaign got customers, prospects and the media prepared for a change that was coming. This made the change visible and memorable. The continued campaign with the changed name got these audiences to remember the name, associate it with the old Andersen Consulting and begin to develop positive feelings toward the name. The rapid changeover of all the identity material reinforced the message and reminded audiences that the name had indeed changed.

This communications campaign, though expensive, saved Accenture a great deal of trauma–and eventually money–as it let Accenture continue to focus on its core business without having to worry about rebuilding goodwill associated with the brand. .

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Learning Objectives Understand the distinctions between personal selling and the nonpersonal types of promotion.

Understand the differences between promotion in consumer markets and promotion in business-to-business markets.

The Communications Model, presented in Exhibit 15.1, below (PowerPoint 15.2), provides a simple, but effective way of understanding communications and its implications.

Exhibit 15-1: A Model of the Communication Process Noise

Noise

Medium

Outcome

Sender Encoding

Receiver Decoding

Message

Message

Feedback

Message

Original Message as intended Feedback with distortion Noise

The message can suffer distortion as it moves through the medium, either inadvertently as a result of the technology of the medium or from beliefs about messages that use the medium.

Message enters the receiver’s decoding process

Outcome can be an action, modification of or formation of a belief, increased awareness, Feedback etc.

Noise

Feedback

Feedback: Information about the outcome returns to the sender, with the potential of additional noise.

Noise: Noise can be a belief or predisposition which acts as a filter that interprets messages. Noise can also distort messages. Distortion can be caused by misunderstanding, misinterpretation, rumor, predetermined beliefs and other competing influences, such as fatigue, distractions, crises and competitive messages. Noise can occur anywhere in the communication process.

One concept that stands out clearly is that personal selling has one large distinguishing characteristic–the medium between the sender and receiver is very short and direct. It is face to face or voice to voice. The time lag between message delivery and message reception is immediate; the time for the loop to be closed and a feedback message received can be almost instantaneous.

Some internet communication is this rapid, but otherwise, nothing is as fast and rich among the communication tools available to the marketer.

There are three key ideas in providing value through communications (PowerPoint 15.3).

• Members of the buying center respond to messages; media are only a

means of delivering messages.

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• •

Messages must assist members of the buying center to progress through the buying decision process.

Messages must be crafted to implement the positioning chosen in the design of marketing strategy.

Elements of the Model have implications for getting the best messages to audiences in business marketing communications (PowerPoint 15.4). The marketer must be concerned about using appropriate language so that the audience can properly interpret the message. The marketer must: • Be aware of differences in jargon between different industries • Be aware of limitations/distortions introduced by various media • Seek feedback quickly, in all forms, to make adjustments as necessary • Recognize that the customer, message and the media combined should be selected as the most appropriate for the customers’ industry Learning Objective Become familiar with the kinds of promotion used in business-tobusiness marketing and their uses.

The general promotional mix includes the following elements (PowerPoint 15.5): • Personal selling • Advertising • Sales Promotion • Public Relations Personal Selling (PowerPoint 15.6) • Person to person conversation • Immediate feedback allows adaptation of message • Costly per contact, but • Effective to persuade Advertising (PowerPoint 15.7) • Paid access to media–monologue conversation often with no direct feedback • Needs to carry short message • Low cost per contact • Usually not good for direct influence on final decision Sales promotion (PowerPoint 15.8) • Inducements to action–enhance value • Three general kinds of promotions o Sales promotion focused on sales team support o Sales promotion focused on middlemen support−“push” promotions o Sales promotion focused on customers−“pull” promotions .

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Public relations (PowerPoint 15.9) • Efforts to get favorable coverage of the business by third-party media and publics–convey simple messages through third-party media • Build a relationship with media • Creativity in getting coverage • Useful to retain a PR agency Learning Objective Understand the role of promotion in providing value, information and education to customers and influencing the buying decision process.

The focus of communications needs to be on helping customers move through the buying decision process.

Exhibit 15.3 (PowerPoint 15.10) shown below shows the kinds of influence that can be exerted at each stage of the decision process.

Good communications (PowerPoint 15.11) • Starts with knowledge of customers • Maintains a clear and consistent message o Web communications allows many messages to be perceived by people in other segments o Any incongruence will quickly be noted and communicated across the web to other segments .

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Learning Objectives Gain a sense of how to manage promotion in conjunction with the other elements of marketing strategy and the offering.

Gain a sense of how publicity can play a special role in business-tobusiness marketing.

Align promotion efforts with the other marketing elements through integrated marketing communication plans (PowerPoint 15.12).

• Update and review entire marketing effort for communication consistency.

• Integrated effort drives marketer to view interdependence of marketing mix, enabling. o Design for the customer decision process o Recognition of promotional opportunities Some types of nonpersonal promotion (PowerPoint 15.13) • Print promotion o Print advertising o Direct mail advertising o Corporate advertising o Sales and support literature •

Sales Promotion o Channel promotions o Promotional merchandise

Promotions using multiple elements simultaneously–Public Relations, Trade Shows, Conferences and Corporate Positioning These promotional methods are used in an overall integrated corporate promotional plan.

Trade shows and conferences include (PowerPoint 15.14) • Personal selling; • Product presentations and demonstrations; • Relationship building with customers, channels and company sellers; • Building customer memory with premium merchandise and print promotion; • Building credibility and customer memory with presentations, seminars, and panel discussion participation; • An opportunity for learning about customers and competitors.

Public Relations -- integral part of trade shows and conferences (PowerPoint 15.15). Media representatives • Cover the technical sessions and industry trends panel discussions • Comb the exhibit floors for interesting new products and company .

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•

marketing programs Conduct personal interviews with company insiders

Tradeshow key decisions (PowerPoint 15.16) • Which shows to attend • Who should go • What statement/positioning should design of exhibits reinforce In most industries, trade shows and conferences are watched closely by stakeholders and it is imperative to participate in and take these seriously. Special opportunities exist in participating in customers’ industry trade show.

The focus of all this activity should be on company and product positioning. All of the coordinated efforts should be designed with effective and consistent positioning in mind. The role of public relations and publicity in this effort is the credibility it provides. If the other elements are in place–product is well done, the message is well-crafted and communicated, pricing is appropriate and channels are wellmanaged–the positioning will come across and have considerable credibility. The trade show or conference is a setting where these efforts come together and gain traction with the media.

Learning Objective Gain a sense of how Internet communications can play special a role in business-to-business marketing communications.

Web and Internet use in business-to-business marketing (PowerPoint 15.17) • Internet communications facilitate rapid detailed interaction between customer, marketer, seller, and service person.

• Advantages: o Low-cost interactivity o Immediacy, real time or near-real time feedback and adaptation • Internet communications can be effective in any stage of the buying decision process Three key ideas for effective Internet communications (PowerPoint 15.18): • As always, know the customers as well as possible; • Coordinate Internet communications with other forms of communications; • Track effectiveness of communications–server logs offer good data on user/customer response behavior.

Internet Communications Tools (PowerPoint 15.19) • Web site • Opt-in e-mail .

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• • •

Newsletters Webinars Blogs and social media

Web site (PowerPoint 15.20)–can be used by customers in the decision process to • recognize and understand their problems; • collect and compare information about alternative solutions and costs; • collect and compare information about alternative suppliers, their partners, and their successful delivery of value to prior customers; • obtain additional materials, e.g., training materials, user manuals, and troubleshooting guides for use during the installation, testing and use of the supplier’s product or service; • use a product configurator to test alternative solution ideas.

Web Site Design Considerations (PowerPoint 15.21) • Designed to address different segments as viewed by the customer; • Identify site visitors as they access the site; • Designed for ease of use in the customer’s decision process–from the customer’s point of view.

Drawing customers to the web site would usually involve (PowerPoint 15.22) • Search engine optimization–designing the web site so search engines will find it and rank it highly when customers use the search engine.

• Banner advertising on complementary web sites.

• Buying pay-per-click search words on search engines that customers will use.

Opt-in e-mail (PowerPoint 15.23) • Used when an interested person gives permission to the marketer to send e-mail messages.

• Works best when the prospective customer has visited the web site and has responded positively.

• Must have something of value to communicate when you send the email.

• Requires attention to updates, current information.

• Becoming less effective because marketers have abused the trust of the audience and sent too many worthless messages.

Newsletters (PowerPoint 15.24) • On an opt-in basis.

• Fare a little better than opt-in e-mail because they often have more of value to communicate.

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Webinars–online seminars (PowerPoint 15.25) • If well-constructed, these are relatively low-cost.

• Have the advantage of self-selection by prospective customers who are interested in the information.

Blogs and social media (PowerPoint 15.26) Marketers are still learning how to use these methods, but it seems that having real mutual interests and letting the conversation progress are the keys to useful interaction in these methods.

Effective Internet communications The main ideas still hold–design messages based on knowing your customers, coordinate with other forms of communication as well as with the other elements of marketing and measure results. Because Internet communications is relatively new and different from more traditional marketing/communications, following these prescriptions can be more difficult than normal. The temptation is to make a web site based on limited knowledge of customers, because it takes time to learn about them. It may also be difficult to coordinate with other areas of marketing because other marketers are not fully aware of how technically difficult much of this is. And the ease of measurement may subject Internet communications to rigorous milestones when it is really still largely experimental and needs some learning space.

Key Terms advertising blog direct response requests fulfillment firms jargon leave-behind materials media buy noise nonpersonal communications opt-in e-mail premium merchandise product configurator promotion mix public relations public stakeholders publics RFB RFP RFQ SEM sales promotion .

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selective attention selective exposure selective retention server log social media web log Answers to Questions for Review and Discussion 1.

Compare the relative importance of the promotion mix variables in consumer markets versus business-to-business markets. Why do these differences exist?

Most important in consumer marketing are general advertising and sales promotion, followed by personal selling and public relations. In business-to-business, the most important methods are personal selling and public relations, followed by advertising and sales promotion. In businessto-business marketing there are generally fewer customers, making mass communications less efficient. Those customers require more information and make more complicated decisions, requiring more information and analysis. This information and analysis is better delivered through personal selling and through third party media analysts.

2.

When would the use of industry-specific jargon be acceptable in the communication process?

Industry-specific jargon can safely be used in the communication process only when the process communicates exclusively within a sub-group where the jargon is fully understood.

3.

What is the importance of the encoding-decoding process in message accuracy?

How do individuals attach meaning to messages?

When sender encoding matches well with receiver decoding, the process produces shared meaning, i.e., the message has been delivered with a degree of accuracy. Sender and receiver must use the same code. It is the responsibility of the sender to anticipate the receiver’s decoding process and structure the message accordingly.

4.

How will the communication capabilities of the Internet impact the ability of business customers to receive feedback from customers?

Internet technology allows the sender to receive real-time feedback from customers and prospects. Through forms and customer messages, the marketer can have rich, direct communication with a prospect or customer. The marketer can also analyze server log data to understand how customers respond to the construction and content of a web site. This is almost as interactive as communication through personal selling. It is potentially as rich as personal selling in that server log data is easily analyzed for patterns in responses.

5.

.

Explain what promotion can do and what it cannot do.

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Promotion can:

inform a buyer about availability persuade trial encourage purchase/repurchase generate awareness assist in obtaining channels, channel support assist in creating brand preference move product to grow production support all selling efforts transmit a message in a timely and targeted fashion enhance other elements of the marketing mix reinforce each of its elements, e.g., personal selling, advertising, promotion, and public relations, through an interrelationship of communicated concepts • reinforce or build a better competitive position • accelerate the process of evaluating, buying, using, reordering Promotion cannot: • sell a bad product with any continuity • convince buyers to go out of their way to purchase when other goods are comparatively easier to obtain • force buyers to pay more than their perception of value for like products • overcome a weak marketing strategy • replace any other marketing mix variables • represent an effective tool in competition if the product, place and price are not correct • • • • • • • • • • •

6.

How are the promotion mix variables interrelated? Why is it necessary to coordinate efforts between the variables?

Promotion mix variables are interrelated in business-to-business marketing in that each works in tandem with the other to deliver a message and to reinforce the offering value; as a consequence, they must be coordinated to be fully effective rather than working towards uniquely specific goals that would tend to diffuse their overall value.

7.

What types of promotion are most appropriate at different stages of the buying decision process?

During the buying decision process, applicable promotions can be: 1. Definition Stage• personal selling programs • public relations and advertising to generate awareness and interest 2. Selection Stage• personal selling programs • print advertising • sales promotion to induce interaction with seller 3. Deliver Solution Stage• personal selling • service elaboration 4. End Game Stage• use reinforcement via personal selling • publicity to reinforce decision

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8.

What are the promotional goals most desired at each stage of the buying decision process? How well does this relate to your answer to Question 7?

Promotional goals most desired …

Definition Stage• Awareness • Consideration of marketer’s offering as appropriate solution • Focus from buyer on firm’s offering Selection Stage• Choice of firm as supplier Deliver Solution Stage• Highest value offering • Maintain customer satisfaction End Game Stage• Successful buyer evaluation, rebuys

9.

Trade shows have usually been classified as sales promotions. The text makes the case that trade shows are excellent publicity and public relations tools.

Which is it: Are trade shows sales promotion or publicity? Does it matter? Why or why not?

Trade shows can be excellent tools for every aspect of promotion … as sales promotions, they can provide meetings with buyers and prospects along with introduction of various incentives to buy; …as publicity and public relations tools, they can be showcases for new products, new technology, new programs. The key variable is who will be attending the trade show, and this will then dictate which or how many promotional variables can be exploited.

10.

What communication purposes can be addressed in a business-to-business Web site? What purposes can be addressed by e-mail?

The purpose that can be addressed with e-mail is keeping contact with site visitors who have opted in to receiving email communications. If the marketer is careful not to wear out the good will of the prospect, this can be a basis for building a relationship with the prospect. The web site can deliver more information and carry on more interactive communications. This is enhanced by the communicator’s use of basic information via display and distribution of brochures and product data sheets, even including limited seminars, as well as inventories, order status and logistics to interested parties. A new addition is product configurations on sites allowing prospective buyers an opportunity to configure their own product from an attribute selection list.

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Business-to-Business Marketing

Chapter Sixteen

Business Ethics and Crisis Management

Authors’ Comments As an instructor in post-secondary education you likely have had the opportunity to experience student reaction to or lack of interest in business ethics. While we have observed this, we also note that “business ethics,” as perceived by many students is one of the most intimidating aspects of “the real world.” Unfortunately, many students leave business schools with a sense that business (and life?) is a zero-sum game.

While we know we cannot overcome this cynicism with one chapter of a text, particularly in the face of events among our national leaders that reinforce the cynical view, we also know as practitioners that the real world is not as unethical as many commonly believe. With this chapter, we focus on business ethics as both a product of organizational culture and personal choice. Organizationally, good ethics is good business. Personally, an ethical stance is not only good business, it’s an inner choice that is made by the individual without regard for short-term gain or loss.

A natural extension of this discussion is crisis management. We’ve seen numerous examples of companies in the middle of some degree of crisis. We take the position that inoculation–a good ongoing public relations effort–is the best preparation for crisis.

Opening Vignette

TWA Flight 800

TWA did a decent job of handling the immediate response revolving around communications, emotional counseling and legal processing. The other side of the aftermath, determining the cause of the accident and deriving remedies for the future, (mostly out of the hands of TWA) was where ethical questions arise.

The problem was that the cause depended on a concatenating series of issues revolving around the center wing tank (CWT). Several factors combined to create the unsafe–explosive–environment and managing these required considerable systems and procedures redesign.

The principal issue became whether or not “inerting” of the fuel tanks should be done to prevent ignition of heated fuel vapor. Apparently, Boeing had known of the problem occurring in military aircraft. Their investigation dated back to 1980. The problem under investigation at the time was not the problem of fuel vapor ignition and, hence, Boeing made the case that it could not be held responsible for not seeing how the results of the 1980 study applied to the issue that became important in 1996 with TWA 800. ©2010 Vitale, Giglierano, and Pfoertsch

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The real issue arose with the contradiction between the NTSB findings on TWA 800 and the ARAC report on fuel tank flammability. Contrary to the NTSB recommendations, the ARAC report argued against inerting, saying the process was too costly for the benefit obtained. But this was an economic justification, not one that considered the human cost of accidents. Here was an advisory task force trusted to protect consumer interests using the high costs to resolve a situation as reason not to require the remedy. Cost-benefit analysis had shown that the ultimate solution was too expensive. The core question becomes how the monetary costs of accident prevention can be compared with the non-economic costs of a likely catastrophe in a cost-benefit analysis.

You may ask students how they feel about cost-benefit analysis when human life is involved. Had a private industry or company come to his conclusion, would it have been accepted? Using cost-benefit data, many regulations in place today would likely appear unjustified (airbags, tire monitoring systems, baby furniture standards, and so on). However, we expect−demand−private companies not use costs as a determination of viability.

Twelve years after the initial recommendation, in July 2008, it was ruled that the complete solution−inerting–would be required. Some questions to consider (also included in the vignette): • Is it an ethical lapse when individuals make a decision as part of a group or committee that they wouldn’t make as an individual (singly responsible) person?

• Are you confident that decisions have been made that will protect your safety?

• Why did it take 12 years to act on what was recommended after only five months of investigation?

Learning Objectives Understand that a good ethical foundation is a good business foundation.

Recognize that ethics are, ultimately, an individual decision.

Our main purpose in this chapter is to get students to ask themselves questions about their ethical choices and how they will cope with the inevitable dilemmas they will face.

The value image of an organization is formed in individual customers’ or prospective customers’ minds based on all information that they acquire. The value image depends on how the company treats its customers, its partners, and members of the communities in which it operates. Treating these stakeholders ethically thus translates into a more positive value image.

(PowerPoint 16.2)

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The Societal Marketing Concept (PowerPoint 16.3) The societal marketing concept says that in addition to being market sensitive, understanding customer needs, and meeting organizational goals, marketers must deliver satisfaction more effectively than competitors and in a way that considers the well being of society. As customers and customers’ customers– derived demand–demand greater application of responsible and sustainable business practices, firms have little choice but to meet this standard.

Pursuing the societal marketing concept encompasses all aspects of the organization–the whole value chain must be infused with the purpose of meeting the organization’s goals while considering the well-being of society.

The organizational leadership needs to (PowerPoint 16.4): • •

Specify in the company’s mission that ethical behavior and societal good are part of the mission; Create reward structures that allow and reinforce ethical behavior;

The real test of the organization’s ethics comes when there are clashes of standards. The text describes three kinds of ethical clashes (PowerPoint 16.5): • Clash of ethical standards among stakeholders o The example in the book–the manufacturing plant that is going to be discontinued–highlights conflicts between commitments to several different kinds of stakeholders ▪ Employees ▪ Community ▪ Managers in different functions ▪ Board of directors ▪ Shareholders • Clash of ethical standards at different levels of the organization o People at lower levels of the organization who see upper level managers exercising a double standard • Clash of individual ethical standards and the organization’s performance standards o Managers holding subordinates accountable for ethical behavior, but then expecting performance targets reached “at any cost” Individuals ultimately make choices; sometimes the choices conflict with their own values (PowerPoint 16.6).

Learning Objectives Understand the source of ethics, both organizational and personal.

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uncomfortable environment.

Bases and sources of ethics (PowerPoint 16.7): • • • •

Natural law–a higher order Positive law–what is legal Self-Interest considered upon the whole–the greater good Situational Ethics–variable standards depending on cost, convenience, or some other situational consideration of what is appropriate. o We suggest that individuals become concerned about the organization–or the stability of their own values–when the individual finds that making decisions that compromise values is common.

Potential problem areas: common situations in which ethical issues pertain (PowerPoint 16.8) [first three bullets] • Product announcements–should the marketer preannounce using language she knows will be unlikely to prove true?

• Product capability claims–how much hype is really acceptable?

• Obtaining competitive information–is it OK to misrepresent yourself to obtain information the competitor would normally not give to you?

• (PowerPoint 16.9) Others – these are ethically problematic activities that usually grow out of a creeping commitment to do what is seen as necessary to compete or to achieve value for stockholders o Paying bribes by having a consultant pay the bribe and reimbursing the consultant for “miscellaneous marketing costs” o Charging an exorbitant price for your product at a time when your product is in a temporary state of shortage o Taking marketing allowances or promotional money even though there is little likelihood you will perform the marketing activities required o Posing as a prospective customer to obtain competitive information o Creating an unfair advantage, favoring one distributor over another, through sales promotions designed for one of your distributors, knowing that your other distributor in the same territory is not likely to participate as effectively o The instructor might refer to some of the hypothetical situations in the text to generate a discussion. Sometimes students need to be pressed to appreciate the reality of conflicts in values (e.g., profit vs. integrity). The discussion often comes back to individuals make individual choices that are consistent with their own values, but needing the backing of upper level management to reinforce the ©2010 Vitale, Giglierano, and Pfoertsch

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ethical choice.

Consider the events listed in the sidebar “They Did What?” as topics for student discussion. Ask what they would have done.

Experience has shown that students will take the “high road” and demand absolute commitment to standards when the situation is remote.

Ask students if they know anyone that has cheated on an exam.

Invariably, most of the class will acknowledge that they “know of” such behavior. Why did they tolerate it? Convenience? Peer pressure?

This can develop into a discussion of the ease by which unethical behavior is tolerated−“when it doesn’t actually hurt me.”

Learning Objectives Recognize the role of publicity and public relations in crisis management.

Become familiar with the elements of good crisis management.

CRISIS MANAGEMENT (PowerPoint 16.10) • • •

•

The ethical behavior of the organization is intertwined tightly with the occurrence and the management of crises.

One common source for crises is problems arising from less than stellar ethical choices or ethical conflicts in the organization.

A robust value image that involves social capital built up through a strong ethical theme in the company’s culture helps: o Inoculate against crises from ethical lapses; o Manage and recover from any crises that do arise, whether they are ethically caused or arise from some other cause.

An ethical organization is willing to look at its operations objectively and identify possible risks that can negatively affect the company’s stakeholders. An ethical organization is also willing to have and show compassion for those who are affected by its actions.

Crisis preparation–start with the following mind set (PowerPoint 16.11): • • •

Some crises can be avoided through careful preparation Some incidents and accidents will still occur, but can be contained with foresight and good coping systems Some incidents and accidents inevitably become crises, no matter how much preparation is done. These events can be mitigated with good crisis management practices and systems

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Exhibit 16-5 Layers of Pauchant and Mitroff’s Crisis Management Model Level one. Character of the people in the organization–willingness to take responsibility and take corrective action Level two. Culture existing in the organization–supports appropriate preparation and response actions Level three. Organizational structure–crisis management structure in which all stakeholders are represented Level four. Plans and mechanisms for dealing with crises–crisis management team has fully prepared plans, disseminated them and trained people in key roles.

Source: Thierry C. Pauchant and Ian I. Mitroff, Transforming the Crisis-Prone Organization: Preventing Individual, Organizational, and Environmental Tragedies, (San Francisco: Jossey-Bass, 1992).

Pauchant and Mitroff’s layers of a crisis are shown in Exhibit 16-5 (PowerPoint 16.12).

If upper management has set the tone as an ethical organization and the culture supports this, the first two levels are in place.

Crisis Preparation Four Key Aspects (PowerPoint 16.13) [numbered 1 through 4]: 1. Establishing effective structures for planning and handling crises– o ongoing, established crisis management team o represent viewpoints of all stakeholder groups o upper management support 2. Assessing the elements of the company’s operations that produce risks and working to reduce these risks o systematic analysis of what is the worst that could happen and how likely is this o what happens if bad things occur simultaneously (e.g., could Boeing have anticipated CWTs exploding?)

3. Planning for procedures to follow as events occur to minimize the damage and isolate the effects 4. Inoculating against negative public attention that will occur during a crisis Plan for Stages of a Crisis–Exhibit 16-6 (PowerPoints 16.14 and 16.15) • Early buildup period–early signals indicating an impending crisis o Requires ongoing collection and assessment of information • The organization goes through a preparation period if it has perceived and understood the early signals, or • If signals have not been picked up, the crisis will be triggered by some event ©2010 Vitale, Giglierano, and Pfoertsch

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• •

•

•

If the organization has been able to prepare for, but not prevent a crisis, a trigger will occur that creates an incident or accident A period of intense activity and public scrutiny will ensue. The organization must address the situation with “crash management” activities. This period will be made more tolerable if good preparation has occurred Following the crisis, o lower-intensity period occurs in which the organization and its environment and stakeholders proceed to a new normalcy o may be very different from “doing business as usual” The organization may take follow-up actions and may go through a period of serious learning. In most cases, follow-up and learning should be done or a new crisis may be brewing soon

News media coverage of a crisis It will scrutinize the company’s actions and speculate on motives. If their prior experience with the company has been neutral, negative, or nonexistent, they will tend to attribute questionable motives whenever possible.

If the media have a positive relationship with the company in the past, they have information that suggests more positive motives. As long as the public image is backed by substance – true caring and consideration of customers and communities – media will tend to give at least even-handed treatment of the company.

This respect from the media depends on prior relationship – it is difficult to build from scratch at the time of the crisis.

Media Relations during a crisis Basic rules: (PowerPoint 16.16) • give the media access • tell the truth • be proactive • stay calm Pre-crisis stage [Pre-crisis and Preparation stages in PowerPoint 16.17] • Make sense out of incoming data • Avoid wild speculation (by yourself and others), so reactive stance toward media at this time.

Preparation stage More proactive for possible externally generated crises–“this is what we are doing in preparation, if needed;” preparations generally done in private, though.

Triggering event/intense-crisis stage (PowerPoint 16.18) Crisis management team needs to determine public response. ©2010 Vitale, Giglierano, and Pfoertsch

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• • • • •

(In most cases) Respond quickly, backed by effective action.

Both the communication and the action will be anticipated if the preparation has been done well.

Limit points of contact for consistent, focused message.

Value network partners may assist to reinforce some ideas, or enhance the communication of information about how the network is responding to the crisis.

Given the circumstances, the company may have to accept blame, make apologies and start looking for ways to “fix” things.

Consider relating the “Here Comes the Goodyear Blimp” story as an example of 3rd party support.

Here Comes the Goodyear Blimp! Third Party Support in a

Crisis

In September 2000, at the peak of the tire controversy between Ford Motor Company and Bridgestone/Firestone, the Goodyear Tire and Rubber Company released data on the performance of its tires that had been standard equipment on Ford Explorers in 1995-1997. The data showed virtually no failures of the Goodyear tires. This certainly helped Ford in its argument that the problem was with Firestone tires, not the vehicle, and it likely reinforced the relationship between Goodyear and Ford. An annoyed source within Ford who wished to remain anonymous commented with regard to the conflict with Firestone, “we just dropped the Goodyear blimp on them.”

Source: Robert L. Simison, Norihiko Shirouzu, Timothy Aeppel, and Todd Zaun, “Logistics of Tire Recall, Investigation Cause Increasing Corporate Clashes,” Wall Street Journal. (August 28, 2000).

Aftermath stage (PowerPoint 16.19) • Begin repair of the company’s image (time consuming process) • Thoroughly debrief, learn from experience o Improve effectiveness of functional processes, planning process, or coping processes • Value image can be sustained/repaired if the organization maintains its ethical approach • Reinforce to management and employees that they have done the right thing(s) Minor crises (PowerPoint 16.20) • Same approach for handling minor or everyday issues that can erode public image or confidence. However, • Preparation and avoidance are preferred over having to handle each problem as a one-off • Reoccurring incidents indicate a structural solution rather than a ©2010 Vitale, Giglierano, and Pfoertsch

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band-aid o Objective 1: Solve the problems so customer and stakeholder value are not compromised. o Objective 2: Maintain or repair public reputation.

Small/Startup companies (PowerPoint 16.21) • Special case–they have only begun to anticipate what problems can occur, what risks exist.

• Little or no experience with media interaction.

• Utilize public relations firm with values consistent with the company’s.

• Set in writing the young company’s philosophy for handling public adversity.

Preparing for Crises vs. Marketing Entrepreneurially–is there a conflict?

(PowerPoint 16.22) • Potential Conflict−Entrepreneurial orientation suggests moderate risk taking; crisis planning suggests reduction of risks.

• Risk taking in entrepreneurial marketing is taking manageable financial risks.

• Minimizing risks in crisis planning is more about minimizing nonfinancial risks–injury, legal exposure, etc. Generally the two can be done concurrently without much conflict.

Time permitting; consider a class discussion of the issues presented in the text sidebar “What Would You Do?”

Key Terms natural law positive law self-interest considered upon the whole situational ethics societal marketing concept value image Answers to Questions for Review and Discussion 1. Discuss consumer attitudes toward business ethics. Why are so many people willing to accept business ethics as an inconsistency in terms?

People may be willing to accept business ethics as an inconsistency in terms because their experiences or the experiences that are most often reported to them by news sources focus mostly on the negative. Also, some organizations with less-than-stellar reputations may attempt to influence public opinion through corporate image advertising that may be viewed as somewhat ©2010 Vitale, Giglierano, and Pfoertsch

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disingenuous. Added to these events is a business history and culture prior to recognition of the marketing or societal marketing concept that may have forsaken ethics for short-term profits.

2. Are ethical marketing practices more important at the business-to-business level or at the consumer level? Is there a difference?

Ethical marketing practices ideally should be consistent in both business-to-business and consumer marketing, but the publics involved seem to judge more harshly those behaviors that directly impact consumers even though consumers, per se, may not always be as involved or concerned. In business-to-business situations, established relationships tend to lessen any unethical behavior– both sides have too much to lose.

3. Should a company respond (or “or go along with”) a customer that wants something because it is best for them, but not aligned with what may be beneficial for society?

The easy answer here is to say “of course not!” but when a customer is large and important, this becomes more difficult. Generally, a long-term view would suggest not going along. Such actions tend to come back to haunt. Having strongly stated corporate values, enforced and reinforced by top level management, helps the sales person or business development specialist maintain a firm position. If a sales person or account manager faces this dilemma, it might be a time to call in a business development person who could help find an alternative, creative solution that everyone can live with.

4. Considering the nature of relationships in business-to-business marketing versus consumer marketing, are ethical lapses more likely to occur in consumer markets or in business-to-business markets?

Ethical lapses would seemingly occur more readily in consumer markets due to the fact that communications between manufacturer and customer are not as frequent and often less involved than in a business-to-business relationship where one-on-one or group-to-group contact is more the norm.

5. Select a recent crisis faced by a prominent member of society–politician, statesman, community leader and so on–how well was the crisis handled with regard to the principles discussed in this chapter?

Students’ answers will depend on the crisis ‘du jour.” Things that students might look for include: • character • organizational culture • organizational structure • plans/mechanisms for dealing • relationships with the media • responses to events

6. What ethical factors can contribute to individual discomfort in a position in an ©2010 Vitale, Giglierano, and Pfoertsch

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organization?

Ethical factors that can contribute to individual discomfort in an organization position include the role of leadership in setting the standards while perhaps not following or participating in uneven scrutiny of standards, unrealistic demands placed on subordinates in the face of these standards, a conflict between perceptions of natural law vs. positive law, frequency of apparent lapses, ethical dilemmas between norms held by different populations.

7. Do all crises, big and small, involve ethics? Briefly explain.

Not all crises, either big or small, involve issues of ethics, but rather can find contributing factors in poor communications, normal human error, misjudgment, etc. which may then cause ethical lapses in judgment as to how to respond appropriately.

8. Can all crises be averted with good crisis planning? Why or why not?

Not all crises can be averted with proper crisis planning, especially in complex and large organizations where a variety of inputs occur regularly in the normal operations of a business, and lapses in judgment or behavior may occur by chance. However, facing a crisis with a positive “public credit” to spend on the situation makes “payment” less painful and usually, faster.

9. What should an organization look for in a PR agency to handle the company’s public crises? When should the PR agency be hired? Why? A public relations firm should be hired before a crisis occurs to allow a regular business relationship to develop between the firm and the agency unencumbered by issues of unexpected turmoil. The firm hired should be highly professional, experienced in crisis management and well-connected to the appropriate news sources that might be needed by any firm planning for crisis management.

10. Think about the emotions experienced by TWA’s stakeholders (both internal and external to the organization) during the Flight 800 crisis. If you were the spokesperson for TWA, whose emotions would you be expected to address? How might you, in your role as spokesperson, address these emotions?

As spokesperson for TWA during the Flight 800 crisis, you should be expected to deal with the emotions of families of travelers onboard the plane, followed by the flying public per se, then the federal agencies involved, in that order. These emotions would be addressed in a consistent manner to the extent the facts would be presented similarly, honestly and directly. If information were revealed exonerating the firm, that information would also be presented, but without reduction in intensity of concern for the injured parties.

11. Go to the web site for the American Marketing Association, www.ama.org and review the AMA Code of Ethics. Consider how difficult it would be for you to adhere to it, in the examples described here and from your personal experience.

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why.

12. How can a business-to-business marketing organization be watching for the sources of minor crises without becoming too conservative in its strategies and actions? How can marketers stay entrepreneurial while still proactively managing crises?

A business-to-business marketing organization would watch for the sources of minor crises without becoming too conservative in strategies/actions by essentially “staying in touch” with the circumstances that surround planning, day-to-day activities, policy development and implementation and by maintaining the quality of the human resources becoming involved throughout the marketing process; the environment would not be punitive in nature, but rather nurturing in leading people toward how to perform.

The organization’s management needs to be careful not to stifle an entrepreneurial approach to the market. This is a difficult balance to maintain. Moderate risk-taking is a cornerstone of entrepreneurial marketing. Addressing financial risk separately from non-financial risk–and minimizing the non-financial risk–may keep an entrepreneurial orientation alive.

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